Building Permits, December 2022

The monthly total seasonally adjusted value of building permits in Canada decreased 7.3% in December to $10.3 billion. Declines were posted in both the residential and the non-residential sectors. On a constant dollar basis (2012=100), the total value of building permits fell 7.4% to $6.1 billion.

Residential sector down in December following a strong November

The total value of residential permits declined 8.4% to $6.5 billion in December.

Construction intentions in the single-family homes component decreased 3.9% while multi-family permit values fell 11.6%, with seven provinces posting declines. Quebec (-43.4%) contributed to much of the decline in the multi-family component following a strong November. Conversely, notable gains were posted in New Brunswick (+46.4%) and Saskatchewan (+36.9%) in December.

Ontario drags down non-residential sector

The total value of non-residential permits declined 5.3% to $3.8 billion in December. Decreases posted in Ontario more than offset gains posted in seven provinces.

Construction intentions in the industrial sector decreased 23.4% in December, following a record high in November.

In December, the value of commercial permits edged up 2.2%, with seven provinces posting increases. Alberta led the way with a variety of large permits in Calgary.

The total value of institutional building permits posted a modest growth month over month (+0.9%). Large losses in Ontario (-30.1%) were offset by notable gains in Quebec (+45.1%), Manitoba (+228.6%) and Saskatchewan (+333.8%). The superlative results in the latter two provinces were driven by building permits for new hospital construction.

Fourth quarter construction intentions continue to slow

The total value of building permits in the fourth quarter of 2022 decreased 7.8% from the previous quarter to $31.0 billion.

The residential sector decreased for the second consecutive quarter in the fourth quarter after a year of multiple interest rate hikes. Rising interest rates impact construction intentions, as they increase the costs for new projects and can make it more difficult for developers and buyers to secure financing. Construction intentions fell 13.0% to $19.8 billion in the quarter, with declines posted in all provinces except Newfoundland and Labrador. Single-family permits decreased 13.8%, while multi-family permits dropped 12.3%.

The non-residential sector increased by 2.9% to $11.2 billion, led by the industrial component, which sharply increased by 29.5% to a record quarterly high ($2.8 billion). Commercial permit values remained relatively stable (+0.3%), while institutional permit values fell by 12.3% for a third consecutive quarterly decrease.

Annual review of 2022: trending decline for building permits of single-family homes

The total current dollar value of building permits continued to climb to new records, increasing 6.8% in 2022. However, the annual increase was largely the result of inflated valuations from persistent material and labour cost increases. On a constant dollar basis (2012=100), the total value of building permits declined 6.6% to $83.0 billion.

The remainder of the article will be presented in constant dollars to eliminate the impact of changes in purchasing power of the dollar over time.

After three consecutive yearly increases, construction intentions in the residential sector declined 12.3% to $50.9 billion. Decreases in the value of single-family permits (-15.5%) outpaced the decline in multi-family permits (-9.6%) in 2022.

The amount and mix of residential permits for single and multi-family homes can be attributed to a multitude of supply and demand factors, such as shifting household characteristics and preferences, changing construction regulations, and the price of single and multi-family homes. Over time, residential construction intentions have shifted away from single-family buildings, which composed of 58.8% of the value of residential building permits 10 years earlier compared with 43.6% in 2022. This translated to 84,000 units ($28.4 billion) being issued for single-family homes in 2012 compared with 72,000 new single-family units in 2022 ($22.2 billion), despite a population increase of over four million people over the same period.

The non-residential sector was up 4.1% to $32.0 billion in 2022. Despite a second consecutive yearly increase, the sector remains below pre-COVID-19 pandemic levels ($34.6 billion in 2019). Much of the increase was due to the industrial component, which sharply increased by 20.1%. This was led by 10 industrial permits valued over $100 million throughout the year, including a $425 million permit in November for a manufacturing facility in Toronto.

Despite the largest building permit of the year being worth almost $1.5 billion for a new hospital in Vancouver, the institutional component advanced 3.0%. The commercial component posted a marginal decline of 0.7% on an annual basis.

Source: Statistics Canada

High Interest Rates Bringing Balance After Years of Housing Overspending

Higher interest rates hurt, but they might be bringing some balance to Canada’s economy after years of overspending on housing. Statistics Canada on Jan. 31 said gross domestic product increased 0.1% in November from October, evidence the economy was approaching stall speed at year-end, just as the Bank of Canada predicted it would be.

It was the weakest month-to-month increase since January 2022, and there’s little reason to anticipate a re-acceleration in December. Statistics Canada said preliminary data suggest GDP was unchanged last month, which implies the economy grew at an annual rate of 1.6% in the fourth quarter, according to Bank of Montreal chief economist Douglas Porter.

That would be a slightly faster pace than the 1.3% rate the Bank of Canada predicted in its latest economic outlook, but still considerably slower than the 2.9% rate in the third quarter and the 3.2% rate in the first quarter. The Bank of Canada’s interest rate increases — four percentage points between March and December with an additional quarter-point lift in January — are starting to bite.

Canada is coming off a long high of housing-led growth. Population growth and limited supply were responsible for some of the demand that drove housing prices to rare heights over the past decade, but much of it was caused by ultra-low interest rates and a decision by households to pile up dangerous levels of debt. Now, interest rates are higher than some new homebuyers have ever seen, and the housing bubble is deflating.

