August 6, 2010
ECONOMY AND STRATEGY GROUP – 514.879.2529Stéfane Marion,
Chief Economist and Strategist
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Topic of the week
Unlike the United States, which went through ahousing crisis, Canada saw its residentialconstruction sector make a spectacular recovery.Indeed, construction employment is now only 3%shy of its 2008 peak and residential constructiontoday accounts for a very high proportion of theCanadian economy on a historical basis. What’smore, this proportion is presently greater than itsU.S. counterpart was even at the height of thehousing bubble south of the border. Based on theaverage annual household formation rate of 174Kfor the period from 2001 and 2006, the level ofhousing starts observed in Canada since the start of2010 might appear unsustainable. However,according to our estimates, the household formationrate should have accelerated since the last censusand should even have reached 212K in 2009.Moreover, we expect household formation toaverage 200K annually on a 5-year horizon. This isgood news for the residential construction sectorover the medium term. However despite floor-levelmortgage rates, the resale market is on the verge ofreverting to a buyer’s market, a situation that coulddrive housing starts to a level below demographicneeds in the short term. Given the normalization ofinterest rates under way, record-high home pricesand the end of a season of earlier-than-plannedhome purchases in Canada, we can indeed expectactivity to decline in the next 12 to 18 months.Fortunately, Canadian demographics remainsupportive for residential construction over themedium term.
Economic indicators review (p. 5)
Things to watch
Economic calendar and significant earningsannouncements of the week ahead (p. 6)
Economic tables (p. 7)
Residential construction in Canada:cyclical challenges, structurally sound
The residential construction sector recorded negative growthin the past three months, its first signs of losing steam sincethe start of this recovery.
The pullback comes on the heels of a strong rebound.Employment in construction is only 3% shy of its 2008 peakand the portion of the economy accounted for by residentialconstruction is very high on a historical basis. The situationin Canada is poles apart from the one in the United States,where the sector is still seeking to get over a housing crisis.
Since the beginning of the 2000s, the annual rate of housingstarts in Canada has averaged 201K. It is presently at 199Ksince the start of 2010. Such a level of activity might let usfear the worst insofar as, according to the latest availablecensus data, the annual average household formation rate inCanada stood at 174K from 2001 and 2006.
However, based on our forecast model, household formationshould have picked up sharply since 2006, peaking in 2009 at212K. From 2010 to 2015, household formation should recorda sustained annual average of 200K.
While demographics remain a positive factor for theresidential construction sector in Canada over the mediumterm, there are headwinds ahead in the short term. Despitefloor-level mortgage rates, the resale market is on the vergeof reverting to a buyer’s market, a situation that could meanseeing housing starts drop to a level below demographicneeds in the short term.
Solving an enigma
Since the beginning of the 2000s, the annual rate ofhousing starts in Canada has averaged 201K. As ithappens, based on the 2001 and 2006 census surveys,the annual household formation rate averaged only 174K.While several factors might explain a short-term gapbetween this demographic statistic and housing starts, thefact remains that the level of activity observed since 2006in Canada exceeds the formation of households from2001 to 2006, if we exclude the recent recession. Since2009, the rebound observed in construction and related