Housing starts on the decline in Ottawa: Report

New home construction is seen in the Barrhaven neighbourhood of Ottawa on Friday, Aug. 30, 2024. THE CANADIAN PRESS/ Patrick Doyle

Housing starts in the month of August dropped by 21 per cent in Ottawa, according to new data released by the Canada Mortgage and Housing Corporation (CMHC).

The CHMC reports housing construction reached its lowest level in nearly 10 years, reaching a level corresponding to 22 houses per 10,000 people in the first half of 2024.

The decline is due to the current economic conditions for construction growth, including high interest rates and the rising costs in the last two years, which have negatively affected investments in residential properties, according to the report. Low demand for houses and condominiums is also another factor contributing to the decline in housing starts in the capital region.

"A lot of it is just consumer demand. It's tough economic times right now. Interest rates are still high, they're coming down a little, but it's keeping people on the sidelines," Jason Burggraaf, executive director of Greater Ottawa Home Builder's Association, told CTV News Ottawa's Kimberley Fowler Thursday. 

Different outlook for rental apartment starts

Rental apartments are showing more resiliency than condominium market, despite the decrease in apartment starts, reads the report, noting that "it's the rental market that's the main driver of apartment construction."

Rental apartments represent one third of all housing starts, which represents at least twice the rate for condos.

"Rental construction is kind of the one segment of the industry right now that is starting to grow, and that's great for Ottawa. Ottawa needs more rental. It's had a really low rental supply of new rental supply over the past number of years, so we're seeing more and more companies getting into that because there's not much of a condo market in Ottawa either," Burggraaf added. 

"If a company can own and operate a building afterwards, it's a good money-making proposition. You build the building, and then you can rent that out for years on end, and you've got that kind of steady stream of income."

The increase in the construction of rental apartments is due to rising costs and interest rates --- blocking accessibility to home ownership, and population growth driven by "a record number of immigrants and non-permanent residents have settled in the area," according to the report.

"Housing starts on the rental market didn’t decrease as much as for other housing types. However, they're definitely down since the beginning of the year, a sign that the industry is taking a cautious approach. Some market stakeholders have told us that absorption rates have fallen for new income properties. As such, tenants are sometimes offered incentives to increase occupancy (for example, the first month's rent free)," reads the report.

"There are currently few sales of large existing rental properties and therefore few performance indicators (such as the capitalization rate) for this asset class on the market. This makes it harder for developers to decide whether to build new rental properties."

Construction of high-rise buildings in central neighbourhoods are no longer a priority in the capital. It declined by 51 per cent. This is due to lower demand, which is driven by higher costs and smaller unit sizes, notes the report.

Larger units in smaller buildings outside the city centre are more appealing to buyers, reads the report.

Over the past five years, construction of buildings with more than 100 apartments have fallen from an average of 17 per cent to seven per cent in 2024, says the report.

The report suggests implementing zoning measures to encourage construction growth. The measures include the first draft of the City of Ottawa's new zoning by-law to increase housing supply, such as allowing at least four units per lot throughout the city, removing the obligation to provide a minimum number of parking spaces, and increasing the heights of buildings near public transit stations.

An increase in development charges, starting Oct. 1 "could cancel out some of the cost savings from the sales tax exemption for rental projects," according to the report.

"The industry is building 1,400 thousand units currently on the go, some of those are apartment buildings, so it's going to be, you know, later the year into next year before those are completed," added Burggraaf.

CMHC Economist Francis Cortellino says interest rate decreases will make it a bit easier for builders to have financially viable projects.

"I think that a lot of municipalities including Ottawa (are) looking at how to improve the permit process, how to improve the approval process, more supply can come to the market more rapidly than before, as well there help from different levels of government. I think we need to work on all those different elements to have more supply on the Ottawa market, and also in the rest of the country."

With files from CTV News Ottawa's Kimberley Fowler