Home Builder Canada - 2004 Sept Econ

The economy is performing well
By Dr. Peter Andersen

Canada's economy is performing well. Economic growth has picked up and is estimated to have actually been stronger here in the second quarter than in the United States. Exports show widespread gains. The latest Business Conditions Survey carried out by Statistics Canada shows an improvement in business confidence. The composite index of 10 leading indicators is showing its strongest increases in two years. This means that the new housing and renovation industries will benefit from underlying economic strength this coming fall and winter.
Risk of higher interest rates
Builders should be prepared for a new interest rate cycle in 2005. The U.S. and Canadian economies now appear to be in self-sustaining economic expansions that no longer require emergency support from ultra-low interest rates. At this point the outlook is still positive for housing demand as interest rates appear likely to increase only gradually.

Strong Canadian dollar
A strong Canadian dollar is helping to keep interest rates at relatively low levels in Canada. It is an important reason why inflation is running at a lower level in Canada than in the United States. The strong Canadian dollar is making imports cheaper and it is reining in the pricing power of domestic companies. This, in turn, is giving management more of an incentive to resist higher wage demands.
The Canadian dollar appears to be on the upswing again. By default, it tends to rise when the U.S. dollar is declining. We think that the U.S. dollar is set to resume its downtrend that began in early 2002 and came to an end this January. The Canadian dollar could also be pushed the other way by evidence of better economic performance compared to the United States. Canada's monthly foreign trade surplus increased dramatically to an all-time high of $8.6 billion in June, reflecting widespread strength in industrial goods, aircraft and auto exports.
A strong Canadian dollar is therefore good news for new home builders and renovators. It is a substitute for higher interest rates as far as the Bank of Canada is concerned. The Bank will undoubtedly be raising interest rates as well, but a strong Canadian dollar means that rate increases don't have to do all the work in fine-tuning the economy. There is also a direct effect in the form of cheaper imported building materials.

Healthy single-detached starts
Housing starts declined in July to 218,700 units (seasonally adjusted annual rate) from 232,100 in June. The decline was completely attributable to the volatile multiple starts category, which showed a decline of 21 per cent from the month before. Single-detached starts actually increased in July. Single unit starts remain close to their peak of cycle level established more than two years ago.
On a year-to-date basis, total starts in July were running 8.5 per cent higher than in the first seven months of 2003. Housing start forecasts have been revised upwards in recent months. We are currently estimating 229,000 starts in 2004 and CMHC has now raised its forecast to 225,700 starts. This compares with an actual level of starts in 2003 of 218,426 units.

Building permits surge
An exceptionally large increase in residential building permits in June points to a rebound in housing starts in August. Permits are a good leading indicator of housing starts, with about a two-month lead time. They increased by 27 per cent between May and June to a new all-time record high. Permits in British Columbia were up by nearly 80 per cent from the month before. Ontario showed a 30 per cent increase. The increase in B.C. largely reflects multiple-unit construction, while two-thirds of the increase in Ontario is associated with single-family permits. Not all provinces showed higher permits in June though. Alberta was down by 8.7 per cent from the month before. Declines were also experienced in Newfoundland, Nova Scotia and Saskatchewan.

New house prices accelerating
New house prices are beginning to heat-up. They have accelerated noticeably in the past three months. The percentage year-to-year increase in June was the largest in more than 14 years. The average 6.2 per cent increase was the largest since February 1990, when a 7.1 per cent year-over-year increase was recorded. Strong housing demand is allowing builders to partly pass on even larger increases in building materials such as lumber, drywall, insulation and steel. Land prices are also under strong upward pressure in a number of markets.

Renovation
The strong resale housing market is creating a pipeline of future business for renovators. Last year was a record year for resale transactions and this year will be even stronger. The number of homes sold on the resale market in the second quarter was the second highest on record. On a year-to-date basis for the first half of 2004, sales activity was up by 9.0 per cent from 2003. Renovation spending has shown four consecutive quarters of double-digit year-over-year growth. With new construction and renovation activity running at such high levels, it should come as no surprise that sales of business materials are up sharply. Nonetheless the year-over-year gains in such sales are striking - increases at the wholesale level averaged 15 per cent in March, April and May. Retail sales of home centres and hardware stores show an increase of over 30 per cent in a little more than two years. HB