Housing starts and under construction

Just had a look at the CMHC Housing Now publication with the January starts/completions data. Completions exceeded starts by 2115 in January 2010--which is the most for a single month since 1981 (and the data in 1981 is really wonky so I don't know what to make of that). Correspondingly, under construction is 'cliff diving' as they say over at Calculated Risk. Straight downhill.


The 12 month total of starts tweeked up in January 2010, but it is still at a deep low. How deep? Check the data back to 1948 below.


The 12 month total of starts is in the neighbourhood of the lows hit in 1967, 1983, and 2000. That's right, lower than the depths of 1967--when Vancouver's population was much smaller. That is not a lot of starts.

What do I see happening over the rest of 2010?

1. It is unlikely that starts will stay so low. Look at the green line--it has never rested at the bottom before (but perhaps we've never had such a speculative glut before!).
2. Completions will continue to chug along at the current pace for the rest of the year, still exceeding starts.
3. Under Construction will drop below 10K and might touch historic lows close to 5K if starts don't pick up as much as I think they might.
   

One big implication of this is for the employment market. We know that a big part of the boom in the BC labour market was driven by construction employment. Construction employment depends on the 'under construction' total. As that number continues to drop over this year, we will see unemployment rise.

About a year ago, I predicted 10% unemployment by June 2010. We're at 8.1% now. I don't know if we'll make it to 10% in the next 4 months, but it's not a crazy prediction to hit 10% sometime in 2010 as the Olympic workforce gets laid off and the construction workers join them.

We see the next labour market data point this Friday. That data comes from the middle of the Olympics, so we won't start to get a real glimpse of the post-Olympic period until the March numbers come out in April.

Construction employment

Housing starts have really fallen off a cliff in the past year. However, we have not yet seen the last of the construction lay offs. Why not? Because construction employment relates to units under construction, not starts. Units under construction has fallen, but still has some way to go--we're maybe half way there. I predict it will bottom out below 10K/year. This means we still have a lot of construction jobs to be lost.


As for construction employment, it has dropped by around 20 percent since the peak. I think it has a long way to go--I would not be surprised at seeing 2001 levels again by the end of 2010.

That alone, all else equal, would be enough to push the unemployment rate back above 10 percent.

These rates do appear to have plateaued at current levels. However, once the Olympics are done and we see the continued completion of construction projects through the spring and summer, I would not be surprised at all to see 10 percent unemployment in BC by the end of the year.

BC Budget assumptions: nice try

Three weeks ago the BC Budget was released. The basis for the revenue and cost projections for the budget was an average 6.2% unemployment rate in 2009, falling to 6.0% in 2010.

I previously posted on this topic here. For the assumptions in the budget, see this pdf page 87.

How are we doing so far? Well, three weeks after their projection, unemployment has now hit 6.7%--up 0.6% from January. I'll put up the graphs later, but it appears to be going hyperbolic. [UPDATE: here it is! I think my 10% by 2010 prediction is looking likely.]
In short, the $495 million dollar deficit projection has now been blown out of the water.

I'm not clairvoyant here. I just observed that housing starts were going to plummet leading to construction employment to go back to pre-bubble levels. If you do the math, you can see what will hapen to employment. But, I'm sure all we'll hear from the usual economic commentators and our government leaders is another chorus of 'hoocoodanode'.

Enough with the koolaid and the rose coloured glasses! Can we please all open up a can of reality soda and get on with what has to be done?

BC Budget: Junky assumption

I didn't look at the BC Budget in too much detail, but something on the radio caught my ear. Sure enough, I confirmed it on this pdf on page 87.

The BC Budget hinges on the projected unemployment rate averaging 6.2% in 2009. Have a look at the January 2009 numbers here. The January number is 6.1%. Does anyone really think that we won't see that go higher in February and then farther up from there?

I think the budget projection is pie-in-the-sky. I would say a more realistic projection, given the construction sector dry-up, is 8.7% by the end of 2009, with an average of 7.5% for the year.

The 2010 projection is 6.0%. By then, most condos under construction will have completed. Construction employment will be back below historical averages. The Olympics will be over as well. Unless every other sector suddenly pulls up the slack, there is a serious risk of double digit unemployment rates. 6.0% is a total joke.

Labour Market Problems in BC

Just a few weeks ago, Helmut Pastrick told us:

British Columbia's economy will lose 42,500 jobs this year and another 6,500 in 2010, Central 1 Credit Union chief economist Helmut Pastrick forecasted this week. If his dire prediction comes true, it will be the first time the province will have seen successive years of declining employment in more than a quarter century. But keep in mind that those are reductions of just under two per cent and 0.3 per cent respectively, hardly the wholesale losses of about five per cent B.C. saw during the recession of '82, and Pastrick expects employment to recover to 2008 levels by 2011. In the meantime, however, Central 1 expects B.C.'s unemployment rate to rise from 4.5 per cent last year to 6.7 per cent in 2009, and climb even further to 7.5 per cent next year.

Well, we now have the January numbers and we're already down 35,000 jobs. Only 7,500 more to go to reach Helmut's 2009 prediction. Or, more likely, Mr. Pastrick will have to revise his prediction.

Maybe I shouldn't pick on him too much. He's not alone in being rosy with the forecast. Then again, some people did mention a long time ago that our labour market boom was based on construction, and that this was not likely to be sustainable once the construction boom stopped.

I'm sure that the newspapers will tell us that such a change in employment came out of left field; 'no one' predicted it. Hoocoodanode?

Anyway.

The labour market in BC took a very sharp worse turn in January. Here are the pictures.

The unemployment rate shot up to 6.1%. The proportion of people with jobs fell under 62%.

This can be seen in clearer context by looking at this long run picture:
You might notice that the other times we've seen such sharp movements have been in deep recessions. One might therefore predict that we are starting a serious recession here. But time will tell for sure.

What I do know is this. If the labour market continues to spiral in this direction, the housing market is seriously toast.

When the bubble started to burst in Spring 2008 in the midst of a strong economy, it burst mostly because there was a psychological change--people stopped wanting to pay the inflated prices because they didn't have confidence that they could find a greater fool to whom to unload their property in the future. We've seen 15% or so come off prices, but the main effect really has been that properties have just sat around not getting sold. Aside from a few flips gone bad, there hasn't been a lot of urgency on the sell side. So it didn't sell in 2008--just rent it or try again in 2009.

What will be different going forward is this. As unemployment approaches double digits in BC (we'll get there shortly after the Olympics--if not earlier), there will be thousands of people who cannot make their mortgage payments on their primary residence--not to mention their inability to feed the monthly bleed from their condo 'investments.' These properties will be thrown back on the market first by themselves, and later by banks as foreclosures.

When will this happen? When people lose their job, it takes some time before they get irreversibly behind on their bills. It then takes some time for the bank to foreclose and get the thing on the market. So, the 'have to sells' are not going to seriously start hitting the market until late 2009. But in 2010, this will be a dominant part of the housing picture.

So, let's add this up. We have record new housing inventory on the way. We will have a cascade of 'have to sell' people driven by job losses. On the demand side, speculators are out of the market. As well, home ownership rates are at record level, which means we have borrowed a large part of demand from the future--how many 22 year olds were buying condos pre-boom? How many rushed to 'get in' before they were 'priced out'? And that's just the local stuff--not to mention the impact of a worldwide (including Asia) economic meltdown. This sums to one thing: 2009-10 are going to provide a tremendous amount of pain for those who are overexposed to Vancouver real estate.