Con­struc­tion of new homes and con­dos may slow later in the year if rate hikes and the HST put the brakes on sales

Helen Mor­ris, National Post

This week, another bank raised fixed mort­gage rates, fuelling spec­u­la­tion that at least some of the heat will be taken out of the Toronto hous­ing mar­ket as the year progresses.

“We’re prob­a­bly in the lat­ter stages of the strength in the hous­ing mar­ket that we’re going to see this year,” says Robert Kav­cic at BMO Cap­i­tal Mar­kets Eco­nom­ics. “There are a num­ber of fac­tors at play: ris­ing mort­gage rates, the HST com­ing in Ontario, and you are prob­a­bly going to see a lot more [resale] sup­ply com­ing into the mar­ket as well.” (Indeed, the Cana­dian Real Estate Asso­ci­a­tion on Thurs­day reported a record 20% increase in list­ings nation­wide in March from that month’s pre­vi­ous record set in 2008.)

Over the next few months, these fac­tors will likely reduce the num­ber of peo­ple look­ing to buy a home and so reduce the upward pres­sure on prices.

And those fac­tors would also impact the sup­ply of new homes and con­dos down the road.

Trends in con­struc­tion activ­ity tend to lag sales and prices by about six months. “If sales start to fall off in, say, May or June, you’d expect to see con­struc­tion activ­ity trail off later in the year,” says Mr. Kavcic.

Already, hous­ing starts for March in the Toronto met­ro­pol­i­tan area fell 23% to a sea­son­ally adjusted annual rate of 26,300 units com­pared with the pre­vi­ous month. How­ever, the decline fol­lowed a hefty 66% month-on-month gain recorded by Canada Mort­gage and Hous­ing Corp. (CMHC) in February.

Last month’s 23% decline was over­whelm­ingly felt in the multiple-family sec­tor, which took a 40.2% dive from the pre­vi­ous month, to hit 12,500 units. The sea­son­ally adjusted annual rate for single-family starts, on the other hand, rose 4.5% month-on-month to reach 13,800.

“Hous­ing starts in Toronto are show­ing two sep­a­rate sub-plots,” says Shaun Hilde­brand, CMHC’s senior mar­ket ana­lyst for the GTA. “High-rise con­do­minium starts have made lit­tle progress over the past sev­eral months, while low-rise sin­gles and rows are mak­ing con­sid­er­able headway.

“As hous­ing in Toronto becomes less afford­able, demand will shift towards con­do­mini­ums and con­struc­tion will again begin to favour high– rise projects.”

The raw data, which is not adjusted for sea­sonal fluc­tu­a­tions, show that in the first three months of this year, total hous­ing starts fell 4% com­pared with the same period in 2009, which was itself very slow. Again, the mul­ti­ple and single-family sec­tors showed sig­nif­i­cant diver­gence. In the first three months of 2010, there were 2,380 single-family starts, a 112.9% hike on the same period last year. The multi-unit sec­tor recorded 3,289 starts from Jan­u­ary to March 2010, a 31.3% decline from the first three months of last year.

At the national level, hous­ing starts fell 1.5% month-over-month to an annu­al­ized rate of 197,300 units in March. As with the Toronto mar­ket, it was the 15.2% fall in the volatile multiple-family starts that led the over­all decline. Single-family starts rose 6.9% to 97,700 units in March – the high­est level since March 2006.

“We do expect that the level of over­all hous­ing activ­ity should advance as buy­ers try to close deals ahead of [Monday’s] tight­en­ing of mort­gage rules and the July intro­duc­tion of the HST,” says Ian Pol­lick, port­fo­lio strate­gist at TD Secu­ri­ties. “How­ever, the tim­ing mis­match between clos­ing the trans­ac­tion and the length it takes to com­plete a new res­i­den­tial struc­ture might dis­suade builders from con­tin­u­ing to ramp up production.”

The homes on which con­struc­tion has just started will even­tu­ally make their way on to the mar­ket, where prices are – at least for now – still buoyant.

Sta­tis­tics Canada’s New Hous­ing Price Index for Toronto and Oshawa fell 0.7% in Feb­ru­ary com­pared with the pre­vi­ous month. How­ever, prices of new homes rose 1% in Feb­ru­ary when com­pared to the same month last year.

“If you just ignore the month-over-month, new hous­ing prices in Toronto are almost near record lev­els,” says Mr. Kav­cic. “Hous­ing in gen­eral is strong com­ing out of the reces­sion; the HST is prob­a­bly a fac­tor, too. I think you’re see­ing a lot of pur­chases pulled for­ward before the HST comes into effect. That’s prob­a­bly prop­ping up demand a lit­tle bit more than would nor­mally be seen right now and that’s prob­a­bly putting a lit­tle addi­tional upward pres­sure on prices.”

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