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Canada’s Residential
Construction Industry
Short-Term Risk Index
KEY ISSUES
(percentage change)
Forecast Trend Policy Changes—A further tightening of mortgage lending standards
0.4 will restrain growth in residential construction spending this year.
Production 0.3
0.2 Interest Rates—Although the Bank of Canada has temporarily moved to
Weak 0.1
0 the sidelines, further rate increases are expected, starting in the second
Prices 6 mos. 3 mos. Current half of this year. Higher mortgage rates and reduced affordability will be
Weak the result.
Cyclicality Job Creation—Canada will continue to create jobs this year, but at a slower
Profits 0.52
P pace. The resulting weaker income growth will prevent a significant rebound
Weak
in residential construction spending.
−1 0 1
KEY INDICATORS
F
ollowing a hot start to the year, residential In terms of existing home sales, the However, despite those headwinds,
construction activity in Canada closed out market is also expected to remain the pace of construction activity is
2010 on a cooler note. Housing starts have somewhat cool. The sales-to-new- expected to improve in 2012 as the
been averaging nearly 170,000 units on an annualized listings ratio is in balanced territory, effects of lending policy changes
basis in recent months; and despite expectations for suggesting that price appreciation fade. Demographic demand will
modest job and income growth in 2011, spending on will remain limited this year. Given support housing starts in excess of
residential construction is expected to experience lit- the limited price outlook, a modest 185,000 units a year over the rest of
tle change over the course of this year. As a result, and pace of existing home sales, and the the forecast period. As well, a steadily
because they will compare unfavourably to the strong announced policy changes that will expanding and aging housing stock
numbers put up in early 2010, industry revenues on tighten up lending standards for will allow the share of residential
a year-over-year basis will be down this year. home lines of credit, it is expected construction expenditures devoted
that demand for home renovations— to renovations and repairs to grow.
A variety of factors will limit the pace of construction and the ability of consumers to
activity this year. These include a further tightening finance them—will remain weak
of mortgage lending rules by the federal government over the course of this year.
that will take effect in March and April, elevated
levels of consumer debt, and the expectation that Beyond 2011, the industry will con-
mortgage rates will begin to rise again in the second tinue to face the headwinds associated
half of the year. These factors will detract from with rising interest rates and the sub-
growth in spending on new housing. sequent reduction in affordability.
MACROECONOMIC DRIVERS
High debt loads, a slower pace of job and income growth, and rising
1
mortgage rates later this year are all factors that will limit spending on
Consumers Carrying Heavy Debt Loads
(ratio, consumer debt to net worth, per cent) residential construction in the near term. A continued strong pace of
to tighten mortgage lending rules is the concern that Canadian consumers are
Source: Statistics Canada. over leveraged. There is no doubt that debt levels relative to disposable income
have steadily increased over time. By the end of 2010, this ratio had reached
a record high 137 per cent. However, it is important to keep in mind that a
variety of factors have contributed to this increase, including low interest
rates (which reduce the burden of repaying debt) and the fact that the share
of the population that has access to credit has increased over time.
It is also important to note that average net worth per person has also been
generally rising over time, and comparing debt loads to net worth tells a less
stark story. The level of consumer debt relative to consumer net worth has
been much more stable over time. The ratio did rise at the end of 2008 (see
Chart 1) when the stock market fell in the wake of the global financial crisis.
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But what is more troubling is that the ratio has not fallen since then despite
2 the rise in asset values. This implies that consumers have been borrowing at
Mortgage Rates Will Begin to Rise Later This Year a brisk pace over the past two years. For the residential construction industry,
(five-year rate, per cent) this will likely mean a reduced pace of spending growth in the near term as
9 consumers take a breather and pay down some of their debt.
8
7 Interest Rates
6 After raising rates by 75 basis points over a four-month period last year, the
5 Bank of Canada has now paused in its monetary tightening. The decision to
4 hold off on further rate hikes was triggered by rising global uncertainty and
a foundering U.S. recovery that has dampened prospects for the Canadian
01
02
03
04
05
06
07
08
09
00
f
12f
f
f
f
10
11
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14
15
20
15f
12f
13f
00
14f
f
11
Consumers
20
f = forecast
Employment growth slowed in the second half of 2010; and although job
Sources: Statistics Canada; The Conference Board of Canada.
creation is expected to continue through 2011, the pace of growth in both
employment and real disposable income is expected to be much weaker this
year than in 2010. (See Chart 3.) Slower job and income growth has resulted
in The Conference Board of Canada’s Index of Consumer Confidence weak-
ening since last spring. Of particular importance to the residential construc-
tion industry are the responses to the index survey’s question regarding major
purchases. Nearly half of respondents continue to say that it is not a good
time to make a major purchase.
