Housing starts slow, but no signs of crash: analysts
Canada’s once-sizzling housing market continues to fall back to more sustainable levels, but as yet is managing to avoid the earmarks of a damaging crash that would spill over into the general economy.
The latest data on housing starts from Canada Mortgage and Housing Corp. shows construction fell to 15,390 for a seasonally adjusted annual rate of 174,858 units in April, moderately lower than the upwardly revised 181,146 recorded in March.
The dip was concentrated mostly in Ontario, British Columbia and Atlantic Canada and mostly came in the condo market.
“Canadian homebuilders are facing the new reality that the decade-long housing boom has ended, and are retrenching in orderly fashion,” said Sal Guatieri, a senior economist with BMO Capital Markets.
“They are cruising below annual household formations of about 185,000, reducing the risk of a supply glut now that demand has slackened.”
TD Bank economist Sonya Gulati noted the long-held concerns about Canada’s housing market, particularly from the International Monetary Fund and the Bank of Canada, but said the recent trend should ease some of the fears. Even when the market was overheating, she said, that was mostly due to the influence of Toronto and Vancouver and not widespread.
“Both have been recording fewer starts over the past six months. If the slower pace continues to prevail, the concerns of too many projects in the absence of actual demand will subside,” she wrote in a note to clients.
Analysts said the housing market will likely act as a small drag on economic growth this year, after contributing 0.4 per cent to gross domestic product output in 2012.
Most if not all housing indicators — starts, resales, building permits and prices — have cooled considerably since July 2012 when Finance Minister Jim Flaherty’s new tighter regulations for mortgages and lending practices went into effect.
Last month, Bank of Canada governor Mark Carney told a parliamentary committee that all indicators were moving in the right direction and that household debt accumulation had stabilized, albeit at an extremely high level of 165 per cent of disposable income.
April starts were on the mark with economist expectations and slightly below the first quarter average.
The seasonally adjusted annual rate of urban starts was down 2.5 per cent, led by a 3.5 per cent decline in multiple urban starts. Single urban starts remained relatively unchanged from March.
Regionally, starts fell by 41 per cent in Atlantic Canada, 15 per cent in Ontario and six per cent in British Columbia.
Offsetting the losses, starts rose by 15 per cent in Quebec and nine per cent in the Prairies.
Opinion: Despite alarmists, little sign of a Canadian housing crash
The international prognostication industry has recently turned its attention to the Canadian housing market. It does not like what it sees.
Steve Eisman, an American hedge fund manager famous for predicting and profiting from the most recent collapse of the home market in his own country, told a stateside conference that “misaligned” government policies in Canada let too many people qualify for mortgages. Vijai Mohan, another American hedge fund captain, is shorting Canadian banks, betting 95 per cent of his investors’ assets that Canadian housing is about to blow up real good.
“I have a lot of confidence a crisis will happen,” Mohan told the Globe and Mail, “but I don’t have a pinpoint on time.” This is like a meteorologist saying it’s likely to snow in Edmonton, sometime between now and next March, but we take his point.
Even the Economist magazine is in on the act, speculating that Mark Carney’s recent jump from the governorship of our central bank to that of Great Britain was motivated by a desire to avoid a pending bubble collapse in the colonies. And, just this week, the Organization for Economic Co-Operation and Development ranked Canuck real estate the third most overvalued of the three dozen or so countries it surveyed.
Such forecasts, while as fun to read as a Stephen King novel or any other blood-chilling thriller, make a hyperbolic mountain out of a molehill.
For proof, we can look to good, hard numbers.
It is indeed true that consumer-debt levels in Canada continue to run around 165 per cent of income, and the average price of a house has doubled since 2001. But Bank of Canada data show that housing is more affordable now than at any time in the last three decades.
The national ratio of mortgage costs to disposable income sits at 26 per cent, about the same place it has been since the boring but relatively heady days of 1997.
Debt, like a Steven Spielberg movie, can either be good or bad. Buying a house is the biggest purchase many Canadians will ever make, and unless they happen to be one of Frank Stronach’s children, they’ll need to go into debt to do it.
Housing’s sustained affordability — even as actual house prices and consumer debt have gone up — suggests that Canadians are generally acquiring more debt as their means improve. And, in the end, it would take a quick spike in interest rates — not a gradual and moderate increase — to cause a real problem.
Locally, Edmonton’s economic and real estate data suggest stability, more stability, with a side order of stability.
Workers’ weekly earnings are up. Employment is high. And the Edmonton Real Estate Board’s May numbers, released this week, show slightly lower sales, slightly higher listings, and moderating prices. This is not a housing engine revving in the red.
More importantly, Canadian and American financial cultures differ sharply. The tired clichés about our kindness and deferential manner have some basis in financial reality. The World Economic Forum, for the past three years, said our (conservative and disciplined) banking system is the best in the world.
In part, that’s because our banks offered virtually none of the ultra-risky sub-prime mortgages our American cousins favoured with such gusto, and such disastrous results. Another difference: Canadians can’t slink away from ugly or impossible mortgages and let private industry and public funds deal with the aftermath, as so many Americans did in 2006 and 2007.
Canadians don’t default. Well, they do, but as the Canadian Bankers Association points out, never more than one per cent of us, over the last two decades.
So, as we’re tempted to curl up with a lively American-investor-shorts-Canadian-banks yarn this summer, keep in mind that many of the voices calling loudly for a collapse in Canadian housing stand to make fortunes if that comes to pass. The rich tradition of casino capitalists generating profits for their hedge-funds by shorting a company’s stock would yield a half-dozen other editorials.
Buying and selling homes is already plenty complicated, stressful and emotional. Misguided, pernicious calls for a market collapse do nothing to help matters. Canadians would do well to tune them out and find more realistic summer reading.
Scott Bollinger is the broker with Edmonton-based CommonSense Network, part of the ComFree family.
Should have listened to this man. Austrian economics ftw.
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