Residential construction will taper off in 2005, and reach 216,400 units, a decrease of 7.3% from 2004, according to Canada Mortgage and Housing Corp.’s (CMHC) second quarter report, which was released today.

CMHC says the 2005 total will still be the third highest level for housing starts in 17 years.

In 2006, residential construction will continue to slow but will remain strong by historical standards. Housing starts will drop 7.5% to 200,200 units next year, CMHC forecasts.

“The outlook for housing starts remains upbeat for this year and next,” said Bob Dugan, chief economist at CMHC. “However, a slight rise in mortgage rates, eroding pent-up demand, slower employment growth, and waning spill-over of buyers from the existing home market are some of the factors that point to a gradual slowing in the pace of new home construction.”

Existing home sales, as measured by the Multiple Listing Service , will register their second best year on record with 441,100 units in 2005, a slight decrease of 4.3% compared to the previous year. A rise in new listings will help maintain the level of transactions well above the 400,000 mark for each of the next two years.

However, CMHC says the steady price increases of the past three years and the expected rise in mortgage rates will push mortgage carrying costs higher and housing demand will ease gradually. This in turn will create more balanced conditions in the existing home market and cause price growth to slow to 6.8% in 2005 and 4.3% in 2006.