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February 2008

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Building Contractors' Profits Decline - February 28, 2008

After a 22 per cent drop in profits last year, Canada's residential construction industry can expect profitability to decline further in 2008, according to the Conference Board's Canadian Industrial Outlook: Canada's Residential Construction Industry - Winter 2008.

"With a growing inventory of new homes, declining housing starts and weaker price growth, builders' profits are expected to shrink over the next two years," said Valérie Poulin, Economist.

Profits are expected to fall slightly from 2007 levels to $3.3 billion in 2008. Profitability is expected to decrease by another four per cent in 2009, before improving gradually beginning in 2010. However, profit margins will remain higher than historical norms, staying above their 17-year average over the next four years.

Pent-up housing demand appears to be satisfied, which, along with slower economic growth, is leading to a lengthy slowdown in the housing market. Waning affordability of houses, following years of price increases, is also detracting from the industry's performance. When declining affordability is coupled with economic uncertainty, many potential purchasers are expected to postpone their decision to buy homes.

Builders who may have become used to a demand for their services during the boom years should start developing a marketing program for their businesses as competition for providing various building services increase.

Construction May Ward Off Effects of U.S. Recession - February 21, 2008

Strong resource-based activity in Western Canada will continue to underpin solid consumer and investment spending in 2008, according to Scotia Economics' latest Provincial Trends report.

"Alberta's output growth should top the provincial performance ladder at 3.2 per cent in 2008, driven by broad-based business and consumer strength," says David Hamilton, Economist, Scotiabank. "Private and public construction activity will remain robust, and oil production will continue to increase as new oil sands projects start up over the next few years. Strong employment growth and income support will continue to bolster household spending in the province."

British Columbia will remain one of Canada's economic growth leaders, with real GDP set to expand by 2.8 per cent this year, underpinned by strong construction activity, and robust mining and service sectors. While the forestry sector will continue to consolidate, the run-up to the 2010 Winter Olympics and development of the Pacific Gateway bode well for employment prospects in the province.

In Saskatchewan, surging mining activity and strong domestic demand will help the province grow three per cent in 2008. A rising inflow of migration, sizeable employment growth and fiscal stimulus have led to a surge in household income and spending. The agriculture sector will benefit from record grain prices, although hog producers are under pressure.

"Manitoba should witness solid output growth of 2.5 per cent this year, largely due to robust construction activity and high demand for metals and minerals," says Mr. Hamilton. "Construction on the Wuskwatim dam will pick up this year and the manufacturing sector will benefit from strong demand for transportation products, particularly aerospace parts and buses."

According to the report, a combination of factors, heightened foreign competition, a soaring loonie, and more recently, a weakening U.S. economy, are restraining Canada's overall economic performance, with the manufacturing sector bearing the brunt of the slowdown. National output growth is expected to decelerate from an average of 2.6 per cent in 2007 to 1.9 per cent in 2008.

At the same time, however, non-residential construction and ongoing strength in service industries are providing enough forward momentum across the provinces to offset these headwinds. Construction activity, in particular, is receiving solid support from both private and public sectors, mainly for spending on infrastructure.

Federal, provincial and municipal governments have announced significant multi-year infrastructure investments. Faced not only with the need to upgrade roads, bridges and water treatment systems, Canada is also challenged by a growing economy and population base. At the provincial level, British Columbia, Ontario and Quebec propose ambitious longer-term transit development. Alberta faces a critical need to upgrade the infrastructure surrounding the oil sands. Quebec is spending a substantial amount on super-hospital projects, as well as investing in power generation and transmission facilities. On the East coast, the Atlantic Gateway initiative aims to increase port activity alongside an improved transportation network.

"Although most provinces are expected to witness some softening in growth in 2008, there will continue to be significant regional disparities between the Western, Central and Atlantic provinces," says Mr. Hamilton. Regionally, the West will continue to lead with average growth of three per cent, underpinned by the booming energy and mining sectors. Central Canada, mired by weakness in its export-oriented manufacturing sectors, will trail the national average with 1.4 per cent growth in 2008. Similar to the West, average growth of 1.8 per cent in the Atlantic provinces will be supported by the continuing resource boom.

