Housing depreciation

Condo owners in downtown Vancouver are at greater risk for price depreciation than single-family homeowners in the suburbs, a BMO Capital Markets economic analyst said Tuesday.

"Condo prices could drop faster because of overbuilding," Robert Kavcic said in an interview. "When you have excess in the market, that pushes prices down."

A BMO survey released Tuesday suggested B.C.'s housing starts have to fall by about 25 per cent from current levels to return the market to sustainable numbers.

"With home sales falling, and given that starts lag sales by about six months, residential construction activity should soften in the coming months -- look for starts to dip below 200,000 annualized units [in Canada]," the report stated.

"Trends in B.C. are particularly concerning, where the same comparison suggests housing starts have to fall to the mid-20,000 range, about 25 per cent below current levels."

The survey said while housing starts remain "amazingly resilient," sales have dropped substantially and that starts should also start tumbling.

It said while single-family starts have started correcting, multiple-unit construction "has yet to break, let alone drop back to more sustainable levels, raising the risks of a hard landing on that front."

Kavcic said single-family starts have been declining in B.C. over several years and that the numbers are much closer to the actual need -- meaning prices should remain more stable.

That's not the case for multi-unit starts.

"Single-family starts are declining, so the risk [of cooling prices] is a lot lower. But multi-family units haven't cooled down. The downtown [Vancouver] condo market is more at risk than the single-family market. Condo prices could drop faster because of overbuilding."

Kavcic said he has seen sales dropping for about a year, but that housing starts and construction have held up well, creating a disconnect.

For example, there have been about 225,000 new housing units built annually in recent years across Canada, while just 180,000 new households were added each year. "It looks like we've been overbuilding in the last year or two."

Kavcic said as construction slows to offset the oversupply, the job market will be impacted. "We're still seeing job growth, but that's an area that's at risk going forward."

He said the trend is particularly relevant in Vancouver, where prices have fallen eight per cent year over year and sales have dropped about 40 per cent.

"The B.C. housing market has stalled, [and] sales are sharply lower. But B.C. housing starts haven't cooled at all in the last three years."

Kavcic said B.C. is on pace to produce about 37,000 starts in 2008, a number he believes should fall to the mid-20,000 range in 2009.

Preliminary figures Monday from Canada Mortgage and Housing Corp. indicated housing starts in Metro Vancouver stood at 1,846 homes in October, a slight decline from September.

However, year-to-date housing starts were about four per cent above 2007 figures.

Peter Simpson, chief executive officer of the Greater Vancouver Home Builders' Association, said if the pace continues, Vancouver will achieve its highest number of starts since 1993.

He said starts are expected to drop in 2009.

Meanwhile, the president of a Vancouver insolvency firm said in an interview Tuesday there are growing signs that some local developers are facing a financial crisis because of the housing slump.

"Do I think there will be some [bankruptcies]? Yes," said David Wood of Boale, Wood & Company Ltd. "Lenders have told us there's projects out there that may be in trouble. They wouldn't tell us which ones until they appoint us receiver."

Wood said he expects smaller developers will be hurt the most. "The market slows down and they're under water. I've seen projects on Fourth Avenue that seem to be taking a long time to finish."

(prepared by Brian Morton/Vancouver Sun)