It seems everywhere you look, there’s evidence of Canada’s booming new home construction market – but that’s not expected to last, according the the Canada Mortgage and Housing Corporation (CMHC). The national housing agency anticipates developers will stop bringing as many homes to market and will shift focus to selling what’s already built in its quarterly Housing Market Outlook, released last week.
Although both prices and new housing starts are still trending upwards, CMHC notes, the pace of construction is expected to slow significantly over the next two years.
“Recent trends have shown an increase in housing starts, which is broadly supported by demographic fundamentals. However, our latest forecast calls for starts to edge lower as builders are expected to reduce inventories instead of focussing on new construction,” says Bob Dugan, chief economist for CMHC.
The forecast predicts lower sales volumes for 2015, with 163,000 to 203,200 new homes expected to be built. The lower end estimate is well below the 179,600 to 189,900 new homes expected by the end of this year.
Record Number Of New Homes Now Under Construction
Overall, CMHC expects roughly 463,600 homes to be sold this year, and 474,300 units next year. Both figures are slightly above the 457,338 homes sold in 2013.
There are a record number of new homes now under construction, which once completed will increase supply and take some pressure off prices, CMHC predicts.
While the agency expects to see a 4.5 per cent gain to $399,800 in 2014 for the average home, it forecasts a more modest increase of 1.8 per cent to $406,800 the following year.
A Soft Landing Still In The Cards
Unlike in the United States, Canada’s housing market is still showing surprising resilience, suggesting that any ‘soft landing’ is unlikely to really take hold until interest rates start rising, which many analysts expect could be in mid-2015.
And recent government announcements have done little to shake this view.
“We’re aware, of course, that prices keep moving up – in a somewhat more moderate way, recently – although there are obviously differences between the different urban centres,” Finance Minister Joe Oliver said last week.
“We know that part of the reason for this is low interest rates. Part of it is the fact that Canadians are investing more into their homes and making them more valuable. We’re monitoring the market carefully but are not alarmed by what we see,” he added.
Condo Market Will Take The Lead
With the exception of hot urban markets, demand for condos in Canada has been soft, compared to the frenzy for single-family home purchases. But with more and more new Canadians fuelling the market, demand should shift from pricey single family homes to less expensive housing such as condos, analysts suggest. In fact, all signs point to a stabilizing of the condo market, according to a recent report from Genworth Canada.
Continued growth in immigration, affordability pressures in major cities, and aging baby-boomers looking to downsize will continue to drive demand for condos in urban centres, Genworth predicts.
And while rates will inevitably rise, increases in average household incomes should help to keep mortgage costs affordable, particularly for new entrants.
Toronto Market Will Cool, But No Collapse Expected
One of Canada’s most hotly debated condo markets, however, is expected to see sluggish growth following years of booming activity.
Some analysts have warned that the excess supply of units in the GTA could actually spur a slowdown in the overall housing market – but Genworth disagrees.
Toronto’s condo market is expected to “cool slightly but avoid the collapse many fear due to healthy population growth, a solid economy and the desirability of downtown living,” the report says.
New urban dwellers and young people entering the workforce need a place to live, but rent controls have persuaded developers to build condos instead of apartments.
That’s why the vacancy rate for new condos in Toronto is so low – and why so many analysts expect it to stay there for the foreseeable future, stabilizing prices at the same time.