New home building across Canada dropped by a sharp 13 per cent in November as the volatile sector that represents condos and apartments showed declines, but there was still no sign the red-hot Canadian housing market is poised for a tumble, analysts said.
The Canada Mortgage and Housing Corporation reported Thursday the seasonally adjusted annual rate of housing starts was 181,100 units in November, down from 208,800 in October.
It was a much larger decrease than economists had expected, as construction of multiple units fell after months of increases driven by a booming condo market in large cities like Toronto, and Vancouver.
The decline in November building activity wasn't necessarily a sign the Canadian housing market is collapsing, taking sky-high prices down with it, said Douglas Porter, deputy chief economist at Bank of Montreal.
He pointed out that the decline was entirely due to a 23 per cent drop in the volatile multiple unit sector, while the “more stable (and important)” single family market nudged up 3.5 per cent.
The pullback also followed an unexpected surge in condo building in recent months, meaning there is still a lot of supply in the market.
“That marks the weakest reading for housing starts in nearly nine months,” said CIBC World markets economist Emanuella Enenajor.
“In recent months, the multiples category (i.e. condo building) has been responsible for nearly all of the rise in housing starts activity, with singles activity stalling on land supply issues as well as relative affordability.”
But the latest figures suggest “that the multiples category is showing clear signs of softening, a trend likely to persist as that heated market cools in the quarters ahead. Given a softer pace of multiples building expect starts to average around 190,000 to 195,000 in the coming year.”
Meanwhile, Statistics Canada reported that its New Housing Price Index rose 0.2 per cent in October after a similar increase in September.
The agency said its data on new home prices showed the metropolitan regions of Toronto and Oshawa, and Edmonton were the top contributors to the housing price increase in October. Year over year, the index was up 2.5 per cent in October.
Many Canadians are scaling down or choosing to rent as home prices and debt loads sit at record levels and economic uncertainty persists. For some first-time buyers in urban centres, a condo is the only affordable option.
The influx of multi-unit builds has led some economists to warn of overbuilding in the Canadian housing market, which could leave a glut of unsold homes on the market in the case of a downturn. A downturn in demand would also likely lead to an easing of Canadian home prices, which The Economist magazine recently declared are about 25 per cent overvalued.
But Mr. Porter said he expects the market to simmer down, rather than dry up altogether.
“While starts dropped to their lowest level since February, the details of this report are hardly troubling. The volatile multiple-unit sector has corrected from a bout of surprising strength earlier in the fall,” he said.
“Even so, we do expect homebuilding activity to simmer down somewhat in 2012 amid softer consumer confidence and a recently cooler job market.”
The Bank of Canada is expected to leave its overnight lending rate at a historically low one per cent until next year in order to encourage Canadians to borrow even as the global economy slows.
Given that interest rates — which impact the carrying costs of variable rate mortgages and other loans tied to banks' prime rates — have been low for years now, some economists wonder how much demand is left in the Canadian housing market.
The Bank of Canada warned Canadian mortgage holders Thursday that they are vulnerable to a potential shock to the economy as global financial conditions are deteriorate rapidly.
The central bank's semi-annual financial stability review says bluntly that Canadians need to start worrying about the worsening debt mess in Europe, and its ability to hit home hard.
Not only is the overall economy exposed, but many Canadian households who have been piling up debt during the low-interest environment, might find themselves unable to make their payments.
The bank said it is so concerned about household debt, which is at record levels and is continuing to rise, that it is advising the government to keep a close eye on the situation.
It noted it hasn't been a year since Ottawa tightened rules for obtaining mortgages, but the bank says while that slowed credit early on, the housing market has since picked up and Canadians keep borrowing at a faster pace than their incomes are growing.