Alex Carrick
Chief Economist, CanaData

February home starts in Canada rose to 181,900 units from 170,600 units in January, seasonally adjusted and annualized, according to Canada Mortgage and Housing Corporation (CMHC).

February 2011’s level was 9.9% lower than February 2010. Versus the first two months of last year, home starts in 2011 have averaged -10.6%. The first half of 2010 was relatively strong, before a modest decline settled in during much of the second half.

There are several reasons to expect home starts this year to be weaker than last year. Ottawa has tightened rules governing mortgage approvals, shortening the amortization period for example.

Some sticker price shock exists as home prices in Canada experienced only a mild drop in the recession. There was nothing like the 30% correction in home prices that occurred south of the border. To date, no progress has been made in reversing the decline in U.S. residential prices. By way of contrast, the latest reading on year-over-year new home prices in Canada is +2.1%.

The Bank of Canada (BOC) is likely to move interest rates higher from this summer on. And the BOC Governor, Mark Carney, has been warning Canadians about taking on excessive debt.

A particular concern has been mortgage debt. There is the danger of people committing to too much property. This may make it hard to keep up payments once rates start to climb again.

The increase in global oil prices on account of popular uprisings in Libya and elsewhere in the Arab world will rein in the enthusiasm of some people for major expenditures. Some will choose to wait and ponder the impact of rising gasoline prices on their wallets and spending plans.

The inventory of unsold multiple units (i.e., mainly condos) nation-wide in February continued to climb, lifting a level that was already far too high. Toronto, Montreal and Vancouver account for more than half of total condo starts in the country. Year-to-date condo starts in Montreal are -29% versus January-February, 2010. But in Vancouver, they are +51% and in Toronto, +58%.

At the same time, there are ongoing positive indicators for the homebuilding sector. Sales of existing homes have exhibited a solid recovery after slipping for a while last summer. They now reside at a figure approximately halfway between their recessionary low and their previous peak.

The Bank of Canada’s policy-setting overnight rate is so low (1.00%) that even when it does receive a prod upward again, it will set a tone for mortgage rates that will still remain appealing, versus historical levels, throughout this year. Real worry should stay dormant until mid-2012.

Demographic signposts in the form of population change and family formations are key underlying determinants of housing demand. In 2010, the number of immigrant arrivals in Canada was the highest in 50 years at 280,000. Normally, the annual immigration level lies between 200,000 and 250,000. These are individuals and families that must be housed.

Employment in Canada is very encouraging. There are as many jobs now as before the recession. Furthermore, gross domestic product growth (GDP) in 2011 is expected to be +3.0% or more.

The foregoing mix of counterbalancing factors indicates a figure for housing starts in 2011 not far off the number they have achieved in the first two months of the year, around 175,000 units.

A year of solid economic growth in 2011 will help with jobs and home starts. Going forward, GDP will receive a push from a great number of resource projects that are being planned across the country. The regional pattern of the raw materials boost may be more diverse than in the past.

In the last resource sector boom, there was a heavy weighting towards projects in Western Canada, thanks particularly to Oil Sands work in Alberta. This time around, due to nearly across-the-board increases in commodity prices, central Canada may share more fully in the bonanza.

Ontario has major precious and base metals mining projects on the drawing boards for its northern regions, Sudbury and the Ring of Fire. Due to the demand for steel to build infrastructure in emerging nations, Quebec is expecting major spending on iron ore projects.

It’s too early in the year to draw too many firm conclusions about Canada’s housing market. The approaching spring buying season will provide a better indication of how healthy the market is.

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Contact the Jeffrey Team for more information – 416-388-1960

Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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