[waterland]

Garry Marr | 13/06/10 | Last Updated: 13/06/10 7:01 PM ET

New housing already purchased and in the pipeline continues to propel the Canadian real estate market but worries persist about what happens when that tap turns off.

Canadian housing starts rose at their fastest pace in more than a year in May on a surge in condominium construction, CMHC reports

For now, the industry got another bit of good news Monday with Canada Mortgage and Housing Corp. saying new home construction or starts reached the lofty 200,000 level in May on a seasonally adjusted annualized basis.

CMHC said urban multiple starts, mostly condominiums, made up 114,346 of the 200,178 May figure. May starts easily outpaced the April number of 175,922.

“Gains in the multiple starts segment partly offset the moderation in activity that was observed in previous months, especially in Atlantic Canada and Ontario. As a result, the trend in housing activity remains close to its historical average and is in line with estimates of household formation,” said Mathieu Laberge, deputy chief economist at CMHC.

While these numbers paint a good picture, most of the construction going on today is of previously sold units rather than a sign of fresh interest in the housing market, said Benjamin Reitzes, senior economist with Bank of Montreal.

“Before you put shovels in the ground for multiples, you need to sell a majority of the units,” he said. “Some are concerned if all these units hit that market at the same time you will get a flood of units and a lot of them being owned by investors who will bail out.”

Ben Rabidoux, analyst and strategist with U.S.-based Hanson Advisors, said we are seeing a last hurrah in the housing sector before a glut of homes hits the market.

“The condo market is very well supplied to begin with in the resale and new front. Even if they presale to 80%, they don’t sell to just end users, there are investors,” said Mr. Rabidoux. “The demand is not there from end users. It’s simple economics, it can’t continue.”

The jump in May housing numbers comes on top of news Friday from Statistics Canada that the economy added 43,000 construction jobs. StatsCan also reported that municipalities issued $7-billion in permits in April, up 10.5% from March.

Mr. Reitzes allows that those numbers may not hold up but over the long term, but he says fears we are overbuilding may not be justified. Housing starts over a 25- 30-year period are about 180,000 annually which is close to what is demanded by Canadian household formation. And he says any decline in sales is coming gradually enough that there won’t be a crash.
But a slowdown almost seems like a certainty.

George Carras, president of RealNet Canada Inc., noted high-rise sales in the greater Toronto area are off 12% year to date from the 10-year average while low rise sales are down 45%.

He said the market is now in “uncharted territory” because there are 242 condo projects in the GTA under construction as of the end of April that translates into 63,237 units — an all-time record.

“About 70% of those units have been presold to people with binding agreements,” said Mr. Carras. What isn’t known is whether the bulk of those units will hit the market and add to record number of existing units already for sale in some cities.

The impact has been felt on rental rates in Toronto already but owners are still getting healthy rent increases. Year over year, rental growth was still 4.6% in the GTA in the first quarter but that was down from 6% between 2012 and 2011, said Mr. Carras.

Jim Murphy, chief executive of the Canadian Associated of Accredited Mortgage Professionals, said what happens next will depend on investors.
“Is the investor a speculator who will panic in a glut and drive prices down? Or are they someone who will take their investment and just be happy to collect rent?” said Mr. Murphy.