July 16, 2008

Total Canadian housing starts remain at high levels in June 2008

RICHARD GILBERT

staff writer

Housing starts in Canada have remained strong, even though markets in most of the major industrial countries, in particular the United States, are declining.

The seasonally adjusted annual rate of housing starts fell to 217,800 units in June, which is down from 227,700 units in May, according to Canada Mortgage and Housing Corporation (CMHC).

“Despite the decrease in June, total housing starts remain at high levels.” said Bob Dugan, chief economist at CMHC’s Market Analysis Centre.

“This is mostly due to the multiple segment which has been continuously above the 100,000 unit threshold since the beginning of the year.”

The seasonally adjusted annual rate of urban starts moved down by five per cent in June compared to May.

Both urban multiples and singles decreased, with a decline of three per cent for multiples to 114,700 units and a 7.8 per cent drop for singles to 74,600 units.

“We think the greater number of existing homes for sale and the continued long-term shift to smaller and relatively cheaper multiple-family units will continue to put downward pressure on single family unit starts over the next 18 months,” said Pascal Gauthier, TD Financial Group economist.

“The overall level of new residential construction activity recorded in June was consistent with our theme for this sector of the Canadian economy, which is that while homebuilding is unlikely to carry as much weight in fostering employment and growth as it had in 2005-07, it also looks unlikely to be a source of significant weakness.”

For the first half of 2008, actual starts in rural and urban areas combined were up an estimated 1.5 per cent compared to the same period last year.

Year-to-date actual starts in urban areas have increased by an estimated 6.1 per cent over the same period in 2007.

Actual urban single starts for the first six months of this year were 13.1 per cent lower than they were a year earlier, while multiple starts were up by 23.1 per cent over the same period.

According to the TD bank, residential building construction employment has remained strong year-to-date (as of April), recording 9.3 per cent growth, and is outperforming overall employment growth of 1.9 per cent.

After peaking in October 2007 at 10.9 per cent, year-over-year employment growth in this sector of the Canadian economy eased to 7.7 per cent in April.

While Canada’s housing market and residential employment has remained strong, this situation may not last for long.

“Canada has thus far avoided a housing adjustment. Starts are soaring on the strength of the domestic economy and a huge dollop of very well-timed fiscal stimulus,” said Peter Hall, vice president and chief economist with Export Development Canada.

“But, Canada’s turn may come soon. Although imbalances in the marketplace appear to be small, starts are currently well ahead of requirements, and are unlikely to continue indefinitely at today’s pace:”

The federal government announced last week that it was moving to avoid a housing meltdown like the U.S., by tightening up mortgage-lending practices.

These measures include limiting the amortization period for government-insured mortgages to 35 years, requiring a minimum down payment of five per cent for such mortgages, and requiring that anybody with an insured mortgage have a minimum credit score.

Even though the housing market remains strong in Canada, the performance of the sector may be hampered by the slump in housing in the economies of its main trading partners, especially the U.S, but also in Europe and Asia.

According to Hall, data for May shows that U.K. housing starts fell by 56 per cent from year-ago levels, and sales are down 37 per cent for the same period following a one-month, 13 per cent drop in May.

In Spain, first-quarter housing starts were down 18 per cent and mortgage lending is down 13 per cent from 2007 levels.

Housing starts in France have fallen by almost 17 per cent in May, while in Japan housing starts for April were down nine per cent year-on-year.

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