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New home starts slip, prices rise modestly

TORONTO - Canadian housing starts fell in July for the third straight month and home prices rose less than anticipated in June, according to new reports that reinforced signs of a dampening trend in the housing market expected to continue into next year.

TORONTO - Canadian housing starts fell in July for the third straight month and home prices rose less than anticipated in June, according to new reports that reinforced signs of a dampening trend in the housing market expected to continue into next year.

"We've seen a cooling on the demand side of the housing market for a good six months now and the supply side tends to follow that," said Robert Kavcic, an economist at the Bank of Montreal (TSX:BMO).

New home starts fell 1.6 per cent to 189,200 last month, with the drop led by a decline in single-unit homes, according to figures released Tuesday by Canada Mortgage and Housing Corp..

"The first thing you see is sales slow down and then about six months later construction activity starts to slow down. Sales actually peaked at the end of 2009 and I think it makes sense that construction activity peaked a couple months ago," Kavcic said.

After three consecutive months of decline, housing starts are now down a moderate eight per cent from their April peak, and will likely slow further over the rest of the year, he added.

July's figures came in just above market expectations for 185,000 new homes — but represented a 1.6 per cent decline from the previous month after the agency revised June's starts upward to 192,300 from 189,300.

In a related housing market report released Tuesday, Statistics Canada said the New Housing Price Index rose 0.1 per cent in June following a 0.3 per cent increase in May.

Despite June's modest price increase, it's a much better time to buy now than it was a year ago, Kavcic said.

"This time last year it was 100 per cent a sellers' market, there's a lot of demand and really no supply.

"Now we're seeing just the opposite, we're seeing a lot of demand that was pulled forward has worn off ... I would probably say it's just slightly a buyers' market."

The housing market helped pump Canada's economy out of recession, but has stalled in recent months as consumers face rising mortgage rates and worries over a still-fragile economic recovery.

Canada's housing market is now cooling faster than in any other country amidst a recent global real estate slowdown, according to Global Real Estate Trends, a report released Tuesday by Scotiabank (TSX:BNS).

“The recent slowdown has been most dramatic in Canada,” said Adrienne Warren, senior economist at Scotia Economics.

Home prices in Canada were up just 6.8 per cent year over year in the second quarter, compared with 16.6 per cent year over year in the first quarter, she noted.

"Sales, while still at a high level, have trended steadily lower alongside reduced affordability and exhausted pent-up demand."

Canada's once-hot housing market likely made a less substantial contribution to the country's GDP in the second quarter before it becomes a drag on GDP in the third quarter, said TD Bank (TSX:TD) economist Dina Cover.

After a sharp rebound in the housing market earlier this year, the downward trend in home building activity should not come as a shock, she added.

"Existing home sales have been trending down since the start of this year — with the decline accelerating in May (through) July — while prices have been losing modest ground since May," Cover wrote in a report.

"In turn, lower home prices have dampened the incentive for home building. With prices expected to slide a bit further, fewer home starts are likely to hit ground."

Many Canadians rushed to enter the housing market in the second half of last year and the first half of this year as buyers hoped to secure mortgages while interest rates were historically low and before the introduction of new mortgage lending rules and the harmonized sales tax in B.C. and Ontario.

"And given the lag time between construction and sales, builders began slowing housing starts a few months in advance," Cover said.

Meanwhile, Kavcic says June's rise in new home prices was softer than expected, but lifted the annual year-over-year increase to 3.3 per cent from 2.9 per cent in May. He expects a softening, or modest decline, in home prices for the rest of the year.

"Next month’s release will reveal the full impact of the HST in B.C. and Ontario. While the index excludes taxes, it will be interesting to see any sign that builders are passing on part of their cost savings, which would apply some downward pressure to prices," he wrote in a report.

New home starts in Canada's urban centres actually increased by 1.9 per cent to 169,300 units in July — driven by multiple-unit starts, which increased by 13.4 per cent to 101,400 units. Single-unit urban starts dropped 11.3 per cent to 67,900 units.

That falls in line with a trend over the past six months in which multiple starts have been rising while single-unit starts — seen as the best barometer of the housing market's health — have been contracting.

"Some of the strength in condo construction we're seeing right now could reflect some of the strong demand that we saw last year and a lot of those presales are just actually starting to have their shovels put in the ground right now," Kavcic said.

However, there is also significant overbuilding in the condo market, in which construction activity has outpaced demand for units. The number of condo units that are completed, but not yet occupied, has been picking up steadily in the past months, he added.

Kavcic and Cover predict that housing starts will be driven down to between 165,000 and 170,000 units by the end of the year.

Meanwhile, Warren's report found that Canadians have been paying more to sellers of resale homes than to new home builders in the past decade — in which the average cost of a new home increased by just over 50 per cent, while the average resale home price has more than doubled since 2000.

“Traditionally, the demand and pricing for new homes mirror, but with a lag, trends in the resale market," the report said. "When resale housing selection is limited, and/or prices are increasing sharply, buyers are more likely to consider a new home purchase.”

Buyers have been driven to the resale market due to factors including an influx of renovation activity that has added value to the existing stock of houses as well as increases in urban land values.

 
 
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