Home construction robust in warm winter; good for GDP, but could be sign of glut

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The corporate logo of the Canada Mortgage and Housing Corporation (CMHC), or Soci�t� canadienne d???hypoth�ques et de logement (SCHL), is shown. THE CANADIAN PRESS/HO

TORONTO - The pace of housing starts slowed slightly in January but remained robust during an unseasonably warm winter, according to data from Canada Mortgage and Housing Corp.

Strong homebuilding activity will likely to be a boon to the Canadian economy in the short term, but could also signal overbuilding that could wreak havoc in the longer term, economists warned Wednesday.

The seasonally adjusted annual start rate — which smooths monthly variations — was 197,900 units in January, down from 199,900 units in December, the CMHC reported.

"While housing continues to surprise on the upside, we caution that this pace of homebuilding is unsustainable," said TD economist Diana Petramala.

January's one per cent decline was mainly because of sharp decreases in Quebec and Atlantic Canada — regions that posted big gains in the month before.

Builders have been able to continue construction during the winter season, which has been noticeably warmer and largely snow-free in many parts of the country.

Low borrowing rates — tied to persistent economic uncertainty — appear unlikely to rise any time soon, which has propped up demand for homes. At the same time, home prices have risen sharply as buyers rush in to take advantage of those low rates and compete for homes, making ownership less affordable for some. Senior government officials have issued repeated warnings about the implications of taking on too much debt when mortgage rates inevitably rise.

Still, the January report was good news for Canada's economy because the housing sector makes up a sizable portion of GDP and an influx of building has contributed to a run up in construction jobs in the latest jobs report.

Based on the high level of building permits approved in December, construction could trend even higher in the months ahead, said David Madani of Capital Economics.

"The large amount of work under construction is broadly consistent with the elevated level of construction employment as a share of total employment. This is a stark reminder of just how important strong housing investment is for the broader economy."

The report is a good indication that housing activity will continue to support GDP growth in the first quarter of 2012, said TD economist Diana Petramala.

However, overall weakness in the job market since July —the unemployment rate now sits at 7.6 per cent —could put a damper on demand later this year and the market appears to be "slightly overbuilt and overpriced," she warned.

In line with a recent trend, January's strength was concentrated in the multi-unit, or condo sector, which has been identified as most at risk of a downturn because of a potential glut of supply that could outpace demand.

Multi-unit starts increased 0.4 per cent, while single family home starts fell 7.8 per cent — their lowest level since May.

Housing construction is outpacing the levels demanded by demographic fundamentals such as the level of new household formation — especially in the condo market.

"The result has been a large over hang of newly built and unoccupied multiple units, putting significant downside risk to home building once interest rates begin to rise," Petramala said.

Madani also said he remains concerned about overbuilding and the "rising likelihood of a housing slump down the road."

Given that developers usually begin construction with only about 60 to 70 per cent of units sold, the recent strength in multi-unit starts suggests there could be a glut of newly completed, unoccupied condo units, he said.

"This is just one sign of a housing investment boom that has gone too far."

While January's figures reflect that construction is settling into a healthy pace, there were some specific regional and sectoral trends that underlie the data, BMO economist Robert Kavcic said.

Most prominent of those trends is the booming Ontario market, where condo building has been strongest in the past few months, the level of multi-unit building is just slightly below the all-time high set in late 2008, he said.

The CMHC data showed the seasonally adjusted annual rate of urban starts decreased by 2.8 per cent to 176,600 units in January, with single starts down by 7.8 per cent and multiple starts up 0.4 per cent.

Urban starts decreased by 35.4 per cent in Atlantic Canada and by 34.4 per cent in Quebec on a seasonally adjusted annual rate. Those sharp declines followed particularly robust gains in those regions in December.