Home builders having best year in a decade
Rapidly growing population cited as possible key driver in surprise rebound
For Canada’s real estate developers, 2017 is shaping up to be a comeback year.
Builders are on pace to start work on more than 215,000 new homes. That would be the most since 2007, and a rebound after four straight years below 200,000.
The strength isn’t confined to Toronto.
Advances are broad-based, including sharp rebounds in the Prairies and Quebec and elevated levels in British Columbia, in addition to residential construction in Ontario that’s on pace for its best year since 2004.
The level of activity has surprised policy-makers and analysts, most of whom began the year predicting the industry would be a drag on the economy.
Economists forecast housing starts would drop in 2017 to the lowest since the 2009 recession. A year ago, the Bank of Canada projected housing would curb growth by 0.2 percentage point in 2017. It has revised that projection upward to a 0.3 percentage point contribution to growth. The halfpercentage-point swing explains a big chunk of the bank’s total revision for this year.
How did everyone get it so wrong? For one, the economy is performing better than almost anyone expected. Employers have created almost 400,000 jobs since mid2016, which has fuelled the fastest expansion in almost a decade.
Also, federal measures to tighten access to mortgage insurance haven’t had quite the cooling effect some predicted when they were imposed late last year, according to Doug Porter, chief economist at Bank of Montreal.
“Sentiment was at a pretty low ebb toward the housing sector at the end of last year,” Porter said.
But perhaps the biggest influence has been an acceleration in population growth that few anticipated. Statistics Canada estimates the population has grown at an annual pace of more than 1.2 per cent over the past year, which is the fastest since the early 1990s.
“A lot of the baseline assumptions on what demographic demand are not right anymore,” according to Porter.
So, having gotten it wrong this year, are the forecasters more bullish on the housing outlook? Doesn’t look like it. The Bank of Canada estimates the sector will contribute nothing to growth next year, before becoming a drag in 2019. Economists are now predicting that 2019 will be the worst year for housing starts since the recession.
Remember the great Toronto condo glut of 2012? It never happened, but it was a major concern at the time as cranes began popping up all over the city’s downtown. Analysts, banking executives and policy-makers speculated the added supply would trigger the downfall of Toronto’s overvalued resale market. The federal government, citing the need to curtail developers, even tightened up housing finance regulations.
Three years later the same warning bells could be heard as developers began to ramp up new starts in the second half of 2015.
Fast forward to this year, multiple-unit projects are again leading the charge and this time it’s a Canada-wide phenomenon.
Builders in urban centres are on pace to start a record 135,000 such projects, which include everything from semi-detached houses to condos. Since 2011, two out of every three homes built in Canada were part of multiple-unit projects, versus less than 50 per cent over the preceding two decades.
Could this revive concern about condo overbuilding? It’s unlikely on the basis of one key gauge of demand.
The share of newly built apartments sold at completion was 91.2 per cent in September, according to Canada Mortgage and Housing Corp. data. That’s the most since 2008 and the third-highest in records back to 1990. The figure in Toronto is 99.9 per cent.
Nationwide, the so-called absorption rate at completion for all types of homes is 84.9 per cent, well above average. In Toronto it’s 97.6 per cent.
The numbers suggest Canada’s housing markets remain at historically tight levels, even with the recent correction in Toronto.