September 19, 2013
Canada’s new home starts in August drifted lower
Canada’s housing starts in August were 180,000 units seasonally adjusted and annualized (SAAR), according to Canada Mortgage and Housing Corporation (CMHC). That’s a drop of 6.6% versus the previous month’s 193,000 units.
The highest figure reached so far this year has been May’s 200,000 units. A year ago, the number was 228,000. The most recent peak for nationwide residential groundbreakings was 253,000 units in April 2012.
Year-to-date in 2013, new home starts have averaged 183,000 units, a decline of 16.2% versus the first eight months of last year (219,000 units).
Clearly, the Minister of Finance, Jim Flaherty, has succeeded in cooling the Canadian housing market. Over the past couple of years, he has taken a number of steps — most notably, reducing the amortization period to qualify for government-backed insurance — to tighten the mortgage approvals process.
Ottawa has been worried that Canadian home-buying has been too frenetic. Today’s record-low interest rates will eventually be shoved aside by pricier levels that will drive up monthly carrying charges when mortgages are renewed.
This will leave less money in homeowners’ wallets and purses for consumer spending, the number one mainstay of gross domestic product (GDP).
A number of international agencies and media outlets (e.g., The Economist magazine) have raised similar yellow flags concerning Canada’s housing sector, warning that home prices here may be venturing into “bubble” territory.
This may not be giving enough credit to the fact Canada’s economy weathered the recession better than other G-7 nations and that employment here returned to its pre-recession peak in mid-2010 and has been setting new records in many of the months that have followed.
Canada is also fortunate in recording ongoing strong population growth. Over the past year, the increase in our resident count has amounted to nearly 400,000.
That’s the equivalent of a new city the size of Halifax in only one circle of the sun.
There are six census metropolitan areas (CMAs) in Canada with populations that exceed one million. (A CMA is the broad boundary definition that includes closely integrated suburbs as well as the downtown core.)
From July 1 2011 to July 1 2012, the latest annual span for which city data is available from Statistics Canada, the population of CMA Toronto increased by slightly more than 100,000.
Calgary was next with a gain of 40,500, followed by Montreal, +39,800, Vancouver, +37,500 and, Edmonton, +33,400. In “sleepy” Ottawa — I’m sure our politicians won’t be happy with that adjective — the gain was only +17,300.
In any event, the goal for Canada’s housing sector is to achieve a soft landing.
New and existing home prices in most regions of the country are still finding buyer support. It’s important that this continue to hold true. A significant drop would not be good for the overall economy. It would take away from consumer confidence and lead to that most dreaded of nightmares, as witnessed in America, a ramping up of “foreclosures”.
On account of a contraction in world trade, Canada is already struggling with weakness in commodity prices that has undercut our usual foreign trade surplus, felling it to zero.
The Bank of Canada’s overall commodity price index is lower by one-quarter (-26%) versus its most recent peak achieved in June 2008.
The outcry concerning Canada’s overheated housing market has focused on exceptional condominium demand in Toronto and Vancouver. But those markets are already undergoing corrections.
Toronto’s multi-unit starts in August of this year were -40% compared with August of last year.
On a year-to-date basis, they were -43%. The comparable figures for Vancouver were -21% and -11%.
Among Canada’s six largest cities, only Edmonton (+27%) has seen a rise in total starts year-to-date. In the nation’s other five largest cities, the smallest decline in new home starts was recorded in Vancouver (-7%), with the picture becoming progressively worse in Calgary (-12%), Ottawa-Gatineau (-13%), Montreal (-27%) and Toronto (-36%).
Mortgage rates are beginning to rise and that will eventually put a damper on activity levels anyway.
Maybe it’s time for Ottawa to stop trying to inhibit housing demand and let natural forces work their dark magic.
(seasonally adjusted at annual rates)