Home building quickly running out of steam

Housing construction in Canada is quickly coming off the boil, economists say, pointing to weaker-than-expected levels of new home starts in May.

The level of activity slipped 6.3% in the month to 189,100 units compared with expectations of 202,000 starts. April was revised up slightly to 201,800.

But “the details of today’s report were softer than the headline would suggest,” said Douglas Porter, deputy chief economist at BMO Capital Markets.

He cited the fact that the more important single-family component of starts fell for the second month in a row, off 14.1% after an 11.4% slide in April and now at an eight-month low. Multiple-unit starts also fell, down 5.6%.

Economists said tighter lending criteria, higher interest rates, reduced affordability and the pending implementation of the harmonized sales tax in Ontario and British Columbia were all to blame for the May slowdown.

“A bigger culprit, however, is easing price conditions in the broader housing market,” said Derek Burleton, deputy chief economist at TD Economics. “Today’s data suggest that the rebound in home-building activity is quickly running out of steam.”

Sales are slowing and more listings are coming onto the market, and the drop in housing demand has builders pulling back, leading TD to forecast that resale home prices in Canada will drop 6% to 7% over the next four to five quarters, Mr. Burleton said.

Even with May’s declines, new home construction is still running hotter than the market needs, said Mr. Porter, pointing out that May’s total lies well below the volume of home construction needed to meet the demands of newly formed families, which currently sits at 175,000 homes a year.

(prepared by John Morrissy/Financial Post)