Canada’s housing starts in October fell to their lowest level in more than a year, according to Canada Mortgage and Housing Corp. (CMHC).
Economy at a Glance
Chief Economist, CanaData
Canada’s housing starts in October fell to their lowest level in more than a year, according to Canada Mortgage and Housing Corp. (CMHC). October’s figure of 167,900 units (seasonally adjusted and annualized) was 9% below September (185,000 units).
The last time a lower number was recorded for national housing starts was in September 2009, at 166,300 units.
Due to strength earlier this year – 200,000 units were exceeded in both February (202,000) and April (206,000) – the year-to-date average of starts in 2010 has been +35% versus January to October of last year. The final result for 2010 is likely to be between 185,000 and 190,000 units, once November and December reports are in. For 2011, CanaData is forecasting 175,000 units.
Starts have been trending down over the past seven months, with the rate of decline picking up speed in the latest three months. Reduced affordability due to higher taxes on residential real estate services in some provinces, as well as a perceived mild climb in interest rates, played roles. More stringent guidelines with respect to mortgage approvals have also been a factor.
The governor of the Bank of Canada (BOC) has adopted an interesting leadership position. Mark Carney has been vigorously warning Canadian households about taking on too much debt. He has expressed concern that the debt-to-income ratio for homeowners is too high, based on international comparisons. Current low interest rates have contributed to a false sense of security. There is potential for significant problems when interest rates climb back to more normal levels.
For potential homebuyers, mortgage payment calculations may be attractive with rates currently so low. The temptation may be to take on a more expensive property purchase than is wise. The same mortgage will acquire a more onerous dimension at some future date when the renewal rate is significantly higher. Many families may quickly find themselves in over their heads.
The inventory of unsold units may also be contributing to the latest adjustment in starts to some degree. New single-family homes are in good demand-supply balance, but multiples are another story. The number of unsold multiples is too high by a factor of 1.5 versus their long-term level.
The three largest cities in Canada by population account for 55% of multiple unit starts. Toronto’s multi-unit starts year to date (-4%) are about even with last year. But in the latest month, they were -43% versus September and -59% when compared with October of last year.
The same restraint isn’t apparent in Montreal and Vancouver. Montreal’s multi-unit starts were +26% year to date. October alone starts were +22% versus September and +62% versus a year ago. Vancouver’s multi-unit starts were ahead even more. They were nearly double (+99%) year to date, while October alone was -15% versus September but +114% versus a year ago.
Weak housing starts provide another excuse for Mr. Carney to hold interest rates steady through at least the end of this year. The sideways move for employment in October and September indicated an economy that is waiting for better external factors, specifically a pickup in the U.S.
The Federal Reserve recently committed to pumping another $600 billion into the U.S. money supply. The consequence for the U.S. dollar has been a downward adjustment in value. The BOC will be wary of rate increases that push the Canadian loonie beyond parity with the greenback.
Minimizing the chance of such an outcome is crucial for helping Canadian manufacturers and suppliers make export sales to the U.S. There is a flip side to this equation. It is also important to limit the sales gains that cheaper imports would make into the Canadian market.
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. His lifestyle blog is at www.alexcarrick.com
Per cent change in year-to-date housing starts – ranking of Canada’s major cities (Jan.-Oct. 2010 vs Jan.-Oct. 2009)>
Data source: Canada Mortgage and Housing Corporation (CMHC) (based on actuals rather than seasonally adjusted data.)
Chart: Reed Construction Data – CanaData.
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