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Job Growth Will Be Key to Sustaining Recovery

With seven months of housing starts data now available, a clearer picture of the shape and longevity of the housing downturn in Canada is emerging. The anticipated return of economic growth in the third quarter of 2009 is expected to lead to a gradual improvement in the quarterly pace of housing starts as well, but the key word is gradual and thus the key response from those of us in the industry should be patience.
Total Canada-wide housing starts came in at 128,100 units seasonally adjusted at annual rates (SAAR) in the second quarter of 2009, according to the Canada Mortgage and Housing Corporation, which is down about eight per cent from the first quarter and at the lowest level since the third quarter of 1996. Housing starts rose modestly to 132,100 in July, suggesting modest upward momentum. The upturn is expected to be focused in single-family starts, as apartment starts continue to struggle.
There are growing signs that Canada’s economy may be emerging from its long recession. The economy contracted by some 5.5 per cent in the first quarter (quarterly on an annualized basis), but these declines are likely decelerating, and the estimate for the second quarter is a more modest 2.5 per cent decline. Furthermore the odds are strong that the third quarter will see slight positive growth.
A factor encouraging for economic growth is the modest recovery in commodity prices, especially oil. This is tempered by a corresponding rise in value of the dollar, which will continue to weigh heavily on Canada’s manufacturing sector.
The greatest challenge an economy faces following a recession is how to cope with excess capacity. Generally we concentrate on citing the marginal percentage changes from month to month, or quarter to quarter, in economic growth, but it is also telling to focus on the actual size of the economy. In May, Statistics Canada reported that the total size of the economy (as reported in constant 2002 based dollars) was $1.184 trillion. This is down almost $52 billion from a peak in July 2008 and brings the economy back to its size (in inflation adjusted terms) of February 2006.

Jobs Recovery May Not Be Imminent
Turning back the clock 40 months on economic progress can have a lot of implications, but primarily it suggests caution with regards to expectations for a jobs recovery. The number of jobs in Canada declined by some 13,300 over the course of the second quarter — somewhat slower than the 272,900-person decline over the previous three-month period. All told, Canada’s labour market continues to be of concern. The unemployment rate in June reached 8.6 per cent — an 11-year high and up 2.8 percentage points (and 538,000 persons) from the beginning of 2008.
Typically, solid recovery in the job market lags improvements in output following a recession by several quarters, and this time will be no exception. Despite all the job losses in Canada since October 2008 (some 370,000 job losses), Canada’s workforce remains almost 500,000 persons stronger than it was in February 2006. While we don’t expect further large job losses, these numbers do suggest that there is considerable room for the economy to grow and expand without requiring substantially more workers. Therefore we don’t expect to see any impressive sustained job growth numbers until the latter half of 2010.

Some Positive Signs of Life
Ultimately, job growth is critical for a solid recovery in housing demand. Recently, “green shoots” in housing demand have been encouraging. Existing home sales through the Multiple Listing Service have surged in the past four months, erasing most of the recession’s losses, while new home sales are rising in markets such as Toronto.
Clearly, lower mortgage and modest wage gains (among those with jobs) have been positive for housing affordability, and this, along with a certain amount of pent-up demand from depths of the recession, is making the housing market a bit bubbly. But without a sustained recovery in job growth these gains may be temporary.
Recent research we undertook on behalf of the Canadian Home Builders’ Association suggests that underlying levels of housing demand in Canada are currently close to 175,000 units per year. This suggests that there is considerable room for the new housing construction sector to recover from its second quarter performance of 128,100 units (annualized), but anticipated sluggish recovery in jobs will mean that the recovery in housing will also be slow. We expect some 131,000 total housing starts for 2009 as a whole with a modest recovery to 144,000 in 2010. Clearly we have a long way to go, and patience, as always, will be a virtue.

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.

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