House prices to increase as new home builds slow, CMHC says

Canada's national housing agency says it expects fewer homes to be built this year and next as the market absorbs a flood of new condominiums already underway.

The Canada Mortgage and Housing Corporation revised its forecast for housing starts lower for 2014 and 2015, saying it expects there to be between 160,600 and 203,600 construction starts next year.

Those come on the heels of the between 172,300 and 189,900 it expects to be built this year.

In 2013,187,923 new Canadian homes were built. That was lower than the 214,000 starts the year before.

Growth slowing

"Builders are expected to continue to manage their starts activity in order to ensure that demand from buyers seeking new condominium units is first channelled toward unsold completed units or unsold units that are currently under construction," CMHCeconomist Mathieu Laberge said.

On the price side, the housing agency expects activity to slow down, but still remain in growth territory. Its point forecast for the average price for 2014 as a whole is up by 3.5 per cent to $396,000 before ticking up another 1.6 per cent next year to $402,200.

Data from the Canadian Real Estate Association released last week showed the average price of a Canadian home hit$409,708 last month, up 7.6 per cent in the last 12 months.

In terms of sales, CMHCalso sees activity slowing down. The housing agency expects about457,900 homes to be sold in Canada this year, up only marginally from 457,338 in 2013. In 2015, the sales forecast picks up a little to 471,100units.

CMHC economist Laberge says he sees no catalysts that would result in a hard crash in the market as some have predicted becausefundamentals, particularly population, employment and economic growth, low interest rates and the pool of first-time buyers all support the market.

"When we set house prices against those fundamentals, we do see some modest level of over-evaluation, but it's within historical norms."

CIBC housing analyst Benjamin Tal agrees with the CMHC view, saying a crash would require a "trigger," such as sharply rising mortgage rates, but there is no sign of that happening. The Bank of Canada under Stephen Poloz has taken a dovish stance on rates and many don't expect any hikes until the spring of 2016, and even then that the increases will be small.