Canada's top red-hot housing markets show restraint: BMO

A dip in the number of new homes being built across Canada proves there is discipline in the nation’s housing sector, which should ease fears of a housing bubble, according to a new report from BMO Capital Markets.

Three cities that are of most concern to market watchers - Vancouver, Toronto and Calgary – are behaving particularly well, says the report by BMO senior economist Robert Kavcic.

“While recent home prices trends are starting to raise some eyebrows, there’s little concern about overbuilding in Canada with housing starts trending near fundamental requirements,” Kavcic writes.

And while prices of resale homes are heated in the three “hot” cities, Kavcic says new construction in Vancouver, Toronto and Calgary are “largely following population trends.”

Canada Mortgage and Housing Corp. reported earlier this week that housing starts were at an annualized rate of 183,600 in October, down seven per cent from 197,400 in September and below the nearly two-year high of 198,900 units in the third quarter of 2014.

“The result was below expectations for a print around 200,000,” says Kavcic, “but will allow policy makers to rest assured that homebuilding activity is roughly meeting demographic demand.”

He said new home starts averaged 191,000 units for the first nine months of the year, “roughly consistent with what is needed to satisfy new households and some replacement.”

According to Kavcic, Vancouver is holding “remarkably steady,” and Toronto starts are slowing “surprisingly to many.” Despite a pullback in October, Calgary’s market is still strong, he says, although lower oil prices could cause the market to soften.

“Fittingly, building trends in these three cities largely mirror different population growth trends since 2012 — relatively stable in Vancouver, accelerating in Calgary and cooling in Toronto,” Kavcic says.

The latest housing market analysis comes amid the ongoing debate about whether Canada’s housing market is poised for what hard-core skeptics predict will be a steep fall and the less pessimistic, including the Bank of Canada, describe as a “soft landing.”

So far neither side has claimed victory as housing sales and prices continue to climb steadily, driven by low interest rates. Home sales across Canada fell 1.4 per cent between September and August this year (the latest figures available) but increased 10.6 per cent in September versus the same month last year. The average sale price rose by about six per cent to $408,795.

RBC economist Laura Cooper believes the overall market will slow, pulled down by slowing momentum in resale activity amid forecasts of rising interest rates in the coming months.

“Our view remains that rising borrowing rates and [a] deterioration in housing affordability will augment the slowing in resale activity and curb further gains in new home construction in 2015,” Cooper said in a recent note.

RBC is calling for new housing starts to slow to 191,000 units for 2014 as a whole, and then fall to 185,000 units in 2015.

Some economists see more market volatility ahead, and renewed concerns about a housing bubble in Canada.

Capital Economics economist David Madani said in a note Tuesday that the unexpected decline in housing starts will likely be reversed in the months ahead, “reigniting concerns about overbuilding in the large hi-rise condominium market.”

He cites recent strength in the number of residential building permits issued as an indication that housing starts will rebound to an annual rate of more than 200,000 units “soon.”

“That would put starts well above population requirements again, at a time when the stock of unsold condos coming onto the market is already elevated,” he says.