Unsurprisingly, recent high interest rates have put a real dent in Canada's new housing starts.

In a new bulletin, Canada Mortgage and Housing Corporation (CMHC) estimates higher interest rates decreased new home construction by about 30,000 units in 2023, which is roughly equivalent to a drop of 10 per cent to 15 per cent of the annual total that would otherwise be expected — based on the annual average of about 250,000 units.

Generally, housing starts are defined as the beginning of construction work on the building.

This national figure of 30,000 is also roughly equivalent to the total number of housing starts within Metro Vancouver in 2023.

High interest rates, of course, have not only led to lower demand for home ownership, but also higher borrowing costs to cover the financing of land acquisitions and construction costs.

Amid the challenging market conditions, various levels of provincial and federal governments have stepped in to provide significant repayable low-cost construction financing to private developers for secured purpose-built rental housing projects, including some projects converted from strata market ownership condominiums to secured purpose-built rental housing.

But unsecured market rental housing supply — specifically strata market ownership condominiums that are rented out by their individual owners, who are often investors — also accounts for a very significant portion of the overall rental housing supply, especially in the key urban markets of Metro Vancouver and Greater Toronto. With such condominium projects stalling, this source of new rental housing supply is almost stagnant.

CMHC specifically highlighted that the full impact of high interest rates on Greater Toronto's housing market may not be fully reflected yet.

According to CMHC, private developers will move ahead with their condominium project construction if about 70 per cent of the units are pre-sold.

In essence, condominium housing starts are sensitive to interest rates that homebuyers face, while rental housing starts are sensitive to interest rates that corporate investors face.

While some provincial jurisdictions and housing advocates have called for an increased focus on public housing, the private sector is overwhelmingly the key player in building new housing in Canada, accounting for 95 per cent of the country's housing supply.

"The private sector is central to increasing supply and improving affordability. Most of the increased housing supply that Canada needs must come from the private sector," reads the bulletin.

"Small investors provide much of the funding to build condo apartments. Developers raise funds from prospective buyers who may occupy those units or rent them out.

Buyers need to borrow money, perhaps not for their downpayment, but almost certainly to pay for units upon completion… Large investors are also critical to supplying financing for building large multi-storey purpose-built rental buildings.

While their multimillion-dollar construction costs will ultimately be covered by renters over time, those upfront expenditures need to be paid before revenues begin to flow in."

Fundamentally, to better meet long-term housing demand and improve affordability, CMHC recommends that all levels of government ensure that the private sector is encouraged to "build as much housing as possible when the going is good, and interest rates are low."

But with the Bank of Canada expected to take further steps to continue the trend of lowering its policy interest rate, CMHC anticipates such a move should stimulate new housing supply over the coming year.

Currently, the policy interest rate is hovering at 4.25 per cent, following three 0.25 per cent cuts since June 2024. The next interest rate announcement is scheduled for October 23, 2024.

With inflation stabilized in both Canada and the United States, some economists project the Bank of Canada could gradually lower the policy interest rate to 3.75 per cent by the end of 2024 and 2.75 per cent by the end of 2025.