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Canadian housing starts fell 8.6 per cent in May from April, a decline fuelled by a massive pullback in new home construction since Ontario moved to cool the housing market in Toronto.

“The story in May was the big drop in Ontario, following the new housing rules the province implemented on April 20th,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets.

He noted Toronto starts dropped 44.4 per cent, following a 22.7 per cent decline in April, to about 22,600. It was the lowest level for starts in the city since September, 2014.

“Don’t be surprised if activity remains subdued for at least a few more months as the housing market digests the changes. The surge in existing home supply we’ve seen over the past two months, could also help restrain home building activity as buyers have more choices,” said Reitzes.

The decline in Toronto and around Southern Ontario follows a provincial decision to unveil a 16-point plan to cool the housing market which included a 15 per tax on foreign buyers and tougher rent control rules which restrict how much landlords can charge tenants in buildings constructed after 1991 — a move impacting condo investors looking for income property.

The impact of the Ontario changes could already be seen in results for existing homes published by the Toronto Real Estate Board this week. May sales were down 20.3 per cent from a year ago and average prices dropped 6.2 per cent from April.

Brian Johnston, chief operating officer Mattamy Homes, said if anything start are not fully reflecting the slowdown in sales that he’s now seeing. “There is always a lag between starts and sales,” said Johnston. “I can tell you sales have dropped. We are seeing that in our offices. It’s a reduced level of activity. It’s noticeable but it’s not like 1989 when markets dried up. Sales are just a little lumpier. Before everything just went. You opened a sales office and pointed people to the desk to sign a contract.”

Statistics Canada data out Thursday showed prices were still surging in April on a national basis. The new home price index rose 0.8 per cent in April from a month earlier, well above economist expectations, and pushed the annual increase to a nine-year high of 3.9 per cent.

“The Greater Toronto Area and Vancouver drove the gains, as the increases in land and building costs (the former of which is clear to anyone watching those markets) finally appear to be showing up,” said Reitzes.

On a national basis, the six-month trend for housing starts was 214,621 in May compared to 213,435 in April. But the stand lone number for May, on a seasonally adjusted annualized basis was 194,663 for the country, down from 213,498 the month before.

“Housing starts trended higher in May in Canada’s urban areas”, said Bob Dugan, chief economist for CMHC. “Row and apartment units led the upward move, while construction has slowed for pricier single- and semi-detached houses.”

CMHC agreed with the trend line being seen by economists in the Toronto market. “May marks the first month that single-detached starts have bucked their upward trend since September 2016,” the Crown corporation, said in a release. “This coincides with a noticeable increase in new home listings in the resale market, providing added choice to homebuyers, causing less demand to spill over into the new home market.”

Josh Nye, an economist with Royal Bank of Canada noted Canadian housing starts for 2017 are still on their strongest pace in five years but he expects a cooling in the second half of the year.

“It seems a bit early to attribute this (decline in Ontario) to regulatory changes that began to cool the city’s hot resale market in April. Starts usually lag resale activity, so we think the true regulatory-induced slowdown will take hold later this year,” said Nye.

Source: Financial Post