January 29, 2014

Soft landing for Canadian housing starts in 2013 or more jolts to come?

It would be nice to say Canadian housing starts achieved a “soft landing” in 2013.

They were lower than in 2012, but an open question remains. Have they reached bottom or is a more jarring touch-down still to come?

According to Canada Mortgage and Housing Corporation (CMHC), the average of the twelve seasonally adjusted and annualized (SAAR) monthly figures last year was 188,100 units, a decline of 12.6% versus 2012’s similarly-calculated 215,200 units.

With the exception of the upward blip in 2012, annual housing starts have been fairly stable in three of the past four years. In 2011, they were 194,000 units and in 2010, 190,000 units.

December 2013’s stand-alone number was 190,000 units (SAAR). CanaData is expecting 182,500 units on average in 2014, with slightly more downside risk than upside.

Much is being made of the fact Canadian consumers are more heavily indebted than their counterparts in the U.S. Heavy deleveraging has been the phrase most widely applied.

This has implications for gross domestic product (GDP) growth. The argument is that Americans are now in better financial shape than Canadians, which will enable them to spend more freely.

What isn’t elaborated often enough is how they arrived at that “blessed” state. During the Great Recession and coincident with the credit crisis, a great number of Americans shed debt by walking away from their mortgages, mostly under duress.

For the sake of our banking system, let alone consumer confidence, that’s not a prescription Canadians should be seeking or adopting.

Worries about solvency at this time centre on new and existing home prices and jobs. The danger of imminently rising interest rates can be set aside for a reason I’ll come to in a moment.

Let’s look at these in order. Statistics Canada’s New Housing Price Index (NHPI) in November 2013 was 0.0% month-to-month and +1.4% year-over-year. The upward slope of the NHPI appears to be leveling off.

At the other extreme, the Canadian Real Estate Association (CREA)’s average selling price calculation nationwide was +10.6% year-over-year in December, adding to the speculation about a potential bubble in the country’s resale market.

Job creation and retention are also key factors in home ownership and the demand for housing.

In December, total employment in Canada fell by 46,000 jobs. The decline in full-time work was even greater, -60,000.

Going forward, the nation certainly doesn’t need an ongoing string of such dismal numbers.

At least the latest weak jobs report has provided one beneficial result. It has taken the pressure off interest rates. The Royal Bank of Canada has already assumed a leadership role in dropping mortgage rates for a variety of term lengths.

Among Canada’s 33 census metropolitan areas (CMAs), only nine (or less than one-third) recorded percentage increases in residential groundbreakings in 2013 versus 2012.

Abbotsford, B.C., was the leader with a doubling in starts (+102%), but that was on top of a nearly moribund level in 2012. Second-place Guelph was a more restrained +22%.

Among the nation’s six cities with populations greater than one million each, only Edmonton (+14%) was a winner last year.

Worst among the nation’s six largest cities was Toronto (-30%) which came in second-last. The city’s previously overheated condo construction market finally conceded ground.

Multi-unit starts in Toronto in the individual month of December were -18% versus November and -40% compared with December 2012. For full-year 2013 over 2012, they were -36%.

The same three sets of numbers for Montreal were +15% (m/m), +19% (y/y) and -24% (ytd).

For Vancouver, they were +30% (m/m), +55% (y/y) and -6% (ytd).

The Toronto and Montreal performances in housing starts — with the former second-worst and the latter fifth-worst — were consistent with their labour markets.

Toronto was second-last for unemployment rate in December 2013, at 8.4%, while Montreal was fourth-from-the-bottom, at 8.0%.

Vancouver was in the middle of the pack for new home starts, as it also was for jobless rate (6.4%). The Canada-wide unemployment rate in December was 7.2%.

Those three cities — Toronto, Montreal and Vancouver — normally account for two-thirds of all high-rise residential starts in Canada. As a result of Toronto’s big drop, their share fell to 53% in 2013.

Making positive contributions to multi-unit starts last year were Edmonton (8,719 units and +21%) and Winnipeg (2,487 units and +28%).

Winnipeg (+16%) placed fourth among all CMAs for new-starts percentage change, lifting Manitoba (+20%) to number one among the provinces.

Alberta (+8%) was the only other province with a significant increase in new home starts last year.

Newfoundland and Labrador (-20%), Ontario (-21%) and Quebec (-22%) were virtually tied near the bottom with declines of one-fifth.

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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