Single family home construction drops in October

Urban single-house starts were down nine per cent, while multiple-unit urban starts were up by 1.7%.

Overall starts were slightly better than economists had expected — but the fact that the gain was entirely driven by multi-unit housing could lead to problems in the future, said Robert Kavcic, an economist at BMO Capital Markets.

“Not surprisingly, multi-unit starts outperformed in the month as they have been doing for a good year now,” he said, adding that single starts were at their lowest level in just over two years.

“On the supply side, there’s a clear divide between singles and condos, with the latter looking more vulnerable if a correction does indeed come.”

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.

“To put the yawning gap between single and multi-unit construction in perspective, single-unit starts have fallen 29% since the end of 2009 while multis have risen more than 70%,” Kavcic said.

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.

Meanwhile, the below average building of single detached homes makes that market even tighter and puts upward pressure on resale prices.

But Kavcic believes headwinds like weak consumer confidence and a recently cooling job market could start to weaken the housing market, which has remained stronger for longer than expected.

Economists had expected a pullback to 195,000 homes in October, and the beat suggests that the low interest rate environment is still stimulating home building activity, said Emanuella Enenajor of CIBC World Markets.

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.

“Downshifting economic growth, recent declines in the value of residential building permits, combined with a gradual exhaustion of pent-up demand suggest that starts could soften towards 190K-200K into 2012,” Enenajor said.

“However, October’s elevated housing construction … suggests that home building activity heading into Q4 still remains strong.”

Across the country, urban housing starts were down sharply in the Atlantic region and Quebec and up slightly in British Columbia, while Ontario and the Prairie region saw strong increases.

The CMHC said in a report released last Friday that the Canadian housing market has flattened out and will likely stay pretty close next year to where it is now in terms of new housing starts and resales.

Low mortgage rates, the domestic economy and immigration remain positive factors for the real estate market, while uncertainty in the global economy and the U.S. economic recovery pose threats.

CMHC expects new housing starts to come in around the 191,000-unit mark this year and level off next year to about 186,750 units.

The average home price in Canada for 2011 is expected to be $363,900 in 2011, and reach $368,200 in 2012.