Housing starts ring alarm bells for investors

Investors have benefitted from population growth and a strong demand for homes from both domestic and foreign buyers, but with growth at its lowest pace ever, some are wondering if the well is running dry.

According to a Globe and Mail column by Ben Rabidoux, president of North Cove Advisors, Canada’s working-age population is growing at a meagre 0.4 per cent, which is the slowest pace on record and just one-third of the long-term average.

Compared to 2010, when Canada added more than 200,000 people to the working-age group, that number has been cut by more than 50 per cent over the last five years.

Despite this, national housing starts have not slowed down one bit, creating concerns and drawing comparisons to 1989-1993 when Ontario house prices fell 25 per cent due to supply overwhelming demand.

“Elevated price risk poses concerns, especially with a significant amount of inventory poised to hit the market,” said a new Fitch Ratings report. “As a large number of units come on line, prices may soften, which could reverberate throughout the Canadian economy.

“With price levels relatively flat over the last six months, the significant boost to supply implied by this construction overhang could present a problem for continued price growth, with the market potentially becoming oversaturated.”

This follows Rabidoux’s column, which says that this year alone, residential investment in Canada hit 7.1 per cent of GDP, the highest level since 1989, when population growth was three times what it is now.

“Fast forward to today,” Rabidoux wrote in the article. “Housing starts in June hit their highest level in 10 months at just under 203,000 on a seasonally adjusted basis. That level of construction means we’re currently building over two new houses for every person we’re adding to the working-age population.”

At a time when the economy has slowed, housing growth is still a pivotal part of it, creating worry among investors and other key real estate stakeholders.

In March, Hillard Macbeth, the financial analyst who predicted the market was overvalued by 40 per cent, looked to the Toronto’s condo sector as an example of oversupply.

“The surplus of condos in Toronto that is developing is dangerous too, as an oversupply of units could mean that condos, which are difficult to sell except when brand new, will be dumped on to the market by ‘investors’ who have borrowed most of the money, or by lenders who have foreclosed on the properties,” he told CREW.
 

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