Canada's Housing Bubble

Jan 11, 2011 Ben Rabidoux financialinsights.wordpress.com

Housing starts hit the brakes

After the much celebrated November housing starts showed a pronounced spike over October’s numbers, I suggested that this number was likely a one-time bounce off a declining trend line.

Today CMHC released their preliminary December housing starts data which showed a 13.5% decrease over November totals, registering at 171,500 units annualized.   A small decline had been expected given the recent weakness in building permits, but economists anticipated a much smaller 4.3% decline in the level of starts to the 180K annualized mark.  This reading marks the slowest pace in housing construction since August 2009.

“The seasonally adjusted annual rate of housing starts was 171,500 units in December, according to Canada Mortgage and Housing Corporation (CMHC). This is down from 198,200 units in November.”

It’s not hard to figure out that there has been significant overbuilding in the past few years as housing starts have outpaced net household formation.  I’ve suggested that this inventory has been absorbed by speculators investors and an influx of new home buyers lured by ultra cheap mortgage rates and loosening mortgage requirements.

With home ownership rates now over 70%, an all time high, it certainly bears asking where the next wave of buyers will come from.  It’s why I think the Bank of Canada is largely out of effective tools for stimulating new demand.  Much of the demand that we saw in late 2009 and through 2010 was artificial demand that had been pulled forward.  The persistently weak sales, particularly at the market entry level suggests that we’re heading for a demand gap where new first time home buyers, the ultimate engine of the overall market, become scarce.

I suspect home builders see this writing on the wall.  If this trend persists and if sales don’t pick back up from their anemic levels, we may well see housing starts average in the 150-160K range in 2011, as suggested in my 2011 predictions.  This would certainly exert some upward pressure on the unemployment rate which has benefited from a strong showing in the construction sector over the past 18 months.

-Ben