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August 2008

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More Slump Expected in Housing Market - August 18, 2008

It is far too early to call an end to the U.S. housing downturn, according to the latest Real Estate Trends released today by Scotia Economics.

The report notes that there have been a number of encouraging signs in recent weeks that the two-and-a-half-year slide in U.S. housing activity may finally be coming to an end. While combined new and existing home sales in June fell to a fresh cycle low of 5.4 million annualized units, and are now down roughly 35 per cent from their late 2005 peak, the rate of decline has moderated since the spring. A few regions are even reporting a modest pickup in sales. The pace of home price decline has likewise slowed.

"However, the potential for a meaningful turnaround in home sales is limited when soaring gas prices and mounting job losses are severely straining household finances," said Adrienne Warren, Senior Economist, Scotia Economics. "Real wages have been falling on a year-over-year basis since last November, and consumer confidence is hovering around a 16-year low."

The report suggests that the recent rise in long-term mortgage rates alongside increasingly restrictive lending conditions will also keep many potential buyers on the sidelines. Meanwhile, a massive over-supply of unsold homes will keep downward pressure on both prices and construction. The outstanding inventory of existing homes for sale stood at 4.5 million units in June, or 11 months' supply at the current sales pace. There were an additional 426,000 new single-family homes for sale, or 10 months' supply. A supply of around 6 months is considered balanced.

"A number of fundamental valuation measures, including the ratio of home prices to household incomes and home prices to rents, suggest average U.S. housing prices are moving back in line with long-term trends," added Ms. Warren. "The improvement in affordability will eventually underpin a revival in demand. In the meantime, a continuing yawning supply imbalance, a weakening U.S. job market and tight lending conditions point to a prolonged period of housing market lethargy, with the risk of still lower home prices and construction, and relatively depressed sales volumes."

The report notes that in contrast to the United States, there is still scant evidence of a significant supply overhang in Canada. The inventory of completed but unsold new homes, while edging higher across most major markets, remains relatively low from a historical perspective, both for single-detached and multi-family developments.

The volume of homes for sale in Canada's resale market has also been moving up, and combined with softer demand, has lifted the national ratio of new listings to sales from an average of 1.6 in 2007 to 2.0 in June. "This shift from the strong sellers market of recent years to essentially balanced conditions points to a cooling off period in which home prices should rise in line with general inflation," said Ms. Warren. "There are significant regional differences, however, with new-listings-to-sales ratios in several of Canada's previously hottest markets like Saskatoon, Calgary and Vancouver now favouring home buyers, with greater inherent downside price risk."

According to the report, with the steep cutbacks in U.S. homebuilding over the past two years, the national rate of U.S. housing starts is now running well below long-term household formation requirements. "We estimate the underlying replacement level of U.S. housing starts to be around 1.7 million annual units, based on average annual household formation of about 1.5 million," said Ms. Warren. "A period of underbuilding is necessary to pare down the massive oversupply of housing that resulted in part from years of overbuilding."

The report also finds that the realignment in residential construction toward sustainable levels is just beginning in Canada. Between 2001 and 2006, Canadian housing starts averaged 222,000 annualized units, well above underlying household formation of 175,000. This overbuilding has continued in 2007 and the first half of 2008. A widening gap between new construction and household formation is evident across all provinces, and has contributed to the gradual rise in unsold new homes in recent years.

"Canadian homebuilding has cooled since the spring, but overall starts continue to outstrip sustainable long-term demand. Assuming average annual household formation of 180,000, underlying replacement demand is about 190,000 new housing units per year," added Ms. Warren. "This implies a 10 to 15 per cent reduction in nationwide starts from current levels, more so if demand softens more substantially over the next few years due to reduced affordability, a slowing economy or tighter credit conditions."

Residential Construction Expected to Drop - August 15, 2008

New home construction will begin to slow in 2008, but will remain high by historical standards, according to Canada Mortgage and Housing Corporation's (CMHC) third quarter Housing Market Outlook, Canada Edition report.