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INDUSTRY TRENDS
Fears of a U.S.-style housing crisis here in Canada are driving these changes,
as policy-makers hope to avert a crisis before it occurs. Given the high consumer
debt levels and the expectations that mortgage rates will rise in the coming
years, there is some cause for concern. However, these concerns might be
overblown. For example, the Canadian Association of Accredited Mortgage
Professionals reports that about 80 per cent of mortgages issued in this country
are fixed-rate mortgages—and are therefore much less sensitive to interest
rate movements.1 As well, despite the recent recession, mortgages that are
more than 90 days past due account for only 0.44 per cent of all current
mortgages.2 This compares with 4.3 per cent in the U.S. (See Chart 4.)
Whether the changes are necessary or not, there is little doubt that they
will detract from residential construction spending this year.
1 Will Dunning, Revisiting the Canadian Mortgage Market—The Risk Is Minimal (Toronto: Canadian
Association of Accredited Mortgage Professionals, 2011). www.caamp.org/meloncms/media/
Revisiting%20Cdn%20Mortgage%20Mkt%20Booklet.pdf.
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homes over the medium to long term. This is because housing starts are
5 ultimately capped by demographic demand, but the size of Canada’s housing
Canada’s Aging Housing Stock Will Require stock—and thus the potential renovations market—continues to expand each
More Renovation Sopending year. The end result is that renovations and repairs will account for a growing
(per cent) share of total residential construction expenditures over the forecast period.
Share of housing stock
Share of homes in need of repair A key factor driving expenditures in the coming years will be the aging stock
60 of Canadian homes, which will require considerable ongoing expenditures on
50 maintenance. (See Chart 5.) At present, nearly 60 per cent of homes in Canada
40
are more than 30 years old, and about one-third of homes are in need of repair.
30
With 13.5 million households in Canada, the potential renovation market in
20
10 Canada is sizable.
0
Implications of an Aging Population
19 5
19 0
19 0
19 0
19 0
20 0
0
ea 20
−4
−6
−7
−8
−9
−0
−1
19 ier
or n 19
21
46
61
71
81
91
01
rl
change, and residential construction activity will not be immune to these chan-
Sources: Statistics Canada; The Conference Board of Canada. ges. For example, the type and size of homes that people desire tends to change
with their age. A shift toward smaller units requiring less maintenance (such
6 as condo units) has already started and is expected to intensify over the next
Retirees Move Into Smaller Accomodations decade. Based on the latest census data available, the share of people living in
(share of dwelling structures by age cohort, per cent) an apartment or condo is much higher among those 65 and older. (See Chart 6.)
Houses: single-detached, Apartments and condos As well, this trend toward smaller units will be reinforced as buyers of all ages
semi-detached, and row
show an increased interest in living near urban cores. Thus, the average size
80
70 of new housing units and spending per unit are likely to shrink in the coming
60 years. At the same time, although people may opt for less floor space, they
50
40 will likely put more money into finishings and fixtures, at least partially miti-
30 gating the effect of downsizing on spending.
20
10
0
0−24 25−34 35−44 45−54 55−64 65−74 75+
FINANCIAL PERFORMANCE
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Price appreciation will be a key source of revenue growth for the industry in
8 the coming years, but this will largely be the result of the industry attempting
Building Material Prices Are on the Rise to pass increases in material and labour costs through to customers. Because
(year-over year change, per cent) each home or renovation project is a unique product, builders do have some
ability to compete on design and service rather than on price. However, compe-
Plastic pipes tition in the industry is considerable. There are many small players, builders
need to compete with the existing stock of homes, and affordability is declin-
Roofing materials
ing. These factors are expected to limit the ability of builders to enact price
Bricks and tiles increases, and this will be a key reason why margins in the industry will
remain low over the outlook period.
