Wednesday, June 11, 2008

Canadian Home Building Boom is Coming Back to Earth!

Canadian Home Building: Back to Earth

On the heels of one of the best quarterly performances in the past 20 years in Q1, Canadian housing starts came down to earth in April with a tally of 213,900 units (at an annualized rate). Above-expected results in February and March had flown in the face of signs of moderation in the housing sector in recent months, including a softening trend in building permits. Therefore, it wasn't a complete surprise that, this time, starts undershot consensus expectations.

In April, the weaker tone was evident virtually across the board, both on a major segment and regional basis (with a few provincial exceptions). The multi-unit segment, which had been particularly strong in the previous two months (second and third highest tallies since 1978), gave back the most. However, activity in this segment remained relatively healthy, holding above its 12-month average.

The single-unit segment fell to its lowest level in seven years, accelerating its downward trend since 2004. Singles have been historically a better indicator of the sector's overall direction, so this should raise a red flag.

Regionally, starts slipped in all provinces except B.C., Manitoba and P.E.I. In the case of B.C., the increase was only a partial retracement of an outsized drop in March. Starts in that province remained below their 12-month average in April.

The biggest declines in percentage terms occurred in Nova Scotia, Newfoundland & Labrador and Alberta, although all of them represented payback for spikes the previous month. Despite falling for the second straight month, the pace in Ontario remained solid.

The Bottom Line: With growing signs that deteriorating affordability and mounting economic uncertainty are cooling residential real estate markets in many parts of Canada, it's only natural that new home building also moderates. While a U.S.-style meltdown is unlikely on this side of the border, the faster decline in singles starts in the past several months is cause for close monitoring.

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A. Mark Argentino
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