The following is CanaData’s Summer 2008 summary of the residential and commercial construction outlooks for Canada.

Residential Construction Forecast
Beginning with residential construction markets, CanaData is forecasting that housing starts in 2008 will drop to 210,000 units (versus 228,000 in 2007), then experience a further decline in 2009 to 195,000 units. By 2010, positive momentum will begin to gather again with an increase in starts to 205,000 units nationwide.

In a comparison of pluses and minuses for the residential outlook, the latter is made up of a considerably longer list. On the plus side, mortgage rates are low and the economy has continued to maintain healthy job growth, so far.

However, on the downside, consumers have become more cautious about major spending commitments, on account of all the talk about slowdown/recession and the hits that they are taking to discretionary income from high prices, especially for gasoline, but also for food and some other essentials.

Canada’s economy recorded a -0.3% quarter-to-quarter change in real (inflation-adjusted) Gross Domestic Product (GDP) in the January through March period of this year and this will eventually seep down into the labour market.

One major demographic shift that drove housing starts in 2006 and 2007 — the move to Alberta by workers and their families looking for jobs — has finally stalled out. On the other hand, the populations of Saskatchewan and Newfoundland are on the upswing for the first time in many years, due to their strong resource sectors, but both are relatively small markets.

Finally, the current situation might be described as “the pendulum finally swinging back the other way”. Housing starts were exceptionally high in the six years 2002 through 2007, averaging 223,000 units per year. Therefore, pent-up demand, especially from first-time buyers has now been largely satisfied. Plus, the sellers’ market that has prevailed since 2002 has meant a bidding up of house prices in many regions to levels that are somewhat off-putting.

Commercial Construction Forecast
Commercial construction starts this year are expected to be 47.0 million square feet, after reaching 55.6 million last year. In 2009, they will be 41.0 million and in 2010 they will increase marginally to 42.0 million.

The two major sub-categories of commercial work are office buildings and retail. In office building markets, office vacancy rates are quite low in almost all major centres across the country. Office rents are also up, more in Western Canada than in the east. However, there are only two centres where these factors are translating into new office building construction in a big way — Calgary and Toronto. Nevertheless, office building starts will be strong this year and this will mean good levels of job-site activity at least through next year.

Retail is an interesting sector to consider at this time. Healthy retail sales volumes usually depend on high levels of employment and good job growth. Labour markets have done well so far, but this may be about to change. The weakness is coming from a manufacturing sector that is being sorely tested by the high-valued Canadian dollar. Capacity utilization rates dropped substantially in the latest quarter, with total industry at its lowest level in fifteen years and manufacturing dropping below 80.0%.

Another factor to consider is that a great deal of retail activity ties to residential markets — think purchases of appliances, carpets, home renovation products, etc. If one supposes that housing starts will weaken, then this has negative implications for retail spending as well.

Finally, in this category, hotel and motel construction starts are ahead of last year. But they are not nearly as dynamic as they should be at this late stage of the economic cycle. The probable cause is that visits from the United States to Canada have taken a nose dive. There is a whole host of factors at play, ranging from the increase in value of the loonie versus the greenback, through the high cost of gasoline, border crossing delays and the new requirements for more-official documentation of American citizenship (e.g., a passport) when returning to the U.S.