Wood products
Costs
Cement and concrete With revenues weakening, the industry has begun to cut costs. The largest
cuts have come from labour and material costs. On the labour front, industry
0 1 2 3 4 5 6
employment is falling modestly, but the wage bill is being cut more predomin-
Sources: Statistics Canada; The Conference Board of Canada. ately through reductions in the number of hours worked. On the materials side,
a reduced pace of building has meant reduced use of material inputs. However,
9 this is being partially offset by rising prices for most material inputs. (See
Industry Profits Will Be Slow to Return to Their Chart 8.) Products that use oil as an input, such as asphalt shingles and plastic
2008 Peak pipes, are showing the largest gains.
($ billions)
6 Cost containment will continue to be an issue for the industry this year as it
5 struggles to maintain profitability in the face of weak sales. However, costs
4 will rise along with profits in 2012 and beyond. Prices for some materials, such
3
as wood and bricks, remain below their pre-recession peak, and commodity
2
prices in general are expected to rise in the coming years. As well, the industry
1
0 is labour intensive, and wage costs are expected to experience above-average
growth due to labour market tightness, particularly for skilled trades.
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f
f
00
f
13f
14f
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12
20
f = forecast Profits
Sources: Statistics Canada; The Conference Board of Canada. Cost control in the industry means that profits are expected to post only a
small decline this year, despite lower revenues and cost pressures. Pre-tax
profits will fall to $1.8 billion in 2011, their lowest point since 2004. (See
Chart 9.) Industry profitability will steadily improve beginning in 2012,
but cost and competitive pressures are expected to keep margins tight. As
a result, the industry is not expected to return to its pre-recession peak in
profitability before the end of the forecast horizon.
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AT A GLANCE
Main Inputs, 2007 Average Annual Output Growth Housing Starts by Province
(price index, 2002 = 100) (2002 $ 000s, capital stock per employee) (workers per $1 million of real output)
f
f
97
11
15
13
f = forecast
Sources: The Conference Board of Canada; Sources: The Conference Board of Canada; Sources: The Conference Board of Canada;
Statistics Canada. Statistics Canada. Statistics Canada.
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USER GUIDE
Key Indicators
Real GDP Revenues
Real gross domestic product (GDP) is a standard measure of industry Revenues are the total receipts that an industry accumulates. They are a
output and is equal to the total value that an industry creates. As such, product of pricing and of production (which is equivalent to sales in 2002
it is a measure of the industry’s contribution to economic growth. It is dollars). The data are reported by Statistics Canada as part of its Quarterly
stated in millions of 2002 dollars and is reported by Statistics Canada. Financial Statistics for Enterprises and are stated in millions of dollars.
Employment Costs
Employment is the total number of full-time and part-time employees in Costs are the sum of labour, material, and capital costs for each indus-
a given industry. As part of its Labour Force Survey, Statistics Canada try, where capital costs include both interest expense and depreciation
reports employment data monthly, in thousands. expense. The data are reported by Statistics Canada as part of its Quarterly
Financial Statistics for Enterprises and are stated in millions of dollars.
Price Index
This indicator is a composite measure of the output prices for all of an Profits
industry’s products. The data for this series come from the Industrial Profits are equal to revenues less costs and are stated before taxes or
Product Price Index produced by Statistics Canada. All price indexes extraordinary items. The data are reported by Statistics Canada as part of
are standardized in the form of an index where 2002 = 100. its Quarterly Financial Statistics for Enterprises and are stated in millions
of dollars.
Profit Margin
The profit margin is the ratio of profits to revenues.
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USER GUIDE (cont’d)
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The Canadian Industrial Outlook Service includes detailed five- based on forecasts of key domestic and international factors such as
year forecasts in 16 key Canadian industries. The report examines interest rates, exchange rates, and tax policy. The Conference Board’s
the short- and medium-term economic and profitability outlooks Canadian Outlook Executive Summary is presented in a separate
for the following industries: oil extraction, gas extraction, residen- publication to set the stage for the Canadian economy.
tial construction, non-residential construction, food products, paper
products, motor vehicles, motor vehicle parts, aerospace products, The Canadian Industrial Outlook is updated twice a year using the
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tions, computer systems design, computer and electronic product can be accessed online at www.e-library.ca and, for clients subscribing
manufacturing, and wood products. Outlooks for several financial to e-Data, at www.conferenceboard.ca/edata.htm. For more informa-
and economic variables—prices, production, revenues, expenditures, tion, please contact our information specialist at 613-526-3280 or
profits, gross domestic product, and employment—are generated 1-866-711-2262, or by e-mail at contactcboc@conferenceboard.ca.
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