May 18, 2012

January 11, 2012

December home starts in Canada again defied expectations

Alex Carrick

Chief Economist, CanaData

National housing starts in December, at 200,200 units seasonally adjusted and annualized, returned to a surprisingly high number according to Canada Mortgage and Housing Corporation (CMHC).

For the fourth time in the past six months, country-wide home starts exceeded 200,000.

In November’s data release, CMHC recorded a figure of 181,100 units. That was a pull-back from 209,000 units in both September and October.

The impression was that starts were becoming more realistic; that they were aligning better with long-term trends in family formations, immigration and replacement needs.

Most analysts subscribe to a figure of about 180,000 units per year as the “healthy” or sustainable or equilibrium level for starts at this time.

Developers obviously feel otherwise.

Not only was December’s level of starts higher than expected, but there were also significant revisions to the November and October figures. The former was bumped up by 4,500 units to become 185,600 and the latter by 2,900 units to yield 211,700.

The official annual figure for 2011 has not been released yet, but it will be very close to last year’s number of 190,000 units.

The strength in home starts in the second half of 2011 went against conventional wisdom in at least one major regard.

While Canada did experience good jobs growth (+600,000) from mid-2009 through mid-2011, the level of total employment in the country stayed flat over the final six month of last year.

In 2011, almost all of the support for starts was provided by the multi-unit (i.e., condo) markets in Toronto and Vancouver.

Multi-unit starts in Canada as a whole, full year 2011 versus full year 2010, were +17% while the single-family segment was -10%.

Individual month of December multi-unit starts in Toronto were +74% versus November and +181% when compared with December 2010.

For full year 2011, Toronto multi-unit starts were nearly 50% higher than in all of 2010. In absolute terms, the increase was 9,200 units.

Since total multi-unit starts in all of Canada’s major cities were up by 15,400 units in 2011 versus 2010, Toronto accounted for 60% of the increase.

Individual month of December starts in Vancouver were -37% versus November and -40% versus the same month of the previous year. But for the year as a whole, they were one-third greater than in all of 2010.

In absolute terms, Vancouver multi-unit starts were ahead by 2,700 units. Therefore, the Toronto plus Vancouver multi-unit starts increase made up 77% of the overall nation-wide increase.

Toronto (+13%) was also one of the few cities in the country to record an increase in single-family starts in 2011 versus 2010.

Among Canada’s 33 census metropolitan areas (CMAs), only five recorded a percentage gain in “singles” for full year 2011 versus the year before.

Is Toronto’s labour market supporting the strength in starts? Not according to the headline numbers.

Toronto, with a figure of 7.9%, placed 27th among all 33 CMAs in a ranking of unemployment rates in December. The overall Canada result was 7.5%. Regina was number one with a jobless figure of only 3.3%.

In terms of year-over-year employment growth, Toronto (-0.4%) also performed relatively poorly, coming in 28th among all cities. The Canada-wide figure was +1.2%.

Not far from Toronto, the numbers were much better. Guelph led the nation at +15.4% and Peterborough was second at +10.0%.

The strength in multi-unit starts must have other drivers. Most often cited are the desire by empty-nesters to experience a downtown lifestyle and heightened demand from foreigners.

Continuing with an examination of the linkage between labour markets and home demand, the province with by far the greatest percentage gain in employment in 2011 was Alberta (+4.9%).

What may not be as well known, however, is that Alberta – which, at only 11% of total Canada, is relatively small in population compared to some other provinces – also provided the largest absolute increase in jobs last year.

There were 99,000 more jobs in Alberta at the end of 2011 than at year-end 2010. Ontario, which is home to nearly 40% of the nation’s population, saw a smaller increase of 91,000 jobs.

The home starts race between Edmonton (9,332) and Calgary (9,292) in 2011 was a photo finish. Both cities experienced levels that were little changed from the year before.

If investment in the oil sector continues to grow and the availability of work keeps rising, expect home demand in Alberta to pick up shortly.

Only one province experienced a decline in employment in 2011, Quebec (-51,000 jobs or -1.3%). Montreal total home starts last year were +3%. In Quebec City, they were -18%.

According to CMHC’s figures on completed but unsold units, the inventory of singles is only slightly higher than normal, but the inventory of “multis” is too high – even based on an upwardly adjusted “norm” to take into account societal change – by about 80%.

There are some good reasons to be worried that Canada’s housing market might not just keep skipping along.

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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