Canada’s economy began 2010 with a roar, registering a first quarter growth rate of 5.8%. In the second quarter, GDP moderated to 2.0% and further deceleration is expected in the latter half of this year, heading into 2011. The nation is being held back by a U.S. economy that continues to underperform, both in terms of labour markets and residential real estate. Canada’s foreign trade position has been in deficit for a year and a half, whereas normally there is a substantial surplus.
Canadian housing activity recovered remarkably quickly after the recession, but is now showing signs of a stall. Unit home starts from 2000 to 2008 averaged 50% higher than during the decade of the 1990s. During the worst of the recession in 2009, they were pulled out of a steep decline by record low interest rates served up by the Bank of Canada (BOC). The low rates fired up the resale housing market first, which spilled over into new homes after about a six month lag.
The era of super-low interest rates is coming to an end. The BOC has instituted three 25 basis point (100 basis points equals 1.00%) increases since June 1. Reduced home affordability has also resulted from HST introductions or increases in British Columbia, Ontario and Nova Scotia.
Tighter mortgage lending rules and an excess inventory of unsold units in the multi-family/condominium market complete the list of negatives for new home construction through the end of next year. By 2012, more normal cyclical factors will see a return to stronger starts.