TORONTO — Canadian home construction has been unexpectedly strong in the first half of 2011, including last month when Ontario was the driving force, but economists predict the activity isn’t likely to last.
A jump in construction activity on apartments and condos in Ontario cities in June helped boost the national seasonally adjusted rate to 197,400 units last month. The rate was up from a 194,100 units in May and 194,100 units in April, both revised upward, Canada Mortgage and Housing Corp. reported.
The strong housing starts are a response to still robust demand and high home prices, which create an incentive for builders to put up more homes — but that could change soon, said Robert Kavcic, an economist at BMO Capital Markets.
“We’re in a situation now where we’re probably going to see interest rates rise in the fall and that should cool the demand side of the housing market a little bit,” he said. “By extension, that will hold new building activity steady throughout the rest of this year and into next year.”
Demand in the housing market has dropped off from overheated levels reported early last year, when interest rates sat at emergency low levels. But it remains robust, especially in urban centres, causing prices to hover at record highs.
In cities like Toronto, the influx of cranes and construction activity remains constant as builders see opportunity in the sky high prices buyers are willing to pay, and ahead of an anticipated interest rate hike, which drives the cost of carrying variable mortgages higher.
But housing starts tend to follow — with about a six-month lag— trends in the resale housing market, where many economists are predicting a more pronounced slowdown in coming months as high home prices and the looming interest rate increase could make home ownership less affordable.
Sonya Gulati, an economist at TD Economics, said in a note that Canadian housing starts in the first half of 2011 have been averaging at 191,000 per month — well above TD’s forecast of 178,000 units.
“Recent homebuilding activity suggests that builders are breaking ground sooner rather than later to beat out interest rate hikes on their way next year which will likely simmer down housing demand,” Gulati wrote.
“Over the 2012-13 period, we are calling for a moderate correction in both resale activity and home prices across the country. With the resale home market gravitating more towards balanced territory, homebuilding should follow suit, albeit potentially with a bit of a lag.”
CHMC also pointed out that recent months have shown particular strength, which it doesn’t think will continue.
“The revised numbers show that housing starts have been above their trend line since March. However, we expect housing starts to move back towards levels consistent with demographic fundamentals in the near term,” said CMHC chief economics Bob Dugan.
Emanuella Enenajor, an economist at CIBC World Markets. said the new home building market is outperforming most expectations, but is consistent with trends in the broader market on the back of stimulative low interest rates, and positive sentiment from a robust resale market.
“Starts have been heading up since the start of the year, and we’ve also seen resale activity in terms of unit sales ... going up since the start of the year,” she said.
“So it seems like for the last couple of months they’ve been moving in lock step with each other, more or less.”
But she warned that rising interest rates and slower consumer credit growth will put the brakes on demand for more houses.
“Overall there are some headwinds in terms of how fast this market can keep growing,” she said.
Ontario’s rate of urban starts increased by 24.1 per cent in June to 69,000, based on 6,390 actual starts last month, up from 55,600 in May. Atlantic Canada also increased, rising 5.6 per cent to 9,500.
Meanwhile, the biggest regional decline was in British Columbia, which showed a 27.6 per cent decline to a rate of 21,200 units, with only 1,859 actual starts. Home prices in that province — especially in Vancouver — have been far outpacing price hikes in other parts of the country, leading some economists to believe a significant slowdown is inevitably close.
Urban starts also decreased 3.6 per cent in Quebec to 42,800, and by 1.2 per cent in the Prairie region to 32,100.
Kavcic noted that the cooldown in starts in the pricey B.C. market follows a surge in building activity ahead of the 2010 Olympics. That has left a lot of unoccupied inventory, mostly apartments and condos, on the market, reducing the impetus for new building.
Most economists expect a moderate drop in demand in the coming months, but a more severe downturn could leave a glut of unsold homes on the market.
But that scenario is unlikely, Kavcic said. “It’s not like there’s rampant overbuilding in Canada.”