Worst may be over for the housing market

July 10, 2009

A  Financial Post report by Garry Marr dated July 09, 2009:

New home construction rose for a second straight month in June, in what analysts say is another sign that the worst may be over for the Canadian housing market.

Canada Mortgage and Housing Corp. said Thursday there were 140,700 new homes constructed in June on a seasonally adjusted annualized basis. Construction was up almost 8% from the 130,300 May figure.

“There are some pretty good signs that we are starting to see in the housing market,” said Bob Dugan, chief economist with CMHC. “We’ve seen it for quite a few months on the existing homes side.”

Existing home sales rose 42% from January to May across the country and the early indications are that June was strongest month this year. Sales in Vancouver were up 76% last month compared with a year earlier and Calgary and Toronto both recorded 27% increases during the same period.

Existing home inventories have begun to shrink across the country, convincing builders to ramp up construction. CMHC said urban single family homes — considered the best barometer of the new home market — climbed 7.3% in May from a month earlier.

“It’s well into seller’s market territory again with the May and April numbers,” said Mr. Dugan.

The optimism about the Canadian market comes despite the fact new construction at 140,000 units is way off the 200,000-plus figure the market in Canada has seen for the past seven years.

“I can only speculate, but maybe a lot of people are relieved we are not seeing the decreases we have seen in the U.S.,” said Mr. Dugan. “Peak-to-trough, the decline in the U.S. was something like 80%. In Canada, that would mean we’d have to have 55,000 starts. Some people may have thought that’s where the Canadian market was going.”

The consensus among economist is construction won’t return to pre-recession levels but will gradually improve in the coming months.

“This month’s increase is an important confirmation that the Canadian housing sector is past the worst and in recovery mode,” said Marco Lettieri, an economist with National Bank. “The recovery seems to be broad based with gains observed in both multiple [which includes condominium construction] and single units.”

Robert Kavcic, an economist with Bank of Montreal, said there could be some room for modest growth in starts in the coming months.

“Higher affordability and improved consumer confidence brought buyers off the sidelines this spring,” said Mr. Kavcic.

A report this week from RBC Economics said declining prices and lower interest rates led to one of the biggest quarterly improvements in affordability in history. The bank said monthly payments on a typical detached bungalow in Canada had decreased by almost 17% from a year earlier.

Royal LePage Real Estate Services was also forced this week to upgrade its forecast for 2009 because of the improved market conditions. It now expects 430,000 sales this year, an improvement from its previous call of 416,000, but still down 1% from a year ago.

“I think 2009 will go down as a moderate correction as opposed to the deep and sustained recession that we had first feared,” said Phil Soper, chief executive of the real estate company.

Royal LePage expects prices this year will still fall but not by as much as previously feared. It expects the average sale price in 2009 to be $297,000, a 2% drop from last year. It had previously forecast a 3.5% decline.

Mr. Soper said a decline is still tough to swallow after years of compound growth of close to 10% in the housing market but it’s proving to be a far cry from what has happened in the United States.

“We are long way from the 35% decline that a lot of regions in the United States are experiencing. It’s a very different kind of correction,” said Mr. Soper

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