By Sunny Freeman, The Canadian Press
TORONTO – The number of new homes being built will grow slightly more than originally thought this year as strong employment and low mortgages rates outweigh the risks posed by financial turmoil, Canada Mortgage and Housing Corp. said Wednesday.
The agency forecasts that an average 183,200 units will be built in 2011, with about 183,900 new homes being built next year.
The prediction for this year was up from CMHC’s second-quarter outlook, which had forecast 179,500 starts this year. But the new figure for 2012 was down from the 185,300 starts originally expected.
Despite the recent financial uncertainty, which was factored into the outlook as a downside risk, CMHC expects factors such as employment, immigration and mortgage rates will support demand for housing, said Mathieu Laberge, deputy chief economist for CMHC.
“The uncertainty we observe right now is in the financial market and there’s no way to say with some degree of certainty how this will translate to the real economy,” Laberge said.
“That’s why the outlook is slightly revised, but quite consistent with our previous outlook.”
The outlook assumes 1.7 per cent employment growth this year and next and about 245,900 new immigrants this year and 263,000 next year — both of which contribute to housing demand.
It also factors in the decreased likelihood that the Bank of Canada will raise interest rates any time soon after the U.S. Federal Reserve bluntly stated that it does not intend to raise rates until 2013.
Housing starts have been strong in the past few months, but will likely moderate closer in line with demographic fundamentals — or the rate of new household formation — Laberge said.
Ontario and Saskatchewan are expected to see the most new home growth this year, while British Columbia and Alberta will see the biggest gains next year.
The new home market tends to follow trends in the resale market — with about a six-month lag — and the strong demand will help prop up the home building industry.
The CMHC predictions come a week after the Canadian Real Estate Association revised its forecast for national home resales up for the rest of the year, citing stronger than expected sales and higher prices in the second quarter.
CREA said sales should grow less than one per cent this year to 450,800, up from an earlier forecast that called for a one per cent dip in sales. Housing demand has been more robust than expected as interest rates remain low, enticing more buyers to take on mortgages at historically low carrying costs.
CMHC’s prediction for sales of resale homes Wednesday was slightly lower, forecasting an average of 446,700 homes, essentially the same number as in 2010. In 2012, it believes sales will rise to 458,000 units.
Both organizations say an unexpected increase in sales of high-end homes, especially in the Vancouver area, pushed average prices higher than expected in the first half of the year and they expect prices to moderate slightly for the rest of 2011.
CMHC expects the price of an average resale home to rise by 8.4 per cent to $367,500 this year and by 1.3 per cent to $372,400 in 2012.
But as the existing home market moves into a more balanced territory as the number of new listings increases, growth in the average home price on CREA’s multiple listing service is expected to be more modest in 2012, CMHC said.
Economists have said they expect home prices to fall between five and 10 per cent as the real estate market cools off in 2012 once mortgage interest rates rise again.
Adrienne Warren, a senior economist at Scotiabank who specializes in real estate, said it makes sense that both CREA and CMHC revised their forecasts, which she said reflects the stronger than expected first half of the year and also the anticipation that interest rates are not going to rise until next year.
“I think where there’s a little more risk is when we eventually see interest rates move up, you’ll see demand cool off a little more,” she said.
“…With record high home prices, once interest rates move up, the affordability equation won’t look quite so positive.”
The low interest rate environment stimulates activity especially among first-time buyers, Warren said.
But in the higher end of the market, uncertain economic environment and financial market turmoil could cancel out some of the gains from low interest rates, as potential buyers may have lost some investment income, making them less likely to spend on an upgrade.
Warren said there’s a risk of prices dropping in overheated areas like Toronto and Vancouver. But declines will need more of a trigger such as a big economic setback.
Meanwhile, the housing market, once a bright spot that led Canada out of recession, will likely be neutral for the economy going forward. It won’t be a drag but it won’t be a driver of growth as much as it was in the first part of the year, Warren said.