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A sign advertises a house for sale in Toronto.

Chris Helgren/Reuters

The slowdown in Toronto's real estate market is spilling into the market for newly constructed homes as builders face weaker demand, especially for more expensive detached houses.

Since the Ontario government announced a package of measures in late April to cool the overheated housing market in Toronto, builders of ground-level homes – including detached and semi-detached houses as well as townhouses – have seen sales slow significantly as many buyers have remained on the sidelines or have turned to the less expensive condominium market.

One result has been an acceleration in the long-term shift toward building smaller and less-expensive housing options, especially townhouses.

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Brian Johnston, chief operating officer at Mattamy Homes, Canada's largest home builder, said his staff have already talked about adding smaller units in a planned new project to offer a lower-priced option for buyers.

"Our strategy is to sell what you want to buy, and if you want smaller, we'll sell it to you," he said.

Mr. Johnston said the summer months were very slow as nervous buyers sat on the sidelines, but there has been some improvement in buyer interest in September.

"We've seen a bit of a perking-up, but we're not back to where we were 12 months ago," he said. "A year ago, we could have opened up 80 townhouses in one of our communities in the GTA and we would have sold it out in a weekend. That's no longer the case. We might sell four to six in a weekend, which is more like a normal market. It's what we used to be used to."

In the five months from May to September, the number of new detached-home starts in Toronto fell 14 per cent compared with the same period last year, while construction starts of less-expensive townhouses and semi-detached houses climbed sharply, according to data from Canada Mortgage and Housing Corp.

Housing starts are often a lagging indicator because many of the projects that started construction in September were presold to buyers many months earlier.

The Building Industry and Land Development Association (BILD), which represents Toronto-area builders and developers, reported sales of new low-rise homes fell 76 per cent in August compared with a year earlier across the Greater Toronto Area, after falling 85 per cent in July compared with the same month last year.

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BILD chief executive officer Bryan Tuckey said the summer is typically slow and it will take more months of data to see how much the market has really been affected.

But while the condo sector remains on course to be at or near a record sales year, Mr. Tuckey said the low-rise home market has seen sales fall owing to both lower demand and low inventory available for sale after a strong first half of the year. For new low-rise homes, 2017 is well below the 10-year average for sales, even despite a strong start to the year, he said.

"It has cooled from July to August and I think a lot of that is the fact that there is a little more inventory there," he said.

Prices have also declined as demand has waned, but not nearly to the extent that has been seen in the resale market. The average new single-family detached home in the GTA sold for $1.29-million in August, down 2 per cent from $1.32-million in July but still up 38 per cent compared to a year earlier.

Mr. Tuckey said there has long been increasing demand for smaller units, spurred by buyers seeking more affordable options and by planning rules requiring more density in new developments.

"Townhouses have really become the new single from an affordability perspective," Mr. Tuckey said. "You see in projects now many more townhouses, and single-family houses tend to be a little more high-end."

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Patricia Arsenault, executive vice-president at real estate research firm Altus Group, said the available inventory of new low-rise homes is low in historic terms and much of what is available is over $1-million, which is beyond the reach of most buyers.

She believes resale home sales peaked in March and were already softening before the province's measures were announced in April, and says the new home market followed suit, but with a lag.

Personal finance editor Roma Luciw tells you what you should be doing with your money if you're never going to be a homeowner.
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