Canadian housing soft landing, not crash

OTTAWA – There are fresh signs of cooling in the Canadian housing market, but analysts say fears of a major crash have yet to materialize.
Canada Mortgage and Housing Corp. reported Tuesday that the pace of housing starts crept up slightly last month from February, despite a drop in the number of single dwellings begun in some urban markets.
Starts in March totalled 12,273 or 184,028 annualized, just slightly higher than in February but down 13.6 per cent from a year ago.

Simultaneously, Statistics Canada released a report on building permits that showed future building intentions for residential construction fell 7.2 per cent in February to $3.6 billion.
Both numbers were bad news for the Canadian economy as a whole, suggesting the key housing market will be a net drag on growth during the quarter and likely in the near term as starts and sales come off higher levels of previous years.

But analysts added that the recent slow descent from very high altitudes in a sector that some calculate is overpriced by as much as 25 per cent and overbuilt — especially in Vancouver and Toronto — is actually what the doctor ordered and may hold off a punitive collapse.
“The slowdown suggests we are not crashing, people are not panicking, especially condo builders,” said Benjamin Tal, a senior economist with CIBC World Markets.

“All the indicators we are seeing as of today, in the resale market and in the housing start market, suggest this is a market that is slowing softly. We should be in the neighbourhood of 170,000 to 180,000 in housing starts and we should be getting there.”

Tal said demographics dictate that builders should be erecting about 180,000 new units a year in order to keep the market in equilibrium. At 184,000, that is still too high and he predicts starts will eventually slow to about 170,000 to soak up excess supply.

Canada’s housing market, which had been among the world’s hottest following the recession, began to slow at about this time last year and braked sharply after Finance Minister Jim Flaherty tightened mortgage rules in July. The policy move, which made it more difficult for first-time buyers to enter the market, was widely praised at the time as necessary to avoid a U.S.-light housing crash that would be crippling to the economy.

Recently, Flaherty has upbraided lenders from cutting mortgage rates too far and undercutting his policy objectives, succeeding in having both the Bank of Montreal and the Manulife reverse mortgage rate cuts.

Arlene Kish of IHS Global Insight said she expected residential construction to remain subdued for the rest of the year, but added that it has become “increasingly unlikely there will be any kind of precipitous collapse in new home building activity.”

A major ballast for the market is that despite Flaherty’s recent efforts, mortgage rates remain at historic lows, and affordability — the measure of household disposable income in relation to home ownership costs — remains near historic levels.

Tal said the cooling, if it continues for a year so, will prepare the market for the eventual squeeze when interest rates start rising, likely in 2014.

“We’ve never seen a crash without a trigger. In 1990-91, the trigger was a huge increase in interest rates. In the U.S., the trigger was an increase in interest rates and the sub-prime shock,” he explained.
“So any slowing we are doing now without those triggers is a bonus because it means we will be more ready to absorb interest rates rising.”

The March start numbers show the downturn was all in urban construction, which dipped slipped 2.7 per cent to 157,217 as single-unit construction fell 6.6 per cent and multiples by 0.1 per cent. By contrast, rural starts had their best month in three years, increasing 24 per cent to 26,800 units.
Regionally, urban starts decreased 15.7 per cent in Ontario on a seasonally adjusted annual rate and were down 13.5 per cent in Quebec.

However, urban starts jumped 27.1 per cent in Atlantic Canada, were 13.8 per cent higher on the Prairies and 13.1 per cent higher in British Columbia.

Emanuella Enenajor, an economist at CIBC World Markets, said the overall numbers were in line with her expectations but better than a consensus estimate calling for the seasonally adjusted rate to fall to 175,000 in March.