Economic Update April 2009 by Andersen Economic Research
Economic Update April 2009
Posted: Mar 31, 2009
Source: Andersen Economic Research Inc.
Home Sales
After being frozen by the shock waves from the financial crisis, there are signs of life reappearing in home sales. Housing starts are down a lot so far this year but home sales are now the key indicator, not starts. A stabilization in home sales points to a bottom in housing starts. At this point it is good enough just to see an improvement in the existing home market. This is giving the signal that buyer attitudes are thawing and this has to be good news for new housing.
There is therefore a sliver of positive news amongst the economic indicator gloom. Home sales are climbing from depressed December and January levels. At the national level, seasonally adjusted existing home sales in February showed their first month to month increase since last September. There is a good chance that March sales will show a second consecutive seasonally adjusted increase.
First-Time Buyers
First-time buyers appear to be responding to improved affordability. The “special offer” mortgage rate is down to 3.85% for 1-yr mortgages and 4.25% for 5-yr mortgages. The March gains in the stock market are also giving a more positive message to buyers who have been sitting on the sidelines. Since reaching a cycle low on March 9th, the S&P/TSX Index has climbed a lot - by almost 1,500 points.
The Fear Factor
It is the fear factor that differentiates this recession from any other one experienced by any of us still in the workforce today. Previous recessions through the post-WW2 era all involved problems, but none of them were as serious and as widespread as the ones that we have been facing over the past 12 months. The solvency of the world’s banking system has been seriously threatened. It has taken us until March of this year to see light at the end of the tunnel.
The financial crisis steadily worsened following the collapse of Bear Stearns in March 2008. By the summer of 2008, some of the largest financial names were on the brink of failure. We narrowly missed a catastrophic financial melt-down after Lehman Brothers declared bankruptcy on September 15th last year.
Facing a possible financial abyss, stock markets plunged, eroding personal wealth and consumer confidence. The S&P/TSX composite index peaked at 15,096.4 at the close on June 17th, 2008. It declined by 50% to a cycle low of 7,566.9 at the close on March 9th. It is no wonder that homebuyers stayed on the sidelines up until now. Fortunately, there is finally some good news beginning to appear.
Canada’s Economy
Canada’s economy is contracting and will continue to do so through the rest of 2009. A large 1st quarter real GDP decline at an annual rate of 6% to 8% is expected. This would match or exceed the largest quarterly decline in 1990-91. There could be five or even six quarterly real GDP declines before economic conditions stabilize around this time a year from now. This means continuing job losses and rising unemployment.
However, the end is in sight. There is an 80% chance that Canada’s economy will be growing again by the spring of 2010. The housing sector has the potential to begin to recover before the economy at large. The preconditions for an improvement in housing market conditions are now forming.
The U.S. housing market is bottoming. This will send positive signals to Canadian homebuyers who are quick to adopt U.S. market psychology. Mortgage interest rates are down to historic lows in Canada. One-year closed mortgages are being offered at 3.85% and 5-yr mortgages at 4.25%. Also, Canada’s banks are well capitalized and are able to extend mortgage credit.
Housing Start Forecasts
Even with some positive signs beginning to appear, a sharp decline in housing starts in Canada in 2009 seems inevitable. We are now forecasting 150,000 starts in 2009, down from an estimated 211,056 in 2008. Some forecasts are even lower than ours. However, this has to be put in perspective. The seven year period from 2002 to 2008 was a golden age for Canadian housing. Starts averaged over 221,000 units per year through this period.
This is well above the underlying demographic requirement based on household formation, which runs in the 160,000 to 180,000 range per year, depending on economic conditions. In fact, the annual total of 150,000 starts forecast for 2009 is not far from the average performance in the late 1990’s. Another point of comparison would be with the United States. There we have seen a decline from over 2.0 million housing starts in the peak year 2005 to a projected 600,000 starts in 2009. This would be equivalent to housing starts in Canada declining to well below 100,000 units.
Renovation
Residential renovation spending is not recession-proof and is also contracting. Sales at home centres declined sharply late last year and early this year. However, the decline in renovation spending will moderate. The high levels of housing starts and existing home sales over the past seven years have created a major backlog of renovation work.
All that it needs to get started is an easing in the fear factor and a rebound in the stock market. With the banks’ prime lending rate running at 2.50%, renovation loans are affordable. In addition, people know that renovation is all the more important if they are planning to sell a home in today’s competitive market.
The federal Government’s home renovation tax credit is intended to provide about $3 billion in fiscal stimulus. The work will have to be performed between January 27, 2009 and February 1, 2010. The 15% tax credit may be claimed on the portion of eligible expenditures exceeding $1,000 but not more than $10,000. Therefore the maximum tax credit that can be received is $1,350. Renovation of a kitchen, bathroom or basement will be typical eligible expenditures along with carpets, hardwood floors and new furnaces and water heaters.
Social Housing
Home builders will also find some opportunities in social housing construction. The federal Government’s January 27th budget provides $1 billion per year for such construction. Approximately half is allocated to the renovation and retrofit of existing units.
Non-Residential Construction
Non-residential construction is holding up well compared to residential construction. ICI construction will provide opportunities for manufacturers of building materials. In addition, some home builders will be able to find work in the non-residential sector. The federal Government’s January budget provides almost $12 billion for infrastructure spending and some of this will be on construction. Ontario is also making a major commitment to infrastructure spending.