May 22, 2012

October 21, 2011

Canadian housing starts float above 200,000 units in September

Alex Carrick

Chief Economist, CanaData

Housing starts in Canada bounced higher again in September to 206,000 units, seasonally adjusted and annualized, according to Canada Mortgage and Housing Corporation (CMHC).

That’s their second-highest level in almost three years, dating back to October 2008 at 209,000 units. There was a last hurrah in the fall of 2008 before the recession, lasting until summer 2009, really took hold.

Monthly housing starts were almost as high in April 2010 at 205,000 units and in February 2010 at 202,000 units. As for when they were bested, that occurred two months ago in July, at 214,000 units.

Starts on average through the first nine months of this year were almost on a par (-2.3%) with the same period last year.

The high level of starts is being supported by good jobs growth – e.g., +61,000 in September – and nearly record-low interest rates.

Prices remain on a modest upward trajectory. Statistics Canada’s new home price index (NHPI) recorded a 0.1% month-to-month increase in August, yielding a 2.3% climb year over year.

It should be noted the (NHPI) is calculated for properties with associated land and therefore does not include high-rise condos.

Paradoxically, higher home prices (within moderation) promote demand. When home prices are dropping, the tendency is for buyers to wait for even bigger bargains if the downward spiral continues.

With one-sixth of the nation’s population, Toronto is a trendsetter. New home prices in the Queen City were +5.1% year over year in the latest month.

That tied Regina (also +5.1%) for fastest new home price increases among 25 of the nation’s major urban centres.

A number above 200,000 units for home starts is notably high. This is especially true given where the nation stands on its recovery path.

The current level of starts begs the question, “Is a bubble developing in Canadian home starts?”

If so, it would seem to be in the multiples market more than singles. Year-to-date starts in the latter category are -14% versus the same January to September time-frame last year.

But year-to-date multiple unit starts are +17%. And in two of the three key cities for multis, the gain so far this year has been out-sized.

Toronto, Montreal and Vancouver have accounted for 65% of multiple-unit starts across the country so far this year.

Montreal multi-unit starts have been a reasonable +6% year to date; Vancouver has been more aggressive at +39%; Toronto’s gain has been an astounding +56%.

Toronto multi-unit starts are only slightly less than one-third of the national total. They are almost equal to Montreal and Vancouver combined.

Most analysts believe the justifiable level for total housing starts in Canada – based on immigration, family formations, second home demand and replacement needs – to be in the range of 170,000 to 180,000 units.

Theoretically, starts should be hovering around that equilibrium.

Furthermore, these are highly uncertain times for the economy.

A world economic slowdown is clearly underway and there are almost certain to be repercussions in Canada that will initially be felt in commodity prices and foreign trade.

Under such circumstances, jobs, income growth and confidence will suffer some setbacks.

Nevertheless, high-rise residential builders seem comfortable with their gung-ho plans.

But the inventory of completed and unabsorbed row, townhouse and condo units increased again in September.

To outsiders, there are definitely some scary aspects to what they’re seeing as frenzied activity levels.

Is there credence to the concerns? The answer seems to be “quite possibly”, based on the following logic.

It’s commonly said that because 80% of a condominium development must be sold before financing comes through, the market is assuredly sound.

No doubt, that’s true when a limited number of projects are being built.

But when there’s an abundance of projects, there’s another way of looking at the 80% rule.

If 80% and only 80% is sold, then one out of every five structures (in effect) might stand empty.

If there are 100 such structures, then 20 will be “see through”.

That’s a rather alarming statistic.

In a market as uncertain as the current one – with the prospects for economic growth open to so many questions – a good deal more caution in initiating projects would seem to be warranted.

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 lifestyle blog is at www.alexcarrick.com

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