Wednesday, April 23, 2008

Pent Up Supply

CMHC released the March data last week and it looks like this:



We are well into unprecedented territory for units currently under construction in the Vancouver area at 27,000. This is enough housing under construction to house nearly 60,000 people which is enough to handle two entire years of population growth of the Vancouver Census Metro Area.

It also looks like the rolling 12 months of starts number may reach record levels this year too.

The past few months of numbers are really messing with my head right now because I don't understand how developers are starting construction on so many projects while not completing much. Starts were 1353 in March and Completions were only 890. This has been going on for quite some time now and it is clearly unsustainable and the hangover from this overbuild is going to be absolutely massive.

If we were to follow some of the previous boom bust cycles we would have seen the starts line fall below and stay below the completions line in early 2007 but the boom was extended for whatever reason and developers are starting way too many projects now.

I find it very telling that the units under construction number has always, in previous cycles, remained below the number of starts and completions but we have been moving into highly uncharted territory for quite some time now. I am certain that the bust portion of the cycle will be 'uncharted' as well.

14 comments:

macho slob said...

I think we need to understand that large scale projects require at least a year to:
-acquire and assemble property
-arrange financing
-planning
-negotiate compliance
-variance procedures
-scheduling and budgeting
-design
-permit application
-review and approval

Markets could easily change after commitment to proceed with such projects, but well before commencing with construction.

However, this is not the case with spec builders of individual houses where the pre-construction process is much shorter. In fact, many of these small time spec builders are cutting back dramatically, as recently completed houses are not selling.

mohican said...

I am fairly certain that it is Olympic related venue and infrastructure construction that has prolonged our bubble this extra year.

macho slob - you are correct that big condo projects have a much longer time to complete than single family homes. I believe CMHC's definition of a 'start' is that the shovel has been put into the ground and all of the things you mentioned happen before the start is counted.

Warren said...

The definition of start and finish is certainly important.

Amazing that completions have dipped as starts have spiked.

I don't know what the construction job numbers look like, but I'd guess that the pool of workers hasn't spiked that much in the last 12 months, the number of workers per unit would be dropping, and completion schedules getting pushed back even further.

I'm not a developer, but with all of the financing involved, I'd like to think I'd rather build 1 building over 2 years than 2 buildings that take 4 years. I'm sure the math isn't that simple of course.

seeker said...

Thanks for this. What a graph.

Good point about the pool of workers. I believe most of the olympic venues are complete now?with only a handful remaining of which most should be done by fall.

Look out when the completions top.

johnnyrent said...

Here's a brain teaser that might make for an interesting debate. I read today that new home sales in the US dropped to an anualized, seasonaly adjusted rate not seen for 16 1/2 years.

Over building resulting in a supply glut I understand. But the US population has obviously grown considerably over the last 16.5 years so why are new home sales so incredibly low?

Could it be that so much new home purchasing was on the part of investors, that now, these same investors are ridding themselves of properties, and these, many of which would be deeply discounted near new homes, are being purchased by those who would have otherwise bought a new home?

There is a very high percentage of condos and townhouses in the Lower Mainland already owned by investors. Coincidentally, we are constructing an all time record number of new homes. Is there a perfect storm brewing for new home sales here reminiscent of what is now happening to this sector in the US?

I'm going to post this on Chipman's site as well

/dev/null said...

I was wondering - are not a lot of the starts condo developments that generally have a large percentage of pre-sales? In effect doesn't that mean much of the risk is with the buyers and not the developer?

So maybe if a building is 90% presold before it "starts" then there is less motivation to rush before the market turns. Better to get as many suckers..er..buyers in the queue while prices are high and demand is there. Sort-of like a restaurant that fills up the reservation book but still tries to take every walk-in that appears. Fill the pipeline.

Just a thought...

(I see mini-Mohican got you up early today. :)

/dev/null said...

johnnyrent: Good point. Isn't it also true that developers are more able (and willing) to drop prices than investors (who would be underwater a lot sooner)?

Odd then that the MOM/YOY drop was 8.5/36.6% for new homes but only 2/19.3% for existing homes.

I'm not smart enough to figure out why that is, or what it means. But I still think that when push comes to shove developers will slash a lot faster and further than individuals will be able to match. And that could get ugly for the investors without much of a margin.

johnnyrent said...

dev/null

I think it stands to reason and also to scrutiny in the US that large home building companies are more inclined to offer deep discounts than individual investors. Being as most large builders in the US are public companies, they are forced to turn inventory as quickly as possible.

This makes the decrease in new home sales in the US even more perplexing.

BBY said...

That chart kinda flies in the face of this report from the Bank of Canada.

Bank of Canada does not see house prices falling
http://news.yahoo.com/s/nm/20080424/wl_canada_nm/canada_boc_housing_col_1

But I tend to agree with the graph, more than this press release from the BoC. Hard to ignore all the building cranes in this city...

patriotz said...

Isn't it also true that developers are more able (and willing) to drop prices than investors

Able and willing aren't the right words. Obliged is. Developers must sell. All the time. They cannot hold inventory.

Developers will always drive the market down. This has been very apparent in the current US bust.

patriotz said...

But the US population has obviously grown considerably over the last 16.5 years so why are new home sales so incredibly low?

I thought the answer would be obvious. Because lending standards had been non-existent from about 2004 to 2007, anyone who had any inclination to buy, whether they could afford it or not, has already bought.

And those who couldn't afford to buy are now walking away from "their" houses, increasing the supply and pushing down prices.

Tightened lending standards, combined with non-existent savings, mean there are now very few qualified buyers.

Also those people who stayed out of the market over the past few years, and are qualified, are smart enough to realize that prices have a lot further to fall.

Aleks said...

"So maybe if a building is 90% presold before it "starts" then there is less motivation to rush before the market turns."

I think your supposition is sound but your premise is flawed. Yes, if a building was 90% presold the developer would have very little on the line. However, I doubt many buildings are 90% presold.

Here in Victoria, there have been a number of condo projects that have had to suspend construction and drop prices (or offer hidden price drops like paying half the first year of your mortgage) to generate enough presales to complete construction.

There's a show suite in the lobby where I work that has a sales board. Most of the second floor is sold and less than half of the other three floors for a grand total of 32 sold out of 56 units or 57%. And I would say this is one of the better developments in the area.

jesse said...

"those who couldn't afford to buy are now walking away from 'their' houses, increasing the supply and pushing down prices."

So the pool of buyers has shrunk which has stalled sales (not to mention cancellations) but the two statements "builders will reduce price aggressively to offload unsold homes" and "builders are having trouble selling" don't compute. The builders are not lowering their prices aggressively enough so it seems obvious to me they are hoping for stabilising prices but it's just not working out for them.

I'm sure they're waiting for the miracle $150B bailout package and those Fanny/Freddie Jumbos to turn things around.

jesse said...

"there have been a number of condo projects that have had to suspend construction and drop prices (or offer hidden price drops like paying half the first year of your mortgage)"

I've already read this chapter. Stalling sales, hidden price drops, upgrades, then finally price drops. Happened in the US and we're now seeing it here too. With all the condo projects that just started up, look for hidden discount/upgrade schemes becoming the norm.