New home construction falls 13% in November

It was a much larger decrease than economists had expected, as construction of multiple units fell after months of increases driven by a booming condo market in large cities like Toronto, and Vancouver.

The decline in November building activity wasn’t necessarily a sign the Canadian housing market is collapsing, taking sky-high prices down with it, said Douglas Porter, deputy chief economist at Bank of Montreal.

He pointed out that the decline was entirely due to a 23% drop in the volatile multiple unit sector, while the “more stable (and important)” single family market nudged up 3.5%.

The pullback also followed an unexpected surge in condo building in recent months, meaning there is still a lot of supply in the market.

Many Canadians are scaling down or choosing to rent as home prices and debt loads sit at record levels and economic uncertainty persists. For some first-time buyers in urban centres, a condo is the only affordable option.

The influx of multi-unit builds has led some economists to warn of overbuilding in the Canadian housing market, which could leave a glut of unsold homes on the market in the case of a downturn. A downturn in demand would also likely lead to an easing of Canadian home prices, which The Economist magazine recently declared are about 25% overvalued.

Francis Fong, an economist at TD Economics said November’s 13% decline was the largest single-month drop since April 2009.

However, he added “this was not a pan-Canadian story.” Falling construction activity in the Toronto region — a market some have considered overheated — accounted for more than two-thirds of the decline.

“Today’s report, though dramatic, was not surprising in the least. For many months, TD Economics has considered the Toronto region as being at-risk for a correction due specifically to the substantial overhang of supply in the rapidly expanding condo market,” Fong said.

Economists have also said that rapidly rising home prices, which have continued to spike longer than expected, are due for a correction. Some have even gone so far as to say homes are overvalued and predict a collapse.

Statistics Canada reported that its New Housing Price Index rose 0.2% in October after a similar increase in September.

The agency said its data on new home prices showed the metropolitan regions of Toronto and Oshawa, and Edmonton were the top contributors to the housing price increase in October. Year over year, the index was up 2.5% in October.

Fong said moderation is “in the cards” for the Canadian housing market.

“High levels of household debt and elevated uncertainty surrounding the economic recovery will be the dominating factors in the coming quarters and TD Economics expects housing starts to moderate further through 2012 and 2013,” he said in the report.

But Porter said he expects the market to simmer down, rather than dry up altogether.

“While starts dropped to their lowest level since February, the details of this report are hardly troubling. The volatile multiple-unit sector has corrected from a bout of surprising strength earlier in the fall,” he said.

“Even so, we do expect homebuilding activity to simmer down somewhat in 2012 amid softer consumer confidence and a recently cooler job market.”

The Bank of Canada is expected to leave its overnight lending rate at a historically low one per cent until next year in order to encourage Canadians to borrow even as the global economy slows.

Given that interest rates — which impact the carrying costs of variable rate mortgages and other loans tied to banks’ prime rates — have been low for years now, some economists wonder how much demand is left in the Canadian housing market.

The Bank of Canada warned Canadian mortgage holders Thursday that they are vulnerable to any potential shock to the domestic economy as a result of the European debt crisis.

Many Canadian households who have been piling up debt during the low-interest environment, might find themselves unable to make their payments, it said.

It added it is so concerned about the record levels of household debt that it is advising the government to keep a close eye on the situation.

It noted it hasn’t been a year since Ottawa tightened rules for obtaining mortgages, but added that while that slowed credit early on, the housing market has since picked up and Canadians keep borrowing at a faster pace than their incomes are growing.