Source: The Canadian Press

New home construction slowed in May as the number of startups last month fell below economists’ expectations — the latest indicator that Canada’s once white-hot housing market is cooling off.

Canada Mortgage and Housing Corp reported Tuesday that the annual rate of housing starts dropped last month, pegging the rate at 189,100 units in May, down from a revised 201,800 in April.

Douglas Porter, deputy chief economist at the Bank of Montreal, said May’s figures were below expectations but “hardly a shock.”

“The surprise so far in 2010 had been how quickly starts had ramped up from their depressed levels a year ago,” Porter wrote in a note Tuesday. “While the May level of starts is the lowest so far this year, it’s still above where we see activity for all of 2010.”

Economists have widely predicted a slowdown in the housing market in the second half of 2010.

Consumers pushed many sales forward into the latter half of 2009 and the early part of 2010 in order to get into the market in advance of tougher new mortgage rules in April, the widely expected interest rate increase that was announced by the Bank of Canada in June and the implementation of the harmonized sales tax in Ontario and B.C. coming July 1.

CMHC said the decrease in May is consistent with its forecast of 182,000 housing starts for all of 2010.

Urban starts fell 9.5% to 165,200 units in May, while rural starts were estimated at an annual rate of 23,900 units. Urban multiple starts, which include condos and townhouses, decreased 5.6% to 92,800 units, while single urban starts dropped 14.1, to 72,400 units.

While spring and summer are generally the busiest building seasons of the year, construction is expected to slow markedly as a result of cooling demand in Canada’s housing market, Porter said, adding it looks as though Canadian residential construction activity has peaked for the time being and will recede in the months ahead.

Most economists now predict that home prices will either remain flat or fall in the rest of the year and into 2011.

Derek Burleton, vice-president and deputy chief economist at TD Bank Financial Group, said starts dropped in May despite unseasonably warm, construction-friendly weather in Central and Eastern Canada and were the first major setback for home building in several months.

“Today’s data suggest that the rebound in home-building activity from last year’s recession is quickly running out of steam,” he wrote in a note Tuesday.

“Prior to May, starts had rallied strongly from a recession low of 112,000 units in April of last year. In the first four months of the year, starts had plateaued at the 200,000 level.”

He added that TD Economics anticipates average resale home prices to decline by 6 to 7% over the next four or five quarters.

“A bigger culprit (than the HST) however, is easing price conditions in the broader housing market, as sales continue to come off the boil and more listings make their way onto the market,” Burleton said.

But, thanks in part to a strong showing in April, housing starts in the second quarter are still likely to be solid — around 190,000 to 195,000 on an annualized basis — down slightly from about 200,000 units in the first quarter, Burleton predicted.

Meanwhile, he said in the second half of the year, housing starts will moderate to the 160,000 to 170,000 unit range.

The Canadian Real Estate Association last week lowered its 2010 national forecast for resale transactions following a weaker than anticipated start to the year in some provinces, mainly British Columbia, Ontario and Alberta.

CREA also revised its projected housing price increases for this year, saying it still expects a record to be set this year but that the increase now is expected to be just 1.6% over 2009.

The previous forecast had called for prices to rise 5.4% over last year’s record-setting peak.

The association predicted that by 2011, the national average housing price is expected to decline by 1.5%, driven down by an easing of the growth in sales in B.C. and Ontario.