Construction boom ‘winded’

Friday, February 29th, 2008

Longest post-war success story now ‘out of breath’

John Morrissy

The Conference Board of Canada is warning of “a lengthy slowdown” in Canada’s residential construction industry.

It’s forecasting that profits –already off 22 per cent in 2007 — will fall still further over the next two years.

The longest housing boom in the post-war era is now “out of breath,” following spectacular growth in the number of homes built and the prices paid for them, the board said in a report released yesterday.

“Satiated pent-up [sic] demand and slower economic growth is leading to what is expected will be a long slowdown in the housing market,” the report says.

After years of “relentless” house-price increases, declining affordability will be one of the primary factors weighing on the market, board economist Valerie Poulin said in an interview.

As prices continue to edge upward by a forecast 5.3 per cent in 2008 — far outstripping the 1.3-per-cent rate at which general consumer prices will rise — affordability will be further eroded.

Demographics are playing a role, too, as baby boomers have passed the “household-formation” stage of their lives, which is when people leave home, rent or buy a home and form families.

Young people today, conversely, are slowing down that process — the main driver of residential construction — as they remain in or return to their parental homes.

Recent census information shows that more than 43 per cent of Canada’s four million young adults –those aged 20 to 29 — lived with their parents in 2006, up from 32.1 per cent in 1986.

The effect will be more strongly felt in Central Canada, where the manufacturing sector is suffering at the hand of the high dollar and a flailing U.S. economy, Poulin said.

Housing markets in the West, particularly in Saskatchewan, will be supported by continued strength in the mining, agriculture and energy sectors, she predicted.

In 2007, profits in the industry fell by almost $1 billion to $3.4 billion and will fall further to $3.3 billion in the year ahead, she said.

Rising costs of building materials will squeeze builders’ margins in coming years, Poulin said, as softening demand will make if difficult to pass on those costs.

While profitability will remain above historical averages, “profits will slowly decline, falling to $3.1 billion in 2009 before improving modestly in the outlying years of the forecast.”

The renovations industry, which constitutes 42 per cent of the residential-construction business, will remain strong as a result of the buoyant resale market, with existing home sales hitting 520,000 in 2007, Poulin forecast.

Housing starts crested in the third quarter of 2007, with 247,000 units built.

© The Vancouver Province 2008


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