Thursday, October 26, 2017

On the mechanics of CMHC construction data

A quick note on the mechanics of CMHC construction data. CMHC reports three main datapoints in its Table 027-0048 Canada Mortgage and Housing Corporation, housing starts, under construction and completions in selected census metropolitan areas monthly (units): starts, completions, and under construction.

Definitions are as follows (link):

Start: For purposes of the Starts and Completions Survey, a Start is defined as the beginning of construction work on a building, usually when the concrete has been poured for the whole of the footing around the structure, or an equivalent stage where a basement will not be part of the structure.

Under Construction refers to the number of units under construction at the end of the period shown, and takes into account certain adjustments which are necessary for various reasons. For example, after a start on a dwelling has commenced construction may cease, or a structure, when completed, may contain more or fewer dwelling units than were reported at start.

Completion is defined as the stage at which all the proposed construction work on a dwelling unit has been performed, although under some circumstances a dwelling may be counted as completed where up to 10 per cent of the proposed work remains to be done.

The graphs I show on construction activity were authored by Vancouver Housing Blogger (the blog is now almost 10 years defunct). Since there is seasonality in starts and completions, a seasonal adjustment has been performed by summing a year's worth of starts and completions, therefore the starts and completions data are filtered with a delay of 6 months. Sudden changes in starts and completions will be "averaged" so could take some time to show up. (Smarter ways of seasonally adjusting are available but whatever.)

One behaviour worthy of note is that under construction is the cumulative difference between starts and completions. If starts outpace completions, under construction rises. If completions outpace starts, under construction falls. Here is where we are today:

Starts have outpaced completions since the end of the last recession. More recently starts went plaid and under construction has gone off the charts (literally, in the case above). Since the construction process has a fair amount of fixed resources (engineering, labour, materials, inspections, etc.), this sudden surge in activity has resulted in completions lagging moreso than they have in the past (i.e. projects have been delayed), and units under construction has ballooned as starts, until just recently, have continued apace.

As the construction backlog clears, completions will increase as resources become freed up to be transferred to other projects. As completions increase, units under construction should begin to drop, but only if starts do not continue in beast mode.

Regardless, supply is coming very soon.

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