New home construction in Canada fell to eight-year low in 2009

The pace of Canadian home construction for 2009 peaked as the year was coming to an end, closing out the first year in what is expected to be a markedly different era for the sector than the period that preceded it.

Canada Mortgage and Housing Corp. said Monday that housing starts were up 5.9 per cent in December from the month before, to an annual rate of 174,500 units, the most since October 2008. Most economists expected between 160,000 and 165,000 units in December, following an upwardly revised 164,800 starts for November.

CMHC is scheduled to officially report totals for 2009 next month. However, based on what the federal agency has already reported, calculations by Canwest News Service indicate the yearly tally will come in at about 145,000, marking the first time in eight years the figure has been less than 200,000.

CMHC chief economist Bob Dugan noted that the normal rate of household formation in Canada is about 175,000 a year, meaning the rate of housing starts for most of the last decade was out of whack with demographic trends.

He said it will likely be a while before 200,000 or more housing starts are seen in one year. Dugan said it will take another extended period of home building that falls well short of household formation -- as happened in the 1990s -- to create ideal conditions for another home-building boom.

"Somewhere in the 170,000-to-175,000-unit range is probably where we're going to see starts for most of the year in 2010," Dugan said. "We're getting back to equilibrium, where housing starts are back in line with that level of household formation."

Urban housing starts were up 6.6 per cent to 157,100 units in December, CMHC said. Within this category, multiple-unit starts totalled 77,700, up 6.7 per cent from November, while single-unit starts totalled 79,400, up 6.4 per cent from the previous month.

Rural starts were unchanged at 17,400 units.

Ian Pollick, economics strategist at TD Securities, said in a report: "It is increasingly looking like the 'fever' in the existing-home sales market is starting to catch in the new residential housing market."

Marco Lettieri, economist with National Bank Financial, noted that December housing starts were up almost 50 per cent from their April lows. He attributed this to low interest rates, strength in the Canadian job market, and a "wealth effect" created from rising property values and stock-market gains.

"This said, we are currently concerned over the elevated levels of inventory of new unoccupied multiple-family dwellings," Lettieri said in a research note. "This points to a current oversupply of inventories and could be an indication of a coming slowdown in multiple starts down the road."

CMHC's Dugan said he is not overly concerned about inventories of multiple-housing units, though he did acknowledge they are at "relatively high levels." He said builders, for the most part, have been responding to shrinking demand.

(prepared by Derek Abma/Financial Post/Vancouver Sun)