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New construction permits down 11.2%: Is this important?

November saw an 11.2% contraction in building permits, the second monthly decline in a row.  BC and Ontario with the source of the contraction, but the news while less dire elsewhere was still negative in every province and segments (institutional, commercial, multi unit and single unit homes).  Not entirely surprising following 2009/10 Canadian construction boom, eventually supply had to slack to match demand, which in both (a coincidence, maybe not) British Columbia and Ontario has fallen off due to rather excessive growth in prices over the past two years.

Construction which was a net contributor in both 2009 and 2010 will probably not provide any “growth” to the GDP; however, it is important to note that construction (all types) account for less than 5% of Canada’s GDP, so any contraction will have only a very limited impact on the overall GDP growth for 2011.

The question remains what is driving the Canadian real estate market?  Every night Canadians are exposed to the disaster that is the U.S. real estate market, the recent push in the value of all real estate in Canada (up 14% since the low of 2007 and up 6% year to date) make many Canadians wonder what is pushing Canadian housing prices.  First and foremost is personal income (Note that Canadians are not in cumbered by health care insurance premiums as their southern neighbors) which has been rising ahead of inflation (although below the increase in house prices).  Moreover, the Canadian government has directed Canada’s banks to remove the ability of Canadians to borrow for periods in excess of 25 years, and Canadian home buyers must past revenue test which assume much higher interest rates before they can borrow.

These tests were enacted in October 2010 – coincidence I think not!  Overall, the data is not important since construction is such a small percentage of the overall economy.  It is reassuring to see the market responding to changes in market rules (mortgage duration and interest rate tests).



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