November 28, 2013

Canadian housing starts are stuck in a sweet spot

Canadian new home starts have been remarkably consistent over the past six months. Their average of 196,000 units seasonally adjusted and annualize (SAAR) has moved within a narrow range from a high of 200,000 in May to a low of 186,000 in August.

The figure in the latest month, October, was 198,000 units, according to Canada Mortgage and Housing Corporation (CMHC). A year ago, in October 2012, the level was 209,000 units.

It’s interesting to note that October’s average level over the past decade has also been 209,000 units, swinging from 229,000 in 2004 to 175,000 in the recession year of 2009.

The year-to-date average so far in 2013 has been 187,000 units, a decline of 14% from the first ten months of last year at 218,000 units.

Preliminary indications that mortgage rates might be trending upwards brought forward a number of purchase commitments. This effect is expected to subside. Ongoing anxiety about the strength of the U.S. recovery, especially in light of Washington’s proclivity to cause havoc, has led the Federal Reserve to postpone withdrawal of monetary stimulus. The Bank of Canada is similarly following a wait-and-see strategy.

An earlier Economy at a Glance (Vol. 9, Issue 119) made the case that the annual norm for Canadian housing starts appears to be moving higher. Analysts are still quoting the old figure of 175,000 units as the sustainable rate. The better bet many now be 200,000.

A high level of immigration, enthusiastic second-home demand, a desire among wealthy foreigners to own Canadian property and a replacement rate that demolishes more homes each year, simply based on an accumulating inventory, are all contributing factors.

Through October of this year, single-family starts in the nation’s 33 largest census metropolitan areas (CMAs) have been -6%. The drop-off in multi-unit starts has been more dramatic, -19%.

Previously-heated demand for condominiums has “come off the boil”. Developers must now offer substantial incentive packages, such as waiving maintenance fees for a year or providing upgraded kitchen packages, to attract buyers.

Multi-unit starts in Montreal in October of this year were -4.9% month-to-month, -26% versus October 2012 and -28% year-to-date.

In Vancouver, the comparable figures were -18% month-to-month, -22% versus October of a year ago, and -11% January to October of this year versus the same time frame last year.

In Toronto, the nation’s largest multi-unit market, starts so far in 2013 have been -38% compared with the first 10 months of last year.

But the city’s individual-month-of-October level was +13% versus the same month in 2012 and more than double (+142%) September 2013.

Toronto’s October level of multi-unit starts was the highest this year. It resulted from sales agreements signed a year or so ago. Nevertheless, the concern about the proliferation of cranes in Toronto and the potential for a “bubble pop” won’t immediately go away.

Among other interesting city-level housing-start comparisons is the divergence between Calgary and Edmonton. Year-to-date, the former is in decline (-9%), while the latter is enjoying a boost (+20%).

Strength in housing starts is needed to keep a lid on prices in both the new and existing homes markets. At the website of the Canadian Real Estate Association (CREA), there is an interactive >map showing average existing home prices in major cities across the country.

The highest-priced homes are in Vancouver ($787,000), followed by Toronto ($534,000).

The year-over-year price increase for the nation as a whole has been +8.8%, with five cities in the vanguard — Vancouver (+8.8%), Hamilton-Burlington (+8.7%), Calgary (+8.2%), Edmonton (+8.1%) and Saskatoon (+7.8%).

In the U.S., where residential groundbreakings are still way below normal, year-over-year resale home prices are increasing even more dramatically, +10% to +13% depending on the authoritative source.

Toronto (+6.0%) has also recorded a good price gain, while Ottawa (-1.5%) and Montreal (-2.3%) have moved backwards.

Most home prices in the Atlantic Region are low compared with the rest of Canada, with the exception of St. John’s, N.L. ($314,000), where they are almost a match with Montreal ($322,000) and above both Quebec City ($266,000) and Winnipeg ($256,000).

There is considerable price disparity between some cities across the nation. This becomes even more apparent when the targeting is specific to some local neighborhoods. But then care must be taken to only compare homes with the same features and characteristics.

Coldwell Bankers Real Estate adopts such an approach for both Canada and the U.S. The company looks at the average price of one “standard” property — a four-bedroom home with two bathrooms — in 2,000 regional markets in both countries. (Note that some premium markets with an insufficient sample size of middle-of-the-road properties are left out of the data.)

At the top of the firm’s >ranking in Canada are Greater Vancouver ($952,000), Fort McMurray ($630,000) and Oakville, Ont. ($624,000). At the bottom are Grand Falls, New Brunswick ($160,000) and Windsor, Ont. ($189,000).

If we think we have regional disparity in Canada, consider the U.S. The listing takes a dizzying swoop from a high of $2.156 million in Malibu, Calif., to $63,700 in Cleveland, Ohio.

Among the 25 highest-priced homes in America, 13 are in California. Besides Malibu, other exclamation-inducing and high-profile locations on the Pacific Coast include Newport Beach ($1.774 million), Saratoga ($1.684), Los Gatos ($1.360), San Francisco ($1.310), Cupertino ($1.292), San Mateo ($1.133), Pasadena ($1.092) and Santa Barbara ($1.061).

Stone Harbor, N.J. ($1.302 million) is the first non-California state to crack the top 25. Other states prominently represented are Massachusetts with three — including Newton ($0.913 million) — and Connecticut with two.

A high proportion of the states in the bottom-25 grouping are in the Midwest, including Ohio (4 spots), Michigan (3), Missouri (3), Illinois (2), Iowa (1), Nebraska (1) and Wisconsin (1).

There are also some bargain locations in the South — in Florida, Georgia, Arkansas and Mississippi.

Also on the least-expensive list are two cities in New York State that will be particularly familiar to residents of Ontario — Buffalo ($102,000) and Niagara Falls ($110,000).

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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