Higher mortgage carrying costs will be a catalyst for the decrease in residential construction to 215,475 units in 2008, from 228,343 in 2007. As a result, seven of the 10 provinces will register a lower number of housing starts in 2008 than in 2007.

“Strong economic fundamentals such as continuing high employment levels, rising incomes and low mortgage rates will provide a solid foundation for healthy housing markets this year,” said Bob Dugan, Chief Economist for CMHC. “Increased competition from the existing home market, coupled with the elimination of the pent-up demand that built up during the 1990s, will exert downward pressure on housing starts, which will decline to 194,000 units in 2009 from 215,000 in 2008.”

Existing home sales, as measured by the Multiple Listing Service (MLS®)1, are expected to fall by 11.9 per cent in 2008 to 458,300 units. In 2009, the trend will continue with a decrease to 446,600 units (-2.6 per cent). Despite a slowdown of MLS® sales, demand remains strong by historical standards. For 2008 and 2009, MLS® price growth will remain above inflation. Prices will reach $317,450 (+3.3 per cent) in 2008 and $327,000 (+3.0 per cent) in 2009.

At the provincial level, despite British Columbia's growing population and job numbers, a well-supplied resale home market will lower new construction. Home starts will move back toward their long-term average by 2009. A tight labour market and robust income growth will partially offset the dampening effect of rising mortgage carrying costs on the demand for new and existing homes. As well, an increase in the number of existing homes for sale will offer more choice to home shoppers and reduce new home demand. Housing starts will decline to 35,800 units in 2008 and 31,500 in 2009 from 39,195 units in 2007. The average MLS® price in British Columbia will grow by 7.6 per cent in 2008 and 3.3 per cent in 2009.

Alberta continues to experience very low unemployment and overall prosperity. Despite these positive factors, the province is expected to face a drop in net migrants between now and the end of 2008 due in part to the increased house prices in Alberta and improved labour market conditions in other provinces. These factors will combine to reduce housing starts to 32,750 in 2008 and 29,000 in 2009, from 48,336 units in 2007. Following exceptional 30.7 per cent and 24.8 per cent gains in 2006 and 2007 respectively, growth in the average MLS® price is expected to slow to 1.1 per cent in 2008 and 2.8 per cent in 2009.

Since 2007, Saskatchewan has experienced a rebound in economic growth, strong job creation and a surge in net migration. This continues to contribute to strong housing demand within the province. Total housing starts reached 6,007 units in 2007, the highest level in 24 years. However, escalating costs will stabilize housing starts at 6,700 units this year and 5,750 units in 2009. The average MLS® price in Saskatchewan rose by 32.0 per cent during 2007 and is expected to climb by 29.0 per cent in 2008 and 6.7 per cent in 2009.

Manitoba's solid economic performance and tight labour market conditions have boosted net migration to levels not seen since 1982 and have contributed to healthy levels of new home construction. Total housing starts reached 5,738 units in 2007, the best performance in 20 years. Starts will edge down to 5,400 units in 2008 before rebounding to 5,550 in 2009. The average MLS® price in Manitoba increased 12.6 per cent in 2007 and will continue to increase by 14.1 per cent in 2008 and 7.8 per cent in 2009.

In Ontario, economic uncertainty, rising new housing prices and a greater selection of homes available in the resale market will result in fewer new home sales in 2008 and, by extension, a dip in new home starts in 2009. Housing starts will move up to 76,025 units in 2008 from 68,123 units last year due to pent-up demand; however starts will decrease to 65,000 units in 2009. The average MLS® price in Ontario rose by 7.6 per cent in 2007. For 2008 and 2009, the increases will be more modest at 2.8 per cent and 2.3 per cent respectively.

Solid job creation and steady economic growth in Quebec during 2007 pushed housing starts up by 1.4 per cent to 48,553 units. A moderation in employment growth will cause a slight shift downwards in 2008 to 46,600 units and 45,750 in 2009. A reasonably healthy resale market will also fuel average MLS® price growth in Quebec; prices will increase by 4.7 per cent in 2008 and 2.7 per cent in 2009.

