The condominium sector continues to be the power behind the national housing market which is now seeing a steady decline in single family home construction, according to new data from Canada Mortgage and Housing Corp.

October statistics reveal a tale of two markets — a condo sector where new construction of urban multiples was up 1.7% from a month earlier and a single family home picture where starts dropped 9% from a month earlier.

Take a longer-term look and single-family home construction is now at its lowest level in two years and off more than 29% since the end of 2009. Multiple-unit starts, which are mostly made up of condominium construction, have climbed 70% during the same period and the sector is at its highest level October 2008.

Overall, new home construction was 207,600 in October on a seasonally adjusted annualized basis. That’s down from 208,800 in September but starts are in line with the 2002-2008 housing boom when they checked in at more than 200,000 a year.

Robert Kavcic, economist with BMO Capital Markets, sounded some alarm bells for the condominium market which he maintains is seeing unoccupied units — also classified as unsold — at their highest number since 1992 which is the earliest year data was available.

“On the supply side, there’s a clear divide between singles and condos, with the latter looking more vulnerable if a correction does come,” Mr. Kavcic said in a note. “Suffice it to say that while starts are again running slightly ahead of the estimated rate of household formation (about 175,000 a year), the supply situation is looking a lot tighter for single detached homes than for condos.”

Brian Johnston, the president of Monarch Construction, said the condominium market has been driven by affordability issues which includes the cost of land for single family homes.

“House prices have been going up faster than inflation for the past 10 years,” he says, noting people must travel further and further into the suburbs to buy homes that compare in price to urban condominiums. “People are saying it’s just not worth it. I’d rather sacrifice to reduce my commute times.”

Mr. Johnston also said in Toronto, which is considered the largest condominium market in North America, the provincial government has made it policy to have more intensification and discouraged low rise construction.

Despite the pace of construction, he doesn’t see condominium sales slowing anytime soon with one caveat. “I don’t see any increase in unsold condominiums. We are at like 98% sold by the time we get to occupancy,” Mr. Johnston says . “The only issue in my mind is the day interest rates start to go up, then we may have a problem. If that happens, the economics start to fall apart.”

Urbanation Inc., which tracks the Toronto condominium market, said the number of unoccupied units may be up but cautioned against comparisons with 1992 because the overall market is so much larger.

“There are 29 buildings in the category of occupying now, there are 5,627 units and 5,194 have been sold or 92%,” says Ben Myers, vice-president of Urbanation. “I mean how many projects were there in 1992? You have to expect the numbers to be skewed.”

While urban single new home construction may have seen better days, a strong market for existing homes could ultimately lead to a rebound.

In Toronto, single family detached sales have been rising since May compared to a year earlier, said Gregory Klump, chief economist with the Canadian Real Estate Association “You have to have a tight market in the resale market before new home construction picks up,” he said. “You have to have a shortage of supply and then they start building.”

Kirsten Cornelson, an economist with Royal Bank of Canada, said the volatility of the multiple-unit sector leads her to put more faith in urban singles for an overall understanding of the market.

That said, she doesn’t seem worried about the market. “We think multiples will fall back to a more normal pace,” said Ms. Cornelson. “We don’t see any reason to be alarmed. We think the Canadian housing market is in for a pretty steady period. The strength over the last couple of months is not sustainable but we don’t expect any sort of collapse.”

Source: Christine Dobby & Garry Marr, Financial Post

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