Housing starts ‘on fire’ in July

(August 9, 2005) The boom in new housing construction looks set to continue for the rest of the year in Canada, but the latest numbers from the Canada Mortgage and Housing Corporation (CMHC) suggest affordability is becoming a greater issue for many would-be homeowners.

Low mortgage rates and solid labour market conditions helped housing starts and new home construction to grow 0.4% in July, up from 241,300 new units built in June. Although the numbers exceeded most expectations, there is a telling shift in the kind of units that companies are building. Throughout most of 2005, new construction has focused on building multi-unit, multi-family homes like condominium complexes. Single family starts on the other hand fell 9% during the month.

“Canada’s homebuilding boom still appears to have plenty of steam,” says Scotiabank economist, Adrienne Warren. “With permit also hovering around this level, we expect activity to remain brisk throughout the second half of the year.”

She says low interest rates and decent job gains will continue to support a high level of construction activity, but the fact that all growth is coming from multiple-unit construction, “suggests that affordability is becoming a greater issue. A steadily rising inventory of completed and unsold new homes, most notably for multiples also suggests the multi-year housing boom may be cresting.”

Single family starts are generally considered a better barometer of underlying strength in construction activity. Construction in urban, single family homes fell roughly 8% while the number of multiple family dwellings rose 5%. Urban starts in July were higher across the country, except in Ontario.

CMHC indicators also show the number of actual urban starts fell 2.6% in the first seven months of the year compared to the same period in 2004. Year to date single family starts decreased 9.8%.

TD Bank economist Sébastien Lavoie, meanwhile says the number of houses currently under construction reveals a more positive picture of homebuilding activity this year. He points out the number of housing units under construction at the end of the first half of 2005 is up 7% from this time last year. He says it typically takes between six and nine months to build a single detached home, and 12-24 months to build a multiple family building.

“While rising prices and higher rates will ultimately lead to a moderating in starts,” he says “any significant slowdown in homebuilding activity is unlikely to emerge until 2006, when starts fall back towards 200,000 units.”

Still he says next year’s pace should come in well above 175,000, the rate of new construction than current demographics seem to support.

“Right now it’s much higher than what the long term trend suggests because there are other factors at play such as the low interest rate. That makes the housing starts more buoyant than it should be on a trend basis,” he says.

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com