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With warmer weather, Canadian home starts heat up to seven-month high

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OTTAWA - Canadian home construction showed surprising strength in May, beating market expectations and continuing to defy expectations of a slowdown as the pace of housing starts hit a seven-month high.

The 0.8 per cent gain in May to a seasonally adjusted annual pace of 198,324 starts reported by Canada Mortgage and Housing Corp. built on the previous month's rebound from the near five-year low of 157,500 set in March, which increasingly appears to have been related to unusually poor weather.

Still, economists say the housing market can't sustain such a pace for much longer, given that by most indicators — from prices, to affordability, to home ownership rates to household debt — the sector appears to be at the top of its cycle.

"There are still many signs that the Canadian housing market may be moderately overbuilt. The number of condos for sale in the existing home market has increased considerably faster than demand in (in many cities). Meanwhile, the number of new homes under construction is at an all-time high," noted TD Bank economist Diana Petramala.

"Looking past this near-term volatility, housing starts are expected to continue to trend down to 170,000 to 175,000 units, a pace that is more in line with household formation, as the housing market works through the elevated number of condos for sale."

Still, RBC economist Laura Cooper points out that the current rebound will likely give a lift to second-quarter gross domestic product growth since home building remains a key driver of construction jobs, real estate services and sales of furniture and appliances.

The biggest gains in May came in urban single-unit starts, which rose 5.4 per cent, while multiples dipped 0.8 per cent and rural starts fell by 3.8 per cent.

There was also a significant regional disparity in the data, with a huge leap in the Atlantic provinces (82.3 per cent), and more modest increases in Quebec and British Columbia. Tempering the gains was a 15.7 per cent pullback in the Prairies and a mostly flat reading in Ontario.

The overall increase helped elevate the six-month moving average for the seasonally adjusted annual pace to 184,438 compared with 183,872 in April.

For the past two months, however, starts have averaged almost 198,000, which represents a 13 per cent increase from the first three months of the year and well about what is considered as the underlying rate of household formation in the country.

While the market has slowed somewhat from the torrid pace in set a few years back, most analysts believe there is more retrenching ahead as the economy recovers and interest rates start heading higher.

Still, the last month or so has seen mortgage rates declining rather than rising as banks seek to attract a bigger share of what is perceived to be a shrinking pool of buyers. Both Scotiabank and the Bank of Montreal recently made news by dropping their five-year fixed rate offerings below three per cent.

In past years, the federal government had expressed concern at such low borrowing costs, even intervening in one celebrated occasion, but Finance Minister Joe Oliver has signalled that Ottawa does not intend to weigh in.

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