Housing Starts Rebound in January - February 8, 2008

The seasonally adjusted annual rate of housing starts was 222,700 units in January, up from 184,700 units in December, according to Canada Mortgage and Housing Corporation (CMHC).

“Historically low mortgage rates, solid employment and income growth as well as a high level of consumer confidence continue to underpin the high level of housing starts”, said Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre. “Housing starts in January returned to a level more consistent with our expectation that housing starts will total 211,700 units in 2008, remaining above the 200,000 mark for the seventh consecutive year.”

In January the seasonally adjusted annual rate of urban starts increased 25.2 per cent to 189,500 units compared to December. Urban multiples surged 64.1 per cent to 108,000 units in January, while singles fell 4.8 per cent to 81,500 units.

The seasonally adjusted annual rate of urban starts increased in four of Canada’s five regions in January. Urban starts registered an increase of 43.7 per cent in Ontario, 22.4 per cent in Quebec, 19.4 per cent in the Prairies and 17.5 per cent in British Columbia. The Atlantic region bucked the trend and registered a decline of 17.4 per cent in January. Urban multiple starts were up in all regions except in the Atlantic. Urban singles were down in all regions except Quebec and Ontario.

Rural starts were estimated at a seasonally adjusted annual rate of 33,200 units in January.

Actual starts in rural and urban areas combined, decreased by an estimated 11.1 per cent in January 2008 compared to January 2007. In urban areas, actual total starts decreased by an estimated 11.5 per cent. Actual urban single starts for January 2008 were down 15.7 per cent compared to January 2007, while multiple starts fell an estimated 8.9 per cent over the same time period.

Housing Starts Expected to Decline - February 4, 2008

Housing starts reached 228,343 units in 2007, an increase of 0.4 per cent from 227,395 in 2006, according to Canada Mortgage and Housing Corporation's (CMHC) first quarter Housing Market Outlook, Canada Edition report. In 2008, residential construction will decline to about 211,700 units, given higher mortgage carrying costs. Nevertheless, Canada's housing market remains strong and 2008 will mark the seventh consecutive year in which housing starts exceed 200,000 units.

“Despite some global financial instability with regards to the U.S. housing market, Canada continues to experience robust employment levels, ongoing income gains and low mortgage rates,” said Bob Dugan, Chief Economist for CMHC. “This has strongly supported Canada's housing markets. However, housing starts are expected to decrease in 2008 mainly due to recent increases in house prices, which will push mortgage carrying costs higher for home buyers.”

Existing home sales, as measured by the Multiple Listing Service (MLS®)1, are poised to experience a very strong year with about 520,000 units in 2007, a 7.6 per cent increase over 2006. In 2008 the level of MLS® sales is expected to fall by 3.9 per cent to 499,650 units, while 2009 will see an additional decrease to 488,300. Growth in the average MLS® price has remained high at 10.6 per cent in 2007, mainly because of continued strong price pressures in Canada's western provinces. However, as most resale markets move toward more balanced conditions, growth in average MLS® price is forecast to slow to 5.2 per cent in 2008 and 3.8 per cent in 2009.

At the provincial level, British Columbia's housing starts, which have been above historical averages, are expected to decline in 2008. It is anticipated that a continuing tight labour market, robust income growth and high levels of consumer confidence will help to offset the dampening effect of rising mortgage carrying costs on the demand for new and existing homes in British Columbia. Housing starts should decline from 39,195 units in 2007 to 33,250 in 2008 and 31,700 in 2009. The average MLS® price in British Columbia will grow by 12.1 per cent in 2007, 6.0 per cent in 2008 and 5.0 per cent in 2009. This moderation is due to increased listings and fewer resales bringing more balanced supply and demand conditions to existing homes.

 

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