Feeling sorry for oneself comes naturally to an economist. We are a much maligned lot. Our forecasts are often seemingly wrong. But that is because we are aiming at a moving target or some dramatic event drops down from out-of-the-blue. Or the forecasts cause policy or behavioral changes that alter the outcome. Plus there is one other factor. The rest of society simply refuses to behave in a rational way – witness the housing market.

Housing starts in Canada stayed strong for seven years from 2002 through 2008. They continued to stay elevated even in the face of deteriorating prospects for the economy as world growth was winding down. Forecasters were expecting a decline in starts much earlier in the cycle. That did not happen because of enduring and unrealistic optimism. Now the cycle has turned and the swing has become exaggerated. According to Canada Mortgage and Housing Corporation (CMHC), starts in Canada in April 2009 were an excessively low 117,000 units. No wonder economists get frustrated. (story continued below)

Canada Monthly Housing Starts
(Seasonally Adjusted at Annual Rates)

Jan-Apr average 2008 = 231,000 units;
Jan-Apr average 2009 = 134,000 units (-42.0%).

Canada's Annual Starts:
2005 = 225,481 units (-3.4%);
2006 = 227, 395 units (+0.8%);
2007 = 228,343 units (+0.4%);
2008 = 211,056 units (-7.6%).

Data source: Canada Mortgage and Housing Corporation (CMHC).
Chart: Reed Construction Data – CanaData.

A Sounder Foundation for Starts in Canada than in the U.S.

Housing starts in Canada are currently down nearly 60% from their peak monthly level of 277,000 units annualized in September 2007. In the United States, starts have fallen by 80% from peak to trough. The market in Canada should not deteriorate to the same extent nor for as prolonged a period as in the U.S. for several reasons including: (1) less impact from the sub-prime mortgage meltdown; (2) fewer pockets of speculative home price binges earlier in the cycle; (3) a stronger financial sector; (4) firmer government backing of mortgage facilitators; (5) fewer job losses on a proportional basis; and (6) stimulus for housing (i.e., low interest rates) applied much earlier in the problem phase.  

The chart on housing inventory below highlights the problem. The unsold inventory of multiples is too high by more than double and the unsold inventory of singles is in excess by 80%. The number of singles under construction is coming down (-38% from peak), which will help with the inventory problem, but the number of multiples under construction has barely budged, which means ongoing problems for a while to come. Deep discount pricing and major incentive programs are everywhere in the condo market. (story continued below)

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 110%; the unsold inventory of singles is too high by 80%.

Data source: Canada Mortgage and Housing Corporation (CMHC).
Chart: Reed Construction Data – CanaData.

The Toronto Condo Market Finally Turns

The bellwether market for multiples is Toronto. Condo starts in Toronto have finally dried up. In April of this year, they were -67% versus the month before, March, and -65% versus April of last year. Vancouver condo starts adjusted earlier than in Toronto and so were only down marginally versus March, but they were off by 74% compared with April of last year. Calgary (-89%) and Edmonton (-70%) are the other two large urban markets where multi-unit starts have been mostly curtailed versus the same month a year ago.

Housing Stays Afloat in Newfoundland

Newfoundland and Labrador (+27%) is the only province in the country with an increase in housing starts so far this year versus the first four months of last year. New home prices in that province are also up dramatically, +20.8%. The three major reasons for Newfoundland’s more buoyant housing sector are: (1) recently affluent workers returning home from Alberta (i.e., more people means more spending); (2) the carryover of offshore energy earnings from a year or so ago; and (3) ongoing large capital spending in the metals and mining sector, for processing Voisey’s Bay ore.

Percent Change in Year-to-Date Housing Starts –
Ranking of Canada's Provinces
(Jan-Apr 2009 vs Jan-Apr 2008)

Data source: Canada Mortgage and Housing Corporation (CMHC)
(based on actuals rather than seasonally adjusted data).
Chart: Reed Construction Data – CanaData.

Percent Change in Year-to-Date Housing Starts –
Ranking of Canada's Major Cities
(Jan-Apr 2009 vs Jan-Apr 2008)

*Canada’s Census Metropolitan Areas (CMAs) have core populations of 50,000 or more people. 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.