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Construction the next shoe to drop

The big surprise so far this year has been the resilience of housing starts which, despite falling from their 10-month high of 300,000 annualised in September, remained at a relatively strong 267,000 in October. While developers have largely shrugged off the impact of higher interest rates so far, we doubt that will be the case for much longer due to the weakness of pre-construction sales, which developers rely on to fund their projects. Pre-construction sales in Toronto fell to a record low in September, which points to a sharp fall in housing starts in 2023. (See Chart 1.) As most of the homes under construction are now multi-year condo projects, investment in existing projects and related employment are unlikely to fall as quickly as housing starts. Nevertheless, the further 8% fall in residential investment we forecast will still directly subtract 0.6% from GDP and contribute to a moderate recession next year.   

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