OTTAWA - A stronger than expected housing market has helped propel growth in the Canadian economy this year, but economists say recent economic and market tumult could jeopardize momentum in the sector.
The Canada Mortgage and Housing Corp. said Monday that national housing starts rose to 205,100 units on a seasonally adjusted basis in July, 11.6 per cent higher than the 188,900 reported in the same month last year and up 4.3 per cent from the 196,600 recorded this June.
However, the pickup, driven by strong construction on condos and apartment buildings in urban centres, is likely due to builders catching up to robust demand last year, rather than expectations of coming growth.
Home building activity has been increasing through the first seven months of 2011, but starts are still down 4.6 per cent from a year ago.
During the first half of last year, the market was rebounding from recession and buyers were on a tear, prompting an influx of demand and the need to build more units.
Housing starts tend to lag activity in the resale market, and economists believe the recent strong construction activity is the result of increased demand last year.
But they doubt whether the pace can continue as the prospect of a double dip recession in the U.S. forces them to rethink the prospects for economic growth in Canada.
"While many economic indicators have pointed to much softer growth through the summer, Canadian housing starts is not one of them, still likely responding to a firm rebound in sales activity in the second half of 2010," said Bank of Montreal economist Robert Kavcic.
"Going forward, expect underlying household formation (about 175,000) and current economic concerns to apply some gravitational pull to starts."
Stock markets -- although they rebounded sharply on Tuesday -- have seen severe selloffs in recent days over fears about U.S. and European debt loads and the potential for a double-dip recession south of the border.
The Canadian economy is so closely linked to the U.S. that slower American growth translates into less demand for Canadian goods, and lower employment and income growth in Canada.
Those worries could soon sour the mood of real estate investors who may not want to bet on an improving economy by the time new builds go on the market.
Buyer sentiment is "vulnerable to recent market turmoil," as the large decline on stock markets has a negative effect on consumer wealth and confidence, making them less inclined to make big purchases, said CIBC economist Peter Buchanan.
"That of course can cut both ways, it can make investors fearful of buying real estate, on the other hand it does mean the Bank of Canada won't be tightening quite as early," Buchanan said.
"The other thing is that if people are worried about putting their money into the equity market, hey real estate may not look so bad."
Many observers believe the Bank of Canada may now its overnight rate -- which affects variable mortgage rates tied to bank prime rates -- at the current low one per cent until next spring. Fixed rate mortgages could also fall as bond markets react to government debt issues.
The U.S. Federal Reserve announced Tuesday that it will likely keep interest rates at record lows near zero through mid-2013. The Fed had previously said only that it would keep it low for "an extended period" and the more explicit time frame was aimed at giving nervous investors a clearer picture of how long they will be able to obtain ultra-cheap credit.
Low mortgage rates are a big incentive for buyers to get into the market, and led to rampant activity last year.
But even with low rates that make the cost of carrying a mortgage cheaper, pent up demand in the housing market could be largely exhausted.
Many buyers rushed into the market during the closing months of 2009 and early 2010, when the Bank of Canada rate was set at an emergency low of 0.25 per cent. Others decided to buy before the implementation of the new HST in Ontario and British Colombia in July 2010, or to beat two rounds of tighter lending rules.
Some observers say it's unlikely Canada's housing market can continue at a strong pace, with prices continuing to rise relative to rent and income levels, even as home prices in the U.S. market have tanked about 30 per cent since the recession.
Home sales began to moderate in January, owing to a combination of high household indebtedness and recently implemented tougher lending rules, which should take some of the heat out of home building activity, said Francis Fong, an economist at TD Economics.
"All said, the current pace of home building activity is well-beyond the fundamental level of household formation and we expect a slow decline over the next 18 months," Fong said.
TD Economics expects starts fall to a monthly average of about 164,000 starts in 2012.
The trend toward much higher construction on multiple-unit dwellings, and a decline in single family starts, could indicate the housing market isn't as strong as it appears at first glance. Single family homes are usually the barometer of growth in household formation and more multiple unit homes could signal more people are looking to rent.
Multiple urban starts were 13 per cent higher at 120,200 units, while urban single starts decreased by 7.8 per cent to 65,000 units.
It was only the fifth time since 1990 that multiple units outpaced single family builds by such a wide gap, the Bank of Montreal's Kavcic said.
For the first seven months of 2011, multiple units starts are up 16.4 per cent year over year while single units are down 22.1 per cent.
"Clearly the trend continues to be multis over singles, and that has created more ample supply conditions for condos in Canada," he said.
"As of June, newly completed and unoccupied multis sat 51 per cent above the 10-year average (mostly due to Vancouver and Calgary, with Toronto close to average), while that of singles was four per cent below."
CMHC overall urban starts were up 36.1 per cent in the Atlantic region, 33 per cent in British Columbia and 1.7 per cent in Ontario. Quebec posted a decrease of 7.8 per cent in July, while urban starts were off 0.3 per cent in the Prairies.
