Alex Carrick: In hard times, the fault line in our finances may reside in our homes

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In the upcoming stretch of uncertainty for the Canadian economy, look for the residential real estate sector to be the fault line. 

More than any other asset, the home provides a sense of well-being, both of a personal nature and financially speaking.

It is the bedrock most individuals and families use when assessing their own wealth.

In the fall-2008 to summer-2009 recession, housing starts fell as low as 112,000 units seasonally adjusted and annualized.

Then the Bank of Canada lowered interest rates, the resale market picked-up and new home starts recovered about six months later.

They currently sit above the 200,000-units annualized benchmark.

Let’s put that in a historical context.

In the decade of the 1990s, new home starts averaged 150,000 units per year. Between 2002 and 2008, they rose consistently above 220,000 units.

In other words, new home starts climbed almost 50 per cent between adjacent decades. That’s a huge jump.

They were probably too low in the 90s and too high in the 00s. More on the appropriate level for housing starts in a moment. So far this year, new home starts have averaged over 190,000 units through nine months.

In July, they were 214,000 units and in September, after dropping back to 190,000 units in August, they were 206,000 units. Home prices have held up well. In the resale market, they are +8 per cent year over year, according to the Canadian Real Estate Association (CREA).

For new homes in 25 urban centres across the country, year-over-year prices are +2.3 per cent according to Statistics Canada. It may seem paradoxical, but increases in home prices are usually good for demand.

Consider the alternative. When home prices are falling, buyers delay purchases in hopes they’ll get even bigger bargains at the bottom of the downward spiral. The United States is familiar with this pattern. The spate of foreclosures accompanied by falling home prices has been slow to spur much buying interest. Most analysts feel the proper level of Canadian housing starts —justified by current demographic trends in family formations and immigration, plus second home allure and replacement needs—lies between 170,000 units and 180,000 units per year.

So where is the current excess demand coming from? The single-family market year to date is -14 per cent compared with January to September last year. Row, townhouse and multiple-unit starts, however, are +17 per cent. Condos make up 50 per cent of the multiple-unit market and clearly that is where the surge is originating.

Three cities presently account for 65 per cent of multiple-unit starts in the country. In two of those three centres, year-to-date starts are out-sized. Montreal multi-unit starts are a reasonable +6 per cent year to date; Vancouver is a more spectacular +39 per cent; and Toronto is an astonishing +56 per cent.

Toronto, with one-sixth of the nation’s population, is currently accounting for nearly one-third of multi-unit housing starts.

Furthermore, the inventory of completed but unabsorbed (i.e., vacant) multi-unit structures keeps rising. The Department of Finance earlier made it harder to obtain mortgage approvals and to take out personal loans with property as collateral. But there are other sources of credit tied to the home and the Office of the Superintendent of Financial Institutions (OSFI) has identified where another major risk may lie for Canadians in a downturn.

The recession taught many of us to scale back on our credit cards and personal borrowing. But there is still tremendous potential from home equity lines of credit (acronym HELOC).

These are even more attractive based on current very low interest rates. If people find themselves under undue stress on account of job losses and/or income roll-backs, there will be tremendous temptation to increase HELOCs.

Homeowners won’t be the only ones facing a “crisis in the wilderness”. Banks, wishing to maintain revenues, will be able to promote HELOCs at seemingly bargain rates.

But those rates are often tied to the prime. As such, they will be instantly adjustable upwards when the Bank of Canada begins to tighten monetary policy again. Most of us can’t lower the principal amounts we owe with any great speed and we could find ourselves in over our heads.

That’s the purchaser side of the housing market. What about the supplier side, especially as it pertains to condos?

We often hear the argument that the new condo market must be in reasonably good shape because 80 per cent of units need to be sold before financing can be finalized. This is an argument with strong validity when only a limited number of projects are proceeding. But what if precisely 80 per cent is the norm when there are a great number of towers rising up in a region? In effect, within each cluster of five buildings, one will stand empty. In 100 such buildings, twenty will be “see through.”

That puts a different spin on things. On several counts, there are reasons to be concerned about Canada’s housing market over the next year or two. 

Alex Carrick is Chief Economist with CanaData, a division of Reed Construction Data (RCD). CanaData is the leading supplier of statistics and forecasting information for the Canadian construction industry. RCD is a division of the global publishing firm, Reed Elsevier. For more economic insight from RCD, please visit www.dailycommercialnews.com/features/economy. Mr. Carrick’s lifestyle blog is at www.alexcarrick.com and he would welcome a follow on Twitter (Alex_Carrick) or Facebook. 

www.alexcarrick.com

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