CP24

A stronger than expected hous­ing mar­ket has helped pro­pel growth in the Cana­dian econ­omy this year, but econ­o­mists say recent eco­nomic and mar­ket tumult could jeop­ar­dize momen­tum in the sector.

The Canada Mort­gage and Hous­ing Corp. said Mon­day that national hous­ing starts rose to 205,100 units on a sea­son­ally adjusted basis in July, 11.6 per cent higher than the 188,900 reported in the same month last year and up 4.3 per cent from the 196,600 recorded this June.

How­ever, the pickup, dri­ven by strong con­struc­tion on con­dos and apart­ment build­ings in urban cen­tres, is likely due to builders catch­ing up to robust demand last year, rather than expec­ta­tions of com­ing growth.

Home build­ing activ­ity has been increas­ing through the first seven months of 2011, but starts are still down 4.6 per cent from a year ago.

Dur­ing the first half of last year, the mar­ket was rebound­ing from reces­sion and buy­ers were on a tear, prompt­ing an influx of demand and the need to build more units.

Hous­ing starts tend to lag activ­ity in the resale mar­ket, and econ­o­mists believe the recent strong con­struc­tion activ­ity is the result of increased demand last year.

But they doubt whether the pace can con­tinue as the prospect of a dou­ble dip reces­sion in the U.S. forces them to rethink the prospects for eco­nomic growth in Canada.

“While many eco­nomic indi­ca­tors have pointed to much softer growth through the sum­mer, Cana­dian hous­ing starts is not one of them, still likely respond­ing to a firm rebound in sales activ­ity in the sec­ond half of 2010,” said Bank of Mon­treal econ­o­mist Robert Kavcic.

“Going for­ward, expect under­ly­ing house­hold for­ma­tion (about 175,000) and cur­rent eco­nomic con­cerns to apply some grav­i­ta­tional pull to starts.”

Stock mar­kets — although they rebounded sharply on Tues­day — have seen severe sell­offs in recent days over fears about U.S. and Euro­pean debt loads and the poten­tial for a double-dip reces­sion south of the border.

The Cana­dian econ­omy is so closely linked to the U.S. that slower Amer­i­can growth trans­lates into less demand for Cana­dian goods, and lower employ­ment and income growth in Canada.

Com­ment: But a lower dol­lar and lower inter­est rates will keep things going. That is how the econ­omy sur­vives downturns.

Those wor­ries could soon sour the mood of real estate investors who may not want to bet on an improv­ing econ­omy by the time new builds go on the market.

Buyer sen­ti­ment is “vul­ner­a­ble to recent mar­ket tur­moil,” as the large decline on stock mar­kets has a neg­a­tive effect on con­sumer wealth and con­fi­dence, mak­ing them less inclined to make big pur­chases, said CIBC econ­o­mist Peter Buchanan.

“That of course can cut both ways, it can make investors fear­ful of buy­ing real estate, on the other hand it does mean the Bank of Canada won’t be tight­en­ing quite as early,” Buchanan said.

“The other thing is that if peo­ple are wor­ried about putting their money into the equity mar­ket, hey real estate may not look so bad.”

Com­ment: The stock mar­ket dropped 6% on Mon­day, real estate did not. Where do you want your money, to keep it safe?

Many observers believe the Bank of Canada may now its overnight rate — which affects vari­able mort­gage rates tied to bank prime rates — at the cur­rent low one per cent until next spring. Fixed rate mort­gages could also fall as bond mar­kets react to gov­ern­ment debt issues.

Com­ment: Lower mort­gage rates make home buy­ing eas­ier. And where are those who said mort­gage rates were going to jump 3–4% by the end of this year? I need to tell them “I told you so!”

The U.S. Fed­eral Reserve announced Tues­day that it will likely keep inter­est rates at record lows near zero through mid-2013. The Fed had pre­vi­ously said only that it would keep it low for “an extended period” and the more explicit time frame was aimed at giv­ing ner­vous investors a clearer pic­ture of how long they will be able to obtain ultra-cheap credit.

