New home prices fall as builders burn off inventory

When Alberta's housing market abruptly switched from white hot to cold late last year, Calgary home builder Don Doolan decided the best way to keep the buyers coming was to discount prices – a lot.

New single detached houses, which his company sold for $500,000 to $525,000 in 2008, are now on the market for $425,000 to $450,000.

The 15-per-cent price reduction is generating sales that will enable his firm, Talisman Homes Ltd., to ride out the recession and "live to fight another day," Mr. Doolan said yesterday, adding that other Alberta builders are offering similar incentives.

"Home builders are motivated to move product today. They, like everyone else, are living in a recession," Mr. Doolan said in an interview after Statistics Canada reported that prices of new homes in January were down by an average of 10.4 per cent year over year in Edmonton, and 6.5 per cent in Calgary.

For the country as a whole, the prices of new homes were down by an average of 0.8 per cent – marking the first time since January, 1997, that prices dropped year over year, "as builders try to burn off inventory," Bank of Nova Scotia said in a research note.

Gary Friend, president of the Canadian Home Builders' Association, said in an interview that Alberta was "later to go into the slowdown, so it seems if you come to the slowdown later, you get a quicker decline."

As oil and gas prices tanked and economic activity started to slow in Alberta last year, builders knew there was "a correction" coming in the housing market, Mr. Doolan said. What caught many off guard was the depth and speed of the reversal of fortunes in the province.

The Conference Board of Canada projected yesterday that, Canada-wide, declining housing starts and weak market conditions will likely reduce home builders' profits by almost 20 per cent this year.

"Years of frenzied construction activity had left the market overdue for a correction," Valerie Poulin, a Conference Board economist, said in releasing the outlook.

Mr. Doolan agreed that, after a long boom in which builders "made lots of money," profits will be down in 2009.

"Builders are going to be working for a lot less than they did in previous years. Whether it's 20 per cent less, I don't know," he said.

He noted that construction costs are also down significantly, and builders are able to pass on some of these savings to buyers in the form of lower prices.

On a monthly basis, between December, 2008, and January, 2009, builders' selling prices declined 0.6 per cent, a faster pace than the 0.1-per-cent decline the previous month. The month-to-month declines were steepest in Edmonton, Calgary, Victoria and Vancouver, Statscan said. "Builders in all four cities report difficult market conditions."

In most other parts of the country, however, prices held firm. In the New Brunswick cities of Saint John, Fredericton and Moncton, new home prices rose 1.4 per cent between December and January. They were up 0.8 per cent in St. John's and Regina.

"On balance, this is a weak report [from Statistics Canada] and highlights the continued pace of moderation currently afflicting the Canadian housing market. We expect prices to continue to cool as the broader economy continues to slow," Toronto-Dominion Bank economist Ian Pollick said in a note to clients.

"However, the price moderation taking place in Canada is still much slower and to a shallower depth than the correction taking place in the U.S."

(prepared by Virgina Gault/Globe & Mail)