Home building to fall by 25%, CMHC says

Globe and Mail Update

February 19, 2009 at 9:29 AM EST

OTTAWA — Home building is expected to scale back considerably in Canada this year, with housing starts falling 24 per cent in 2009, followed by a barely discernible increase in 2010, Canada's federal housing agency says in a newly downgraded forecast.

“Overall, housing starts will decline in all areas of Canada over the course of 2009. The largest declines will be seen in Western Canada and Ontario,” Canada Mortgage and Housing Corp. says in its quarterly outlook.

Housing starts reached 211,056 units in 2008, which was already lower than the 228,343 starts seen in 2007, a boom year.

But this year will be even grimmer, with just 160,250 starts expected, CMHC said. In 2010, as the economic downturn levels off, housing construction should increase ever so slightly to 163,350 starts.

The downturn is not limited to construction in the housing sector. Existing home sales are expected to take a big hit too, and prices will slide significantly, CMHC said in its forecast.

Existing home sales are expected to drop 14.6 per cent in 2009, and then rise 9.3 per cent in 2010.

Average home prices are forecast to fall 5.2 per cent to $287,900 in 2009. Next year, prices should stay flat.

“The economic downturn will result in a decrease in demand for home ownership leading to a decline in housing starts and existing home sales in 2009,” said Bob Dugan, chief economist at CMHC. “Housing market activity will begin to strengthen as the Canadian economy rebounds in 2010 and the level of housing starts over the forecast period will be more in line with demographic fundamentals.”

The scale-back in home construction is hitting all types of housing and all regions of the country, the CMHC forecast warned.

The entire Canadian economy is already feeling the effects of a sharp deceleration in housing activity noted since October, Statistics Canada noted. Its composite leading indicator in January fell 0.8 per cent, the largest and widespread decrease since the index began falling in September, Statscan said.

The housing part of that indicator contracted by 7.0 per cent – the largest monthly decline since June, 1990 – as existing home sales and housing starts have dropped off. Housing starts are now about half of what they were at the pinnacle of the spring of 2008, Statscan noted, with the biggest drop in Western Canada.

The Western Canada moderation will continue in spades, CMHC said. Construction of single family homes in Saskatchewan, for example, is expected to contract 39.1 per cent in 2009, a reversal of its real-estate boom.

Still, Alberta and Saskatchewan are expected to lead the rebound in single-family home construction in 2010. CMHC sees construction of single detached homes growing by almost 12 per cent in Alberta next year, and 9 per cent in Saskatchewan. British Columbia, on the other hand, is expected to see declines in both years.

Economists say Canada's housing decline won't be pretty but also won't be anything like the ongoing crash plaguing the U.S. economy. Rather, Canada's housing starts are expected to decline because of overbuilding in the past few years, economists say. And once the excess level of housing is worked off, home construction should resume at a pace better suited to Canada's demographics.