March 2, 2010
Economy at a Glance
CanaData’s latest 2010 housing starts forecast raised to 180,000 units
National housing starts have averaged 182,000 units annualized over the past four months, according to Canada Mortgage and Housing Corporation (CMHC). This is a giant step up from their low points of last year: 118,000 units in February and 112,000 units in April.
CanaData is forecasting that starts for all of 2010 will be 180,000 units. This will compare with the 149,000-unit level in 2009. For the seven years 2002 through 2008 inclusive, annual starts averaged 222,000 units per year. In the last year of that exceptional run, they were 211,000 units.
The resale market
Since late-spring/early summer of last year, the Canadian Real Estate Association (CREA) has been reporting on the unprecedented and surprising improvement in the existing home resale market. This is a sector of the economy that is particularly sensitive to interest rates.
With mortgage rates at record lows, there has been considerable incentive for families and individuals to move into bigger and better accommodations, or to change lifestyles by moving from the suburbs to downtown cores in major cities. These trends have gained momentum.
The improvement in the resale market leads new housing starts by about six months. The resale market has been so hot that federal Finance Minister Jim Flaherty has introduced several measures to try to cool it down. These have included the following three principal moves.
There will be: 1) stricter rules for mortgage approvals (applicants must pass five-year fixed rate guidelines); 2) a lowering of the withdrawal percentage on mortgage refinancing (from 95% to 90%); and 3) higher down payments required on properties bought for rental purposes (20%).
Other reasons for strength
These may prove to be relatively minor speed bumps that can be circumvented by determined buyers. At least in the first half of this year, there will be several factors that will encourage prospective homeowners to step into the marketplace. These will be in the areas of cost savings.
Buyers will want to act before interest rates start to move higher. This is likely to occur after the midway point of this year at the latest. There is also good reason to act quickly to avoid extra charges under harmonized sales tax (HST) regimes that are coming to Ontario and B.C.
By next year, 2011, normal cyclical factors will be the driving force behind housing starts. Rising interest rates will inhibit some demand, but they will be more than compensated by improvements in labour markets.
Employment gains and better consumer confidence will see a pick-up in starts that will return above the 200,000-unit level on a consistent basis by 2012.
Regional factors
Regions of the country where starts have more upward potential will include those where the demographics are most favourable. For example, people flock to destinations where the economy is prospering.
In terms of net interprovincial migration, the current return to higher oil prices will help Alberta. Saskatchewan and Manitoba will also benefit from some commodity price gains.
British Columbia is a magnet for international arrivals. It may have something to do with the West Coast lifestyle. Recoveries in B.C.’s forestry and mining sectors will be a draw as well.
Ontario, with its manufacturing-based economy, is not attracting international arrivals to the same degree as in the past. However, in the early stages of recovery, the turnaround in the inventory cycle is providing Ontario with some zip.
This has been partly thanks to stronger U.S. GDP growth and has been achieved despite the gain in value of the loonie versus the greenback.
Quebec and the Atlantic Region both survived the recession in better shape than the rest of the country. As a result, their recoveries will come on top of stronger base levels of activity.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His personal blog is at www.alexcarrick.com
