For construction, non-residential collapse is bigger worry
Posted on 04-09-2014 08:04
Summary: The latest numbers on Canadian housing starts and residential building permits will certainly add fuel to the fire and brimstone of the impending-housing-apocalypse believers. But as alarming as the weak residential data released Tuesday might have been, bigger problems for Canada's construction activity might lie in the non-residential side.
The latest numbers on Canadian housing starts and residential building permits will certainly add fuel to the fire and brimstone of the impending-housing-apocalypse believers. But as alarming as the weak residential data released Tuesday might have been, bigger problems for Canada's construction activity might lie in the non-residential side.
That's a hard one to swallow when you're looking at the housing start count for March of a thin 157,000 (annualized), the slowest pace since the Great Recession ended in mid-2009. It's cold comfort when you also see residential building permits plunge 21 per cent in February - the biggest one-month drop since the recession.
Yes, there's a chance the weak numbers on the residential side are a sign of a long-in-the-tooth market finally, dramatically capitulating. Perhaps we are, indeed, in for some dark days ahead in the housing market, as some people have long feared.
But one month does not a trend make, and the underlying trend in home construction tells a different story. The housing-starts decline is so far out of whack with the recent trend (an average of 185,000 over the prior three months) that it may well be a one-off statistical outlier. The broader trend has been a slow, gradual moderation. February's residential permits, meanwhile, merely reversed January's upward spike, which marked a record high.
There is little in the longer-term trend of building permits (which are notoriously volatile from month to month) to suggest that residential construction has fallen off a cliff. Looking at six-month rolling averages, the pace of residential permits remains near its post-recession peak. This certainly doesn't point to a plunge in residential construction; a measured (and largely welcome) moderation looks more likely.
At the same time, some observers took solace in the fact that non-residential permits rose 6.6 per cent in February - even suggesting that this sign of a pickup would support construction activity as the residential side goes into its long-awaited retreat.
They're barking up the wrong tree. If there's a serious downtrend developing in building permits, it's on the non-residential side.
A look at the six-month rolling average shows that non-residential permit growth stalled months ago, and looks to have gone into a downtrend. Indeed, there has been little growth in the non-residential trend in the past two years.
Permits for industrial structures (which include factories, mining and agricultural facilities, and transportation and utilities infrastructure) are tracking near their post-recession lows. While some of that likely reflects the end of Ottawa's infrastructure-heavy stimulus spending program that had inflated numbers in the first couple of years after the recession, there has also been a distinct slowdown in factory and plant permits over the past year. Permits for commercial structures (e.g. offices, warehouses, hotels, retail) have also lost momentum in recent months.
The non-residential stall is consistent with evidence of lacklustre business investment. While companies in recent surveys (from both the Bank of Canada and Statistics Canada) have indicated their intention to increase capital spending this year, the growth is expected to be modest at best. The trend in industrial and commercial permits suggest that little if any growth in construction activity by businesses is coming down the pipe.
With residential construction also expected to cool, it adds up to another sluggish year for construction activity. The sector was a strong contributor to Canada's early stages of economic recovery, but it stalled out last year, contributing virtually nothing to gross domestic product growth. Don't expect any better from the construction sector in 2014; it's just not in the numbers.