As housing starts fell in July, one economist anticipates a further slowdown as economic conditions soften -- and warns that the trend will not help ease affordability challenges in Canada’s pricey real estate market.

The latest data from the Canada Mortgage and Housing Corp. showed annual hosing starts declined by 10 per cent in July when compared with the previous month. Marc Desormeaux, the principal economist at Desjardins, highlighted in a note Wednesday that Canadian housing starts fell to 255,000 in July.

He said that while July’s data continues the trend of “gentle easing” in housing starts, aggregate new construction continues to be historically high. 

“Going forward, we do expect a more significant slowdown, consistent with construction industry labour shortages, high borrowing and material costs, weak homebuilder sentiment, and expectations of softening economic activity,” Desormeaux wrote. 

He also said the Bank of Canada is likely to “take some comfort” in weak sales and housing starts data, following cooling economic data across gross domestic product, employment, trade and core inflation data.  

“Combined, these more downcast indicators suggest the painful medicine of higher interest rates is working to cool down economic growth and bring price pressures to heel,” Desormeaux said. 

As economic conditions soften, Desormeaux said he anticipates Canada’s central bank will keep its policy rate at five per cent at its September meeting.

NOT GOOD FOR AFFORDABILITY

Experts have pointed to the need for increased supply of homes in Canada to ease upward pressure on prices, as cities across the country grapple with housing affordability challenges.

Amid falling housing starts, Desormeaux also said that current trends in home building “aren’t conducive to improving affordability.” 

He said that robust multi-unit construction in Ontario and B.C. have lifted housing starts in 2023. 

“That doesn’t necessarily mean affordable new supply in these high-priced provinces: our work highlighted a trend toward investment properties that are more expensive on a per-square-foot basis,” Desormeaux said.

“In contrast, the so-called ‘missing middle’ remains largely absent from new home construction.”

Additionally, he said that lower housing starts in other regions are likely to weigh on future supply.