Housing Starts Key Indicator for Canadians

Written by Posted On Monday, 20 February 2006 16:00

January got the real estate year off to a great start, much to the surprise of many housing experts, so Canadian consumers shouldn't feel too bad if they find it difficult to determine which real estate decisions to make in 2006.

"From CMHC's perspective, we don't see a bubble forming in residential construction," said Brent Weimer, Senior Economist with Canada Mortgage and Housing Corporation 's Market Analysis Centre, in reference to a January increase in housing starts after earlier predictions of moderating 2006 real estate markets. "In Canada, housing starts can be volatile from month to month. Given the spike we saw in January building permits, it is not surprising to see this."

The term housing start does not refer to the taking out of a building permit, but to actual construction activity. A housing start is counted when a concrete footing is poured in the excavation for a new home. A footing is the concrete footprint upon which a new building is constructed.

A wide range of Canadian housing professions employ housing starts in procedures for business forecasting, pricing and securing labour contracts. Some economists view housing starts as a leading indicator of the health of the general economy, while builders use these statistics to size up their local market. For instance, if housing starts were up 10 per cent, but a builder's volume had only increased 5 per cent, then that builder would know his or her market share was slipping while a competitor's was gaining ground.

"Our survey for housing starts and completions is for urban areas in Canada," explained Weimer. "Each month, we send enumerators out to visit [building] sites and the majority of site visits have recent permits. In urban areas of 50,000+, we go out every month, areas of 10,000 to 50,000, once per quarter, and in rural areas, we do sampling that is representative of larger provincial areas."

Many experts feel that pent-up buyer demand has been satisfied and Canadian housing markets will slow, but how much and when is difficult to predict. Short term variables like mortgage rates, weather patterns and unemployment rates cause local variations.

On January 31, 2006, CMHC, the federal housing agency, announced its 2006 predictions:

  • Housing starts will continue to moderate this year to 208,700 units after reaching 225,481 units in 2005. After five consecutive years above 200,000 housing starts, residential construction will decline to 194,800 units in 2007.

  • The housing market will continue to be moderate both this year and next as demand for home ownership eases toward more sustainable levels. Higher mortgage carrying costs due to strong house price growth and modest increases in mortgage rates will contribute to the slower pace of new home construction.

A few weeks later, CMHC announced that January figures were much higher than projected. The seasonally adjusted annual rate of housing starts was 247,900 units in January 2006, up from 232,600 units in December.

"Certainly the number is much higher than we anticipated for January and we do not expect this to continue through the year," said Weimer, who credited milder weather and local factors like Toronto builders filing for permits ahead of a pending increase in development charges. "This will moderate if we take into account that for a few years we have been exceeding 200,000. Demographic fundamentals suggest we build l75,000 to 185,000, but in the 1990s, we were only building at 150,000 with pent up demand. Housing is cyclic. We saw the new homes peak in 2004, but the existing market [peaked] in 2005."

At the provincial level, new home construction in British Columbia, Alberta and Manitoba is expected to remain high by historical standards. Manitoba is the only province predicted to experience increases in both MLS sales and housing starts in 2006 and 2007.

Buyers should be aware that rising housing starts indicate increasing competition for skilled construction workers and for building materials, which may result in elevated prices, delays in home completion and trouble getting builder attention if problems arise.

"In the Calgary market, a number of builders are putting a cap on building even though they could sell more," said Richard Corriveau, Regional Economist for CMHC's Prairie and Territories Division. "Demand is exceeding supply. There is so much work in the pipeline, that builders could not determine when [buyers'] possession would be. They decided to satisfy demand by focusing on current buyers, then they'll worry about the future once those housing units are completed."

CHMC's Market Analysis Centre produces monthly housing starts and completion surveys and reports like the annual rental review that are available online at no charge. Consumers are also encouraged to contact analysts quoted in these publications.

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