Tuesday, August 12, 2008

Canada's housing market cools in face of sharply slower economic growth

Canada's housing market lost some steam in July as the fevered pace of new home and condo construction cooled, especially in Ontario, after prices rose at their slowest pace in over six years in June in the face of sharply slower economic growth.

Canada's national economy "is flat on its back" after two straight monthly declines in employment, Sal Guatieri, senior economist at BMO Capital Markets, said Monday.

As a result, he said, people are "anxious and worried about the economic outlook," (and) "are not inclined to make big-ticket purchases like homes."

He also said the housing slowdown comes as a kind of payback after "unsustainably strong" building activity in past years and prices being "overly high for too long."

Helene Begin, senior economist with Desjardins Securities, said "it is possible that poor weather conditions, particularly in central and eastern Canada, magnified the decline in construction."

Both regions have experienced record amounts of rain and severe storms over the past couple of months.

The Canadian economy has been hurt by the slowdown in the United States, brought on by the worldwide credit crunch, which has savaged Canada's export-sensitive forestry and automotive industries, leading to thousands of layoff announcements.

Softening commodity prices, especially for oil, are also creating uncertainty in the marketplace.

The national economy lost 55,000 jobs in July, with Ontario and Quebec, the country's two most populous provinces and the centre of the manufacturing sector, the hardest hit.

Statistics Canada said Friday the national unemployment rate improved slightly to 6.1 per cent in July, from 6.2 per cent in June, but only because many people - especially the young - left the workforce.

Canada Mortgage and Housing Corp. reported Monday that July's annual rate of housing starts was 186,500 units, down from 215,900 units in June.

"It was the second consecutive monthly decline, and the most significant since December last year," said TD economist Pascal Gauthier in a note to clients.

He said "the overall level of new residential construction activity recorded in July fell significantly short of expectations for a total of 210,000 starts."

While Alberta and British Columbia sidestepped the national trend in construction activity, up 23 per cent and five per cent respectively, "every other province recorded significant reductions in housing starts," said Gauthier.

Saskatchewan fell the most with a 56 per cent decline, "but it was Ontario's 28 per cent pullback in starts that weighed the most on national figures," he said.

The volatile multiple unit segment, including housing such as condos, "took the largest hit, mostly in Ontario as well," said Gauthier.

Urban single-unit starts posted a seven per cent decline in July, continuing their gradual downward trend, he said.

Meanwhile, Statistics Canada said Western Canada's softening market slowed housing prices to their slowest pace in over six years in June.

Nationally, contractors' selling prices rose 3.5 per cent between June 2007 and June 2008, compared with the 4.1 per cent year-over-year increase in May.

Neil Killips, an economist with Statistics Canada, said "the price softening housing market is mostly due to Western Canada."

"Calgary... about two years ago... was at almost 60 per cent increases, but now it's at 0.1 per cent in July," he said. "That's really been the drive in the last two years, is what's happening in Alberta."

The housing market, said Guatieri "is downshifting from the elevated rates of activity of recent years."

Sales volumes fell sharply around the start of 2008, then price growth downshifted and now homebuilders are scaling back, he said.

Brent Weimer, a senior economist at CMHC, said that "after a strong first half of the year, the volatile multiple segment is now readjusting itself."

The figures bring the year's activity more in line with the agency's 2008 forecast of about 200,000 housing starts for the seventh consecutive year, he said.

Will this forecast hold? "As an average for this year, it's possible just given how high starts were in the first half of the year," said Guatieri.

But "in the second half of this year, housing starts will be far lower, quite likely under 200,000."

The seasonally adjusted annual rate of urban starts fell 14.8 per cent in July from June.

The June price increase was the slowest rate of growth since March 2002 when year-over-year prices increased by 3.4 per cent.

Prices edged up 0.1 per cent between May and June this year.

Regina homebuyers suffered the largest gains in new home prices, at 28.5 per cent over June 2007, while St. John's, N.L., had the second largest increase, at 22.2 per cent.

Going forward, said Gauthier, "one should not read too much into an oversized drop in multiple starts in a single month. The month-to-month volatility in this market segment is remarkably high on both the upside and downside."

A better indicator of the market going forward, he said, is the trend in single starts. For the remainder of the year, this segment "should experience a cooling after running too hot for too long."

BMO's Guatieri also predicted that the construction trend in single family starts for the rest of the year "will be downward."

House prices, he said, "will continue to moderate. In some cities, we will see outright declines as we're already seeing in Calgary, Edmonton and Victoria."

"Housing will no longer act as a tailwind for our economy at an unfortunate time because trade still presents a pretty stiff headwind and we won't get the offset from housing that we saw in the last year."

Source: By Eric Shackleton, The Canadian Press

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