Fears of housing crash remain as starts slow but to still elevated levels

OTTAWA – Housing starts declined for the fourth consecutive month in December, but remained well above sustainable levels, leading to further fears the economically important sector could be headed for a hard landing.

Canada Mortgage and Housing Corp. said Wednesday the pace of housing starts slowed by a modest 1.7 per cent last month to 197,976 on an annual basis, the fourth drop in as many months.

On an real basis, CMHC said there were 16,352 actual starts in December, with condo construction falling 4.7 per cent and single-unit dwellings rising by 8.6 per cent.

But the decline was less than analysts expected, even before the agency revised November’s starts upwards to 201,376.

That made the average starts for 2012 tip the scale at a hefty 215,171, up 11.4 per cent from 2011 and the highest level since 2007.

On Tuesday, Canada’s leading bankers judged the country’s real estate market as “relatively solid” despite the slowdown and concerns about overbuilding in the condominium segment, forecasting that 2013 would see a “soft landing” in the market.

But December’s relatively strong numbers also gave skeptics more reason to warn of a future reckoning.

David Madani of Capital Economics said Canada’s real estate market is exhibiting the same cracks as the United States before the 2007 crash.

While lower, December’s starts were still well above the 175,000-185,000 the annual growth requirement needed to accommodate population growth. Meanwhile, sales are heading south. Toronto resales of existing properties have fallen 19.5 per cent from a year ago, while Vancouver’s crash has been worse, down 31.1 per cent from last year.

“The upshot is that too many housing units have and are still being build, excesses that will eventually upset the balance of demand and supply,” Madani warns.

“We will stand by our long held view that home prices are likely to fall by around 25 per cent over the next year or two.”

Bank of Canada governor Mark Carney has long voiced concerns that Canadians are borrowing too much to enter the housing market, primarily because low interest rates makes ownership affordable even with inflated home prices.

The worry is once the correction comes — whether soft or hard — Canadians will find themselves with record levels of debt and depreciating assets, which could slow consumer spending not just in real estate but across the economy.

In its most recent economic outlook, the central bank forecast housing would be a net drag on the economy in both 2013 and 2014, although it sees the extent of the pull-back in modest terms.

December’s numbers continue a slowing trend from the summer. Starts surged above 230,000 annualized in the spring, and pulled back after July, when new stricter mortgage rules went into effect.

Bank of Montreal economist Robert Kavcic said he expects homebuilding activity to slow to about 180,000 this year, which “would meet underlying demographic demand, and be just the scenario that policy-makers ordered.”

Seasonally adjusted, December’s annual rate of urban starts slipped 0.1 per cent in December to 178,870 units, with single starts up 8.6 per cent to 67,419 units and multiple starts down 4.7 per cent to 111,451 units.

Regionally, Ontario led the way in starts with a rise of 31.1 per cent to 78,245 units annualized. But there were setbacks in the Atlantic region, Quebec and the Prairies.