Wednesday, October 31, 2007

Record Number of Homes Under Construction

CMHC released data for the Vancouver Census Metropolitan Area today and part of the data released indicates that there were a record number of housing units under construction in September at 23,111. Previous highs were August at 22,421, November 2006 at 22,311, and 16,279 in March 1994 during the last building boom.

As units complete I expect it to put pressure on existing home sales and further new home sales and I believe the market to be currently saturated with supply. If my belief is true then it would hold that we would need significant population growth with people who have the ability to purchase homes in order for no price correction to happen.

A significant price correction in new and existing homes is likely to happen during the next 2-4 years as prices of new and existing homes are priced out of reach for all but a few buyers with existing home equity and the wealthy minority.

18 comments:

M- said...

Awesome. The more the merrier us bears will be!

...Incidentally, it looks like there's been a big bump up in the number of starts lately.

Warren said...

Yes, keep the buildings going. The growing delay of completions and buildings under construction seems to be caused by the labour shortage. With that in mind, are developers still rushing a lot of starts (read: presales) to get money in their pockets before nobody wants to buy anything?

patriotz said...

Now that Alberta is tanking, we might find a lot of construction labour moving here once the pipeline is empty.

The final blowout.

johnnyrent said...

Mohican

I'm certain this graph rivals the most over-built markets in the US. I would suggest a correction will occur sooner rather than later, for this and other reasons.

Looking at the peaks and valleys of starts, completions and under construction, clearly the fist three or four years of the current spike in all three would be "catch up", relative to population growth and resulting absorption. It would move from catch up to equilibrium and, given its unrelenting climb upwards, to saturation and then significant over-supply.

We know that the rate of population growth in the GRVD has hardly been reminiscent of the rate of residential development. My guess is that we reached saturation some time early in this year or perhaps late last year and we have since been rabidly over-building. It would be interesting to plot annual population growth of the GRVD over the past six years, estimate absorption based on 2.x per household and then add that line to your chart.

If the multi-billion dollar US builders such as Pulte, Toll Brothers, D.H. Horton et al get so far ahead of the market, there is no reason to believe that our building community is any more enlightened as to what the future holds. In any event, being as so much of the new construction is condos, and these are for the most part sold prior to commencement of construction, the effects of over-supply should kick in long before the units which contribute to this syndrome physically exist.

Gianni33 said...

"A significant price correction in new and existing homes is likely to happen during the next 2-4 years as prices of new and existing homes are priced out of reach for all but a few buyers with existing home equity and the wealthy minority."

Haven't we already reached that point? I feel like I'm in the non-wealthy minority. With most SFH in the lower mainland and fraser valley now "worth" at least half a million or more, if you don't already own your own home, I think you would have to agree.

Joe said...

http://reggiemiddleton.typepad.com/reggie_middletons_perpetu/2007/10/quick-note-on-i.html

This article talks about increased construction in the US even as prices fall.

Gabriel said...

m- said...
"...Incidentally, it looks like there's been a big bump up in the number of starts lately."

remember the Civic Strike? for those 2 months they weren't processing any new housing starts, so there was/is a backlog.

jesse said...

"This article talks about increased construction in the US even as prices fall."

This has been observed before but rightly deserves mention again in this post. This is the conundrum of spec builders, though liquidating land by continuing to build I think will only be an issue in the suburbs. Selling vacant land in the city is easier.

The other issue is that builders know how to build and won't want to lay off their core group because this will inherently destroy their business. They will still build through terrible times, even at a loss, in an effort to keep their core business in tact ready for the next bull run. Many will die trying. Great news for buyers.

freako said...

Now that Alberta is tanking, we might find a lot of construction labour moving here once the pipeline is empty.

On that topic, what about the U.S.? With the dollar and wages as high as they are, coming north must be very tempting to laid off U.S. construction workers. Dunno about the red tape, but surely this could become a factor. I mean if Vancouver is the only real estate market flying high, there is enough North American labour available to build condos from here to Hope.

freako said...

This has been observed before but rightly deserves mention again in this post.

Calculated Risk often posts about the lack of decline in construction workers, even as homes under construction drops (it has dropped somewhat already, but that will pick up pace soon). From what I recall, he suspects misreporting of numbers as one factor.

As for Jesse's point, it is true that in some cases, it will be more economical to build than not, but overall, construction employment will go down down down.

hey will still build through terrible times, even at a loss, in an effort to keep their core business in tact ready for the next bull run. Many will die trying.

Well, some may actually die no matter what. Just recently Horton got its bonds cut to junk. That will put an end to the building for at all costs mentality.

jesse said...

"From what I recall, he suspects misreporting of numbers as one factor."

The other factors mentioned are "illegal workers" and independant contractors, who may not be immediately accurately accounted for in the way the BLS reports data.

Tony Danza said...

That will put an end to the building for at all costs mentality.

I have heard it said that the home builders/developers have no choice but to keep building in order to service debt. It is also apparently more profitable (or less unprofitable?) to sell completed houses than bare land. Not to mention that these developers are competing with each other for market share, so even you're building at a loss if you can avoid insolvency just long enough to outlast your competitors you may emerge as top dog in the market place. You don't want to be the first one to close up shop and yield market share to your competitor right? No one loves a quitter.

jesse said...

CR also surmises the rise in commercial construction spending has partially offset the decline in residential spending which is not mis-reporting, though the two points I mentioned are mis-reporting.

The illegal workers one is likely a red herring as they were not accounted for on the way up so should not be accounted for on the way down.

As for Vancouver, I expect black market work will have the same effect but likely not as prevalent as in the southern States. I would guess construction spending would not flow as remittances as much in Vancouver so expect more of a trickle down shock as local consumer spending drops markedly.

jesse said...

"so even you're building at a loss if you can avoid insolvency just long enough to outlast your competitors you may emerge as top dog in the market place."

This is the game of chicken theory. If you can force others off the road before you, you pick up their market share in the end. The problem is this can lead to mutually assured destruction.

I'm pretty sure most builders will be caught in a bind between carrying costs, insolvent assets, and sometimes negative equity. Same as some investors of course.

I still think if I were a builder by trade it would be extremely difficult to make the decision to do nothing for a few years, knowing how hard it is to re-start after a hiatus.

freako said...

CR also surmises the rise in commercial construction spending has partially offset the decline in residential spending which is not mis-reporting, though the two points I mentioned are mis-reporting.

The misreporting is that residential construction workers move to commercial but are still counted as residential.

freako said...

I still think if I were a builder by trade it would be extremely difficult to make the decision to do nothing for a few years, knowing how hard it is to re-start after a hiatus.

Whatever goes through these guys heads, housing starts will drop. Dramatically! And many many people will leave the trade or go work elsewhere if possible.

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