Housing starts fall again

New-home construction, fuelled by a major drop in Ontario, continued to decline last month, confounding economists who now say the housing market is falling faster than expected.

Canada Mortgage and Housing Corp. said 186,500 new homes were constructed last month on a seasonally adjusted annualized basis, a 13.6% drop from the previous month. The pain was felt hardest in Ontario's condominium market, where the construction of multiple apartment units was down 57.9% in July from June.

Paul Ferley, assistant chief economist with RBC Economics, noted the slide in housing starts was worse than many economists had estimated. The consensus was for 210,000 starts in July, which would have been only a 3.6% decline from June.

"The weakness is occurring much sooner than we expected," said Mr. Ferley, adding no one is expecting the Canadian housing market to get as ugly as its counterpart in the United States.

"The drop in starts in July was likely slightly overstated with the weakness largely concentrated in Ontario. However, housing activity is definitely on a downward trend consistent with indications of deteriorating affordability through last year," Mr. Ferley said.

Most of the country was hit by the sudden dip, with Alberta and British Columbia the only exceptions. Starts rose 23% in Alberta from a month earlier and 5% in B. C. from June to July.

While much is being made of the fact that the condominium sector skewed the July numbers, construction of single-family homes is also waning. CMHC said urban single starts dropped 6.6% in July from June.

Brian Johnston, president of Monarch Corp., a major developer in the Toronto region, said the problem is the housing sector just cannot compete with its own past record. Starts hit a 19-year high in 2006 and dropped only marginally last year.

"I would suggest there is a worrying trend that we are seeing such significant drop-offs," Mr. Johnston said. "Starts always follow sales, and I can tell you sales are definitely trending down in 2008."

Mr. Johnstone said the market is cooling and builders are feeling it because they are unable to raise prices at a time when some of their costs are going up. Market conditions for existing homes are the same, with sales dropping and prices flat or falling across the country.

"It's a tougher market out there. I don't think we are in panic mode, there isn't a huge concern but we are definitely slowing down to some extent," Mr. Johnston said.

CMHC said it still expects starts to top 200,000 for the seventh straight year, the strongest housing run in Canadian history.

"It's not that bad," said Bertrand Recher, senior economist with CMHC.

"What you saw was a one-month blip due to the multiple starts in Ontario and that's mainly Ontario."

In the first six months of the year, condo construction soared in Ontario and now it appears that run is over.

"This is a readjusting because of those strong months," Mr. Recher said.

Pascal Gauthier, an economist with TD Bank Financial Group, echoed those comments. "There will be a natural tendency to read too much into this monthly decline," he said.

"We think it's important to caution observers against such knee-jerk reaction to this month's CMHC report. Residential construction is easing and should continue to do so."

(prepared by Garry Marr/Financial Post)