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Housing starts jump, sparks fears of overbuilding

Tags: Real Estate
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Housing starts were significantly higher than expected in May, with condominiums leading the charge, a development that's likely to renew fears of overbuilding in Canada's key condo markets.

The total number of homes on which construction began last month came in at 200,178, while economists had been expecting the figure to be closer to 175,000. The strong showing suggests that builders and developers are bouncing back unfazed by the recent slump in home sales.

The number of urban starts rose by 14.6 percent, led by a 22.2 percent increase in homes with multiple units (i.e. condos), compared to a 3-percent increase in starts of single houses, Canada Mortgage and Housing Corp. said.

Canadian Imperial Bank of Commerce economist Emanuella Enenajor noted that condo starts can be quite volatile on a month-to-month basis.

"May's increase in homebuilding suggests overall housing construction continues to garner support from condominium-related building, although the overall levels are still off from the highs seen in mid-2012 when the market was more frothy," she wrote in a research note.

"Today's data could mean that homebuilding activity in Q2 could be less of a drag than seen in the prior quarter, although we continue to see this sector struggling on weak secondary market activity, the fading impact of low rates and buyer fatigue."

Economists at Bank of Nova Scotia noted that the gain was focused almost entirely in Ontario.

"To what extent can the home-building boom in multi-family units in Ontario's cities continue?" they wrote in a research note. "Despite slow sales in Ontario in general and weak new home sales in Toronto in particular so far this year, the building boom seems to have picked up at least somewhat in May after a colder-than-usual March/April period."

Minutes before the data was released, Scotiabank economists said in a research note that they saw "downside risk to the consensus call for a 175k housing starts print in May," because soft new homes sales in the key Toronto market would likely send a cautious signal to developers.

Other data released earlier this month showed that the value of building permits issued in April jumped 10.5 percent on the back of a 51.9-percent surge in multi-unit residential permits. That could imply even more condo construction down the road, since there is a lengthy lag between when permits are acquired and when construction begins.

In Halifax last week federal Finance Minister Jim Flaherty said he continues to keep a close eye on the housing market, especially condos, but added that he believes that actions the government has taken to cool the market have helped.

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