In New Brunswick, rising mortgage carrying costs, a slower economy and more choice in the resale market will result in lower levels of new home construction. Housing starts are forecast to decline slightly to 4,200 units in 2008 from 4,242 units in 2007. Moving into 2009, starts are expected to fall to 3,875 units. The average MLS® price in New Brunswick rose by 7.7 per cent during 2007. The price increases will be more modest at 4.7 per cent in 2008 and 2.1 per cent in 2009.

Nova Scotia is experiencing slower employment and population growth during 2008, causing new home construction activity to be more restrained. Housing starts are forecast to decrease to 4,475 units in 2008 and 4,200 in 2009 from 4,750 units in 2007. After rising 7.3 per cent in 2007, the average MLS® price in Nova Scotia is expected to increase by 5.0 per cent in 2008 and 2.4 per cent in 2009.

Prince Edward Island's economy is expected to undergo modest economic growth through 2008. As a result, housing starts will slowly decline to 700 units in 2008 and 650 in 2009 from 750 units in 2007. The average MLS® price in Prince Edward Island will rise by 3.4 per cent in 2008 and 1.4 per cent in 2009. Last year, the average price on the resale market increased by 6.4 per cent.

In Newfoundland and Labrador, a strong export-driven economy has pushed housing demand up. Housing starts for 2007 were up 18.6 per cent to 2,649 units. For 2008 and 2009, starts will reach 2,825 units for both years. The average MLS® price in Newfoundland and Labrador will rise by 14.9 per cent in 2008 and 6.4 per cent in 2009.

Housing Starts Fall Off - August 11, 2008

The seasonally adjusted annual rate of housing starts was 186,500 units in July, down from 215,900 units in June, according to Canada Mortgage and Housing Corporation (CMHC).

“After a strong first half of the year, the volatile multiple segment is now readjusting itself.” said Brent Weimer, Senior Economist at CMHC’s Market Analysis Centre. “This brings activity since the start of the year closer in line with our 2008 forecast of more than 200,000 housing starts for the seventh consecutive year.”

The seasonally adjusted annual rate of urban starts decreased by 14.8 per cent in July compared to June. Both urban multiples and singles moved down, with a drop of 20.2 per cent for multiples to 91,600 units, and a 6.6 per cent decline for singles to 69,800 units.

The seasonally adjusted annual rate of urban starts went down in Ontario and to a lesser extent in the Prairies, where housing starts decreased by 38.8 per cent to 47,800 and by 1.6 per cent to 30,600 in July, respectively. Urban starts increased slightly by 2.2 per cent to 41,200 units in Quebec, by 2.4 per cent to 8,700 units in Atlantic Canada, and by 5.1 per cent to 33,100 units in British Columbia. While single starts decreased in all regions in July, with the exception of the Atlantic Canada where they remained unchanged, multiple urban starts only registered a decline in Ontario.

Rural starts were estimated at a seasonally adjusted annual rate of 25,100 units in July.

For the first seven months of 2008, actual starts in rural and urban areas combined were up an estimated 2.3 per cent compared to the same period last year. Year-to-date actual starts in urban areas have increased by an estimated 2.4 per cent over the same period in 2007. Actual urban single starts for the January to July period of this year were 15.5 per cent lower than they were a year earlier, while multiple starts were up by 19.0 per cent over the same period.

Meanwhile, new housing prices increased at their slowest pace in over six years in June, continuing a slowdown that started in September 2006. This was a result of a softening housing market in Western Canada.

Nationally, contractors' selling prices rose 3.5% between June 2007 and June 2008, compared with the 4.1% year-over-year increase in May according to a report released today by Statistics Canada. This was the slowest rate of growth since March 2002 when year-over-year prices increased by 3.4%.

On a monthly basis, prices edged up 0.1% between May and June this year.

Homebuyers in the census metropolitan area of Regina continued to experience the largest gains in new home prices. Contractors' prices in Regina increased by 28.5% from June 2007, with continuing labour shortages and increased costs of materials likely playing important roles.

