Mortgage Affordability Reflected in New Home Values and Drop in New Home Construction
Mortgage affordability is being reflected in the drop off in new housing construction reported last month and bare gains being reported in the prices builders are selling newly built homes for. The latest numbers from the Canadian Mortgage and Housing Corporation (CMHC) and Statistics Canada show a substantial slowdown in new home construction, led by a pronounced drop in multiple-family condo construction in Toronto, and very moderate growth in the price of new homes offered by builders.
The CMHC reported a 13.6% drop in new home construction between June and July of this year. The pain was felt hardest in Ontario’ s condominium market,” reports the Financial Post, “where the construction of multiple family apartment units was down 57.9% in July from August.” The 186,500 new homes built in July was considerably less than the 210,000 new homes forecast by industry analysts. “The drop in starts in July was likely slightly overstated with the weakness largely concentrated in Ontario,” said Paul Ferley, assistant chief economist with RBC Economics. “However,” he noted, “housing activity is definetly on a downward trend consistent with indications of deteriorating affordability through last year.”
The tightening of Canada’s mortgage and housing market was reflected in the very modest growth in new house prices reported by Statistics Canada. Numbers released yesterday by StatsCan indicate that the price of new housing in Canada barely grew in June, with many regions reporting an overall drop in the price of newly built homes when prices are adjusted for inflation. “The continued correction of house prices in the previous boom regions of Western Canada, particularly Alberta, caused growth in the national new-home price index to ease to an annual rate of 3.5% in June compared with 4.1% the previous month,” says the Financial Post.
The marked slowdown in housing starts and stalled new housing prices do not, however, necessarily herald the beginning of a U.S.-style housing meltdown that was triggered by that country’s lax mortgage lending and securitization practices. The Globe and Mail reports TD Securities economics strategist Millan Mulraine advising clents that the CMHC’s report is a further addition “to the growing body of evidence pointing to the cooling in the Canadian housing sector. “However, according to Mr. Mulraine, the recent slowdown “is in no way comparable to the prolonged correction that we have been seeing in the U.S. Going forward, we expect a bit of a bounce back in starts, as we believe that the long-run trend for starts remains somewhere in the 200,000 to 220,000 region.”
The steep decline in new housing construction and barely perceptible growth in the price of new houses reflects a tightening of Canada’s housing market, where a steep runup in housing prices over the past six to ten years has made mortgage affordability an issue for Canadians looking to enter the housing market. With record numbers of new and existing homes listed for sale on many real estate boards across the country, the demand for new housing can be expected to ease off as supply outstrips demand.