Weekly Mortgage News for November 13, 2009

This weeks top stories include how 2009 saw a housing start high, how unemployment numbers were up, how the HST is causing builders to speed up the process and how industrial land prices in Vancouver have taken a hit.

2009 sees a housing start high

There was more evidence that the Canadian residential construction sector is getting back to normal as housing starts advanced 5.4% last month to the highest level seen this year thus far. Starts increased to 157 300 units in the month of October as builders broke ground on more apartments and condo’s from 149 300 starts from the previous month. Canada Mortgage Housing Corporation (CMHC) released the report on Monday and stated that the numbers are based on a seasonally adjusted annual rate.

Millan Mulraine, economics strategist at TD Securities stated, “It adds to the growing list of indicators that have been pointing to a recovery … though the rebound in residential construction has remained fairly modest. The record low interest rates that have been helping aid in our recovery will continue to spur home buying in the coming months and underpin residential construction activity.”

CMHC noted that gains in the month of October were a result of heightened activity in the multiple starts sector. Single home construction still remains at its second highest level since October of last year. Urban multiple starts were up 13.8% with urban single starts down 2.7% as activity continued to increase the most in British Columbia and Ontario. Quebec saw a fall in their starts sector with starts well below where they were in previous years when they had surpassed the 200 000 mark.

Stewart Hall, economist at HSBC Securities Canada, stated that “Although housing starts remain depressed, with activity below the 175 000 units necessary to keep pace with population growth and attrition, it is clear that the trajectory for the sector is towards recovery.”

The last few months have seen activity pick up with starts now 33% higher than the lows seen in the month of April. More of the activity seen is in the existing home sales market where levels of activity in many resale segments exceeding peaks recorded before the downturn.

So this brings us back to the question of whether or not low interest rates are encouraging excessive level of activity with the Bank of Canada (BoC) expecting to keep their interest rates at 0.25% until June of next year. Economists are cautioning that homebuyers that are over doing it with credit will feel the squeeze the minute the rates begin to rise.

CMHC predicts that housing activity and prices will pick up next year as demand grows and we continue to see low interest rates. They also predict that starts will increase in most cities next year with the exception of Ottawa and Montreal where activity will remain flat. On that note, they did state that Vancouver, Calgary and Toronto will likely be well below the levels we have experienced over the last decade. What do you think? Please comment below.

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Unemployment takes a hit

October saw more than 43 000 jobs disappear after two months of consecutive gains. These are further signs that companies are waiting for more signs of a sustained recovery before they begin the hiring process again. Canada’s unemployment rate was up to 8.6% from the previous months where the rate was at 8.4%. A cold job market is also forcing many to create their own work as we saw an increase in the self-employment numbers.

The economy has now seen the addition of full time jobs for two months in a row while part time work is on the decline. Higher paying jobs were also created in the month of October while positions in the lower paying retail sector were cut. When looking at a 3 month average we can see that the economy is creating roughly 4 800 jobs a month. The move into full time positions has boosted the quality of jobs last month with expectations that more full time job growth will come as activity picks up in the up and coming months.

There is heavy speculation that the unemployment rate will rise further as more people look for work and hiring stays at the same snails pace that we are currently under. The younger youth have taken the largest hit during this recession with youth unemployment at 15.6% for the age group between 15 to 24. It seems that this trend is not only occurring locally but also across the rest of the developed world. Maybe they should start businesses of their own. Self-employment is up 3.9% this year with roughly 2.8 million Canadians now being self employed or roughly 16% of the total Canadian work force, which is well above the historical norm.

HST pushing builders harder

Developers expect to be building homes and pouring concrete over this winter in an attempted effort to beat the new Harmonized Sales Tax that is expected to take effect in July of next year. The new tax will combine the PST and the GST which will impact home purchases over $400 000. It would add $6000 to the cost of a $500 000 home which would easily be enough money for upgrades such as hardwood floors or stainless steel appliances. This is creating an incentive for customers to purchase now rather than wait until after the tax takes effect. For a million dollar home a consumer would spend an extra $36 000 in taxes which is the cost of a new car. Fears of the impact of the HST mixed with low interest rates have jump started the new homes market and caused a strong recovery in the sector.

Ontario housing starts are up to the highest levels seen since March as starts hit a seasonally adjusted and annualized 55 700 units in the month of October which was up 14.8% from the previous 48 500 units seen in September. Housing starts in Toronto were up 13% in the month of October and are rising for the third straight month to 34 200 annualized units.
Builders are currently frustrated that the new HST will impact a fragile recovery in the market.

The renovation side of the industry will be particularly vulnerable as the tax could force renovations to the underground cash market and consumers will simply pay cash for their improvements, especially once the renovation tax credit expires next year. The builders association is working on getting a permanent renovation rebate in the works but only time will tell if they will manage to push the government in their direction.

The renovation industry was worth roughly $39 billion in 2008 and doubled all of the transactions in the resale homes market. The data that we are currently seeing looks more like a housing boom rather than a rebound. Economists predict that prices in the new and resale markets will continue to push higher in the up and coming year.

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Industrial land in Vancouver takes a hit

Over the last year the value of industrial land in Metro Vancouver decreased by as much as 30%. Landowners desperately unloaded their land that was purchased close to the markets peak with little demand to buy now. When there is no demand to build, vacant land is always the first asset that is disposed of. Investors that entered into the market in the later stages of the bubble, with no extra income to support carrying costs, have now been forced to sell their properties at discounted rates while they take a loss.

Between 2003 and 2008 the market saw prices double with prices of $600 000 and acre in Abbotsford and as much as $4 million an acre in Vancouver. The regions industrial vacancy rate was up to 4.4% in the third quarter of this year up from 3.2% seen during the spring of this year. Some investors tried to hang on to see if they could make it through the recession but many couldn’t and had to close or reduce their square footage significantly. This trend is not expected to continue as the Metro Vancouver industrial market is dominated by smaller tenants or those that service the local markets as opposed to other Canadian or U.S. markets.

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