Home builders proceed with caution

After a deadly quiet November and December, British Columbia condominium developer Gary Friend is starting to feel a little more optimistic about sales prospects. Even so, he says, market conditions will have to improve a lot more before he breaks ground on a new project.

"Last weekend, I had 14 buyers on a Sunday. It just seems, all of a sudden, as the prices are adjusted and interest rates are coming down, we're seeing more interest. We're seeing offers being written," Mr. Friend, president of South Ridge Developments of Surrey, B.C., said in an interview.

Still, he cautioned, "if you have existing product, like myself, you have to sell that product before you can get to the next project."

The go-slow approach by Mr. Friend and other Canadian home builders was reflected in a report by Canada Mortgage and Housing Corp. yesterday that showed housing starts fell 12.3 per cent to a seasonally adjusted annual rate of 134,000 units in February from 153,500 in January. After several boom years, characterized by rising prices and bidding wars for both new and resale homes, CMHC projects that housing starts in 2009 will be at least 25 per cent lower than the 211,056 starts in 2008. The economic downturn, a depressed housing market and shaken consumer confidence have exacted a heavy toll on sales and new residential construction, the federal housing agency said.

Condominiums, apartments, row houses and other non-detached units led February's decline in housing starts, CMHC said, noting that the seasonally adjusted annual rate of multiple starts in urban centres fell 17.5 per cent to 63,000 units in February, while urban single starts declined 11 per cent to 44,500 units.

Mr. Friend, newly elected president of the Canadian Home Builders Association, attributed this to the overall decline in consumer confidence – and a requirement by many lenders that developers presell most of the units in proposed new condominium projects before they will advance any money.

"It's difficult. When you have the uncertainty in the economy and consumer confidence declining, it's a really hard thing to work around, because people have to feel right about buying a house," Mr. Friend said.


Economists said the February housing starts were lower than expected, but not surprising, given the general state of the economy and the weak Canadian housing market. Housing starts reflect the actual, shovel-in-the-ground start of construction – and until sales of new and existing homes pick up, developers are not inclined to start new construction, CMHC chief economist Bob Dugan said.

Toronto-Dominion Bank economist Millan Mulraine said in a note to clients that "the recent slew of housing sector reports have all been pointing to a continued correction in the Canadian housing market, and this report suggests that the pace of adjustment is accelerating, which means that the housing sector may remain a key source of drag to Canadian economic activity.

"On the bright side, it is a clear indication that Canadian builders are retrenching their construction activity in the face of waning housing demand, and this may mean that the buildup of unwanted inventory may not become such a source of drag on home prices as has been the case in the U.S.," Mr. Mulraine wrote.


By region, February starts were down by 19.6 per cent to 29,100 on an annualized basis in Quebec, by 19.4 per cent to 14,100 in the Prairie provinces, 14.4 per cent to 44,100 in Ontario and 12.8 per cent to 12,300 in British Columbia. In the Atlantic provinces, starts rose 10.8 per cent to 8,200 on an annualized basis, reflecting an increase in economic activity in the region, Mr. Friend said.

Mr. Friend said members of the Canadian Home Builders Association are forecasting housing starts of about 155,000 this year, well down from last year's levels, in spite of indications – like his 14 prospective buyers on Sunday – that consumers are at least starting to think about getting back into the housing market.

(prepared by Virgina Gault/Globe & Mail)