Housing starts jump 7%

The pace of new home construction in Canada picked up in September, jumping from an annual rate of 191,900 to 205,900.
The pace of new home construction increased in September, CMHC said Tuesday. (CBC)

The pace of new home construction in Canada picked up in September, jumping from an annual rate of 191,900 to 205,900.

"Housing starts picked up in September due to an increase in multiple starts in the Atlantic region, Quebec and in British Columbia," the Canada Mortgage and Housing Corporation's deputy chief economist Mathieu Laberge said.

"Multiple housing starts are expected to move back towards levels consistent with demographic fundamentals in the near term."

Urban starts increased by eight per cent to 185,900 units in September. Multiple urban starts rose by 14.2 per cent to 118,000 units, while urban single starts decreased by 1.5 per cent in September to 67,900 units.

Urban starts increased 47 per cent in the Atlantic region, 32 per cent in Quebec and 18.6 per cent in B.C. In Ontario, the pace declined by 3.5 per cent, while in the Prairies it declined by 12 per cent.

The rate was better than the 190,000 or so that economists had been expecting.

"Although the momentum in housing construction cannot be denied, it is being driven increasingly by multiples construction, the segment of the market where newly completed inventory levels are at historically high levels," said David Madani of Capital Economics.

"The higher level of newly completed unoccupied housing units, however, suggests that housing starts are unlikely to be sustained at rates above those required by demographic shifts (perhaps 175,000) for very much longer."

An extended period of low interest rates, combined with high home prices and a relatively stable domestic economy have helped to prop up demand in Canada's housing market for longer than economists initially expected.

The strength in the September figures could help push third-quarter gross domestic product higher.

A robust September, combined with upward revisions to reports from July and August, prompted Capital Economics to revise its estimates for investment in residential building in the third quarter from two per cent to as much as eight per cent.

That momentum will likely be carried into the last quarter of the 2011 calendar year, Madani said.

But if too many new homes are built, a sudden change in the economic outlook could lead to a glut of supply, which would bring home prices down sharply and reduce the net worth of Canadians.

TD Bank economist Francis Fong said the September numbers suggest the housing market remains "extremely healthy."

"Recent financial turmoil emanating from Europe has hit Canadian markets hard and has led to a renewed flight towards the safety of government bonds. This has helped to keep mortgage rates at their record low levels, meaning affordability is still supportive of housing demand," Fong said.

"However, TD Economics expects that spending fatigue and high levels of debt among Canadian households will lead to further moderation in the housing market," he added.

Low interest rates make mortgages cheaper to carry and encourage first time home buyers to enter the market, which drives up prices.

Once those rates begin to rise, the current price of homes could become unaffordable for many, putting downward pressure on future prices.

Those higher home prices and investor expectations of further capital gains have likely driven apartment and condo sales. That could leave the market vulnerable to a sudden loss of confidence "resulting in falling house prices and significant knock-on effects for the economy," Madani said.

"Although there are many potential economic triggers for a housing slump, we also stress that a negative shock, say to unemployment, is not strictly necessary. Instead, a shattering of the blind faith in ever-rising house prices might be sufficient," he warned.

With files from CBC News