Canada's Housing Bubble

Jan 20, 2011 Mario Toneguzzi Calgary Herald

CALGARY - Canada's renovation market is set to cool this year and a slowdown in activity will reinforce a softer outlook for Canadian housing markets in 2011 with important spillovers to employment, retail sales, manufacturing and credit demand.

A report by senior economist Adrienne Warren, with the Bank of Nova Scotia, says most of the contribution of the housing sector to Canadian output growth over the past decade has come from renovation activity - not from the construction of new homes or from the transfer costs and services associated with resale transactions.

Warren says expenditures on home improvements and alterations have expanded at close to an eight per cent inflation-adjusted annual rate over the past decade, "easily eclipsing the three per cent yearly rise in new construction or the four per cent yearly direct contribution from resale transactions."

"The $44 billion renovation industry now accounts for a record share of housing investment - roughly 40 per cent - and overall GDP (of) 2.8 per cent," says Warren.

She says the renovation boom reflects in part the continuing high level of home sales as homeowners typically undertake their largest renovation expenditures in the first three years following a resale home purchase.

"With home sales having peaked in 2007, the largest share of these new buyer renovations should be winding down," she says. "At the same time, outlays in recent years have been considerably higher than would be expected simply given overall sales. A return to more typical spending levels per household/resale transaction would entail a dramatic slowdown in overall renovation expenditures."

Another factor is the end of the temporary federal home renovation tax credit in early 2010.

But Allistair Elliott, business development manager for MIG Homes in Calgary, said he would probably argue against Warren's forecast.

"Certainly over the last two, three years as the economy has gone down the renovation market has gotten busier. We do not find anything slowing down at all," he said.

"The tax credit certainly got people going. There was a lot of hoops to jump through with the tax credit and I don't think people who are doing renovations are going 'well, I'm not going to do it because the tax credit is not there anymore'. Anything from renovating bathrooms and kitchens and basements to knocking walls out and extending houses. We're one of those renovators that also build so we have taken on seven custom-builds starting this year. We're getting busier and busier."

According to Canada Mortgage and Housing Corp., the average expenditure by households undertaking home renovations in 2009 was just over $12,000 in Canada.

Lai Sing Louie, regional economist in Calgary with the CMHC, said the most recent data for home alterations and improvements in Alberta is $1.039 billion in the third quarter of 2010 which is up 8.7 per cent from the third quarter of 2009.

Year-to-date to the third quarter of 2010, alterations and improvements reached $3.150 billion dollars an increase of 7.7 per cent from $2.925 billion during the same period in 2009.

"Mortgage insurance rules are changing for 2011 in terms of your refinancing. Some people refinance and take out money to renovate their house. The maximum amount that you can take out has been reduced from 90 per cent to 85 per cent. That will probably have some impact on renovation spending," said Louie.

Warren says the economic and financial landscape is becoming less conducive to continued strong expansion in renovation spending because of moderating home sales and prices, a levelling off in home ownership rates, high household debt loads, (eventual) rising interest rates and more stringent mortgage financing rules.

She also says a recent survey from the Altus Group and Ipsos Reid indicates renovation intentions for 2011 have fallen to their lowest level in almost a decade.

"Less than 10 per cent of households are planning a major renovation, defined as costing $5,000 or more, in the coming year, compared with a peak of almost 18 per cent in mid-2009," she adds.

Last fall, the RBC 2010 Home Renovation Survey said 58 per cent of Alberta homeowners plan to renovate within the next two years, slightly lower than the national average (62 per cent) and down from 64 per cent last year and 74 per cent in 2008.

And a report in June last year by the CMHC said the average expected cost of a renovation in Calgary in 2010 year was $13,256 - the highest in the country and $1,825 more than the national average.

It said Albertans spent close to $5.3 billion in renovations in 2009, up 2.1 per cent the year before.

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