November housing starts fall

Multi-unit sector cited in big drop

TORONTO -- A slowdown in apartment and condo construction in November resulted in the biggest one-month drop in Canadian home construction since early 2009, a report found Thursday, just as the Bank of Canada warned of a "heightened risk of a correction" in the multiple-dwelling segment of the market.

The Canada Mortgage and Housing Corp., a Crown corporation, reported the seasonally adjusted annual rate of housing starts dropped 13 per cent to 181,100 units in November, down from 208,800 in October.

It was a much larger decrease than economists expected, entirely driven by a 23 per cent drop in the multiple-unit sector, while the more stable single-family market rose 3.5 per cent.

The CMHC report was released the same day the Bank of Canada warned that the country's robust housing market -- and over-leveraged mortgage holders -- could be in for a shock if the global economy goes south.

The central bank singled out the multiple-unit market as particularly vulnerable to a price correction in the December issue of its Financial System Review.

"The (multiple-unit market) is showing signs of disequilibrium: the supply of completed but unoccupied condominiums is elevated, which suggests a heightened risk of a correction in this market," it said in the report.

A "correction" usually refers to a drop in prices -- often sharp and sudden -- from an exaggerated high. An especially fast and quick correction is often described as a bubble because of the quickness of the collapse.

The Canadian real-estate market has largely avoided the housing bubble that hit the United States in late 2007 and early 2008, setting in motion a series of events that dragged down mortgage lenders and the U.S. financial industry.

Douglas Porter, deputy chief economist at the Bank of Montreal, said the decline in November building activity wasn't necessarily a sign the Canadian housing market is collapsing.

"While starts dropped to their lowest level since February, the details of this report are hardly troubling. The volatile multiple-unit sector has corrected from a bout of surprising strength earlier in the fall," Porter said.

"Even so, we do expect home-building activity to simmer down somewhat in 2012 amid softer consumer confidence and a recently cooler job market."

Francis Fong, an economist at TD Economics, said November's 13 per cent decline was the largest single-month drop since April 2009, when Canada was still in the midst of a major recession sparked by the U.S. financial system's meltdown.

However, Fong added: "This was not a pan-Canadian story." Falling construction activity in the Toronto region, a market some have considered overheated, accounted for more than two-thirds of the decline.

"Today's report, though dramatic, was not surprising in the least. For many months, TD Economics has considered the Toronto region as being at-risk for a correction due specifically to the substantial overhang of supply in the rapidly expanding condo market," Fong said.

A downturn in demand would also likely lead to an easing of Canadian home prices, which The Economist magazine recently declared are about 25 per cent overvalued.

Economists and other observers have been watching for signs of a housing bust in Canada, but there has been little evidence of a bubble, apart from the multiple-dwelling segment and the general Vancouver market.

Many Canadians are scaling down or choosing to rent as home prices and debt loads sit at record levels and economic uncertainty persists.


-- The Canadian Press



Republished from the Winnipeg Free Press print edition December 9, 2011 B4



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