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Canadian Home Starts Return to Earth in May

06/15/2012 by Alex Carrick, RCD Canadian Chief Economist

Canadian home starts in May adjusted significantly downwards versus April, according to Canada Mortgage and Housing Corporation (CMHC).

The latest monthly figure of 211,400 units, seasonally adjusted and annualized, was a drop of 13.5% compared with the previous month’s 243,800 units.

But it was +11.2% versus the same month of last year.

Relative to the other months of this year, May’s level was more in line with March (213,600 units), February (204,000) and January (201,000).

Since home starts breached the 200,000-unit benchmark in July of last year, they have averaged 208,000 units.

Even excluding April 2012’s outsized number, the average has been 204,000 units.

The multi-unit market – dominated by condominiums – has been the main contributor to the high volume.

Year-to-date total starts this year have been +17.9% compared to the same January to May period of last year.

Bank of Canada Governor Mark Carney and Minister of Finance Jim Flaherty have repeatedly warned about a housing market in Canada that may be too buoyant.

The era of exceptionally low interest rates has fostered a home-buying frenzy that could prove less than healthy over the longer term.

When interest rates rise, as they must eventually, new purchasers may find it much harder than anticipated to maintain monthly payments.

Plus, the world economic situation, given the great deal of uncertainty about events in Europe, is hardly conducive to confidence about job security.

There are many indicators of a slowing U.S. economy that will have ramifications for Canada.

More on that in a moment, but first some more analysis concerning the latest housing starts data.

Year-to-date single-family starts in May were +3.8% compared with the first five months of last year. Urban multi-unit starts were +31.4%.

However, in the individual month of May, seasonally adjusted urban single-family starts were -4.2% versus April.

And there was a cooling in the multiples segment of the market where the percentage change was -20.7% month over month. 

For some time now, Toronto has been the pacesetter with respect to new condo projects.

For the year as a whole so far, Toronto multi-unit starts remained elevated at +39.1%.

For the individual month of May, however, they eased back to +9.1% compared with May of last year and dropped by nearly half (-44.8%) relative to April 2012’s explosive figure.

The second and third largest multi-unit markets in the country, with a combined figure that’s less than half of Toronto’s (16,116 units), are Vancouver and Montreal. They are presently almost tied at 6,352 units and 6, 293 units respectively.

Montreal multi-unit starts in May were -39.0% month over month, -13.8% year over year and -3.1% year to date.

Vancouver’s numbers for the same time frames were +29.3%, -17.8% and +8.9%.

While they are smaller markets overall, attention should also be paid to the fourth, fifth and sixth largest cities in Canada by population.

Ottawa-Gatineau multi-unit starts year-to-date in 2012 have been almost double last year (+96%); Calgary’s groundbreakings have been almost quadruple (+291%) their previous January to May performance; and Edmonton’s have increased by half (+51%). 

So why not just go with the flow and be happy that home starts are charging ahead in a variety of regions?

It’s because that hole in the ground you’re seeing may not be a foundation. It may be an enormous pothole.

The effect of the credit crisis in Europe, if it continues to deteriorate, will be felt everywhere.

The U.S. and Chinese economies are already feeling the effects of reduced trade with the continent.

There will also be repercussions in financial markets that may play out in unexpected ways. The hidden linkages between international banks never fail to surprise when some disaster forces fuller disclosure.

U.S. retail sales in May fell for the second month in a row. Industrial production also declined month to month. And initial jobless claims are trending upwards again, not a healthy turn of events.

At least some encouragement can be taken from the fact the price of gasoline is falling. In the latest U.S. Consumer Price Index (CPI), the petrol sub-index was -6.8% month to month and -4.0% year over year.

(The U.S. monthly CPI results are usually released about a week ahead of Canadian figures.)

Lower-priced gasoline frees up dollars for consumers to spend in areas other than basic transportation.   

The all-items U.S. CPI in May was -0.3% versus April and +1.7% versus May of last year.

With that kind of subdued inflation report, the Federal Reserve is in a better position to offer more monetary stimulus – through a QE3 program (printing money) or an extension of Operation Twist (manipulating bond purchases to lower long-term interest rates) – if the signs of U.S. economic slowdown become more pronounced.

Canada monthly housing starts
(seasonally adjusted at annual rates)
Canada monthly housing starts
Jan-May average 2011 = 182,200 units;
Jan-May average 2012 = 214,800 units (+17.9%).
Canada’s Annual Starts:
2007 = 228,343 units (+0.4%);
2008 = 211,056 units (-7.6%);
2009 = 149,081 units (-29.4%);
2010 = 189,930 units (+27.4%);
2011 = 193,950 units (+2.1%).
Data Source: Canada Mortgage and Housing Corporation (CMHC)/Chart: Reed Construction Data - CanaData.
Inventory of completed but unoccupied dwelling units:
centres in Canada with populations of 50,000 or more
Inventory of completed but unoccupied dwelling units: centres in Canada with populations of 50,000 or more
The unsold inventory of multiples is too high by 60%; in the singles market, the unsold inventory is about where it should be.
Data Source: Canada Mortgage and Housing Corporation (CMHC)/Chart: Reed Construction Data - CanaData.
Per cent change in year-to-date housing starts - ranking of Canada's provinces
(Jan-May 2012 vs Jan-May 2011)
Per cent change in year-to-date housing starts - ranking of Canada's provinces
Data Source: Canada Mortgage and Housing Corporation (CMHC) (based on actuals rather than seasonally adjusted data.)
Chart: Reed Construction Data - CanaData.
Per cent change in year-to-date housing starts – ranking of Canada’s major cities
(Jan-May 2012 vs Jan-May 2011)
Per cent change in year-to-date housing starts – ranking of Canada’s major cities
*Canada's Census Metropolitan Areas (CMAs) have core populations of 50,000 plus.
The six CMAs in capital letters are the largest cities in Canada by population.
Data Source: Canada Mortgage and Housing Corporation (CMHC)(based on actuals rather than seasonally adjusted data.)
Chart: Reed Construction Data - CanaData.

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