May 23, 2012

December 19, 2011

Canada’s November housing starts pause for a reality check

Alex Carrick

Chief Economist, CanaData

According to Canada Mortgage and Housing Corporation (CMHC), home starts nation-wide in November fell back to 181,100 units seasonally adjusted and annualized from 208,800 units in October.

The latest level of home starts was the lowest since nine months ago in February.

There were several months between September 2010 and March 2011 that were relatively weak compared to late summer and early fall of this year.

Three times in the past five months, the level of starts has exceeded 200,000 units. Those levels were probably too high. Given the great uncertainty in the world economy, proceeding at that pace of starts has been a calculated risk.

The equilibrium for housing starts – i.e., the level at which demand and supply match based on family formations, immigration, second home purchases and replacement needs – is judged by most analysts to be around 180,000 units.

It is CanaData’s contention that home starts will settle down around that number over the next couple of years.

Home starts are comprised of two main categories, singles and multiples. The “multis” designation is made up of semi-detached, townhouse, row, apartment and condo units.

In Canada’s 33 largest cities by population – the census metropolitan areas (CMAs) as designated by Statistics Canada – single-family starts have comprised 35% of the total so far this year and multis have accounted for the remaining 65%.

In Canada, we take these proportions as a matter of course. In our largest cities, there is often a great deal of high-rise residential construction underway.

Our American cousins experience quite a different housing market. In the U.S., singles currently make up 68% of total starts and multis a much more subdued 32%.

This isn’t simply the result of the abysmal housing market south of the border. In times of considerable strength in U.S. housing demand, before the recession, singles accounted for 80% of the total.

One would think the greater population density in the U.S. would discourage the inefficient use of land for single-family housing. Such has not been the case.

Longer commutes to work have often been a side effect, but that’s another issue.

Interest rate deductibility (which we don’t have) has undoubtedly played a role in Americans traditionally “going big” when it comes to their home buying.

However, the tendency to purchase “McMansions”, as they’ve come to be known, has not necessarily served them well in recent years.

Prior to early 2006, when the U.S. housing market decline began, the tax advantage of buying McMansions played a role in speculative price rises.

Once the market soured, the price swings on the downside in the U.S. were horrendous (-33% peak to trough overall; -60% in Las Vegas). They seem to be finally bottoming out.

The singles market in Canada this year has been less than auspicious. In the 33 CMAs, single family starts have been -10% year-to-date versus the same January to November period last year.

Moving in the opposite direction, multi-unit starts have been +17%. Condominium construction is the major portion of the multi-unit market.

The multi-unit market in Canada is dominated by three cities. Toronto, Montreal and Vancouver are home to nearly two-thirds of all multi-unit starts across the country.

November year-to-date multi-unit starts in Toronto have been +42% compared with the same time frame last year. Vancouver’s percent change has been similar at +44%. Montreal has moved ahead by a more modest +11%.

The latest month, however, was a significant departure for Toronto versus recent experience.

Multi-unit starts retreated rapidly. In the individual month of November, Toronto multi-unit starts were -55% versus October and -60% when compared with November of last year.

Montreal multi-unit starts in November were +17% month to month and +61% year over year. The comparable percent changes in Vancouver were +2% and +132%.

The new housing price index for the country as a whole, which includes coverage of semis, rows and townhouses, but not condos, was +2.5% year over year according the latest survey (for October) conducted by Statistics Canada.

The five cities with the fastest year-over-year price rises in the country were Toronto (+5.6%), Winnipeg (also +5.6%), Regina (+5.1%), St. John’s (+4.1%) and Ottawa (+3.4%). Once again, Windsor (-3.3%) suffered the indignity of last place.

The month-to-month change in the Canada-wide new house price index was +0.2%.

The housing market has the appearance of preparing to cool off for a while. If that’s the case, more caution about the hiring outlook in this country will be a factor.

Statistics Canada reports the number of jobs in Canada has fallen by 70,000 over the past two months. Given the ongoing struggle in Europe to contain an unruly debt crisis and the political gridlock in the U.S. that stifles progress in fixing the deficit, these are uncertain times.

Trumping many of the concerns about the future, however, would be a U.S. economy that returns to better form. There are indications this is indeed taking place.

The U.S. initial jobless claims figure in the latest week was 381,000. That’s the second lowest number since before the recession. Only February 2011 was lower at 375,000.

It points to significant progress being made in ramping up employment and lowering the jobless rate in a steady and progressive manner.

An issue that will receive increasing attention in the years ahead will be the size of the labour force.

The large number of unemployed is receiving a great deal of attention at present.

However, the vanguard of the post World War II baby-boom generation (born from 1946 to 1966 in Canada) has finally reached what used to be considered the normal retirement age of 65.

This will exert a downward bias on the number of willing workers over the next twenty years. Through retirements, the jobless rate will become less of a problem.

Finding young capable people to fill staffing positions will become a greater priority.

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.

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