Building permits plunge
I suggested a few days ago that the October and November housing start data were telling vastly different stories. November building permit data released today suggests that the spike in November housing starts, which were driven almost entirely by condo starts in Toronto (as if they need more), will likely not be repeated in future months.
We’ll get more insight tomorrow when CMHC releases their December building starts data, but for now let’s take a closer look at this rather ugly report which can be found here. As we do so, keep the following in mind: 1) Building permits are a key indicator of future construction activity….hence my negative outlook on housing starts over the next few months; Approximately 1.3 million Canadians work in the construction industry; 3) Building permits are considered a barometer of overall housing market strength.
Allow me to highlight some of the pertinent information in point form:
- Building permits plunged to their lowest level since September 2009
- Analysts had been expecting a 1.5% gain, but permits declined 11.2% instead….a minor 12.7% miss.
- It was the second straight monthly drop and the biggest monthly drop since February 2009, which you may recall was when we were in the throes of the Great Recession and an abysmal housing market that had already declined double digits.
- Condo permits dropped 22%
- Single family residence permits actually increased 3%
- Despite all the Hot Asian Money looking to scoop up all of the Vancouver and the lower mainland, BC saw a massive 43.4% drop in permits. I’m sure if builders working in the industry only had a better pulse on market demand, they’d understand that normal market fundamentals don’t apply in BC.
- The largest declines were in BC and Ontario.
The bottom line is that this is an abysmal reading. On the bright side, the total value of the permits was pulled lower by the notoriously volatile multiple units reading. A drop of this magnitude will likely not be repeated in the coming months, though I certainly don’t expect a strengthening trend either. It certainly bears asking just what has builders so spooked. Perhaps it’s the persistently weak sales and the recognition that there is a substantial shadow inventory waiting to come on market and compete with their product as soon as there is any sign of buyer capitulation.
Bank of Canada desperately hoping to talk sense into consumers
The Bank of Canada is increasingly resorting to the stern lecture as the new monetary tool of choice. They can’t raise interest rates for fear of crushing exports under the weight of a hefty loonie. They would also risk choking off M&E spending by businesses, one of the few bright spots in recent GDP readings. But they also know they’re handing consumers a loaded gun and a big bottle of Johnny Walker. It’s not gonna end well.
So they resort to giving verbal warnings. Carney’s “Living with low for long” speech cast the mold. Today, in her first speech as Deputy Governor, Agathe Cote took a page from her boss’ play book and issued yet another stern warning to consumers that is likely to fall on deaf ears.
Some key quotes:
“Sound household finances are vitally important for a balanced economy.”
“Canada’s recovery has been relatively modest in comparison with previous cycles, and has relied heavily on household and government spending.”
“In addition to low interest rates, rising house prices and home-equity extractions have played a role in the growth of credit in recent years and, therefore, have helped to boost household spending. Why is this? The main channel through which increases in house prices can raise household spending is called the financial-accelerator effect. When the value of a house rises, the owner can borrow against the increased equity through a home equity line of credit…Such expenditures can accelerate the increase in house prices….(giving) access to additional borrowing, thus leading to a rise in household spending. Of course, this accelerator effect can also work in reverse: a decrease in house prices tends to reduce household borrowing capacity, and amplify the decline in spending.”
Wow. That’s my whole blog in one paragraph. If that felt like reading a foreign language, check out The Great Connection, which basically explains this very phenomenon.
“Going forward, house price gains are unlikely to provide the same support to household wealth as they have in recent years. This, combined with the fact that the level of household debt has reached a record high, leads us to expect that the growth of household expenditures will slow to a pace closer to that of income.”
“On the downside, if there were a sudden weakening in the Canadian housing sector, it could have sizable spillover effects on other areas of the economy, such as consumption, given the high debt loads of some Canadian households.”
Finally, two subtle comments that may or may not have any predictive value:
“In the housing market, the federal government has already taken important measures to address household leverage….These measures are beginning to have an impact.”
Is this the Central Bank’s way of suggesting that no further mortgage tightening is necessary? Perhaps they see that the housing market is dangerously overheated and a sudden, drastic change in mortgage rules, however necessary, would cause an economic cascade that would ultimately undermine the credibility of the Canadian financial system? Or am I reading too much into this?
“The Bank is examining whether there may be cases in the future where monetary policy should play a supporting role …by taking pre-emptive actions against building financial imbalances (i.e. too much consumer debt)”
I’d be very curious to know just what pre-emptive measures they envision to keep consumers from blowing their brains out on credit. They’re obviously understanding that their harsh tone is being lost on consumers. They need a time out. Or a spanking.