Canada has had quite a run in its property market. But, the most recent data are a bit soft. David Rosenberg writes:
After a string of above-expected economic data releases, Canadian housing starts missed the mark. Starts sunk 6.3% MoM, to 189.1k May, well below economists’ (optimistic) estimates for a small increase to 202k from 201.8 in April.
The details of the report were terrible with single-family starts plunging 14%, following the 11% drop in April (this adds to the recent downdraft as single-family starts have fallen in 3 of the past 4 months and are now at their lowest level since September 2009). The more volatile multi-unit starts (ie: condos) were down 6%, the second decline in three months, although levels remain relatively high — watch out below if we start seeing multis roll over. After this report, the BoC’s 3.8% GDP forecast for Q2 may be a tad bit rosy, in our view.
On top of this, we also saw some early resale housing data for May from a few large cities and the news was grim as well (we’ll get more a more comprehensive national picture in a couple weeks). Vancouver (arguable one of the most overvalued cities in Canada) saw sales plummet 10% YoY, Calgary sales plunged 17% and Toronto sales were down 1%.
Perhaps the most troubling common thread in these two reports is the supply situation. Even with the drop in housing starts in May, we estimate that builders continued to add supply, as starts were still running above household formation rates (and have been for about eight months now). In the resale housing market, new listings (a proxy for supply) were up by 36% YoY on average in May. Yes, home prices were up by over 10% on average in May but given the deteriorating supply backdrop, we expect that home prices will deflate in the second half of the year (and beyond).
Does this mean an American style housing bust is coming to Canada? No, but it does mean that housing will be a drag on growth.