Interest Rates, Housing Starts and Hope the Canaries Keep Tweeting

If stagflation is to occur (i.e., a period of no or slow growth accompanied by high inflation), as many prognosticators expect, one of the accompanying features will be a moderation in inflation. new housing construction activity. Neither in the United States nor in Canada is such a turn of events yet evident. The canary installed in the mineshaft of stagflation to warn, by an interruption of its choirs, of possible serious economic troubles to come, has not yet ceased to chirp.

U.S. housing starts in April, at 1.724 million units, seasonally adjusted and annualized (SAAR), were little different from the March figure of 1.728 million units. Additionally, they were only slightly down from the highest monthly number in more than a decade of 1.777 million units in February.

Additionally, residential building permits are still being processed ahead of housing starts. The nationwide permit count in April was 1.819 million SAAR units. Permits have been between 1.8 million and 1.9 million units (SAAR) for five consecutive months.

What is true, however, is that the width of the positive gap between permits and housing starts has narrowed. Chart 5 shows 12-month permit totals (actual) minus 12-month housing starts totals (actual). The gap is still substantial, but has been gradually decreasing over the past year.

The Federal Reserve has made clear its intention to reduce its balance sheet (i.e. sell bonds) and make further interest rate hikes. With average home prices as high as they have become, every 1.0 percentage point increase in mortgage rates imposes a significantly higher cost of ownership on homebuyers or debt refinancers.

The only mystery, really, is why the Fed didn’t act sooner on interest rates. He clung for too long to the rhetoric that the take-off in the general price level would only be temporary.

In its defense, the Fed could not have foreseen the Russian invasion of Ukraine and how it would further complicate supply chain ties, especially in food products. Nor that additional waves of COVID would again slow port activity in China.

There was also a time factor. The Fed has been reluctant to act too soon, lest it interrupt a remarkable and badly needed period of job creation in America. The unadjusted unemployment rate improved to just 3.3%.

Currently, however, there is considerable uncertainty as to whether the strong momentum of job creation and income growth will allow the economy to weather the current storms of high inflation and geopolitical unrest. The hope is that, even with creeping notes of tension, the engine of GDP growth will manage to keep going.

Canada has a target of 300,000 units

So far this year, housing starts in Canada have not been as strong as last year. But that’s to be expected. In the first four months of 2021, housing starts north of the border twice exceeded 300,000 units (SAAR), a benchmark never before reached. In January 2021, they were 316,000 units and in March 2021, they reached an all-time high of 330,000 units.

The monthly average from January to April 2021 was 297,000 units. The four-month opening average in 2022 was 251,000 units, a year-over-year decline of -15.7%. Nevertheless, 250,000 units is a high number for Canada. The average annual housing starts in Canada, from 2000 to 2020, was 200,000 units.

The corollary of high demand in Canada is shockingly high house prices, a topic that tends to be a conversation starter at Canadian social gatherings.

A government effort to ease the pressure has focused on reducing the role foreigners play in the demand mix, given that some foreign buyers have particularly deep pockets.

Moreover, in Canada, as in the United States, there is a perception that individual buyers are being squeezed out of the market by professional investors, who see opportunities for financial gain from both rental income and property appreciation. capital.

The inescapable response promoted by many politicians is to dramatically increase supply. The federal administration under Justin Trudeau has set 300,000 units per year as a desirable goal for housing starts, though the practical steps to achieving that goal remain open to debate.

The strength of housing starts in Canada is mainly due to population growth.

As part of the housing starts forecasting exercise carried out by ConstructConnect in partnership with Oxford Economics, population growth projections for the United States and Canada diverge widely.

The number of residents in the United States is not expected to exceed +0.5% in any year through 2026. The figure for Canada will be at least twice as fast, +1.0% or more per year .

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Alex Carrick is chief economist for ConstructConnect. He has given presentations throughout North America on construction prospects in the United States, Canada and around the world. Mr. Carrick has been with the company since 1985. Links to his many articles are posted on Twitter @ConstructConnxwhich has 50,000 subscribers.

Leslie M. Gill