CMHC Housing starts will stabilize in 2020 and 2021 for Canada as a whole

The outlook is upbeat for housing in Canada next year with construction starts, sales and prices expected to rebound on the back of economic and demographic support, according to the country’s largest public mortgage provider.

Housing starts will range between 194,000 and 204,300 next year, showing a return to form after two years of declines, Canada Mortgage and Housing Corp. said in its annual housing market outlook.

The number of sales may be as high as 497,700 next year, while the average price will be between $506,200 and $532,000, the agency forecast. That’s up from a forecast of as much as $497,200 for 2019.

“Housing starts will stabilize in 2020 and 2021 for Canada as a whole,” Bob Dugan, CMHC’s chief economist, said on a conference call Thursday. “Existing home sales will remain essentially flat in 2019, up ever-so slightly from the level we saw last year. However, sales will then start to increase, offsetting much of the recent declines that we’ve seen by 2021."

The economy will boost housing market demand after a soft 2019 with gross domestic product growth of 1.5 per cent. Canada’s economy is expected to increase expansion to 2 per cent next year and 1.9 per cent in 2021, CMHC said. That will lead to a gradual increase in interest rates in late 2020, it said. The benchmark rate has remained at 1.75 per cent after four increases by the Bank of Canada since late last year.

CMHC said risks to its projections would be increased trade tensions that impact business and investor confidence and subsequent economic and housing market activity. Instability could also increase with higher household indebtedness affected by higher interest rates or joblessness, it said.

“The level of debt in Canada is high,” Dugan said. “Should there be some sort of a shock that causes unemployment to rise or the level of employment to drop that can really have an impact on the performance of loans.”

Relatively strong economic growth and housing demand in B.C. will see housing starts there outperform other regions in Canada, though at levels below recent highs, CMHC said.

The outlook for existing home sales growth for next year and 2021 is strongest in B.C. and Ontario because of rising disposable income forecast to exceed the national average, the agency said. Ontario is expected to lead price increases over the two years followed by Quebec, according to the agency.

B.C. will see a modest price recovery in 2020 after a decline this year because of foreign ownership rules and mortgage stress tests, but the province will assume the second-fastest price growth after Ontario in 2021, CMHC said.

Strong economic conditions in places such as Vancouver and Toronto creates demand for housing and increases prices, a situation that’s exacerbated because the housing supply is relatively unresponsive to price changes, Dugan said. Part of the solution is to address land costs by offering larger homes in the condominium market, he said.

“One of the things we think that needs to happen to improve supply is more density in these cities but more of the right kind of density,” Dugan said. “We see a lot of condo construction of bachelor apartments and one-bedrooms. We need to see more two- and three-bedroom apartments to make it feasible for families to take advantage of higher density living in metropolitan centres where supply constraints are more binding.”

Recent measures to address overvaluation in Vancouver and Toronto areas indicate a general easing of vulnerabilities, as prices have aligned with fundamentals in recent quarters, CMHC noted in its report.

“The current outlook for renewed growth in home prices over the forecast horizon does not imply that overvaluation and/or price acceleration measures will necessarily worsen, since growth in fundamentals over the same time period can be sufficient to support stronger resale market activity and price growth,” CMHC said.

In Alberta, more people moving to the province and employment growth in service sector jobs as opposed to a stagnant oil sector has helped to support a housing market that might otherwise be worse, CMHC senior analyst Taylor Pardy said from Regina.

“We’re anticipating starts are going to come down along with sales and prices in 2019, but we are anticipating some slight recovery in 2020 and 2021 because of these positive fundamentals we’re seeing,” Pardy told the conference call.

In Vancouver, the trajectory of interest rates and their impact on the ability to borrow will continue to be the greatest factor alongside how buyers are coping with rules introduced two years ago to cool the market, CMHC analyst Eric Bond said.

“We had a market trough in the latter half of 2018 and the first half of 2019, but more recently the market has certainly started to find its footing,” Bond said on the call. “That’s been particularly driven by activity in more affordable segments in the market, the condo market and so on.”

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