Friday’s deeply disappointing Canadian housing starts numbers, on the back of Thursday’s drastically declining building permits numbers, paint a picture of a housing market in rapid retreat. But what’s more, they represent a massive obstacle to a recovery in Canada’s tepid economic growth.
The housing starts, at an annualized pace of 160,600 in January, were down 19 per cent from December, and are now off a steep 30 per cent from their peak just five months ago. And it may well get worse before it gets better: Residential building permits, indicative of future home-building intentions, fell 11 per cent in December from November, and are down 20 per cent in the past two months.
Residential investment – which includes home construction, renovations and home resales – accounts for roughly 7 per cent of Canada’s gross domestic product, but until the third quarter, this booming sector had been an oversized contributor to GDP growth. (In the 2012 first quarter, for instance, when GDP growth came in at an annualized pace of 1.7 per cent, the residential investment component was responsible for one full percentage point of that, or nearly 60 per cent of all the country’s growth in the quarter.)
But now housing has become a major drag on growth, and it looks likely to get even worse in the first quarter. Just how bad? Let’s do a bit of back-of-the-envelope arithmetic.
In the third quarter, housing starts averaged 222,000 annualized. In the fourth quarter, they averaged 202,000 – a 9-per-cent drop. The first month of the current quarter was another 20 per cent lower than that. Let’s just say, for argument’s sake, that housing starts for the rest of the current quarter rebound to the same average pace as the last two months of 2012, 199,000. (That seems unlikely, given the plunge in residential building permits issued in November and December, but let’s give the market a big benefit of the doubt.) That would mean a first-quarter average pace of 186,000 starts. That’s another 8 per cent below the fourth-quarter pace – and that’s the optimistic view.
Now, if we also assume that housing starts are a fair proxy for overall residential investment (indeed, they are the biggest segment of the residential component), then those quarterly drops imply that residential investment’s contribution to Canada’s gross domestic product dropped more than half a percentage point in the 2012 fourth quarter, and is on track to do about the same in the 2013 first quarter. And that’s the optimistic view.
And we’re talking here about how much housing may be subtracting from overall GDP – as opposed to GDP growth, that increasingly tiny figure that everyone watches to see what momentum, if any, the Canadian economy is mustering.
David Madani, head Canadian economist for Capital Economics, figures Canada’s fourth-quarter GDP growth was about 1.0 per cent annualized – and residential investment was responsible for reducing that figure by roughly 0.2 percentage points.
He said that if you extrapolate the January housing starts number over the rest of the quarter – which he believes is reasonable, given the weakness in building permits and home sales and the fact that the January starts weren’t held back by any particularly disruptive weather – then residential investment “could easily whack off a half a percentage point, if not more,” from first-quarter GDP growth, which he believes is on track for about another 1-per-cent pace.
That’s a pretty deep cut in economic growth numbers that, frankly, can ill afford it.