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Home starts and job levels diverge in Canada and the U.S.

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Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

Many factors determine the level of home starts in a region and in any given time period including prices and mortgage rates, which are usually wrapped up in the term affordability. Another key determinant, one would think would be the availability of jobs. As jobs and incomes increase, the demand for housing should grow. There should be a close tie-in. What’s currently being witnessed in both Canada and the U.S. is an inversion of the equation. Furthermore, the abnormal pattern is the opposite between the two countries.

Many factors determine the level of home starts in a region and in any given time period including prices and mortgage rates, which are usually wrapped up in the term affordability. Another key determinant, one would think would be the availability of jobs. As jobs and incomes increase, the demand for housing should grow. There should be a close tie-in. What’s currently being witnessed in both Canada and the U.S. is an inversion of the equation. Furthermore, the abnormal pattern is the opposite between the two countries. In Canada, homebuilding remains strong at a time when jobs growth has leveled off. In the United States, ground-breakings are flat while employment is showing definite signs of improvement. Let’s begin with Canada. Home starts in January were 197,900 units, seasonally adjusted and annualized, according to Canada Mortgage and Housing Corporation (CMHC). A figure near 200,000 units or above is a strong level of starts in Canada. That mark has been reached in six of the past eight months. There is increasing concern that Canada’s housing market may be too hot. Some of the worry is focused on prices. Homes on the Pacific coast, in particular, are judged to be too expensive. Some correction is already taking place. Existing home prices in Vancouver (-1.7%) and Victoria (-5.5%) dropped year over year in January, according to the Canadian Real Estate Association (CREA). The average price of resale homes in Victoria has fallen back near Toronto’s level, but Vancouver remains about 70% higher. Another problem may be household debt. Families in the U.S. have been making determined efforts to lower their outstanding loans. The debt-to-disposable-income ratio in the U.S. has been on a downtrend for the past couple of years. In Canada, the same ratio continues to climb. It has reached 151%, which is above the figure south of the border. With very low interest rates, the Bank of Canada is worried that purchasers have been taking on risky mortgage commitments. Mortgages are a big part of household debt. People may be buying too much house. Or at least, that’s the way this is usually expressed. While the foregoing are valid concerns, the bigger problem for Canadian homebuilders may be the product mix. Multi-unit starts have been much stronger than in the single-family market. In January, singles were +1% (in units) and multis were +37%. The super-heated action has been mainly in Vancouver and Toronto. There’s little doubt that much of the demand is coming from investors in newly-wealthy regions of the world. This creates a unique dilemma – trying to assess whether or not the foreign demand for properties in those two centres will hold up. If the world economy slows, as expected, the likelihood diminishes. In contrast to Canada, U.S. home starts remain depressed. Interest rates are at record lows, but even highly-qualified potential buyers are having trouble winning mortgage approvals. Once bitten by the credit crunch, the lending sector remains skittish. At the same time, jobs are on the increase. In fact, the improvement in the U.S. jobs market is probably more dramatic than most Americans realize. It is true that total employment in the U.S. remains well below its peak level prior to the recession. In January 2008, U.S. employment reached an all-time high of 138.0 million. Over the next two years, it dropped by 8.8 million to strike bottom at 129.2 million in February 2010. Since then, nearly another two years has passed and total American employment is 132.4 million. That’s an increase of 3.2 million versus the trough. About one-third of the decline has been recovered. That may not sound like a lot, but consider the following. The U.S. service sector accounts for 70% of all jobs. Total service sector jobs in the nation dropped 4.6 million from January 2008 to December 2009. They have since come back to the tune of 3.1 million jobs. The recovery rate in services has been nearly 67%. In a couple of categories, the current level of employment has actually risen above where it was before the recession. The most amazing upsurge has occurred in accounting and bookkeeping services. This is a category that lost jobs steadily over the three years 2008, 2009 and 2010. In a relatively short period of time (i.e., one year), it has recovered fully. The slope of the curve showing job gains is extremely steep. The latest year-over-year change in employment is a remarkable +10.9%. Computer system design services employment is +4.4% year over year and +10.2% versus its August 2009 low point. And leisure and hospitality is a third category where employment has now returned to the same or higher level than its previous peak prior to the downturn. Unfortunately, U.S. construction employment remains mired in the same deep trough it fell into at the beginning of 2010. It has remained flat for the past two years, although there are some tentative signs of improvement. One encouraging note is that positions in architectural and engineering services are +2.5% year over year. This is a leading indicator for on-site work and indicates that more construction jobs are on the way. Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

by Alex Carrick

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