Sunday, March 07, 2010

Housing starts and under construction

Just had a look at the CMHC Housing Now publication with the January starts/completions data. Completions exceeded starts by 2115 in January 2010--which is the most for a single month since 1981 (and the data in 1981 is really wonky so I don't know what to make of that). Correspondingly, under construction is 'cliff diving' as they say over at Calculated Risk. Straight downhill.

The 12 month total of starts tweeked up in January 2010, but it is still at a deep low. How deep? Check the data back to 1948 below.

The 12 month total of starts is in the neighbourhood of the lows hit in 1967, 1983, and 2000. That's right, lower than the depths of 1967--when Vancouver's population was much smaller. That is not a lot of starts.

What do I see happening over the rest of 2010?
  1. It is unlikely that starts will stay so low. Look at the green line--it has never rested at the bottom before (but perhaps we've never had such a speculative glut before!).
  2. Completions will continue to chug along at the current pace for the rest of the year, still exceeding starts.
  3. Under Construction will drop below 10K and might touch historic lows close to 5K if starts don't pick up as much as I think they might.
One big implication of this is for the employment market. We know that a big part of the boom in the BC labour market was driven by construction employment. Construction employment depends on the 'under construction' total. As that number continues to drop over this year, we will see unemployment rise.

About a year ago, I predicted 10% unemployment by June 2010. We're at 8.1% now. I don't know if we'll make it to 10% in the next 4 months, but it's not a crazy prediction to hit 10% sometime in 2010 as the Olympic workforce gets laid off and the construction workers join them.

We see the next labour market data point this Friday. That data comes from the middle of the Olympics, so we won't start to get a real glimpse of the post-Olympic period until the March numbers come out in April.


Fish10 said...

I Agree the late Spring employment numbers will be very telling.

Nevertheless, we have gone from 6% to over 8% unemplyment and housing has hit a new high.

Hoowoodathunkit! :)

The power of low interest rates and unbridled speculaton.

BTW- I think the Libs are looking at the same housing start data, which is why, despite the dire fiscal situation they are pulling out some more busy-hammer projects.

Fish10 said...
This comment has been removed by the author.
JimTan said...

No surprises here for the people who have already done their numbers. Rennie was right in May 20009. I raised the same alarm in 4Q 2009. How can you have a bubble without over-supply? The key to RE is the supply response. Are land owners willing to cash in at the current price level?

There are two likely scenarios. One, land owners sell enough to meet the demand of a growing population. That's a housing start of @15k a year. Prices stabilize. Two, land owners do not cash in at this price level. Same for late 1990s. Demand for housing exceeds supply (2001 situation). Land owners only sell into a rising market. Same as 2002-8. How high does prices have to go to sustain a housing start of 15k a year?

So, Vancouver is different from Calgary and Las Vegas. The supply situation is much tighter in Vancouver. For comparison, Vancouver rental vacancy is still 2% vs. 16% in Vegas and 5% for Calgary.

david said...


Even if you are right about the supply side of things, what about the demand side? We have passed the prices of spring 2008. Things started to fall off well before the bad economic news of fall 2008. Now, interest rates are lower now so I would say it is possible to see prices rise a bit further, but only if rates hold.

A good indicator of demand is rents. Not only vacancy but the actual rent ($) itself. Rents have not increase as much as property values, so that tells me the demand to live here is not as strong as the demand to own here. Can that continue forever?

And yes, vacancy is 2%, but wasnt it less than 1% not too long ago?

Tell you what, if prices hold for the next few years and rents rise dramatically it will screw my theory and it might make more sense to buy. As long as rents are this much lower than carrying costs, I dont see the point of owning. For me, it will take rising rents or lower prices to get me to buy.

Even if supply stays low, the demand has to stay high to keep the high price party going. At some point demand has to give as less and less people can afford these prices. This doesnt even have anything to do with the possibility of rising interest rates and tighter mortgage rules.

RentingSucks said...

I think it is still possible to hit the fabled affordability wall at these low interest rates. This means even at the lowest interest rates ever there are simply no more buyers that are either willing or able to afford at the current prices. We hit it before if I remember correctly we were already piling on inventory before the financial crisis hit. Also if interest rates go up even a little I think we'll slam into it at a high rate of speed because for every rise a big swath of people are cut out of the market.

We are really in uncharted territory here. I'm now extremely concerned not for my own ability to buy but what it going to happen when it all unravels. JimTan is arguing like you can apply regular economic theory when you are at a 9.3 median house price to median income ratio and the lowest interest rates possible. I would argue that you can't because house prices are priced to the very limit absolutely relying on low interest rates. The usual supply and demand is very relavant when you are in the middle but no so good at the extremes.