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Building frenzy

Irrationally high home prices are motivating builders to ramp up construction in urban Canada

Construction of new homes at the highest level in a decade

The pace of construction of new homes in Canada is the highest it’s been since September 2007, according to the latest data from the Canada Mortgage and Housing Corporation.

The rate of “housing starts”, a term used to refer to the number of new homes that have begun construction in a particular month, came in at 253,720 units in the month of March. That was a significant increase from the 214,253 units in February.

Housing starts are a conventional barometer of just how healthy our economy is. If builders and property developers are confident there’s a robust demand in the market to justify the construction of new homes, it’s generally an indicator that people are doing well, and are willing to spend on property.

This time’s different, though. The rate of growth of housing starts may actually be a sign of the irrational exuberance builders are infected with, when it comes to Canada’s real estate market. Just take a look at this chart below. There’s been the consistent ebb and flow of construction over the last one year — but from November 2016 onwards, we’ve started to somewhat of a building frenzy, a perpetual increase in the number of new homes being built.

The most obvious reason why housing starts are at the highest they’ve been in the last decade or so is because home prices in Canada, particularly in Toronto are at a level we haven’t seen since 1989. It’s much more profitable for builders to enter a hot housing market, because they stand to gain handsomely from the sale of overpriced homes.

According to a note put out by RBC this morning, the surge in housing starts was “largely concentrated in a jump in the volatile multiple-unit component.” Indeed, the number of multi-unit urban starts increased by roughly 30 percent in March to 160,989, while single-detached urban starts increased by a mere 3 percent to 74,685.

This latest round of data further reinforces the argument many experts are making about the state of the urban real estate market (i.e. Toronto, Vancouver) — prices of houses are sky-high because there aren’t enough single detached homes being built, as opposed to condominiums, apartments, and townhouses, all under the “multi-unit dwelling” category.

Toronto’s housing market has been the focal point of concern for policymakers over the last few months. The average price of a home in Toronto surged 30 percent in just one year, and Toronto’s rental market is the strongest it has been in three decades. In the last three months of 2016 alone, rental prices of downtown Toronto condominiums shot up 12 percent.

Real estate watcher and economist David Rosenberg has declared Toronto’s property market a “bubble of historic proportions”.

“This bubble is on par with what we had in the States back in ’05, ’06, ’07. We have to actually take a look at the situation. The housing market here is in a classic price bubble. If you don’t acknowledge that, you have your head in the sand,” he told BNN recently.

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Cover: Fred Lum/The Globe and Mail

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