Slower housing starts will have negligible effect on affordability: analyst

July housing starts mainly decelerated due to significant slowdown in urban starts, CMHC reports.

The market deceleration in Canada’s housing starts trend in July might be a prelude to significant economic slowdown, but affordability will almost certainly remain a persistent issue, according to Marc Desormeaux, principal economist at Desjardins.

Data from Canada Mortgage and Housing Corporation (CMHC) said that the annual pace of starts fell by 10% on a monthly basis in July, ending up with a seasonally adjusted annual rate of 254,966 units.

CMHC said that the drop was mainly due to an 11% decline in annualized urban starts, settling at 234,857 units.

Desormeaux said that this “gentle easing” in housing starts could come as good news for the Bank of Canada’s rate-hike campaign.

“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 reported by BNN Bloomberg.

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

Canadian Home Builders' Association warns of slower home starts due to rising construction costs from recent rate hikes. Chief Executive Kevin Lee calls for government action to offset the impact.

Bank of Canada could keep policy rate frozen at 5%

Desormeaux is among those expecting the BoC to keep its benchmark borrowing rate at 5% in its next policy announcement come September.

With inflation spiking from 2.8% in June to 3.3% in July, the case for another rate freeze has become stronger, said Philip Petursson, chief investment strategist at IG Wealth Management.

“We thought that inflation would come in a little bit higher, and this is because of the base effects,” Petursson told BNN Bloomberg. “You’re dropping off some really low numbers in the back half of last year that is going to make inflation look like it’s accelerating, but in reality it’s not.”

“I think the Bank of Canada should pause. If the Bank of Canada realizes that some of the biggest components to inflation is what they’re doing to interest rates then they should no longer be raising rates.”

CMP

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