New home sales in Toronto spiked last month, an early indication that construction may soon pick up for a housing market that is short on supply, not only in Canada’s largest market, but most of the country.

Existing homes sales across the country were up 41.5% last month from a year ago, while the average price of a home jumped 20.7% during the same period. The percentage of homes listed for sale shrank 20.8% last month, which combined with low interest rates has fuelled intense bidding wars in many markets across the country.

Analysts have suggested the market would become more balanced as sellers returned, but that prediction has yet to materialize. It now appears new home construction might fill some of the demand for housing.

The Building Industry and Land Development Association said Friday sales in the Greater Toronto Area were up 106% last month from a year ago and are at their highest monthly total since July 2007.

“Absolutely, starts are about to rise,” said Stephen Dupuis, chief executive of BILD. “It could start to pick up in the next six to 12 months. We should see it by next fall.”

According to Canada Mortgage and Housing Corp., as soon as the foundation is poured that counts as a start. CMHC said this month 157,300 units were built in October on a seasonally adjusted annualized basis, a 5.4% increase from a month earlier. Annualized starts dropped as low as 118,500 in April.

“I think what’s starting to happen is people cannot stand bidding wars — the price is not the price,” said Mr. Dupuis. The problem is, even for a single-family house it can take 12 months for a sale to turn into a start and even longer for a high-rise condominium.

Peter Simpson, chief executive officer, Greater Vancouver Home Builders’ Association, said Vancouver’s new-construction market has also started to improve but even with the uptick 2009 will only see about 9,000 new starts for the area, compared with 19,000 the year before.

“We are feeling a lot better than we were in the spring,” Mr. Simpson said.

But economist Will Dunning says sales now in the pipeline are good news and he can see the new-home market picking up in a number of major centres across the country. “There are a lack of options in the resale market,” he said.

A survey done by Mr. Dunning with the Canadian Association of Accredited Mortgage Professionals (CAAMP) found that 61% of Canadians believe it is a good time to purchase a home. A year ago that number was only 38%.

Derek Holt, vice-president of economics with Scotia Capital, said sales and prices may rise for the next year but he’s worried about the long-term consequences of Canadians taking on so much debt. “We are in the sweet spot for the next year where you can get a volume recovery and prices going up,” he said,

Government moves to liberalize the mortgage insurance market in 2006 have created new products for lending that changed the debt profile of Canadians, he said. He noted flexible mortgages have made it easier for Canadians to take equity out of their homes, pointing to the CAAMP study, which showed 18% of Canadians did that in the last year.

Canadian amortizations are now routinely 30 to 35 years after being 25 years for decades. The same CAAMP survey found only 68% of mortgages are fixed, leaving the rest of country vulnerable if rates should rise.

“Mortgage innovation is welcome in Canada after years of little to no action in this regard,” said Mr. Holt, noting most Canadian products are not as risky as their U.S. equivalents. “But it is definitely a factor boosting near-term Canadian housing demand until a new equilibrium on take-up rates for newly introduced products has emerged.”

Financial Post

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