Garry Marr, Financial Post, April 8, 2014 - New home construction plummeted in March, prompting at least one real estate doomsayer to predict an even larger decline is in the cards for the Canadian housing market. At the same time, one of Canada’s largest real estate companies released its latest quarterly report maintaining all is well in the market with prices still going up, albeit with some caution about the condominium sector.
The spring market — considered a prime time for moving as people try to lock down their purchases in time for summer — will be an important test of the market’s resilience.
Will unsold new inventory continue to grow and prompt builders to reduce starts further? Will that softening demand eventually spill over into the existing home market?
Canada Mortgage and Housing Corp. said March seasonally adjusted annualized starts were 156,823, a 17.7% drop from the 190,639 a month earlier and well below the 192,000 expected by economists. Worse yet for continued real estate boom proponents, housing starts dipped well below the 175,000 needed based on annual household formation.
Capital Economics, which has been predicting a housing decline for more than two years, jumped on the drop as evidence the long-waited decline in the market may finally be happening.
“The recent slowdown in housing starts is just the beginning of a long-term correction that will dampen economic growth this year and next. If, as we expect, new home sales soften further, in response to tighter credit conditions and softening investor sentiment, then the glut of newly completed unoccupied housing units will only get worse,” said David Madani, an economist with Capital Economics.
He’s now predicting after 187,000 starts last year, the figure will drop to 175,000 in 2014 and 150,000 by 2015.
The naysayer argument was bolstered by new evidence from Statistics Canada that building permits, which are applied for much earlier in the housing cycle, are already dropping.
The agency said municipalities approved the construction of 14,011 new dwellings in February but that was down from 23.8% from January. The biggest chunk of the decline was in multi-family dwelling units which were off 29.3% in February from a month earlier. Single family dwelling permits only dropped 14.3% from February to January.
Other economists may not have the same fears as Capital Economics but most seem to agree that a decline in the housing market is on the horizon.
Laura Cooper, an economist with Royal Bank of Canada, cautioned not to read too much into monthly statistics which can be exaggerated by the condo sector. She also pointed out extreme weather may have hit starts because some construction was simply delayed by the elements even though the demand was still there.
“As the weather impact eases, we expect housing starts activity to retrace this recent weakness,” she said, pointing out the six-month average for starts only went down slightly to 183,500. “Overall, our forecast for 2014 of 182,000 does represent a slowing from 188,000 in 2013. The monthly report for March likely represents an outlier on an otherwise moderating trend.”
Meanwhile, the real estate industry continues to paint a fairly bright picture for the housing sector with Royal LePage producing a somewhat optimistic first-quarter report.
“Suggestions of an overheated real estate market and bubble continue within the mainstream dialogue, but are becoming less frequent,” said Phil Soper, chief executive of LePage. “Of the core housing types, the condominium segment remains the most vulnerable to short-term price softness in light of increased inventory, but the situation is limited to only a few cities. The medium to longer term prognosis for this housing sector remains very positive.”
Royal LePage says in the first-quarter what it calls a standard two-storey house sold for $428,943 across the country, a 5.4% increase from a year ago. Bungalows rose 4.4% in value to $380,765 and condominiums were up 2.5% to $252,174.
Genworth Canada, the largest private mortgage default insurer, weighed in yesterday with its own survey on the housing market.
One of its findings was a population that still feels there is room for prices to grow. Genworth found 64% of respondents feel that prices will rise in the next 12 months, up from 58% when the same poll was done a year ago.
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