Canada's housing market in good shape -federal housing agency

Reuters

By Andrea Hopkins and Leah Schnurr

Dec 18 (Reuters) - Canadian condominium construction has surged but population growth has kept oversupply in check, the federal housing agency said in a report on Wednesday that also showed declining mortgage arrears and high home-equity levels.

In its annual report on the housing market, the Canada Mortgage and Housing Corp pointed to steady levels of mortgage debt and an increasing number of households as evidence that residential real estate is in good shape, despite warnings from observers that the market is overheated.

Canada's housing market avoided the crash experienced in the United States five years ago due in part to more conservative lending standards and a stronger economy. While economists have long predicted an eventual correction in Canada, they are divided over whether prices will drop sharply or simply stagnate in a so-called soft landing scenario.

"The main argument here is just that the Canadian housing market still looks fairly normal," said Eric Lascelles, chief economist at RBC Global Asset Management in Toronto.

The agency's report showed that as of June 2013, 0.31 percent of residential mortgages were three or more months in arrears, compared with 0.33 percent 12 months earlier, CMHC said. Arrears averaged 0.41 percent in the decades 1990-2010.

About 31 percent of recent buyers made lump-sum payments or increased their regular payments in 2012 to pay off their mortgage sooner, and 44 percent had set their payments above the minimum, the report showed.

The average amount of equity for homeowners with mortgages was 47 percent, and 71 percent had at least 25 percent equity in their homes. Only 7 percent had less than 10 percent equity as of April 2013, suggesting only about 7 percent of homeowners would be "under water" if prices dropped more than 10 percent.

Some 41 percent of homeowners had no mortgage, while the rest typically had solid equity levels, accelerated mortgage payments or declining arrears.

CONDOS DOMINATE HOMEBUILDING

With the once-booming but cooling condominium market widely perceived to be the weak spot in Canada's urban housing market, the CMHC said condo construction was far outpacing construction of detached homes. Even so, there were no signs of oversupply yet because of an increase in the number of people living alone as well as population growth resulting from a strong influx of immigrants.

While single-detached dwelling starts rose just 1.5 percent to 83,657 in 2012, multiple-dwelling starts - typically condos - rose 17.6 percent to 131,170 units. Condos comprised 61 percent of all construction in 2012, continuing a trend that began in 2002.

The surge was most notable in Canada's biggest cities, where cranes dot the skylines and tens of thousands of new units come on line every year. The share of condominium starts out of total starts was highest in Vancouver at 64 percent, followed by Toronto at 59 percent and Montréal at 58 percent.

While the number of starts suggests a huge supply in the pipeline that will come to the market in the next year or two, the building boom has begun to slow and CMHC said inventories so far are not above historical levels.

Still, economists remain concerned about the level of condo construction already underway in some major cities.

"There's still a huge supply of condos, particularly in Toronto, coming on the market in 2014, 2015," said Diana Petramala, economist at TD Bank in Toronto.

Housing starts began moderating in the last half of 2012 and the first quarter of 2013, with multiple-dwelling starts declining for three straight quarters before rising modestly in the second quarter of 2013.

In 2012, urban inventories averaged 4.7 units per 10,000 people, CHMC said, only slightly above the long-term average of 4.6 from 1992 to 2012. By the second quarter of 2013, however, inventories were at 5.1 units per 10,000 people.

CHMC said population growth and a shift in the way people are living suggests the demand for smaller housing, including condos, will grow.

Condo ownership rates rose in every age group between 1996 and 2011, but condos were particularly popular with seniors and young adults. In 2011, 19 percent of condo owners were under the age of 35, while 29 percent were 65 and older.

"It does show that some of the demand is being driven by demographic fundamentals, particularly for condos," Petramala said.

"Some of the over-building may not be as excessive as some people might be warning."

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