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Housing starts will fall: Moody’s

May 7, 2020

The annualized pace of housing starts in Canada will drop 30 per cent in the second half of 2020 and remain muted for at least a year, with Western provinces taking the worst hit, according to Moody’s Analytics.
Other analysts, however see a more brief, shallow downturn that could reverse as early as June 2020.
“The COVID-19 pandemic along with the collapse in oil prices will create a perfect storm this year for both home sales and residential construction,” according to Abhilasha Singh, an economist at Moody’s who authored the Canada Housing Outlook report released April 30.
This negative effect will be felt acutely in the West because of its economic makeup, the report states, B.C. tourism and the Prairies oil industry are both dealing with record low demand.
Moody’s forecasts a national contraction of the baseline GDP by 15 per cent in the second quarter of 2020, compared to year earlier, while the unemployment rate will nearly double to 10 per cent.
This will cause housing starts to fall to 145,000 annualized units by the end of 2020, compared with a pace of 210,000 in early 2020, according to Moody’s forecast.
While the report highlights the “extraordinary measures” taken to lower lending costs, including slashing the Bank of Canada interest rate to 0.25 per cent in March and a subsequent reduction in the five-year mortgage rate to below 3 per cent, it warns many homebuyers worried about job losses will remain sidelined.
“Not even lower interest rates will be enough to save the housing market,” Singh noted,
As a result, Moody’s expects Canadian home prices to suffer a peak-to-trough decline of about 10 per cent.
 “As the outlook begins to improve in early 2021, house prices are expected to rebound,” the report states.
RBC Economics and the Canadian Real Estate Association (CREA) forecast a more shallow and shorter downturn in the housing market due to COVID-19.
CREA expects to see housing sales returning to a strong pace in 2021.
 “This will be a temporary shock,” agreed Robert Hogue, of the macroeconomic and regional analysis group with RBC Economics who says the recovery could start as early as mid-2020.
“We expect stronger activity to resume once social distancing orders are relaxed. Our baseline assumption is sometime in June. Exceptionally low interest rates will help spur the recovery,” Hogue said.
“Our current view is the recovery will stretch into 2021 in most markets,” Hogue added. “Odds of a major price drop are still low.”

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