Recession Weighing Down Housing Sector

According to the CMHC, total Canada-wide housing starts fell to just under 140,000 units in the first quarter of 2009, seasonally adjusted at annual rates (SAAR). Starts were down some 25 per cent from the fourth quarter of 2008, stemming from a broadly based decline among both single-family (down 26 per cent) and apartment (down 23 per cent) units. Factory-based builders faced somewhat more stability than site-based, as they accounted for about 12 per cent of all single-family starts in the first quarter – up from 11 per cent a year ago.
Quarterly housing starts have averaged 225,000 units SAAR since 2004. On the other hand, there is mounting evidence that construction levels well above 200,000 units per year were unsustainable. Moreover, performance in the range of 140,000 units SAAR is not unusual for the Canadian market. Since the last recession in Canada, which ended in 1991, there have been 13 quarters with housing starts at or below 140,000 units SAAR.
Regionally, the declines were also broadly based. The first quarter ushered in a lower pace of housing starts in each of the provinces, with the exception of Nova Scotia.
Existing home sales markets, by contrast, may be showing signs of firming up. According to the Canadian Real Estate Association, Multiple Listing Service sales were virtually unchanged in first quarter of 2009 after weakening by 22 per cent in the fourth quarter of 2008 (all seasonally adjusted). Softer activity in resale markets at the end of 2008 led to somewhat softer pricing — albeit with a fairly large degree of regional variation. The average value of resale transactions in the first quarter was roughly 9 per cent lower nationally than a year before, but this “national” number mostly reflects continued inventory-related adjustments in British Columbia and Alberta. Elsewhere in the country, resale housing prices are mostly flat or still on the rise.
Finally, the residential renovation sector, which has enjoyed outsized performance for over a decade, slowed considerably in late 2008.  

Economic Directions
The backdrop for the soft housing market performance in the first quarter has been that of the ongoing challenges in the Canadian economy. Canada’s economy continues to be influenced by the international economic recession. The economy contracted by some 3.4 per cent in the fourth quarter (quarterly on an annualized basis), and appears set to retreat a further 4 to 6 per cent in the first quarter. Conditions continue to deteriorate on the jobs side of the economy too. The Canadian economy lost some 378,000 jobs between October 2008 and March 2009. The scope of job losses has also widened, from exclusively goods-producing sectors in the early months of the slowdown, to a wide array of service sectors in the first quarter.
Economic conditions through the first quarter suggest that Canada’s economy is now firmly in alignment with that of the United States. Despite Canada’s significantly stronger fiscal position and the fact that the Canadian banking system remains solvent and highly functional, linkages between the Canadian economy and several of the US sectors hardest hit by the recession, continue to weigh in on the risk side.
The federal government committed some $12 billion in additional infrastructure funding in its January 2009 budget, and most provincial governments have followed suit with their own commitments to additional infrastructure spending. Although the nature of these programs are unlikely to make a significant impact in 2009, there is likely to be more buoyant infrastructure construction activity in years to come as a result of these programs. This will help to offset the recent decline in activity in the construction and real estate sectors.

Emerging Issues
The forecast for housing construction activity in Canada for 2009 and beyond is being influenced by a number of emerging and fluid issues. Canada’s mortgage lenders are still eager to court the business of potential home buyers, and they are starting to pass through declines in interest rates to borrowers. The Bank of Canada has recently lowered its key lending rate to historic lows, and has taken the nearly-unprecedented action of making a “conditional commitment” not to raise this rate at least until mid-year 2010. The lower and more stable rates during this housing downturn are in sharp contrast to any since the 1950s (see illustration). Low rates should help restart the home buying engine, as will  improvements to affordability through more stable prices and potential savings passed on to home buyers by lower construction costs.
That being said, the backdrop of sharp declines in Canada’s job market and rising unemployment, will most certainly keep an upside limit on home sales and housing starts over the next year or two. Housing starts are likely to finish off 2009 in the 140,000-150,000 unit range and show only modest improvement next year. 

Peter Norman is member of the CHBA Economic Research Committee and is Senior Director of Economic Consulting at Altus Group (formerly Clayton Research), a firm of urban and real estate economists.