March Starts Increase to 155,000 Units Annualized

How much of a fuss should be made over the fact that housing starts in the country jumped up from 136,000 units (annualized) in February to 155,000 units in March, according to the latest report from Canada Mortgage and Housing Corporation (CMHC)? Some, but not much.

The current level is about the same as it was in January and lies well below the 200,000-units per month levels that were achieved during most of the preceding seven years. Furthermore, about 150,000 units is what many analysts have been expecting for the year as a whole anyway.

Spring, Affordability and Marketing

There are circumstances that are getting potential buyers out to new home sites. First is the time of year, spring. This is the peak buying season and seasonality in the starts data may or may not be capturing all of this effect. Second, there are affordability issues. Mortgage rates have dropped to extremely favourable levels and prices for existing and new homes have mostly stabilized or fallen.

In a smart marketing move, the real estate industry is heavily promoting this window of opportunity for purchasers and the regrets that might come later from "kicking oneself" due to inaction.

Some Markets Not Adjusting to Fundamentals

Nevertheless, there are indications in some sub-sectors of the market that underlying economic fundamentals are being overlooked. This will prolong the downturn. For example, multiple-unit starts in Central Canada are not dealing with the excess inventory problem. Specifically, Montréal and Toronto multiple-unit starts (mainly condos) more than doubled in March versus February.

This is at a time when job losses keep mounting. Employment prospects are particularly shaky in the manufacturing sector in Ontario. The uncertainty about auto-firm bailouts and related employment stability is just one indication of how home-buying confidence may be balanced on a knife edge. Plus foreign buyers of Canadian real estate are being discouraged by the higher-valued Canadian dollar.

Atlantic Region and The West

Elsewhere in the country, the starts patterns are more in keeping with expectations. Newfoundland is the only province with an increase in starts year to date and prices in St. John's are +24% versus a year ago as reported in the latest New Home Price Index survey from Statistics Canada. This strength is unlikely to last as oil and metals prices stay depressed.

Look to what has happened in western Canada. Alberta (-73% for year-to-date starts), Saskatchewan (also -73%) and British Columbia (-70%) are resource provinces that are feeling the pain from commodity price drops. New home prices in Edmonton (-10.4%), Calgary (-6.5%), Victoria (-4.2%) and Vancouver (-3.2%) reflect this harsher reality.