House starts signal reviving economy

Canada's home builders gave this country's recovery an unexpected boost in August, laying foundations for new homes at a surprisingly vigorous annual pace of 150,000 units. That was up a hefty 12% from July.

Of all the good economic surprises we've seen recently, this is one of the more important, since housing construction is an activity that's exceptionally powerful fuel for economic growth.

Not only does a new home require more local labour and more Canadian-made materials than a new car or television set, but its owners are likely to spend still more on furnishings and landscaping in the months after their purchase, stretching out the impact on economic growth.

Quebec was one of the more notable bright spots in a generally positive national picture. Although most regions showed gains, Quebec was the only one where August housing starts were actually above their year-ago level.

That's partly because of a substantial revival in Quebec, but mostly because its housing starts never slumped as severely as in neighbouring Ontario, whoseautoindustry virtually collapsed early this year, or in British Columbia, where a housing bubble deflated during last winter's financial panic.

Ontario was the only region to see no upturn in August, with construction remaining mired at about half the level of a year ago.

But this weakness won't last much longer, predicts economist Marco Lettieri at National Bank. Now that the auto industry is showing signs of revival and modest job growth is returning to the province, "I think the biggest turnaround will be in Ontario" in coming months."

With most analysts forecasting that home building across Canada will maintain approximately the August level of activity in the coming months, and some anticipating a further upturn, it seems likely that this industry, which had been subtracting from growth, will strengthen it in the third quarter.

It will be a while, though, before home builders are cranking out more than 200,000 homes a year, as they did during the boom years that ended in 2008. Construction next year will remain pretty close to current levels, predicts economist Robert Kavcic at BMO Capital Markets.

And there is one potential cloud over the outlook for a healthier pace of home construction. Derek Holt, chief economist at Scotia Capital Markets, worries that builders are sitting on a rising number of unsold new homes, suggesting to him that they could be inclined to limit their construction in coming months.

That's not a factor that worries other analysts very much, though. Their outlook is guided more by resales of existing homes, a market that accounts for about twice as many transactions as the market for new homes and that heavily influences new-home construction with a lag of a few months.

Resales have shot up at a stunning rate after cratering at the beginning of this year, with July registering a whopping 18% more transactions than a year earlier.

The surge of purchases, driven by low mortgage interest rates and improving consumer confidence, has diminished the supply of existing homes available to buyers in every province, said Gregory Klump, chief economist with the Canadian Real Estate Association.

As a result, the large resale market has shifted from having an excess of homes for sale to being in the early stage of developing a shortage. In large markets such as Toronto and Vancouver, there are once again reports of multiple offers on some homes, Mr. Klump said.

Since many buyers are willing to look at either new or resale homes, it's not clear how the new-home market could suffer from a long-lasting oversupply under these conditions.

(prepared by Jay Byran/National Post)