New housing construction increased in Canada, with seasonally adjusted data exceeding 200,000 units for five months in a row. The increase in the trend was mainly due to apartment construction in British Columbia and Québec, which was partly offset by a decline in Ontario’s multiple starts.

Monthly highlights

• Apartment construction continues to drive the residential market in Halifax. April saw over 400 additional multiple starts breaking ground, bringing year-to-date multiples starts growth to 169% compared to last year. Demand is being driven in part by the ageing population as downsizing baby boomers are increasingly selling their homes and moving into rental units.
• Even though the rate of housing starts in the Province of Québec was down in April, the total for the first four months was up by about 30% in the province’s urban centres. This result was mainly due to the significant construction of apartments, especially rental units, in the Montréal and Québec areas. As well, single-detached home starts have been strong so far in 2017, thanks in part to tightening resale market conditions.
• Despite the slight decline registered in April, residential construction in the Gatineau area showed positive results for the first four months of the year. The gains were particularly strong in the rental segment, with construction getting under way on many seniors’ housing units. Overall, starts were supported by an increase in housing demand and a decrease in the number of unsold units on the new and existing home markets.
• The trend in housing starts in Toronto remained stable in April, as slight increases in low-rise homes were offset by some declines in apartment starts. Overall, new home construction this year has been building momentum as both new single-detached and townhome starts trended higher to reach a nine-year high in April. Tight conditions in the resale market continue to cause demand to spill over into the new home market.
• In London, April 2017 single-detached starts were much higher than in April 2016 and the ten year average for April. The gap between house prices in Toronto and London has widened significantly, making new single-detached homes in London that much more appealing to retirees from Toronto who wish to sell their home but not downsize.
• In Winnipeg, a decrease in inventories in the new home market and balanced resale market conditions are allowing builders to increase production. Actual housing starts in April increased year-over-year for the fourth consecutive month, boosting year-to-date starts to their highest levels since 1987.
• The trend measure for housing starts in the Kelowna CMA surged upwards again in April, due to an increase in both single-detached and multi-unit construction. In particular, a number of large apartment rental projects are now underway as builders continue to respond to the low vacancies that have characterized Kelowna’s rental market for the past two years.
• Housing starts in Metro Vancouver trended higher for the first time in four months, led by multiple-family residential construction. Builders are responding to demand in the market as eight in ten townhouses and all apartments were sold at completion during the last two months.

CMHC uses the trend measure as a complement to the monthly SAAR of housing starts to account for considerable swings in monthly estimates and obtain a more complete picture of Canada’s housing market. In some situations analyzing only SAAR data can be misleading, as they are largely driven by the multi-unit segment of the market which can vary significantly from one month to the next.

-CMHC

Two things happened last week that were a reminder of just how vital real estate has become to Canada’s economy.

On Friday, Statistics Canada released gross domestic product data that showed February was a banner month for sectors linked to housing. The real estate industry, residential construction, financial and legal services generated a combined 0.5 percent increase in output, the biggest one-month gain since 2014. Without those, the overall economy would have contracted slightly in February.

A day earlier, the Ontario government released a budget that projects land transfer taxes will surpass C$3 billion ($2 billion) in the current fiscal year, from C$1.8 billion three years ago. For the province, it’s the difference between a balanced budget and a deficit.

Measures of housing’s contribution to the economy are imprecise, but estimates largely put the direct contribution in excess of 20 percent.

It’s much more than that once you add all the indirect effects, with benefits spread widely from lawyer fees to government revenue and increased retail purchases through so-called wealth effects as rising home equity values prompt households to ramp up consumption. The big worry is that Canada has moved from a reliance on oil to a reliance on real estate.

The influence of housing on the economy is so pervasive that it won’t take much of a slowdown to act as a major drag on the economy, said Mark Chandler, head of fixed-income research at RBC Capital Markets in Toronto.

“You don’t need a collapse in house prices, you don’t need housing starts to be cut in half for weaker real estate sector to have a significant effect on GDP and incomes,” Chandler said. RBC’s ballpark estimate is that a 10 percent decline in national home prices would knock a full percentage point off growth.

A Toronto Dominion Bank report from 2015 found the housing wealth effect has been responsible for about one-fifth of all growth in consumption since 2001.

“A lot of the strength we have seen in consumption is housing related,” said Brian DePratto, the economist who wrote the 2015 report. If you strip out the direct and indirect impact from housing on the economy, “you are talking about a much lower trend pace of growth.”

Record Loans

It’s hard to believe, but there was a time not long ago when Canada’s banks lent more to businesses than home owners. It was the norm in fact until the early-1990s, when mortgage loans surpassed business lending for the first time. Residential mortgages today make up about 52 percent of all chartered bank loans, versus 21 percent for business lending.

Still, that portion of business lending is up from a record low of 19 percent in 2012, suggesting that as home valuations become stretched and as mortgage and capital regulations tighten, banks are increasingly looking to companies for lending growth.

A closer look, however, reveals that much of the new business lending is in fact real estate related. Bank of Canada figures show 14 percent of all private business loans from chartered banks are now bound for so-called real estate operator industries, the biggest share in the history of data back to 1981.

The C$27.4 billion in private loans to the sector, which represents companies that own and manage real estate assets, exceeds the combined lending to the manufacturing and oil and gas sectors combined. That’s on top of the C$15 billion loaned to developers, more than double levels in 2010.

The chartered banks are also lending to real estate operators at the fastest rate on record — C$10 billion since the start of 2014.

The pattern makes sense. Profit margins in real estate rental, leasing, and property management industries were around 34 percent in 2015, Statistics Canada data show, and banks want to lend to profitable businesses. Yet, it also means lenders are increasingly exposed to the industry on multiple fronts.

by Erik Hertzberg and Theophilos Argitis

-Bloomberg

City-wide prices hold steady as labour market improves

Calgary’s housing market continued to show signs of stability in April. With improvements in the labour market and a balanced detached sector, city-wide benchmark prices reached $439,600 in April, similar to the previous month, but 0.90 per cent below last year’s levels.

“More jobs means less uncertainty for people who are sitting on the fence,” said CREB^® president David P. Brown. “There also tends to be fewer people who need to sell when employment improves, and that can prevent inventory gains and further price reductions in the market. It’s a good scenario for sellers who are entering a spring market that’s in better shape than anything we’ve seen in recent years.”

While adjustments are still occurring in the apartment condominium sector, the detached segment of the market is improving across all price segments.

“Detached product has not faced the same supply pressure as the apartment sector,” said CREB^® chief economist Ann-Marie Lurie. “Detached supply from new construction didn’t surpass previous highs. That helped prevent steeper price adjustments in the detached sector when demand eased.”

The relationship between sales and inventory will be a key driver for pricing in the months ahead. Total transactions improved to 1,917 units in April, while inventories totaled 5,495 units, pushing months of supply below three for the second consecutive month.

With sales up and overall market inventory down, months of supply has already pulled back from elevated levels recorded over the past two years. While activity continues to vary by location and product type, more balanced conditions will help to support overall price stability.

“Improvements in the employment situation were necessary to prevent further declines in the housing sector,” said Lurie. “However, economic recovery is still expected to be slow, impacting the pace and quality of job growth. Based on current expectations this should translate into a more prolonged period of recovery in the housing market.”

-CREB