Housing starts slip in July, home prices rise modestly in June

Canadian housing starts fell in July for the third straight month and home prices rose less than anticipated in June, according to new reports that reinforced signs of a dampening trend in the housing market that is expected to continue into next year.

Canadian housing starts fell in July for the third straight month and home prices rose less than anticipated in June, according to new reports that reinforced signs of a dampening trend in the housing market that is expected to continue into next year.

Housing starts slid last month to the lowest level of home building activity seen since the start of the year, said TD Bank (TSX:TD) economist Dina Cover.

“Existing home sales have been trending down since the start of this year — with the decline accelerating in May (through) July — while prices have been losing modest ground since May,” she wrote in a report.

“In turn, lower home prices have dampened the incentive for home building. With prices expected to slide a bit further, fewer home starts are likely to hit ground.”

The number of new home starts fell to 189,200 last month, with the drop led by a decline in single-unit homes, according to figures released Tuesday by Canada Mortgage and Housing Corp..

July’s figures came in just above market expectations for 185,000 new homes — but represented a 1.6 per cent decline from the previous month after the agency revised June’s starts upward to 192,300 from 189,300.

In a related housing market report released Tuesday, Statistics Canada said the New Housing Price Index rose 0.1 per cent in June following a 0.3 per cent increase in May.

The housing market helped pump Canada’s economy out of recession, and led a global recovery, but has stalled in recent months as consumers face rising mortgage rates and worries over a still-fragile economic recovery.

Canada’s housing market is now cooling faster than any other country amidst a recent global real estate slowdown, according to the Global Real Estate Trends report released Tuesday by Scotiabank (TSX:BNS).

“The recent slowdown has been most dramatic in Canada,” said Adrienne Warren, senior economist at Scotia Economics.

Home prices in Canada were up just 6.8 per cent year over year in the second quarter, compared with 16.6 per cent year over year in the first quarter, she noted.

“Sales, while still at a high level, have trended steadily lower alongside reduced affordability and exhausted pent-up demand.”

Cover said after a sharp rebound in the housing market earlier this year, the downward trend in home building activity should not come as a shock.

Many Canadians rushed to enter the housing market in the second half of last year and the first half of this year as buyers hoped to secure mortgages while interest rates were historically low and before the introduction of new mortgage lending rules and the harmonized sales tax in B.C. and Ontario.

“And given the lag time between construction and sales, builders began slowing housing starts a few months in advance,” Cover said.

Canada’s once-hot housing market likely made a less substantial contribution to the country’s GDP in the second quarter before it becomes a drag on GDP in the third quarter, Cover said.

After three consecutive months of decline, housing starts are now down a moderate eight per cent from their April peak, said Robert Kavcic, an economist at the Bank of Montreal (TSX:BMO).

“That was likely the high-water mark of the recovery in Canadian residential construction activity, and (we) expect further slowing in the remainder of 2010.”

Meanwhile, June’s rise in new home prices was softer than expected, but lifted the annual year-over-year increase to 3.3 per cent from 2.9 per cent in May, Kavcic added.

“Next month’s release will reveal the full impact of the HST in B.C. and Ontario. While the index excludes taxes, it will be interesting to see any sign that builders are passing on part of their cost savings, which would apply some downward pressure to prices,” he wrote in a report.

Urban starts increased by 1.9 per cent to 169,300 units in July — driven by multiple unit starts, which increased by 13.4 per cent to 101,400 units. Single urban starts dropped 11.3 per cent to 67,900 units.

That falls in line with a trend over the past six months in which multiple starts have been rising while single-unit starts — seen as the best barometer of the housing market’s health — have been contracting, Cover said.

She predicted housing starts will be driven down to between 165,000 and 170,000 units by the end of the third quarter.

Meanwhile, Warren’s report found that Canadians have been paying more to sellers of resale homes than to new home builders in the past decade in which the average cost of a new home increased by just over 50 per cent, while the average resale home price has more than doubled since 2000.

“Traditionally, the demand and pricing for new homes mirror, but with a lag, trends in the resale market. When resale housing selection is limited, and/or prices are increasing sharply, buyers are more likely to consider a new home purchase.”

Buyers have been driven to the resale market due to factors including an influx of renovation activity that has added value to the existing stock of houses and increases in urban land values.

Warren expects housing market demand to ebb lower into next year and prices to remain roughly flat.

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