The Trap Door Opened Under Canada’s January New Home Starts

02/12/2013 by Alex Carrick

The moment has finally arrived. It had been expected for some time. Economists and housing market analysts, with a good deal of support from the media, have been projecting there would be a serious correction in Canadian new home starts. No one has to wait any longer.

Canadian housing starts in January, seasonally adjusted and annualized, plunged to only 160,577 units from 197,118 the month before, according to Canada Mortgage and Housing Corporation (CMHC). The latest month’s level was -18.3% versus December 2012 and -19.5% versus January 2012.

The 161,000-unit figure for January starts was the lowest since July 2009’s 139,000 units. Three-and-a-half years have gone by since then. July 2009 was when the recession in Canada was ending and home starts had fallen as low as 112,000 units in April of the same year.

One month does not make a year. The question now is whether or not housing starts will recover somewhat in the coming months or plunge even lower.

CanaData is projecting an annual average starts level of 185,000 units for all of 2013.

So far, new home prices have been continuing to move higher. Statistics Canada’s New Homes Price Index (NHPI) was +0.2% month to month in December 2012 and +2.3% year over year.

Only Victoria (-3.0% year over year) saw a significant drop in its new home price index in the latest December. Vancouver, another at-risk city for new home prices, basically maintained its level with a decline of only 0.5%.

The fastest new home price increase in December 2012 was recorded by Winnipeg (+5.0 year over year).  

However, the latest starts number (161,000 units), more than suggests that developers are projecting a drop in demand. And a weaker market presages a fall in prices. The ripple effects will be substantial.

Consumer confidence will suffer. Bank revenue from new mortgage signings will decline.

Be prepared to spend more for services at your local branch. Financial institutions will try to hold onto their profit levels through other means.

At the same time as January’s home starts were published, “official” numbers for 2012 were also released and they make for interesting reading.

Most years, the number of single-family starts is slightly more than half of the total.

In 2012, singles accounted for only 39% of total starts. Semis were 6%, row housing 10% and the remaining category, “apartment and other”, provided the biggest share of all, 45%.  

The vast majority (75%) of “apartment and other” work was condominium construction. In Ontario, the condo proportion rose to 86% of all high-rise residential construction.  

Three cities – Toronto, Montreal and Vancouver – bit off a stunning 75% (or three-quarters) of national condo construction. Those are also the three largest population centres in the country.

Toronto condo projects were 42% of the national total, followed by Montreal at 18% and Vancouver at 15%.

But the high-rise market in those three cities is undergoing some major adjustments.  In the individual month of January 2013, Toronto multiple-unit starts were -76% versus December 2012 and -74% compared with January 2012.

The comparable numbers for Montreal were -56% and -32% and for Vancouver, -1% and -28%.  

The U.S. residential scene is quite different from what is occurring in Canada. South of the border, it’s a shortage of listings that is driving the market. There are two key reasons for the supply-side bottleneck, both resulting from an ongoing improvement in prices.  

First, investors are stockpiling inventory. Private equity and hedge funds are snapping up blocks of unsold homes in some developments in the expectation of reaping windfall profits at a future date.

Second, many individual homeowners are waiting for prices to move higher. This is especially true for families whose properties are figuratively “under water” – i.e., the selling price of the home is still below the outstanding mortgage amount.

The “Economy at a Glances” often concentrate on the 33 largest population centres in the country – the Census Metropolitan Areas (CMAs). These are cities with urban cores of at least 50,000. Vast suburban tracts then stretch out around the perimeters.  

The next tier down is the Census Agglomerations (CAs), with populations between 10,000 and 49,999. There are over 100 CAs in Canada and some of them accounted for a level of housing starts in 2012 that was higher than for several of the CMAs.

For example, there were six CMAs in 2012 with new home starts of less than 600, while there were eight CAs with a level of starts that exceeded that threshold.

The eight CAs by region were as follows: in Atlantic Canada, Fredericton (634) and Charlottetown (612); in Quebec, Granby (678) and Drummondville (631); in Alberta, Lethbridge (660), Wood Buffalo (637) and Grande Prairie (611); and in B.C., Nanaimo (659).

Let’s conclude by looking at the latest Statistics Canada estimates of population change in the country. After all, population growth combined with family formations has a lot to say about future housing demand.

Statistics Canada recently released its Quarterly Demographic Estimates report for the July to September 2012 period.  

By the end of last year’s third quarter, Canada’s total population had climbed above the 35 million mark to reach 35,002,400. The year-over-year percentage change was +1.1%.

Only two provinces had year-over-year percentage population increases that were significantly higher than the national average: Alberta (+2.9%) and Saskatchewan (+2.2%). 

The populations of the four Atlantic provinces stayed more or less flat while the rest of the provinces fluctuated in a narrow band around the national figure of  +1.1% - with Manitoba (+1.2%) above it and Ontario (+1.0%), Quebec (+1.0%) and B.C. (+0.9%) marginally below it.

Strictly in the third quarter, the national population increase was +0.3%, with Alberta (+0.9%) and Saskatchewan (+0.6%) again leading the way.

In the latest quarter, the gains in interprovincial migration were highest in Alberta (+13,900) and Saskatchewan (+1,300).

Net international migration (i.e., immigration less emigration) accounted for two-thirds of the total-Canada population increase in Q3 2012.

Canada monthly housing starts
(seasonally adjusted at annual rates)
Canada monthly housing starts
Jan-Dec average 2011 = 193,200 units;
Jan-Dec average 2012 = 215,100 units (+11.3%).
Canada’s Annual Starts:
2008 = 211,056 units (-7.6%);
2009 = 149,081 units (-29.4%);
2010 = 189,930 units (+27.4%);
2011 = 193,950 units (+2.1%);
2012 = 214,827 units (+10.8%).
Data Source: Canada Mortgage and Housing Corporation (CMHC)/Chart: Reed Construction Data - CanaData.