Housing Starts, Where are they Headed?

February 11, 2011

Economic Snapshot

New mortgage rules should cause housing demand to slow but not stall in 2011

JOHN CLINKARD

consulting economist, CanaData

Although existing home sales in the fourth quarter of 2010 were down 19% year over year, the fact they were up 12.7% compared to Q3/2010 clearly suggests that Canada’s housing market was picking up strength in the final months of 2010.

Factors contributing to this improvement include strong growth of full time employment (+152,000 gain over the previous four months) plus an improvement in affordability stemming from a combination of lower mortgage rates and a significant slowdown in house prices.

Looking forward, the fundamental drivers of housing demand remain positive.

First, based on the most recent Bank of Canada Business Outlook Survey, the outlook for job growth over the next twelve months exhibited a healthy increase in the fourth quarter and now stands at its highest level since the fourth quarter of 2009.

Second, according to the most recent Royal Bank Housing Trends and Affordability Report, housing affordability improved in the third quarter due to lower mortgage rates and some softening in home prices.

Moreover, according to the report, further improvement in affordability is likely due to moderating house prices and rising incomes, despite the prospect for somewhat higher mortgage rates.

While the fundamentals of sustained growth of employment and positive affordability should underpin housing demand over the near term, the federal government’s recently announced plans to tighten mortgage lending rules by reducing the maximum amortization period on government insured mortgages from 35 to 30 years will probably put a drag on housing demand during the second half of the year.

Based on information reported in the November 2010 Annual State of the Residential Mortgage Market in Canada, prepared for the Canadian Association of Mortgage Professionals, this measure will primarily impact first time buyers since an estimated 30% of new mortgages issued over the past year had 35 year terms.

For 2010 as a whole, we expect housing starts to total 180,000 compared to an estimated 193,000 in 2010 and 149,000 in 2009.

John Clinkard has over 30 years’ experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.

Data Source: CMHC/Chart: Reed Construction Data, CanaData