House market hit worse than expected

Canada Mortgage and Housing Corp. says the downturn in the economy will drive new-home construction to a nine-year low in 2009, a forecast that differs significantly from what the Crown corporation was saying in November.

But Bill Clark, senior economist at CMHC, said it was impossible last quarter to predict the economic decline we are seeing and the impact it would have on the economy.

Three months ago, CMHC forecast 177,975 homes would be built this year. Thursday, that figure was adjusted to 160,250 -- a level not seen since 2000. The forecast would mean a 24% decline from the 211,056 units constructed last year.

"There have been some issues that have come up in the economy that were not foreseen, that's been the case for much of the forecasting," Mr. Clark said.

The drop in construction would mark the end of arguably the strongest housing market in Canadian history, a seven-year run of more than 200,000 units built each year. It would also mean the industry is building fewer than the 175,000 units the country needs based on demographic estimates.

"There has been also a lot of new listings lately," said Mr. Clark, referring to the market for existing-home sales, as one of the reasons for the contraction in new construction. He said consumers have a wider choice in the existing-home market and that's driving them away from buying a new home.

CMHC's forecast says existing-home sales will drop almost 15% this year from 2008 while the average sale price will fall by 5.2% to $287,900. It is predicting a modest recovery in 2010 with sales up about 9% but the average sale price will improve by only $200.

Benjamin Tal, a senior economist at CIBC World Markets, says the lack of liquidity in the housing market makes it difficult to forecast where prices will eventually settle.

"The resale market is basically paralyzed," said Mr. Tal, referring to the fact that year-over-year sales are down as much as 50% in some markets, such as Vancouver. "The market is in a state of shock. Nothing is happening. The prices we are getting now are just a rough proxy. It's not an accurate reading."

Mr. Tal said that as the unemployment rate rises, house prices will fall as people are forced to sell. He doesn't see a correction comparable to the United States.

"The unemployment rate will rise from 7% to 9% but that's still 91% people employed although they will be concernd about their job. What do you do when you are concerned about your job, you save your money. The housing market will be boring," Mr. Tal said.

Hamilton builder Jeff Paikin said he still feels confident in the market and will keep building but like many in his industry he says financing issues are making life tougher for him.

"The banks are making it more difficult to access capital. It is available but on more stringent terms," he says. Where once you could get financing for condominium with 50% of the building presold, the figure is now 65%.

"It is harder to get to that presale level because there is less urgency to buy," says Mr. Paikin. "The pressure is on because you have to get to the 65%, so you can get your financing and start building so the first people who bought into a project don't walk away."