Canadian new housing starts made a sharp decline, which normally is a red flag for the economy. BMO senior economist Sal Guatieri said April’s numbers may not be the traditional leading indicator though. He argues there are a few factors that make this time different. I feel like I’ve heard this about another country before. Anyway, on to the numbers.
Canadian Housing Starts Fall 20% In April
Canadian housing starts made a sharp decline last month. Seasonally adjusted at the annual rate (SAAR), starts fell to 268,631 units in April. This is down 19.8% from a month before. This is a sharp drop that would normally have a lot of analysts buzzing with calls. This time it barely made the news.
Housing starts are considered a leading indicator for cyclical activity. That means it’s helpful in gauging the direction of the economy. Rising starts typically align with an income boom, and rising economic activity. Falling starts is typically a sign the economy is running on fumes. Guatieri argues this may not be the case this time. At least in the near-term.
“Canadian housing starts pulled back 20% in April, a move that would normally incite cries of a correction. But not when: 1) it’s from a record high, 2) the 6-month average (279k) is still the highest since at least 1990, and 3) existing home sales are 45% above the past decade norm,” he said.
Don’t Expect Price Relief Anytime Soon From This Supply
Even with the decline, there’s going to be a lot of supply, but don’t expect it to have much of an impact in the near-term. New homes take years to build, meaning the record surge (and pull back) won’t impact the market any time soon. However, all of this stuff will eventually be built — assuming material costs work out.
“The surge in construction likely comes too late to dial down the heat on prices in the near term, but it should help when (if) fiery demand cools off,” he said
Guatieri doesn’t have a reputation as a see-no-froth type of economist. This year alone, he’s highlighted a number of issues with the market. A few weeks ago he said, “asset prices start to raise red flags when they consistently outrun growth in underlying income or earnings.” It doesn’t take a real estate bull to realize how exuberant real estate buyers are. Forecasting they’ll do something, also doesn’t mean it makes sense for them to do it.
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