Housing starts soften, hinting at builder caution amid sales tumult

Share

Housing starts are softening a tad, suggesting that builders are showing a degree of caution in the wake of tumultuous sales.

The number of homes that got under way in July came in at 192,853 on an annualized basis. That's a drop of about 0.5 per cent from June's 193,797 starts. But Canada Mortgage and Housing Corp. has revised down that June figure, which it originally pegged at 199,586 units.

Economists say the softening is a positive development, with many continuing to fear that some segments of the market – such as Toronto condos – are being overbuilt. They have long been expecting starts to decline, but builders have frequently surprised them over the past year and a half.

While July's starts are slightly lower than June's, they are still a bit higher than expectations. The consensus forecast among economists called for starts to come in at about 190,000 units last month. There were 205,000 starts, on an annual basis, in May. The strong figures in recent months were attributed largely to condominiums.

"As long as it remains below 200,000, fears that the market might be overbuilding might subside a bit," said Royal Bank of Canada economist Robert Hogue. "At this stage of the cycle, if the numbers were even a little bit more on the weak side that might not be a bad thing."

Toronto-Dominion Bank economist Dina Ignjatovic wrote in a research note that "the recent string of housing starts coming in above the 190,000 unit level is unlikely to be sustained for much longer, as it is well above the demographically supported level. As well, following last year's stellar performance, there is an estimated oversupply of 250,000 new homes (about one year's worth of construction) likely to hit the market over the next 18 to 24 months."

She added that rising mortgage rates are likely to keep a lid on growth going forward, and actions that CMHC is taking to limit the guarantees it offers banks on mortgage securities could put further upward pressure on mortgage rates.

However, Mr. Hogue and other economists remain perplexed about how the softer starts jive with strong building permit numbers.

"Building permits have been very strong over the last three months, so I've been expecting some kind of pop in starts, which has not happened," Mr. Hogue said. "Those building permits and starts have to reconcile at some point."

While there has been a modest decline in starts, they remain strong, Mr. Hogue's colleague RBC economist David Onyett-Jeffries, said in a research note. Given where building permits are at, starts might maintain some momentum in the coming months, he added. "Thereafter, however, we anticipate that starts will resume the downward trend that had been in place over the previous year as rising interest rates impinge on housing affordability and weigh on demand."

Prior to the numbers being released Friday morning, economists at Bank of Nova Scotia suggested in a research note that it's difficult to gauge what's happening in home construction right now.

"The leading indicators are mixed here: on the bearish side of the ledger, new home sales in Toronto have fallen precipitously so far this year and existing home sales are down on the order of six per cent year-to-date in key markets such as Toronto too," they wrote. "On the other hand, summer construction season has been strong thus far…and building permits numbers are ok, leading us to wonder if builders are simply ignoring weakness on the sales front and plowing ahead."

Much of July's decline in starts comes from houses in major urban areas. Urban starts of single homes fell by 5.5 per cent, while condo starts were essentially unchanged. Starts rose in British Columbia, but were down in cities across Atlantic Canada, the Prairies, Ontario and Quebec. Rural starts, meanwhile, saw a notable pickup.

Ms. Ignjatovic said she's expecting housing starts to trend down to 170,000 units by the second half of next year.