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Heading for a soft landing

By Jay Bryan
National Post
August 16, 2008


Since last year, forecasters have been predicting Canada's hot housing market was about to slow to a much more sedate pace. Well, it's happened.

Except that sedate is hardly the word for the 14% plunge in construction activity that turned up recently in the housing starts data for July. To many, this sharp drop will be downright alarming, raising fears that the catastrophic housing meltdown in the U. S. has now spread across the border.

They can relax. Or at least most of them can.

Maybe a little nervousness is appropriate for those who bought near the market's peak in one of Canada's very high-flying centres of real-estate inflation -- places like Calgary, Edmonton, Vancouver and Victoria.

In these towns, warns BMO Capital Markets economist Sal Guatieri, soaring home prices so greatly outstripped income growth that it wouldn't be surprising if real estate values had to drop significantly in order to restore affordability to the market.

But in most of Canada, what we're seeing looks like a normal return to earth after a six-year-long real estate boom.

The frenetic construction and double-digit price gains of yesteryear couldn't last forever, so now we've entered the cooling-off phase. Economic forecasters think the outlook for most cities is for prices to stagnate, or maybe edge down a little, while the level of construction eases, but doesn't collapse.

If this doesn't seem to fit with the outlook foreshadowed by July's big drop in construction activity, that's simply because you're reading the numbers too literally. No one month's statistics mean very much, especially if you take them at face value.

When you look at a chart of housing starts over a period of many months, it looks like a mountain range, with soaring peaks and deep valleys. Most of this volatility is caused by builders of condominiums and other multiple-unit developments, where a few projects more or less can make the numbers skyrocket or plummet.

That's why analysts take the single-family starts more seriously. They're a lot less volatile and, thus, a better indicator of where the market is really heading. In July, single-family housing starts fell by just 7%.

As well, nearly all of July's decline was in Ontario -- "think Toronto condos," says BMO Capital Markets analyst Robert Kavcic. And exceptionally wet weather in Eastern Canada likely slowed construction, notes Millan Mulraine of TD Securities.

Outside of Toronto, most big cities saw only modest changes in activity.

So what can we expect for the coming months? Continued slowing, most likely, but certainly no savage nationwide meltdown on the model of the U. S.

Royal Bank economist Paul Ferley notes that in 2007, Canadian housing construction remained little changed from the banner year of 2006, even as U. S. activity plummeted 26%. He thinks Canada's housing starts will drop by only about 5% this year, compared with a 30% plunge south of the border.

Mr. Ferley thinks that 2009 will finally bring a significant drop in Canadian activity, but nothing like the U. S. collapse, with starts down by about 15%. The brake on construction is the slowdown in sales that started months ago, with sales figures in each month this year down from the comparable period in 2007, Mr. Guatieri notes.

It's quite likely that this will continue into next year, since the U. S. economic slowdown and the recent sharp decline in commodity prices are both beginning to bite in Canada, bringing declines in job creation.

With housing demand weaker, price gains have already slowed sharply.

With a 5.4% average gain over the past year, Montreal is doing a little better than the national average of 3.5%. Toronto is near average at 3.8%. The hardest-hit include mainly big Western cities, with Vancouver up 1.8%, Edmonton 1.6%, Calgary a mere 0.1% and Victoria down by 0.4%.

But even if the boom is over, there's no national bust in sight. Without the severe financial excesses and fraud that devastated the U. S. mortgage market, undermined that country's banking system and brought soaring numbers of home foreclosures, Canada simply doesn't have the conditions to trigger a housing collapse.

Posted on Thursday, September 4, 2008 at 04:17PM by Registered CommenterElaine in | CommentsPost a Comment | References1 Reference

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