The monthly-average volume of housing starts (227,600 units annualized) in Canada through May 2008 is almost exactly the same as it was during the same period last year. There are many signs, however, that the pendulum may be starting to swing back towards lower volumes in the period ahead, through 2009.

The Negatives for Canadian Housing Starts
Examples of negatives in the marketplace include: high gasoline prices and a riskier jobs outlook are making everyone more cautious about spending plans; home builders are facing higher levels of unsold inventories; demographic shifts to the West have slowed down; and existing home sales have dropped so far this year. On the latter point, the Canadian Real Estate Association (CREA) is expecting unit-sales of existing homes to decline 11.5% in 2008 on a year-over-year basis, after increasing 7.6% in 2007.

Even with respect to one of the few positives for housing starts, low interest and mortgage rates, the outlook may be clouding over. It is unlikely that interest rates will be dropping any further this year, given the increasing concerns that central bankers around the world are having about inflationary pressures.

The Mathematics of Basic Demand
Let’s look at the basic demand for housing in the country. Statistics Canada’s latest measure of the total number of households in Canada is 12.4 million. Therefore, given that the population of the country is 33 million, the average household must be comprised of about 2.7 individuals. Since the rate of population growth is 1% per year, the base number of new homes that is required is 125,000 units per year.

On top of that is: (1) replacement demand and this can take several forms (for example, building a new condo complex can wipe out a significant number of existing homes); (2) second-home or recreational property demand; and (3) demand for housing in Canada by people living in other countries (which is perhaps the reason for some of the large condo developments in Toronto and Vancouver at this time). Plus, there has been a bubble, of late, due to young people (children of the baby boomers) leaving home and setting up on their own.

Long-term Averages

From 1990 through 2001, a period of 12 years, housing starts in Canada averaged 150,000 units per year. This seems a little “light”, given the statistics in the two paragraphs above. However, over the past six years, 2002 through 2007, total housing starts have averaged 223,000 units per year. Frankly, this seems “heavy”. The happy medium figure is probably somewhere around 200,000 units per year. Therefore, expect a period of adjustment ahead.

Moreover, there is the danger of a more severe correction than might be generally anticipated. A “big ship”, once turned around and moving in the opposite direction, can be hard to stop. For confirmation, just ask anyone in the United States. Once housing starts begin to decline, they are likely to continue on that course for a while. The same goes for house prices.

The Market is Changing − Look at the Regional Figures
Another indication that the market is changing can be found in the regional statistics on starts. Four of the provinces with the largest percentage gains so far this year are in Eastern Canada. Ontario (+21%), in particular, has turned in a solid performance, with Toronto’s multiple-unit starts way up (+57%). The province of Alberta (-20%), which has led in so many statistical categories over the past several years, is now at the back of the pack.

When it comes to city-level housing starts, the four leaders (according to year-over-year percentage change) are the new Census Metropolitan Areas (CMAs) of Barrie (+114%), Kelowna (+61%), Brantford (+50%) and Abbotsford (+34%). In terms of the six most populous cities in the country, the ranking by percentage change is: (1) Toronto (+33%); (2) Ottawa-Gatineau (+27%); (3) Calgary (+25%); (4) and (5) Vancouver and Montréal (both +10%); and (6) Edmonton (-42%).

The two new resource-boom provinces are also well represented by St. John’s, Newfoundland (+33%) and Saskatoon, Saskatchewan (+30%). New home sales prices in those two centres are also up dramatically (+16% and +44% respectively), setting the standards for their regions.

The Outlook for Home Prices
On the subject of prices, however, 2002 through 2007 was a sellers’ market. Therefore, home prices were bid up to excessive levels in some urban centres. A number of those prices are starting to come off their highs. For example, the latest statistics from CREA show price drops for existing home sales in both Edmonton (-2.0%) and Calgary (-1.6%).

Nation-wide, CREA is forecasting home prices to increase by 5.3% year over year in 2008 and 4.2% in 2009, versus 11.0% in 2007. This is almost certainly too optimistic. The “real” (inflation-adjusted) change in house prices this year is more likely to be, in CanaData’s estimation, between 0.0% and -5.0% for the country as a whole.

Member Comments