Value of Residential Construction

Canada benefited from a robust real estate and construction market in the early 2000s. The single-family residential housing market performed particularly well during this period, with steadily rising home prices and construction. However, the housing market in Canada suffered a significant setback in 2008 and 2009 as the broader economy entered a recession, with residential investment falling by 5.0% and 5.5%, respectively. Subsequently, a government stimulus package that included residential construction incentives was put into effect, and residential construction investments rose 7.7% in 2010. In turn, this development led to unusually strong property price inflation, putting the country on the verge of a housing bubble in 2013 and causing construction investments to fall slowly over the year.

In 2014, construction investments picked up moderately as fears of the housing bubble in the near-term subsided. This trend largely continued in recent years, with the housing market heating up significantly. The value of residential construction grew at a faster pace than economic fundamentals would have predicted. This spurred the government to act, as consumers were becoming significantly overleveraged in the hopes of purchasing real estate. In addition to steady interest rate hikes by the Bank of Canada, the Office of the Superintendent of Financial Institutions (OSFI) passed stricter mortgage regulations in 2017 and 2018. The guidelines passed in 2018 were much stricter and necessitated that all new uninsured mortgages with down payments over 20.0% were required to pass new stress tests. The mortgage regulations and interest rate hikes hurt investment growth, as residential investment declined 0.9% in 2018. The housing market slowdown resulted in a decline of 0.8% in 2019, as consumers continued to adjust to the changed monetary and regulatory environment.

In March of 2020, the overnight rate target was lowered to near-zero due to fears of an economic slowdown from the spread of coronavirus. Fallout stemming from the coronavirus outbreak was worse than initially expected, leading to the curtailment or complete shutdown of large swaths of the economy. This made lenders look to add additional risk premium to the pricing of loans to account for increased potential defaults. However, the historically low interest rate environment, unprecedented government support, and shutdowns led to consumers redirecting their spending and capital toward their housing. Despite output falling at the sharpest rate on record, investment in residential construction grew by 2.8% in 2020.

This level of residential investment began to significantly decrease in 2022 as the Bank of Canada implemented its policy of raising interest rates to curb surging inflation. Cooling off an overheated economy, the bank increased its policy rate from 0.25% in March to 4.25% in December of 2022. As mortgage rates spiked during the year, the value of residential construction fell 11.9%. With high inflation and mortgage rates lingering in 2023, growth in residential construction continued to fall. Though the central bank initially indicated that it planned to pause rate hikes during the later months of the year, mortgage rates remained high and residential construction remained low, despite the urgent housing crisis that Canada faces. Ultimately, the value of residential construction fell 10.1% during 2023. In 2024, the value of residential construction was sustained by rate cuts made by the Bank of Canada, however growth remained flat due to high costs. As the Bank of Canada continues to cut rates however, growth is likely to return in 2025, and increase 2.9%. Overall however, residential construction is still anticipated to decrease 1.1% to a value of $161.4 billion over the five years to 2025.