August 16, 2005

Blurb: Canadians are buying bigger and pricier homes than ever before and they are buying more of them. That's good news for the economy.

Housing, construction and the economy

By Peter Diekmeyer o Bankrate.com

The news on the housing front is that it's full speed ahead in almost all sectors. New building permits data, housing starts and exiting home sales numbers all point upward. While this is great news for homeowners and those who work in real-estate related industries, it's also good news for the rest of the country.

You could say that as the construction and real estate sectors go, so goes the economy. Last year, Canadians contracted for $141 billion worth of new construction, which comprises fully 11 percent of Canada's GDP. But that's not all. That spending creates huge spin-off benefits that spur growth in a variety of indirectly related sectors.

A strong housing market is also a good indication of a vibrant job market and solid personal finances. People tend to invest in real estate more when times are good and they feel confident about the future. And right now it looks as though they have a reason to be.

"Housing starts remain at levels not seen since 1973," comments Eric Dubé, an economist with National Bank Financial. "This, combined with the fact that mortgage rates remains low despite the recent 250 basis points of Fed tightening, means that the real estate sector should continue to expand in the coming months."

This month's good news started trickling out last week, with Statistics Canada's announcement that municipalities issued more than $5 billion worth of building permits in June. That's an increase of 1.5 percent, making it the fourth month that building permits topped the $5 billion mark this year.

In fact indications are that Canada is on track to set new secular records, with the cumulative value of building permits issued during the first half of the year hitting almost $30 billion, a 10.5 percent increase from the same period last year.

A day after the building permits data came out, the Canada Mortgage Housing Corporation announced that housing starts hit a record 242,300 in July, an increase of 0.4 percent from the previous month. Much of the increase was due to strength in condominium construction, with multiple starts up a solid 12.2 percent in July to 122,100 units, compared to 108,800 the previous month.

The strong housing starts numbers, like almost all Canadian real estate and construction sector metrics, are being driven by the Bank of Canada's cheap money policy, which contrasts sharply with actions by the U.S. Federal Reserve.

Unlike the U.S. central bank, which last week raised the Fed Fund's to 3.5 percent, Bank of Canada governor David Dodge has stood pat, holding the BoC's key rate at 2.5 percent since last October. This has led to the highly unusual situation where Canadian rates are below those in effect south of the border, a trend that home buyers have been quick to take advantage of.

"Low mortgage rates and favorable labor market conditions have boosted new home construction to its highest level of the year," says Bob Dugan, an economist at the CMHC.

The existing home sales data released on Monday also point to a strong real estate market. The average price of a Canadian home sold via the Canadian Real Estate Association's multiple listing service in July, registered its largest increase so far this year (10.6 percent) to $267,917.

The hottest markets were in the Greater Vancouver area, where the average house price sold in July rose a stunning 17.1 percent on a year-over-year basis, to $430,471. Toronto also did well (an average 4.3 percent increase to $325,985), as did Montreal, where houses sold registered an average 6.8 percent yearly gain to $206,100.

The big question right now is what will happen if the Bank of Canada decides to follow the U.S. Federal Reserve, by launching its own round of interest rate tightening, which could start as early as its next announcement. But according to one expert, the effect of any bank action is likely to be minor, since many home shoppers tend to arrange financing in advance.

"Sales momentum from the second quarter has carried forward into the third," comments CREA chief economist Gregory Klump. "The anticipated increase in the Bank rate in September will have little immediate effect on the housing market, with many homebuyers jumping into the market to take advantage of pre-approved rates."

Another key metric to watch in the coming months is U.S. inflation numbers, which have been trending higher. If this continues, it could spur the Fed to tighten money even further, a move whose effects could spill over into Canadian rates over the long term.
The Bank of Canada makes its next rate announcement on Wednesday September 7th, 2005.

Recent Bank of Canada action:
July 12, 2005 No change 2 1/2%
May 25th, 2005 No change 2 1/2%
April 12, 2005 No change 2 1/2%
March 1, 2005 No change 2 1/2%
January 25, 2005 No change 2 1/2%
December 7th, 2004 No change 2 1/2%
October 19, 2004 +1/4% 2 1/2%
September 8, 2004 +1/4% 2 1/4%
July 20, 2004 No change 2%
June 8, 2004 No change 2%
April 13, 2004 -1/4% 2%

The Bank of Canada's rate announcement schedule for the upcoming year.
Wednesday, 7 September 2005
Tuesday, 18 October 2005
Tuesday, 6 December 2005
Tuesday, 24 January 2006
Tuesday, 7 March 2006
Tuesday, 25 April 2006
Wednesday, 24 May 2006
Tuesday, 11 July 2006
Wednesday, 6 September 2006
Tuesday, 17 October 2006
Tuesday, 5 December 2006

 

Peter Diekmeyer (www.peterdiekmeyer.com) is the Montreal Gazette's management columnist.

 

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