Weaker new home sales to drag down construction

The extent of the downturn in the housing market and broader residential investment will determine whether the economy enters a recession in the next 12 months, and in that respect there has been some good news in the past month. Despite the 100 bp policy rate hike from the Bank of Canada two weeks ago and the promise of more to come, longer-term bond yields have fallen alongside those elsewhere in the world, causing five-year fixed mortgage rates to edge down. Meanwhile, there is no sign yet that weaker home sales are weighing on broader residential investment, with housing starts unusually strong in June for the second month running. While all this seems to suggest that there are some welcome upside risks to our forecast that residential investment will plunge by more than 20% over the next year, other indicators have been far less positive. The surge in borrowing costs has pushed new home sales in Toronto down to just 13,400 annualised on a seasonally adjusted basis in June, putting them at crisis levels some 65% below the long-run average. As many developers rely on pre-construction sales to fund their projects, the weakness of new home sales suggests that, despite their recent strength, housing starts will eventually fall sharply as well.