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(Deborah Baic/Deborah Baic/The Globe and Mail)
(Deborah Baic/Deborah Baic/The Globe and Mail)

Clouds darken over new home construction Add to ...

The threat of higher interest rates and record levels of household debt have taken a bite out of Canada's new home construction sector, with a sharp drop in new housing starts foreshadowing an underwhelming year of growth.

Canada Mortgage and Housing Corp. said starts fell 13 per cent in December, pulled lower largely by a 45 per cent drop in condo construction in Ontario. New home construction is a cornerstone of the economy, and a weaker market in 2011 is expected to be a drag on economic growth.

"Ballooning Canadian household indebtedness levels and the prospect of higher borrowing rates confirm the notion that households cannot continue doing the heavy lifting going forward," said Sonya Gulati, an economist at Toronto-Dominion Bank.

The national housing agency reported that the annual rate of housing starts was 171,500 units in December, down from 198,200 in November. The market has been cooling since the summer, however, with more sales in the first half of the year.

That mirrors what's been happening in the resale market, where sales are down as much as 30 per cent in larger cities from a year ago. Many buyers bought early in the year as they worried that interest rates were about to move higher, and demand has continued to slip since early summer.

CMHC said multiple-unit starts - comprised mostly of condominium developments - averaged 91,000 starts last year. That number pulled back to 85,000 in December.

"What we're seeing is that the current levels simply are not sustainable," she said, adding that she expects to see it fall to the historically average level of 75,000.

If the condo market is on the verge of a slowdown, nobody bothered to tell the brokers who piled into a Toronto sales centre this week to get an early peek at a new project slated for the city's downtown core. Realtors stood shoulder to shoulder as they grabbed pamphlets and sales materials, optimistic that they'd be able to convince their clients to move into the Backstage on the Esplanade project when it's completed some time in the next few years.

Toronto builders expect to launch 35 new projects in the first two quarters of the year, with as many as 17,000 new units expected to hit the market in 2011. There were 19,000 sold in 2010, the second-best year on record.

"Economists have been very conservative in their forecasts for Toronto and I don't know why," said Stephen Dupuis, president of the Building Industry & Land Development Association of Toronto. "Everyone assumes interest rates will go up, although we've seen no evidence of that. And they think the longer the market is strong, the less likely that is to continue. I don't think that is the case."

Just because the projects are launched, however, doesn't mean they will be built. Builders still need to find buyers and financing before they can start working.

"Some of those projects may fall by the wayside because even sales don't necessarily mean financing," said Ben Myers of data tracking firm Urbanation. "But we're seeing a lot of new sources for financing - private equity funds are doing more and [large insurers]are partnering."

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