Housing market slowing down, not collapsing

Ever since last year, forecasters have been predicting that Canada's hot housing market was about to slow to a much more sedate pace. Well, it's happened.

Except that sedate is hardly the word for the 14-per-cent plunge in construction activity that turned up in the housing starts data for July. To many, this sharp drop will be downright alarming, raising fears that the catastrophic housing meltdown in the U.S. has now spread across the border.

They can relax. Or at least most of them can. Maybe a little nervousness is appropriate for those who bought near the market's peak in one of Canada's highest-flying centres of real-estate inflation -- places like Calgary, Edmonton, Vancouver and Victoria.

In these towns, warns BMO Capital Markets economist Sal Guatieri, soaring home prices so greatly outstripped income growth that it wouldn't be surprising if real-estate values had to drop significantly to restore affordability to the market.

But in most of Canada, what we're seeing looks like a normal return to Earth after a six-year real-estate boom. The frenetic construction and double-digit price gains of yesteryear couldn't last forever, so now we've entered the cooling-off phase. Economic forecasters think the outlook for most cities is for prices to stagnate, or maybe edge down a little, while the level of construction eases, but doesn't collapse. If this doesn't seem to fit with the outlook foreshadowed by July's big drop in construction activity, that's simply because you're reading the numbers too literally. No one month's statistics mean very much, especially if you take them at face value.

When you look at a chart of housing starts over a period of many months, it looks like a mountain range, with soaring peaks and deep valleys. Most of this volatility is caused by builders of condominiums and other multiple-unit developments, where a few projects more or less can make the numbers skyrocket or plummet.

That's why analysts take the single-family starts more seriously. They're a lot less volatile and thus a better indicator of where the market is really heading. In July, single-family housing starts fell by just seven per cent.

As well, nearly all of July's decline was in Ontario -- "think Toronto condos," says BMO Capital Markets analyst Robert Kavcic. And exceptionally wet weather in Eastern Canada likely slowed construction, notes Millan Mulraine of TD Securities. Outside Toronto, most big cities saw only modest changes in total activity.

So what can we expect for the coming months? Continued slowing, most likely, but certainly no savage, nationwide meltdown on the model of the U.S.

Royal Bank economist Paul Ferley notes that in 2007 Canadian housing construction remained little changed from the banner year of 2006, even as U.S. activity plummeted 26 per cent. He thinks Canada's housing starts will drop by only about five per cent this year, compared with a 30-per-cent plunge south of the border.

Ferley thinks that 2009 will finally bring a significant drop in Canadian activity, but nothing like the U.S. collapse, with starts down by about 15 per cent.

The brake on construction is the slowdown in sales that started months ago, with sales figures in each month this year down from the comparable period in 2007, Guatieri noted. It's quite likely that this will continue into next year, since the U.S. economic slowdown and the recent sharp decline in commodity prices are both beginning to bite in Canada, bringing declines in job creation.

But even if the boom is over, there's no national bust in sight. Without the severe financial excesses and fraud that devastated the U.S. mortgage market, undermined that country's banking system and brought soaring numbers of home foreclosures, Canada simply doesn't have the conditions to trigger a housing collapse.

(prepared by Jay Bryan/Vancouver Sun)