Banks react to starts

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Even with a cooling in August housing starts, economists predict the six-month trend will remain high– but some question whether it’s sustainable.

“Although the housing party continues for now, it can’t last forever,” TD economist Brian DePratto wrote in a research note Tuesday. “We expect the rate of housing starts to gradually decline, as there is some evidence of overbuilding, particularly in the multiples segment.”

Canadian housing starts fell slightly in August, dropping 3.7 per cent after four consecutive months of gains, according to the latest numbers from the Canada Mortgage and Housing Corporation (CMHC).

The numbers, released by CMHC earlier this week, show the monthly starts declined to 192,368 annualized units in August from 199,813 in July, but the six month trend was still positive (the six-month trend is a moving average of the last six months’ starts).

DePratto wrote that last month’s pullback was modest and “the interest rate environment remains supportive of the housing market, and tightness in certain markets, such as detached units in Toronto, continue to push prices up, supporting construction activity.”

DePratto is predicting, however, there will be a gradual slowing in the pace of housing starts as the market approaches 2015.

“An expected gradual increase in interest rates will result in a less favourable funding environment, helping to moderate demand,” he wrote.

Scotiabank economists Derek Holt, Dov Zigler and Frances Donald also wrote that even as Canadian housing rebounded from a weak winter, questions remain.

“If Ontario stays settled at current levels in September (not implausible) and B.C. settles back down from its construction fever, we could be shaping up for a move down in housing starts into the fall,” they wrote.

Royal Bank of Canada economist Laura Cooper agrees, pointing out that while the persistence of unsustainably lean mortgage rates has likely bolstered housing demand in recent months, a shift in the balance of supply and demand is on the horizon as affordability pressures intensify. “Momentum in overall housing market activity is expected to cool,” she wrote.

As for the immediate future, Bank of Montreal economist Robert Kavcic suggests the party isn’t over quite yet, writing that recent permit activity means the months ahead will see an upside momentum in the condo sector.

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