Canada sprouts condos: Are they towers of Babel or viable?

Canada is sprouting condos, from Victoria to Toronto to Montreal, raising the question of whether they’re towers of Babel of something sustainable.

Residential construction starts across the country surged almost 30 per cent in June to an annual pace of 248,000 units, driven largely by condominiums, the latest Canada Mortgage and Housing Corp. numbers show.

Look a little closer: Condo construction climbed 60 per cent in Victoria, 68 per cent in Montreal and a whopping 231 per cent in Toronto to hit a 30-year high for June.

This comes amid a general softening in Canada’s housing markets after new provincial measures in British Columbia and Ontario and new regulatory mortgage rules aimed at preventing a collapse and bursting a debt bubble.

With prices still high, particularly in Vancouver and Toronto, buyers are opting for condos, sparking some concern, notably for Ontario.

“Either every wealthy family in the world is looking to get a toehold into the area, or the weight of excess supply is going to generate quite the price correction,” warned David Rosenberg, chief economist at Gluskin Sheff + Associates.

“The cranes in the sky are starting to resemble London in 1990, Bangkok in 1997 and Las Vegas in 2006.”

The Bank of Canada, too, is raising some red flags, noting in Wednesday’s monetary policy report the “pronounced decline” in house prices but ongoing strength in condos.

“While there has been some moderation in price growth and less speculative demand in the single-family home segment, prices for condominiums have continued to increase rapidly in some markets,” the central bank said.

“Thus, there remains a risk of a sharp decline in house prices in overheated markets, which would likely dampen residential investment and consumption.”

Bank of Montreal economic analyst Priscilla Thiagamoorthy, for one, isn’t concerned.

“The fundamentals of demand are still there,” she said in an interview, adding BMO sees housing stabilizing.

In a report, Ms. Thiagamoorthy added that demand is running high for “the last affordable option” in Vancouver and Toronto among millennials, international migrants and “downsizing” baby boomers.

“Despite headwinds, including government zoning restrictions and rising material costs, construction activity should remain firm, supported by demographic demand and a healthy labour market.”

National Bank of Canada economist Kyle Dahms agreed.

“Although such elevated levels of starts might be worrisome, it seems that there is room for it as vacant new dwellings are well below their 10-year average,” he said, noting that total construction starts declined in the first quarter by 8 per cent, annualized, and were on track for a further loss of 9 per cent in the second.

Global stocks are rebounding this morning. The Canadian dollar, not so much.

“Cautious gains are the order of the day across markets, helped by a lack of any more trade war news,” said IG chief market analyst Chris Beauchamp.

“However, the sight of a fractious NATO meeting yesterday confirms the widening split between the U.S. and its European allies, which will hardly bode well on the U.S./EU trade war front.”

Tokyo’s Nikkei rose 1.2 per cent, Hong Kong’s Hang Seng 0.6 per cent, and the Shanghai Composite 2.2 per cent.

In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were up by between 0.4 and 0.6 per cent by about 5:30 a.m. ET.

“Bargain-hunters stepped into the fold this morning, but given the heightened tensions, the optimistic mood might be short-lived,” said CMC Markets analyst David Madden.

New York futures were also up.

“The best way of gauging whether we are in for more trade war rhetoric is probably to watch the president’s poll ratings; if he sees a bounce thanks to his tough talk, we should probably expect more, even if it hits his beloved stock market in the meantime,” Mr. Beauchamp said.

“Stocks do seem to be recovering from Tuesday night’s trade war panic, but investors know that further losses are just one tweet away.”

The Canadian dollar, having jumped after Wednesday’s Bank of Canada rate hike, only to fall again amid a stronger U.S. currency and lower oil prices, was below 76 US cents, though up slightly.

There are some things worth watching, such as industrial production numbers from Europe and a meeting of euro-zone finance ministers, but the biggie is the U.S. inflation report.

Economists generally expect to see a rise in June to an annual rate of 2.9 or 3 per cent.

“U.S. inflation has been heating up this year, owing partly to a run-up in energy prices recently,” CIBC World Markets’s Katherine Judge said.

“But, despite our expectation for a trend-like 0.2-per-cent monthly gain in headline prices in June, that should still be enough to nudge headline inflation up to 3 per cent. That will be the strongest rate of gains seen since 2011.”

Key for markets will be what the report suggests about the U.S. Federal Reserve’s rate-hiking cycle.

“Despite headline inflation picking up, the Fed has little reason to further accelerate the pace of rate hikes at this point,” Ms. Judge said. “The effects of tariffs up to this point on consumer prices should be lagged and only modest.”

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