New home construction to decline for next two years, says report

The construction of new homes in Canada will continue to decline for the next two years as the economy slows and higher interest rates weigh on consumers, according to a new report from Altus Group.

The real estate services firm saidthe seasonally adjusted annual rate of housing starts will fall to 208,550 units this year, and then decline further to 205,050 units in 2020. That's a two to 3.7per cent dropfrom 2018's 212,843 total units.

"Policy induced turbulence is generally in the rear-view mirror, but housing demand is not expected to recover significantly," the report said, referring to 2018'sstricter mortgage stress tests.

"Higher interest rates compared to a year ago will have lingering negative impacts. A moderately slower economy combined with some uncertainty may keep many consumers on the sidelines."

The latest data from the Canadian Mortgage and Housing Corporation (CMHC) this month showed annualizedhousing starts in February fellbelow forecaststo 173,153 units, compared with 206,809 units the month before.

Before the jump in construction in January, housing starts had declined five times in the last six months, including in December, according to the CMHC.

The fall in housing starts also comes as sales in the country's biggest housing markets continueto decline.

Canadian homes sales dropped to their lowest level in more than six years in February, according to the Canadian Real Estate Association (CREA), as the average home price fell to $468,350.

Fallout from rising mortgage rates

Tighter lending rules such as the B-20 regulations that came into effect in January last year, and higher borrowing costs, are being blamed for the slowdown in the sector.

Rising mortgage rates in 2018 havehomeowners facinghigher rates intheir five year-renewals, the report said.

"This additional cost isn't generally high enough to be a default risk, but may be dampening consumer spending power, including for move-up buying decisions," the report said.

The Bank of Canada has raised interest rates five times since it began tighteningmonetary policy in mid-2017, but expectations for a rate hike in the next six months have fallen dramatically as economic growth has slowed.

"Expectations for more subdued increases in mortgage rates will partly mitigate waning consumer confidence, but eroding spending power will continue to be on balance negative," the report said.

In 2019, housing starts will continue to decline in the country's two biggest markets British Columbia and Ontario Altus Group said. Butnew construction will be higher in Quebec, Alberta and Saskatchewan. By 2020,housing starts are expected to fall in all major markets except for Alberta and Saskatchewan.

A continued economic recovery, improved affordability and surging migration will boost housing starts in Alberta inthe next two years, while a recovery in job growth in Saskatchewan will help the housing market, according to the report.