Housing starts cooled in April, suggesting that home builders are scaling back construction in the wake of the decline in home sales. And, notably, the consensus estimate among economists for this important spring month was virtually bang on.
Starts came in at 174,900 on an annualized basis in April, a 3.5 per cent decline from March. Economists had been expecting starts to come in at 175,000 on average.
The figure is down 31 per cent from a year earlier, when starts hit a four-year high, Bank of Montreal economist Sal Guatieri points out. "Canadian home builders are facing the new reality that the decade-long housing boom has ended, and are retrenching in orderly fashion," he wrote in a research note. Ontario and B.C. led the declines, and Toronto condo starts are likely to continue to recede, he said.
The steady softening that's now under way is something that economists thought would take place much earlier.
Predicting how many new homes are about to be built has proven to be an exceptionally difficult task of late. Heading into 2012 economists were certain that the blistering pace of housing starts would abate, but for most of the year it did not. Toronto's condo market, especially, defied their expectations. As a result many economists boosted their forecasts for this year.
Canada Mortgage and Housing Corp.'s annual report, released this week, illustrates just how tough it's been for economists. The Crown corporation, which tracks and publishes the housing starts data in Canada, aims for its housing starts forecasts to come within a 10 per cent range of the actual number – that's one of the goals it has set for itself. Going into last year it had predicted 186,750 starts for 2012, and the actual number came in at 214,827, meaning CMHC undershot by 13.1 per cent. It was stymied by the high level of construction in Ontario and the Prairies.
Economists were surprised by Toronto condo starts last year, even though the construction followed on the heels of strong condo presales in 2010 and 2011.
But CMHC needn't be too embarrassed by its forecasting miss. As it points out in that annual report this week, its 2012 forecast came closest to the actual level out of the 17 major economists that it tracks.
The fact that April's figure falls inline with expectations suggests that economists are getting a handle on the market, which has shown signs of moderating since last fall.
"The question is whether or not there is more weakness to come in light of slowing real-estate turnover of existing homes in major Canadian cities," economists at Bank of Nova Scotia wrote in a research note Wednesday. "To what extent are soft existing home sales spooking developers? That question is more important now that we're entering prime Canadian construction season."
Toronto-Dominion Bank economist Sonya Gulati said that the days of 200,000-plus annualized starts are likely over, at least for now.
"The new home construction sector is experiencing a soft landing, such that the pace of new projects is now in line with demographic need and economic fundamentals," she wrote. "We expect the slower pace to continue, allowing inventory overhang from previous years to gradually deplete."
That should help to alleviate concerns from bodies such as the IMF and Bank of Canada that have expressed concerns about overbuilding, mainly in Toronto and Vancouver, she added.
But that means that residential construction, which added 0.4 percentage points to GDP growth last year, will act as a mild headwind this year, Mr. Guatieri noted. It now accounts for 6.9 per cent of GDP, compared to a norm of 5.7 per cent over the past three decades, meaning there's "plenty of room for moderation," he said.