Value of building permits plunges in November; Bank of Canada talks tough

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.


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6 Responses to Value of building permits plunges in November; Bank of Canada talks tough

  1. jesse says:

    I read the speech differently. A few key quotes:

    “There are welcome signs of moderation in the pace of debt accumulation, but credit continues to grow faster than income. Without a significant change in behaviour, the proportion of households that would be susceptible to serious financial stress from negative income or wealth shocks will continue to grow.”

    In other words, things are still not good. If debt continues to increase there is need for government to force the reining in of debts.

    “It is the responsibility of households to ensure that, in the future, they are able to service the debts they take on today. Similarly, financial institutions are responsible for ensuring that their clients do not take on unmanageable debt loads. ”

    Blah blah blah market is self-correcting blah blah blah. This is the old platitude that markets are self-correcting. Banks have responded they are bound to compete based on the market rules, which means lending to anything that fogs a mirror. Whether explicit or implicit, lending criteria are likely going to tighten in the first half 2011.

    The problem with Canada is most of the housing sales activity takes place in the spring and early summer months. In terms of total effect, raising rates in the summer will be too little too late: the next foray of profligacy will have already been blown. I really think these guys need to preemptively take measures now or be prepared to have debt continue to increase from “preposterous” to “ludicrous”. This means restricting lending, through one of the many vehicles available to do so.

  2. Diddy says:

    I just don’t see them doing anything substantial to reign in credit just quite yet, we’re too far gone at this point, cutting off any of the taps will bring the country to its knees.

    2011 I feel will be the year where one of China / US / Europe reaches a new brink in terms of economic problems, Carney potentially can dig Canada out a bit if it’s Europe that gets hit hardest, money will flood towards the greenback and pressure will ease a bit, allowing him to raise rates and restrict credit as the Canadian dollar weakens during the flight to US safety.

    He can’t do that at this point in time, raising rates now will push the Canadian dollar too high, too many Ontario jobs in play. He needs an external catalyst to move, which unfortunately means we’re all caught in the middle of US / China / Europe’s game of economic chicken. Although all 3 are screwed, none want to be the first to reveal it. Certainly Carney isn’t going to do them any favors by acting unilaterally, he’ll let the big boys play and hope one of them sinks first.

  3. rp1 says:

    There is no way the government or central bank will do anything to reign in lending now. It’s political suicide. They had numerous chances earlier and did the absolute minimum possible. They cast their die, and now the bomb is armed.

    Carney is warning people but he is also lying. He said 1) the bank will set interest rates with respect to the inflation target and not spare Canadian households mired in debt, and 2) that the bank may raise interest rates to curb household borrowing if it deems the borrowing excessive. This is not a principled approach. Either the bank cares about household debt or it doesn’t.

    We’ve already had two years of excessive borrowing to bring us to this point, so 2) already looks like a lie. That makes Carney’s warnings a substitute for action. I think interest rates will go up when the market demands it, just like in Australia. Carney knows it will happen of course, but he isn’t going to do it. There is nothing to be gained by pricking the bubble which started and ended the recession.

    Likewise for the CMHC, but that’s even more political. The Conservatives do not want to draw attention to the CMHC because they are the ones who introduced zero-down mortgages and 35-40 year amortizations. As soon as it is no longer “different” in Canada people will connect these lending terms to subprime. Same old game plan – the Conservatives aren’t going to do anything to awaken a thought inside the minds of the electorate or the opposition.

  4. John in Ottawa says:

    I’m a great fan of Steve Keen, a post-Keynesian economist out of Australia. In a recent post (Deleveraging, Deceleration and the Double Dip) Steve explains the dilemma Carney finds himself in.

    Steve takes a very rigorous, mathematical approach to economics and it helps to have a basic understanding of calculus when reading his posts, but he explains his work so well that it is not absolutely necessary.

    In “Deleveraging, Deceleration and the Double Dip” he points out that simply slowing down the rate at which Canadians are going into debt, given how far we have gone into debt, can have serious negative consequences for the Canadian economy. By extension, having gone so far into debt, there is no way to reduce our level of debt without driving ourselves into recession and higher unemployment.

    So we are in a Catch-22. We have gone far into debt, but we must go further into debt or suffer a painful consequence.

  5. LRM says:

    In the Cote speech there was mention of the development and use of selected macroprudential tools. As I don’t have a strong economics background, could you direct me to a source for further information on these tools that need development. Are they some new tightning policy that does not involve interest rates?
    The speech was interesting in reiterating Carney’s points and makes one wonder what they may be seeing in their vast data series . CNBC and BNN seem to be promoting a much stronger outlook.

  6. buffates says:

    “stern lecture as the new monetary policy”

    Ben, that’s the funniest thing I’ve read in a long time. Thank you.

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