Soft Landing for Housing Starts in 2007 and 2008

Here is a little news for the day. I didn't know we were having any 'landing' let alone a 'soft' one here in Canada. I thought landings were only for the US market. UPDATE: Check the VHB for a great graph that disputes the 'soft landing' myth.

OTTAWA, February 5, 2007 – Housing starts will moderate this year to 209,500 units after reaching 227,395 units in 2006, according to Canada Mortgage and housing Corporation's (CMHC) first quarter Housing Market Outlook, Canada Edition report. Although residential construction will decline, 2007 will mark the sixth consecutive year in which housing starts exceed 200,000 units. Starts will ease further to 195,500 units in 2008.

"Construction activity will continue to moderate as demand for home ownership moves toward more sustainable levels," said Bob Dugan, Chief Economist at CMHC. "Most of the pent-up demand that built up during the 1990s has been absorbed, and higher mortgage carrying costs due to continued strong price growth and modest increases in mortgage rates will contribute to the slower pace of new home construction both this year and next."

Existing home sales, as measured by the Multiple Listing Service (MLS®), remained near record levels in 2006. Sales will ease to 464,550 units in 2007 and to 449,200 units in 2008. Similarly, after five years of strong growth in house prices, the rate of increase in the average MLS® price will moderate to 5.9 per cent in 2007 and 3.3 per cent in 2008 as existing home markets move toward balanced conditions. The strongest price growth will be in Western Canada; with the average MLS® price in Alberta growing by 13.3 per cent in 2007 – after having increased by 29.5 per cent in 2006. Average MLS® prices in Ontario and Quebec will grow by 3.2 per cent and 4.1 per cent in 2007, respectively.

Also included in this issue of the Housing Market Outlook is a forecast of vacancy rates for key rental markets. The average rental apartment vacancy rate in Canada's 28 major centres decreased slightly by 0.1 of a percentage point to 2.6 per cent in October 2006 compared to October 2005. Looking ahead, favourable employment conditions, high levels of immigration, and the increasing gap between the cost of renting and owning will continue to exert downward pressure on vacancy rates. Nevertheless, many renter households will continue to be drawn into home ownership. As a result, the vacancy rate will remain essentially unchanged, inching up to 2.7 per cent in both 2007 and 2008. Strong rental demand will keep the Calgary vacancy rate low at 0.6 per cent in 2007 and 1.0 per cent in 2008. The apartment vacancy rate in Montréal will rise again to 3.2 per cent in 2007 and 3.5 per cent in 2008 as the growing home ownership trend continues to affect the largest rental market in Canada.

At the provincial level, new home construction in British Columbia will trend lower but remain high by historical standards. High levels of consumer confidence, employment and income growth, as well as positive net migration will translate into demand for housing. However, as the resale market moves toward balanced conditions, there will be less spill-over of demand into the new home market. As a result, housing starts will ease from 36,443 units in 2006 to 34,700 units in 2007, and decline to 32,300 units in 2008.

I find it interesting how this report does not mention rampant speculation, or the unsustainably high price levels in many communities and how that may affect demand or supply of housing. Its all about the balance in the market and how great consumer confidence and employment in our province is. What do you think?