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Economists predict mortgage rules may cool new construction as September tops expectations

FinancialPost.com
Oct. 11, 2016
By Garry Marr

New home construction in September topped the expectations of economists, but changes to federal rules regulating the housing market could slow the market down in the coming months.

On a seasonally adjusted annualized basis, Canada Mortgage and Housing Corp. said Tuesday there were 200,617 starts in September, which topped market expectations of 191,000.

“The pace of housing construction is likely to ease through the rest of 2016. For one, the new mortgage and tax regulation introduced by the federal government last week is likely to shave up to 10 per cent off home sales over the remainder the year, and homebuilding activity will likely follow suit,” said Diana Petramala, an economist with Toronto-Dominion Bank, in a note Tuesday.

Among the key measures approved by Ottawa, which take effect on Oct. 17, are rules that force all consumers with loans backed by the federal government to qualify based on the posted fixed five-year rate, now set at 4.6 per cent. Previously, some consumers could borrow based on the rate on their contract, often 200 basis points lower than the posted rate, which allowed for a larger mortgage. Critics of the changes have suggested they will squeeze some buyers out of the market.

“From a regional perspective, most markets are likely to see a moderation in construction activity. In addition, the normalization in housing activity in Vancouver is likely to temper new home construction in the city. Housing starts in B.C. were near a record high in August, while existing home sales dipped below their 10-year average,” said Petramala, who expects annual starts to drop to a pace of 180,000 by early next year.

The economist noted that since August 2015, starts have hovered between 195,000 and 205,000, a pace considered too hot relative to household formation. But record immigration in 2016 and a three per cent gain in the population aged 25 to 34 resulted in a faster pace of household formation in 2015 and 2016.

“Low inventory, sharp home price gains and a relatively balanced housing market suggest that the pace of new home construction over the last year might be just right,” Petramala said.

CMHC noted its six-month trend for housing starts was 199,503 in September, close to the six-month trend for the period ending in August, when the number was 196,465.

“Housing starts were on an upward trend in September, as residential construction increased across the country with the exception of Ontario, where the multiple segments softened to levels that are more consistent with household formation,” said Bob Dugan, chief economist with CMHC, in a release. “Quebec saw the largest gain in housing starts due to the development of new rental apartments intended for seniors. That said, Quebec’s growing apartment stock emphasizes the importance of inventory management.”

Josh Nye, an economist with Royal Bank of Canada, said the unexpected increase in September pushed the third quarter to the strongest pace this year,

“However, with much of the increase recorded late in the quarter, today’s report will likely have a greater impact on (fourth quarter) homebuilding activity,” Nye wrote in a note. “Our forecast assumes residential investment will remain a modest drag on growth going forward, although the increase in September starts hints that any slowdown could be delayed until next year.”