Low mort­gage rates are a big incen­tive for buy­ers to get into the mar­ket, and led to ram­pant activ­ity last year.

Com­ment: And why will even lower rates cause a dif­fer­ent out­come this time?

But even with low rates that make the cost of car­ry­ing a mort­gage cheaper, pent up demand in the hous­ing mar­ket could be largely exhausted.

Com­ment: Peo­ple have been say­ing that demand is exhausted for years. Ask my buy­ers, they are eager and ready to buy. But list­ings are low, there is lit­tle out there. Trust me, demand is high, there is still a lot of pent-up energy in the market.

Many buy­ers rushed into the mar­ket dur­ing the clos­ing months of 2009 and early 2010, when the Bank of Canada rate was set at an emer­gency low of 0.25 per cent. Oth­ers decided to buy before the imple­men­ta­tion of the new HST in Ontario and British Colom­bia in July 2010, or to beat two rounds of tighter lend­ing rules.

Some observers say it’s unlikely Canada’s hous­ing mar­ket can con­tinue at a strong pace, with prices con­tin­u­ing to rise rel­a­tive to rent and income lev­els, even as home prices in the U.S. mar­ket have tanked about 30 per cent since the recession.

Com­ment: But we never had a reces­sion here. We never had sub­prime mort­gages. What hap­pened in the US hap­pened there, it was com­pletely dif­fer­ent here. Stop com­par­ing them. There could be an issue with the US buy­ing less from us, but that is the extent of the impact.

Home sales began to mod­er­ate in Jan­u­ary, owing to a com­bi­na­tion of high house­hold indebt­ed­ness and recently imple­mented tougher lend­ing rules, which should take some of the heat out of home build­ing activ­ity, said Fran­cis Fong, an econ­o­mist at TD Economics.

“All said, the cur­rent pace of home build­ing activ­ity is well-beyond the fun­da­men­tal level of house­hold for­ma­tion and we expect a slow decline over the next 18 months,” Fong said.

TD Eco­nom­ics expects starts fall to a monthly aver­age of about 164,000 starts in 2012.

The trend toward much higher con­struc­tion on multiple-unit dwellings, and a decline in sin­gle fam­ily starts, could indi­cate the hous­ing mar­ket isn’t as strong as it appears at first glance. Sin­gle fam­ily homes are usu­ally the barom­e­ter of growth in house­hold for­ma­tion and more mul­ti­ple unit homes could sig­nal more peo­ple are look­ing to rent.

Mul­ti­ple urban starts were 13 per cent higher at 120,200 units, while urban sin­gle starts decreased by 7.8 per cent to 65,000 units.

It was only the fifth time since 1990 that mul­ti­ple units out­paced sin­gle fam­ily builds by such a wide gap, the Bank of Montreal’s Kav­cic said.

For the first seven months of 2011, mul­ti­ple units starts are up 16.4 per cent year over year while sin­gle units are down 22.1 per cent.

“Clearly the trend con­tin­ues to be mul­tis over sin­gles, and that has cre­ated more ample sup­ply con­di­tions for con­dos in Canada,” he said.

“As of June, newly com­pleted and unoc­cu­pied mul­tis sat 51 per cent above the 10-year aver­age (mostly due to Van­cou­ver and Cal­gary, with Toronto close to aver­age), while that of sin­gles was four per cent below.”

Com­ment: That is because hous­ing is shift­ing to a more com­pact, down­town style of liv­ing. Gone is the dream of the house in the sub­urbs with a white picket fence. Now first-time buyer want to live near work, near the excite­ment of restau­rants and clubs. Immi­grants are used to liv­ing close together in tow­ers clus­tered together. It is a fun­da­men­tal shift of the mar­ket that we are seeing.

CMHC over­all urban starts were up 36.1 per cent in the Atlantic region, 33 per cent in British Colum­bia and 1.7 per cent in Ontario. Que­bec posted a decrease of 7.8 per cent in July, while urban starts were off 0.3 per cent in the Prairies.

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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