It seems we're not as intimidated by 200,000 Canadian housing starts as we used to be.
Canada Mortgage and Housing Corp. reported Monday that May housing starts came in at a 198,300 annualized rate, the fastest pace in seven months and considerably above economists' expectations. Starts have now averaged 197,500 over the past two months, a dramatic turnaround from the 175,000 average for the first quarter of 2014.
In the not-so-distant past (like, say, last year), this sort of surge would have caused considerable hand-wringing about stubborn excesses in Canada's housing sector, and the dark cloud of risk looming over the Canadian economy as a result. Yet with Monday's numbers, the consensus among Bay Street economists was "move along, nothing to see here."
No doubt it helps that we're a year further removed from the dizzying days of mid-2012, when, over a six-month stretch, housing starts averaged a 226,000 pace; we're a lot more confident now that we're not emerging from some temporary lull to resume the dangerously unsustainable boom.
But there are also details in the May data that temper concern over the size of the headline number. Starts of condos, the more worrisome segment of the market in terms of overbuilding fears, actually slowed in May. Urban single-family home starts increased by a little over 3,000, but that was after a five-month lull in which singles starts had slumped to their lowest non-recession levels in nearly two decades; they were due to bounce back to more normal levels. Toronto's high-octane condo market, a key source of worry, slowed in the month; one of the country's hottest real estate markets, Calgary, saw a substantial decline.
The general feeling is that a rebound in starts was inevitable after the unusually harsh winter slowed construction. With residential building permits having moderated significantly in recent months, the slowdown in home building should resume shortly. And looking through the volatility in the starts numbers so far this year, the six-month average is 184,000 – about in line with the assumed pace of annual household formation in Canada, and therefore quite reasonable.
Still, it's hard not to wonder if there isn't a bit of wishful thinking going on here – a temptation to view the latest numbers through a lens of the current consensus narrative that housing is still in the midst of a "soft landing" as some would (and have) put it. Fair enough; after all, a couple of months of elevated housing starts shouldn't be sufficient to give up on the longer-term slowing trend.
Nevertheless, housing starts have demonstrated a choppiness for months now that should raise questions about whether the housing market is changing direction – and just what direction that will be.
Further muddying matters, it's deeply unclear how much the starts numbers have been distorted by the unusual weather in the early part of the year. The CMHC's numbers are seasonally adjusted, but those adjustments rely on historical seasonal variations in activity – they capture the impact of normal weather-related ups and downs, not extreme ones such as those that look to have occurred this year. It could take months before the weather effects smooth their way out of both the actual pace of building, and the statistics used to measure it.
Only then will a discernible trend emerge. For now, it's unclear just how much strength remains in home construction – and just how much caution we should have around numbers that, on the surface, have returned to elevated ground.
David Parkinson