From 220,000 Units to 180,000

Analysts in Canada have become used to seeing monthly housing starts well above 200,000 units on a seasonally adjusted annualized basis. The average over the past seven years, beginning in 2002, has been 223,000 units. According to the latest numbers from Canada Mortgage and Housing Corporation (CMHC), this scenario has changed and November and December 2008 marked the turning point.

In both of those months, national housing starts dropped below 180,000 units. Be prepared for this to be the new normal level for quite some time, at least through 2010. In fact, it may well turn out that 180,000 units would be more than acceptable given what is transpiring in the overall economy.

The Focus has shifted to Financial Worries
People stopped shopping for real estate and started worrying about their finances in the fourth quarter of last year. This change in thinking was initiated by September's nosedive in stock market values. It is an unfortunate corollary of cycles that a decline in one asset class rarely happens in isolation. It is usually accompanied by declines in others as well. Hence, home prices fall at the same time as equity prices in a generalized slowdown.

House prices have been adjusting downward for almost a year now, although the speed has accelerated of late. The price declines have been most dramatic in urban markets with previous speculative bubbles — i.e., the four major cities in Alberta and B.C.

The Inventory of Unsold Units is Climbing
The unsold inventory of singles is too high, versus its long-term average, by about 75%. But this market has been adjusting in other ways. For example, the volume of singles and semis under construction has been falling month over month for the past half year. The unsold inventory of multiples is too high by 90%. Furthermore, that excess has existed for many years and this has hardly put a dent in the number of units under construction.

One major market that is ripe for a serious shakeout in prices and starts is condominiums in Toronto. Despite all evidence of a weakening economy and lower prospects for condo demand, Toronto's December multi-family unit starts were +227% versus the same month in 2007, bringing the full year total to +67%. Perhaps developers believe the weak Canadian dollar will continue to attract wealthy buyers from China and the Middle East.

The West Led the Step-down in 2008
The four provinces with year-over-year declines in housing starts, 2008 versus 2007, were all in western Canada. Alberta had the most shocking realignment, -34%. Edmonton had the greatest volume drop among all census metropolitan areas, at more than 50%. Edmonton's weakness came in both singles (-66%) and multiples (-44%). Calgary had a major drop in singles (-44%), but did maintain significant strength in multiples (+23%).

In 2008 versus 2007, multiples (+10%) as a category performed better than singles (-18%). This was partly a cost saving trend, as the price of singles had grown prohibitive in some centres. It was also a move from the suburbs to city cores by some empty nesters looking for an easier and perhaps more activity-centred lifestyle. Besides Toronto and Calgary, the multiples market flourished in Hamilton (+49% year over year), Ottawa-Gatineau (+18%) and Québec City (+9%). Montréal did well to stand pat (+1%).

Varying Regional Strengths in 2009?
For 2009, it is hard to project that any one region will do much better economically than any other. Weak oil and gas and other commodity prices are going to hold back the economies of the West. The same will hold true for Atlantic Canada, although individual large construction projects may make a relatively greater difference there.

The financial and manufacturing sectors of Ontario and Québec will be constrained by weak demand from across the border, as well as domestically. Québec's healthy aerospace industry may be one exception. B.C., poised in anticipation of the 2010 Olympics, is well positioned for an early recovery dependent on a pickup in U.S. demand for lumber. Otherwise, it is a matter of waiting to see which government infrastructure projects will be approved for each region and how quickly they will be started.