One of the main causes of the decline in GDP in November was residential building construction, which dropped 1.8%, the seventh decline in eight months and the biggest since unionized construction workers went on strike in May 2022.

Canada could have used two periods of ultra-low interest rates and extraordinary levels of fiscal stimulus to turn itself into a modern economy. And perhaps it took some steps in that direction, as some of that money will have sloshed into productive enterprises and provided backing for some talented entrepreneurs. But we mostly bought existing homes and condos, enriching the real estate industry, perhaps the economy’s least productive sector.

A notable moment in Canadian economic history occurred in December 2008. As the Great Recession gathered force, and central banks pushed borrowing costs to zero, the “real estate and rental and leasing” industry generated output equivalent to 11.7% of GDP, surpassing the contribution from manufacturing for the first time, according to Statistics Canada data.

The country’s brokers, agents and landlords didn’t look back. Their share of GDP climbed to 14.8% in April 2020, when many other industries were forced to shut down, and central banks had once again dropped interest rates to essentially zero to stave off deflation in the early days of the COVID-19 crisis. (Manufacturing’s share was 8.5%.)

Canada’s central bankers dislike taking responsibility for what happens at the micro level in the economy, saying their only job is to keep inflation at around 2%. That’s true, but the problem with that is that there is now sufficient real-world evidence to suggest the distortions created by zero interest rates should be considered against the desire to achieve a certain inflation target.

In some ways, 2022 wiped out more than a decade of such distortions. The benchmark interest rate is now back to where it was in 2008, before the Great Recession. And, perhaps as a result, economic gravity is reasserting itself.

Manufacturing will probably never be the economic engine it was a generation ago, but at 9.4% of GDP, it’s still below its pre-pandemic level of around 10%. There’s room to grow, although higher borrowing costs and an economic downturn will make that harder in the short term.

A more positive sign is that a couple of industries that will be key to future growth — and probably geared to structural changes in the economy rather than short-term interest rates — continue to claim a bigger share of the economy.

Companies that provide services related to information technology now generate about 5.6% of Canada’s GDP, which is more than oil and gas and the most since Statistics Canada started measuring the industry’s output in 2007, when the percentage was about 4.3%.

Combined, IT services and professional and technical services now account for about 12% of the economy. That’s getting close to real estate, which has dropped to 12.9%, the lowest since February 2020, and nearing the 11.4% recorded in early 2008. We’ve almost worked off the excesses of one crisis. There’s still some rebalancing to do.

Source: Financial Post

Canada’s Home Prices Are Only Halfway to the Bottom, Warn These Economists

Spring isn’t that far away, according to the groundhogs, and with signs the Bank of Canada may be winding up its interest rate hikes, the horizon has been looking a bit more hopeful for our battered housing market. But economists at Oxford Economics think we are only halfway through this correction, and prices — already down 14% since the peak in February 2022 — will fall another 16% by the middle of 2023. It predicts that when home prices do hit bottom they will be down 30%.

Declines will vary across the country, of course, with the cities that saw the steepest gains suffering the biggest declines. Prices in Hamilton, Ont., for example, are seen dropping 34% and Kitchener-Cambridge-Waterloo, 33.6%. Western cities should fare better, with Calgary prices expected to fall 11.8% and Regina, 10.7%.

As dire as that sounds it will still leave prices slightly above their pre-pandemic levels in February 2020, said Oxford. “The seasonal pick-up in resale activity this spring will be a key litmus test in a recessionary environment. If distressed homeowners boost listings faster than sales, months of inventory will shift further to a buyers’ market and prices will fall even lower,” said economists Tony Stillo, Michael Davenport and Cassidy Rheaume.

Which brings us to Oxford’s other scenarios. If global supply chains mend faster than expected, easing inflation and boosting investor confidence, home prices may only fall 27% peak to trough, said Oxford.

In their moderate downside scenario, the housing correction jolts household wealth and consumer confidence, creating a negative feedback loop that drives prices lower. In this case home prices could fall 34%.

Then there is the worst case, in which a sharper correction shocks the financial system and credit supply. The economy takes a severe knock, and housing prices collapse 48% back to 2014 levels.

Whatever the scenario, “housing is leading the economy into recession,” said the economists.

Residential investment has shrunk by 13% since the Bank began raising rates, and Oxford predicts it will fall 19% by the third quarter of 2023.

“This would be slightly larger than the average decline during recessions since 1970,” they said.

Oxford’s base case calls for Canada’s GDP to contract -1.3%% in 2023 if home prices fall 30%. But in the worst case, if housing prices are almost cut in half, Oxford predicts GDP will shrink 9.9% peak to trough.

Source: Financial Post

Gloomy Economic Outlook, Elevated Mortgages Drag Down 2023 B.C. Housing Market

The British Columbia Real Estate Association says the chill across the province’s property sector will drag on through this year, but it calls for a strong rebound in 2024. The association makes the prediction in its housing forecast for the first quarter of the year.

Association chief economist Brendon Ogmundson blames expected sluggish sales this year on a slowing economy and ongoing, elevated mortgage rates. But he is looking forward to 2024 when the association says a healthier economy, lower mortgage rates and “record high” immigration should fuel home sales again.

The forecast predicts residential sales in B-C will skid 7.1% this year before surging nearly 24% in 2024. It says even though home listings remain scant, prices have fallen because of what the association calls the “abrupt shift” in market conditions, and it says rates should stay “relatively flat” for most of this year.

Source: The Star