Photo: James Bombales

Canada’s resale market is undergoing a cooling period amid a slowdown in the Greater Toronto Area, but the nation’s new-construction segment is still going strong — and it has a lot to do with pricing, suggests Scotiabank.

“What helps to explain why the new build segment is stronger than the recent weakening in some resale segments in the relative price change in favour of new homes which has been going on for years,” writes Derek Holt, VP and head of capital markets economics for Scotiabank, in a note.

“New home prices are much more affordable,” adds Holt, noting employment and a rising immigration are encouraging more construction which dampens prices.

Specifically, Holt compares the Teranet-National Bank House Price Index, which only looks at homes that have been sold at least once before, with Statistics Canada’s New Housing Price Index, based on sales data collected directly from homebuilders.

The performance of the new-housing segment of Canada’s biggest market, the Greater Toronto Area — which has considerable pull on national trends — after the Ontario provincial government announced its Fair Housing Plan in April has surprised at least one notable expert.

“You would think that the Fair Housing Plan actually would have targeted the pre-construction market a bit more,” Diana Petramala, an economist with TD, told BuzzBuzzNews recently.

“These new condos were not subject to rent control prior to the Fair Housing Plan, and now they are, which means that rents can grow maybe 2 per cent per year, and cap rates are already quite low given where prices are, so we thought that that would have curbed activity in that market ,” says Petramala on BuzzTV, BuzzBuzzNews’ weekly Facebook Live broadcast.

Before the 16-point Fair Housing Plan, which also includes a foreign-homebuyers tax, only condos built before 1991 had rent increases limited, which made newer units a more appealing option for investors hoping to make rental income.

But like Holt, Petramala says the relative “affordability” of some new homes is propping up the segment.

“You saw this too in the Vancouver market: there was a shift from the existing home market to the new home market. In large part that’s because of the affordability issue,” she says.

“If you make… single-family homes less of a good investment, let’s say, you’re going to go and look for the cheaper option and that would be the pre-construction condos,” Petramala adds.

A record number of condos sold throughout the Greater Toronto Area in the first half of the year, according to an Urbanation report published earlier this month.

The market’s “explosive” performance translated to a total of 12,138 new condo units selling in the area over the six-month period ending in June.

As affordability continues to be a strain on many potential homebuyers in Canada’s most expensive markets, immigration and employment has supported more residential construction to meet demand for more affordable housing.

In July, the annualized rate of housing construction reached 217,550 units, representing the seventh consecutive monthly increase, according to the Canada Mortgage and Housing Corporation (CMHC).

Construction in the Vancouver census metro area “remains near record highs,” says CMHC, warning “developers will be keeping an eye on market conditions as these projects are completed in the coming year.”

In the Toronto CMA, another of Canada’s priciest markets, the rate of starts were close to this year’s monthly average. But CMHC noted how construction levels for certain housing types could signal trouble.

“Strong increases in semi-detached and town home starts pointed to affordability concerns driving demand for less expensive housing types,” writes CMHC.

Not just a sign of resilience, Toronto’s construction activity could also signal another problem in a market that has seen home resales plunge more than 40 per cent annually, according to the Toronto Real Estate Board’s July 2017 monthly market watch.

“This buoyancy is in direct contrast to recent sales of existing properties, which are showing a significant slowdown in Ontario following the introduction this spring of new provincial measures aimed, in particular, at the Greater Toronto Area,” writes Desjardins Senior Economist Benoit P. Durocher in a separate report out this morning.

“In light of the rise in housing starts, the fear is that this slowdown is nothing more than a temporary adjustment before new increases,” he continues.

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