May 22, 2013

October 23, 2012

Home Starts in Canada Eased Slightly in September, but Stayed Strong

Alex Carrick

Chief Economist, CanaData

Home starts nationally in September were 220,215 units, seasonally adjusted and annualized, according to Canada Mortgage and Housing Corporation (CMHC). The latest level was slightly lower than the 225,328 units the month before, but it was still impressively strong.

September’s month-to-month percentage change may have been down (-2.2%), but the year-over-year performance was solidly up (+4.8%).

Through the first three quarters of this year, the average of the monthly home starts figure has been 218,300 units, a 14% gain versus the same January to September period last year.

Monthly housing starts in Canada have exceeded 200,000 units in 13 of the past 15 months. Most housing market analysts believe the appropriate level for starts at this time, based on demographics (i.e., family formations), is about 180,000 units.

Monthly figures above 200,000 units are exceeding underlying demand. This is flirting with trouble down the road. There is the danger that unsold inventory will eventually lead to a dramatic drop in prices.

Even if Canada-wide home starts slip back to only 200,000 units on average in the fourth quarter, they will end the year at nearly 214,000 units.

Much of the credit for the strength in starts goes to the multiple-unit segment. Multi-unit starts in urban centres through September were +23%. The single-family market was only +2%.

The multi-unit strength can further be traced to the Toronto and Vancouver markets. Toronto multi-unit starts this September were 28% higher than in the same month of last year. Year-to-date Toronto multi-unit starts were +32%.

Vancouver multi-unit starts in the latest month were -1.0% month to month but +16.1% year to date.

But there’s more to the new homes story than just the Toronto and Vancouver condo scenes. On a percentage-change basis, three western provinces deserve their moment in the spotlight. Year-to-date home starts in Alberta (+38%), Manitoba (+37%) and Saskatchewan (also +37%) were all up by more than one-third in September.

Only B.C. (+9%) was left out of the home-starts surge in the West, falling behind both Ontario (+19%) and New Brunswick (+12%) in the East.

Nova Scotia (-8%) has been the one province to record a significant decline in starts, although Quebec (-1%) has had trouble matching last year as well.

Changes in the resale market often foreshadow the coming trend in new home construction. The latest numbers from the Canadian Real Estate Association (CREA) suggest a break in the sunny weather.

Seasonally-adjusted home resales in August were down 5.8% versus July, the largest decline since June 2010.

The “actual” (i.e., not seasonally adjusted) number of existing homes sold in August of this year versus the same month last year dropped by 8.9%.

And the national average home price year over year was essentially flat (+0.3%).

Everyone is watching Canadian home prices with a great deal of interest. And by everyone, I mean even the International Monetary Fund (IMF). In its latest (October 2012) World Economic Outlook report, Canada is projected to achieve one of the fastest “real” (i.e., inflation-adjusted) gross domestic product (GDP) growth rates among G7 industrialized nations this year and next.

In 2012, our estimated 1.9% GDP rise will be only marginally weaker than the U.S. and Japan (both +2.2%). Japan is receiving a boost this year from massive spending to fix damage caused by the tsunami in the spring of 2011.

Most other G7 nations will record disappointing numbers in 2012. Germany will do best (+0.9%); France will be flat (+0.1%); and the U.K. (-0.4%) and Italy (-2.3%) will slide backwards.

In 2013, only the U.S. (+2.1%) will turn in a higher rate of GDP increase than Canada (+2.0%).

The IMF report usually comes with some cautionary notes, couched in the form of suggestions.

This one was no exception, stating as follows: “In Canada, a priority is to limit risks to elevated house prices and household debt levels.”

Furthermore, “A sharp or sustained decline in house prices could seriously set back the leveraged household sector and domestic demand.”

The IMF’s warning is hardly shocking or fresh news. Ottawa has already spotted the problem and taken pre-emptive action. To cool a residential market that may be overheated, there has been a tightening of the rules for mortgage applications and a reduction in amortization periods.

Real estate boards are reporting that traffic from first-time home-buyers is becoming greatly diminished.

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.

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