September 3, 2010

Economic at a Glance

Canadian housing starts will weaken but won’t be infected with U.S. virus

ALEX CARRICK

Chief Economist, CanaData

Housing starts in the second half of this year will weaken versus the first half, according to CanaData’s latest forecast. There are five obvious reasons.

Several others are subtle and raise the spectre of the Canadian housing market being infected with the deadly U.S. housing-fiasco virus. More on that in a moment, but let’s begin with factors working against Canadian housing starts.

(1) Cost increases have accompanied the July 1 harmonized sales tax introductions in Ontario and B.C. These crop up in legal and real estate fees and in new homes valued above $400,000.

(2) Existing home sales, a forerunner of starts, have taken a significant downturn. The Canadian Real Estate Association reports resales fell 30% year over year in July. Most of the recent decline came in the aforementioned B.C. and Ontario. The HST does not apply on resales, but its impact on overall prices has made consumers more wary about spending in those two provinces.

(3) The Bank of Canada has raised its key policy-setting interest rate, the overnight rate, twice since June 1. Rates remain exceptionally low. It may not be the level of rates that inhibits demand so much as their upward direction. Potential purchasers may be moving to the sidelines.

(4) A certain level of fatigue has entered the marketplace. After falling dramatically in early 2009, Canadian home starts staged a surprising comeback. Since the start of this year, they have averaged just under 200,000 units on an annualized basis. This does not appear sustainable.

(5) It is very difficult to get a read on the level of demand that is likely to come from foreign buyers. There are indications that wealthy owners from the Asia Pacific zone, Europe and the Middle East are picking up Canadian properties. Only three cities – Toronto, Montreal and Vancouver – account for more than 50% of multi-unit (i.e., mainly condo) starts nationally.

One incentive for foreign buyers is increasing recognition of Canada’s safe haven status, due to the financial sector surviving here better than almost anywhere else during the credit crisis.

Canada’s housing sector problems pale by comparison with the U.S. The list of disincentives south of the border begins with the April 30 expiry of the new homebuyer tax credit, a nearly one third drop in existing home prices and a huge level of outstanding and potential foreclosures.

The catalogue can be expanded to include a massive shadow inventory of vacant homes that will eventually be put up for sale (i.e., properties about to be liquidated); a decline in potential buyers and renters at the low-price end of the market as a result of illegal aliens returning to Mexico and Central America in the recession; and disappointingly weak job markets in the latest two months.

Those are the negatives. Let’s not overlook the positives. There is a still high level of immigration into Canada that requires accommodation. Nor is any one region of the country dominating in terms of population growth, as in the past. All provinces have been adding to their rosters, as opposed to the days when everyone was flocking to Alberta to work in the oil sands.

On that note, the populations of B.C. and Saskatchewan have been growing faster than the other provinces, partly due to resource sector jobs. B.C. is rich in base and precious metals, with strong potential in forestry products once U.S. homebuilding revives. In Saskatchewan, the agricultural sector leads. This includes fertilizers, as witnessed in the ownership struggle for Potash Corp.

Housing starts are a function of price, affordability, incomes, employment prospects, mortgage rates, population growth and overall economic prosperity. No doubt, Canada will be caught in the downdraft if the U.S. slips back into recession, also known as the dreaded double dip.

However, this nation also now has the benefit of being more closely tied to the rest of the world. Commodity demand will save Canadian bacon, so to speak. Consider just one example of the type of change underway elsewhere in the world: Outside Beijing, at this time, there is a 100 kilometre logjam of traffic. This consists of delivery trucks trying to get into the capital.

The number of vehicle registrations in Beijing so far in 2010 is ahead 27% versus the same time last year. The middle class in China, India, Brazil and several other developing nations is growing exponentially. The result must be increasing strains on all forms of infrastructure and food supplies. The future can only be a sellers’ market for owners of Canadian raw materials.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com

Housing starts in Canada

Source of actuals: Canada Mortgage and Housing Corporation (CMHC).

Table, estimates and forecasts: Reed Construction Data - CanaData.

Housing starts in Canada’s 6 largest cities

Source of actuals: Canada Mortgage and Housing Corporation (CMHC).

Table, estimates and forecasts: Reed Construction Data - CanaData.

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