Hot housing starts beat predictions

CONSUMERS BULLISH September rate trumps August by almost 12%

New home construction continued to surpassed expectations, with starts in September jumping 11.8% over the month before.

Canada Mortgage and Housing Corp. said yesterday there were 230,500 starts in September on a weather-adjusted and annualized basis, 10,500 more than what economist had been expecting.

The strength of the market means CMHC will be updating its forecast for the year upwards again, the third time it has been forced to do so this year.

“Few people had forecast that long-term [rates] would remain so low,” said Bob Dugan, chief economist with CMHC, commenting about the need for revising housing predictions.

He noted about half of Canadian consumers continue to choose five-year mortgages and those people remain bullish on housing. “They are borrowing at 4.5%, once they negotiate,” Mr. Dugan said.

With the Bank of Canada raising rates only once this year so far, the prime lending rate at the chartered banks remains at 4.5%. Variable rate mortgages are tied to prime, which tracks the Bank of Canada’s overnight lending rate.

CMHC said the current pace of new home construction is 4.7% behind last year’s level, but 2005 should nonetheless post the secondshowing in the past 17 years.

The September construction numbers were particularly encouraging because they followed a disastrous August, when starts dropped 17% from a month earlier. The condo sector tends to make the numbers fluctuate wildly as large buildings coming onstream in a certain month can skew results.

Mr. Dugan said the fact the single-family dwelling rose sharply was a better indicator of the strength of this market. Singlestarts in September rose 9.9% from a month earlier to 96,400 on a seasonally adjusted, annualized basis.

“ The most notable surprise was the 10% jump of single-detached homes, the biggest monthly increase seen since early 2000,” said Sébastien Lavoie, an economist with TD Bank Financial Group.

Nevertheless, Mr. Lavoie is expecting housing construction to cool next year, as the Bank of Canada continues to increase interest rates.

He is calling for 220,000 starts this year, down from 233,000 in 2004. Next year, he expects new home construction to fall to 195,000.

Price increases for new homes continue to remain relatively flat, which also bodes well for the market in terms of affordability.

Statistics Canada said yesterday its new home price index was up 4.6% in August from a year earlier.

Dr. Sherry Cooper, chief economist with BMO Nesbitt Burns, said there is still strong evidence that the country’s red-hot real estate market has yet to slow and will not do so in the nearterm.

“Given housing’s persistent upward momentum, a still healthy employment environment and very low borrowing costs, residential construction acidity will likely perform well into 2006,” said Ms. Cooper.