The metropolitan area with the second largest increase, at 22.2%, was St. John's, Newfoundland and Labrador, which is now showing a larger increase than Saskatoon for the first time since December 2005. Builders reported that higher costs for labour and land helped push prices up.

 

In Saskatoon, the year-over-year price increase was 16.3%, down substantially from 30.2% in May. Contractors reported costs of labour and materials were increasing. However, prices fell 2.8% between May and June because of a softening market.

In Winnipeg, contractors' prices were 11.5% higher than in June 2007, with contributions likely from higher material costs and continuing strong demand for new housing.

New housing prices were up only slightly from June 2007 in Edmonton (+1.6%) and in Calgary (+0.1%), Alberta's two principal metropolitan areas. Contractors in both areas cited a soft market as the main factor.
In British Columbia, year-over-year prices in Vancouver were up 1.8%, while those in Victoria declined by 0.4%.

Higher material costs pushed prices in Québec up by 5.4%. In Montréal, prices were up 5.6%.

In Toronto, homebuilders increased prices by 3.8% from June 2007. Prices in Ottawa were up 4.4%.

Construction Intentions Drop Off Country Wide - August 7, 2008

In June, the total value of building permits fell 5.3% from May to $6.3 billion, as construction intentions decreased in both the residential and non-residential sectors and in several provinces. In constant dollars, the decline was about the same magnitude at 5.5% according to a report released this morning by Statistics Canada.

In the residential sector, the value of building permits declined by 4.4% to $3.6 billion. The decrease was generated by lower values in multi-family permits in all provinces except Saskatchewan. In the non-residential sector, the value of permits decreased by 6.6% to $2.8 billion, due to declines in commercial and industrial intentions.

Residential: Decline in multi-family intentions

Municipalities issued $1.3 billion worth of permits for multi-family housing in June, down 13.8%, a second consecutive monthly decrease. Most of these declines occurred in Ontario and Alberta.

At the same time, single-family permits edged up 1.8% to $2.3 billion. In the last four months, the value of single-family permits has remained between $2.2 billion and $2.3 billion.

Municipalities approved 17,309 new residential dwellings in June, down 9.3% and lower than the 2007 monthly average of 19,817 units.

The number of multi-family units approved fell 19.0% in June, while the number of single-family units rose 3.7%.

Non-residential: Industrial and commercial intentions down

The value of permits for non-residential construction decreased in June, after two consecutive monthly increases. Declines in industrial and commercial intentions more than offset a gain in institutional permits.

The value of industrial permits fell 31.1% to $389 million following a 70.3% increase in May. This result was mainly due to decreases in permits for utility buildings.

The value of commercial permits decreased 7.7% to $1.6 billion. The decline was due to lower construction intentions for hotels and recreation buildings. In all, eight provinces posted declines in the overall commercial component.

In the institutional component, builders took out $765 million in permits, a 17.4% increase, and the third consecutive monthly increase. The gain was attributable to projects for nursing homes and schools.

Permits down in several provinces

The value of building permits decreased in six provinces.

The most significant decrease occurred in Ontario (-7.9% to $2.3 billion), due mainly to a 15.8% decline in intentions for non-residential buildings. The decline in the residential sector was a slight 1.7%. British Columbia and New Brunswick also experienced declines in both the residential and non-residential sectors. Alberta posted a 7.5% decline to $1.2 billion, due to a 19.6% decrease in the residential component.

In contrast, intentions rose 3.5% in Quebec, with gains in both the residential and non-residential sectors.

Metropolitan areas: London and Kingston show large declines

Of the 34 census metropolitan areas, 18 recorded reductions in the value of building permits in June.

The largest decrease occurred in London, with declines in the residential and non-residential sectors. Kingston followed closely with a decline mostly in the institutional component.

In contrast, the total value of permits in the census metropolitan area of Québec rose in June, due to increases in both the residential and non-residential sectors.

 

 

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