Source: The Canadian Press

Construction on new homes slipped in September, a further sign that dwindling demand and slowing building activity is the new norm across all sectors of Canada’s once-bustling housing market.

Canada Mortgage and Housing Corp. reported Friday the seasonally adjusted annual rate of housing starts was 186,400 units in September, down from 189,300 in August.

But Bill Clark, a senior economist at the federal Crown corporation says the dropoff is not a cause for concern, instead it indicates health in the housing market because activity has moderated to a more sustainable level.

“People automatically assume that when things move down a bit, that things are negative. But in actuality, it’s actually quite good because they’re coming more in line with overall demographic demand in Canada,” Clark said.

A decline in new housing starts, which usually lag a cooling trend by about six months, indicates that builders are slowing down construction activity as they see demand falling, to avoid creating a glut of unsold houses on the market.

Home sales volumes began to drop off this spring, normally one of the busiest times for activity in the market, following months of unusually robust activity in the final months of 2009 as Canada’s economy began to emerge from recession.

As consumers began to feel more confident about spending, many rushed into the market during the last quarter of 2009 and the first quarter of 2010 to beat expected increases in mortgage rates, sales taxes in three provinces and tighter federal rules for mortgage qualifications that were brought in last April.

Clark notes that while mortgage rates have moved gradually higher in recent months, they are still near historically low levels — though not at the levels recorded earlier this year.

“A lot of people were taken back a bit by the strength at the start of this year but don’t forget a lot of that was because of people saying well, we have the HST coming up, so a lot of demand was pulled forward,” he said.

Bank of Montreal economist Robert Kavcic said the level of September starts was slightly better than expected, but the downward trend in Canadian construction remains clear.

“Starts should continue to soften in the next few quarters, pulled down by the cooling we’ve seen on the demand side of the housing market,” Kavcic said.

Kavcic predicts forthcoming statistics on existing home sales will reflect a 20% year-to-year decline in September. He also expects new home starts to hover around 175,000 in the months ahead, a level that is just balanced with the rate of new household formation.

CMHC said that a 3.3% decline in urban single starts was largely to blame for the overall drop in construction. Urban multiple starts were unchanged in September at 99,600, while single urban starts moved lower by 8.1% to 63,600.

Home prices in Canadian urban centres, especially Vancouver and Toronto, continue to sit at sky high levels, making it difficult for some to afford a stand-alone home in those markets.

Single units, which are a more stable and reliable indicator of overall health in the new housing market, have now dropped 33% from their March peak, while multiple-unit starts (condos, apartments) are 32% higher.

Urban starts decreased most in Atlantic Canada and Ontario, but were up in B.C., Quebec and the Prairie region. Rural starts were estimated at an annual rate of 23,200 in September.