Construction activity to remain major contributor of Canada’s economic growth in 2016

In March, Canada’s housing starts dropped to 204k from February’s 219k, seasonally adjusted at annual rate. Housing starts, on a six-month moving average trend, dropped to 197k units last month from February’s 202k units. Most of the monthly fall was due to multiple urban starts that dropped 9.7% to 123k units, whereas single-detached urban starts fell just 1.1% to 62k.

With housing starts still at higher levels in March, construction activity in Canada is growing robustly on an annual basis in Quebec (17.9% y/y), British Columbia (29.5% y/y) and Ontario (44% y/y). The increases in these regions countered the Prairie region’s construction activity’s downward trend. Housing starts in the regions of Manitoba, Saskatchewan, and Alberta were down 24.3% y/y, 13.3% y/y, and 55.9% y/y respectively in March.

Due to overbuilding and weaker economic conditions, most of Canada’s markets are declining on a trend basis, according to TD Economics. British Columbia and Ontario seem to be the exception as construction activity in those regions continues to be high and close to record levels, added TD Economics. The strong activity in Ontario and British Columbia is expected to have been contributed by foreign home ownership.

According to CMHC, the share of newer condos owned by foreign investors in Toronto and Vancouver was increasing in 2015. This is likely to continue being a factor influencing the number of starts, noted TD Economics. Construction activity is expected to continue contributing majorly to Canada’s economic growth in 2016, with home prices rising at a stronger rate and mortgage rates dropping back to record levels, according to TD Economics.

But the divergence between provinces of Canada is expected to intensify in 2016. Construction activity in Ontario and BC is expected to grow strongly along with better economic conditions, added TD Economics. Meanwhile, activity in provinces witnessing decline in economic conditions and housing market is expected to be a drag on their growth.

“Overall, we expect housing starts nationally to hold steady in a 180 thousand to 190 thousand range for most of 2016”, says TD Economics.