A key leading indicator for the economy is flashing red. Housing starts, which are historically a strong indicator of the health of the economy, are beginning to roll over. “The national trend in housing starts continued to decline in August from the historical peak that was recorded in March 2018,” CMHC chief economist Bob Dugan said.

Housing starts are also slowing in Metro Vancouver. As of August 2018, the 12 month sum of housing starts sits at 26,565 units as per Stats Canada. This is slightly higher than August 2017, but off by 4% from its recent peak in March 2018.

Vancouver housing starts
Vancouver housing starts

A slowdown in housing starts suggests homebuilders perceive risks ahead or simply can’t  make new projects feasible due to elevated land prices and construction costs, which is typical at this stage of the cycle. This does not bode well for future economic growth considering housing and the consumption that goes along with it (renovations, furniture, etc) are a big driver of the economy. In Canada, household consumption and residential investment as a percentage of real GDP is nearly 65%.

Source: Ben Rabidoux, North Cove Advisors

While it’s certainly possible housing starts could rebound, it seems highly unlikely given how extended this current expansion is. The labour market is at capacity and rising interest rates are a signal to reduce exposure, particularly with recent weakness in the housing market. Developers are pumping the brakes with Vancouver home sales are at a 17 year low. 

Instead, the construction industry is working at a frantic pace to complete existing units. Housing under construction in Metro Vancouver ticked upwards to a new record high in August- hitting a staggering 43,684 units. well above annual population growth of 30,000.

housing construction vancouver
Total housing under construction in Metro Vancouver.

Meanwhile, recently completed units continue to hover near all time highs, coming in just below the record set in March 2018.

Vancouver housing completions
Vancouver housing completions, 12 month sum.

This will be an important sector to watch moving forward as construction as a share of total employment in the province of BC is nearly 10%.