Garry Marr, Financial Post 

The Canadian housing market’s surprising turnaround is spreading to new home construction as developers scramble to respond to a supply shortage that has sent pricing soaring for existing homes.

But any increase in construction on the new home side will likely not surface fast enough to feed the demand for housing that continues to be spurred on by record low interest rates.

Canada Mortgage and Housing Corp. said Monday there were 157,300 units constructed last month on a seasonally adjusted annualized basis, a 5.4% increase from a month earlier. Annualized starts at dropped as low as 118,500 in April.

“There is not a lot of inventory around,” said Gary Friend, president of the Canadian Home Builders’ Association, adding his industry has been careful not to speculate. “We have to watch our Ps and Qs, as we try to meet this demand.”

Any increase in supply would be welcomed as a shortage of new listings has lead to a spike in prices. The Canadian Real Estate Association said last month existing home prices across the country were up 13.6% in September from a year ago as a supply problem was evident in almost every city.

The shortage has yet to ease despite the suggestion higher prices would coax homeowners to sell. This month the Toronto Real Estate Board reported sale prices in October were up 20% from a year ago.

“The existing homes market is in short supply so we’ve gone from a buyer’s market to seller’s market. The way it gets linked is you get some spillover into the new homes market and that’s starting to happen,” said Bob Dugan, chief economist with CMHC.

The agency has already upped its forecast for new home construction for 2010 from 150,300 to 164,900. Even at that level though, construction is still well off the 211,000 new starts recorded in 2008.

Paul Ferley, assistant chief economist with the Royal Bank of Canada, said “at the margins” new home construction could help ease the housing crunch. “Builders are aware and will contribute where they can to advance construction activity but no they can’t turn on a dime.”

FACTS: TM was up 0.7% on a monthly basis, the first rise in 9 months. Prices rose in May in four of the six metropolitan areas covered, namely Toronto (+2.0%), Montreal (+1.5%), Halifax (+1.3%) and Ottawa (+0.7%). Price declines were registered for an eleventh month in a row in Vancouver (-0.1%) and Calgary (-2.2%). On a y/y basis, the composite index declined 6.9%, with home price deflation persisting in four cities: Calgary (-12.2%), Vancouver (-11.8%), Toronto (-6.5%) and Ottawa (-0.6%). Price changes were still up in Montreal (2.3%) and Halifax (1.0 %).

OPINION: Today’s report is consistent with the improved conditions on the national home resale market, as the number of homes sold largely exceeded the pre-recession level in June, while the number of existing homes newly listed for sale continued to decline. The new listings-to-sale ratio is now in a zone usually associated with a balanced market. So, home prices could continue to improve on a monthly basis.

However, on a y/y basis, national home price deflation might remain unchanged, or even worsen slightly over the next few months, due to a base effect. In any event, the resulting negative wealth effect in Canada will definitely be far less severe than the one experienced in the U.S..

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca

Here is some interesting news - more Americans are warming to the idea of buying a home. The University of Michigan reports that its index of home-buying attitude (a component of its consumer sentiment survey) jumped in May to the highest level in five years. This development is strongly suggestive of a tangible increase in home sales in the coming months (the University estimates that its index generally leads sales by about six months). What is driving the renewed interest? Compelling pricing, even for first-time buyers.

The income required to buy a first home at the current mortgage rate has dropped below median family income for the first time in recent U.S. history. This unprecedented affordability keeps us confident in our forecast that the glut of homes on the market will start to melt rapidly enough to stabilize prices later this year. This may prove to be one of the turning points out of this recession.

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca

The decline in home prices in 20 major U.S. cities slowed in February for the first time since 2007, amplifying signals that the market may be stabilizing. The S&P/Case-Shiller index’s 18.6 percent decrease compares with a record 19 percent decline the month before. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.