October 3, 2012
CanaData’s Latest Investment Put-in-place Construction Forecasts
CanaData’s latest investment put-in-place construction forecasts — in both current and “constant” (i.e., adjusted for inflation) dollars — are set out in a series of tables that can be found at the bottom of this article.
What follows is some to the thinking behind the numbers.
Housing starts in Canada have been above 200,000 units, seasonally adjusted and annualized, in 12 of the past 14 months. That’s a remarkably strong performance.
Over the same time frame, employment has risen by 185,000 jobs. That’s close to the long-term pattern. There are indications the jobs advance may be stalling. In the past four months, the net improvement has been only 19,000 new jobs.
The worst of the recession in late-2008 and early-2009 ushered in an era of ultra low interest rates in both the U.S. and Canada.
In the U.S., the recession was partly caused by the collapse in housing starts. In the early to mid-00s, adjustable-rate “teaser” mortgages attracted a rash of low-income home-buyers who were subsequently unable to maintain their monthly payments. A speculative surge in home prices in 2005-2006 that was followed by a bust also contributed to the sector’s woes.
Debt instruments were issued that included a sub-prime mortgage component. These proved to be worthless, bringing down a house of cards. Rating agencies lost their credibility. Investment banks went under and the nation’s largest mortgage-providers needed government bailouts.
The ensuing credit crunch has kept U.S. housing starts deep in a ditch almost to this day. Thankfully, there are signs of an imminent pick-up.
Canada has not shared the U.S. housing experience. Home prices both for new and existing properties have steadily increased, although some weakening is now apparent. Only a few locations, most notably in Victoria and Vancouver, have demonstrated sticker tags far out of reach of the rest of the country.
The strength of the condo building markets in Vancouver and Toronto has inspired the federal government to gently apply the brakes. Measures have been introduced to slow demand.
The amortization period for an insurable mortgage has been reduced in stages to 25 years. First-time homebuyers are finding approvals harder to come by. Home starts are expected to moderate from 215,000 units this year to 185,000 in 2013 and 190,000 in 2014.
In non-residential building markets, one would expect commercial and industrial work to show early signs of improvement. That’s how cyclical recoveries usually unfold. Office-based employment improves, vacancy rates fall and there is a need for more high-rise towers.
At the same time, better retail sales lead to construction of more warehouse, store and shopping centre square footage. An influx of U.S. retailers into Canada will also play a role in spurring on some retail construction activity.
A 2.0% GDP growth rate, plus uncertainty about the employment outlook, however, will inhibit some of the investment that might otherwise occur.
There are a couple of commercial sub-categories that should see significant improvement in the next couple of years nonetheless.
The demand for hotels is on the rise, with a lengthy list of upcoming projects. Niagara Falls will receive a disproportionate amount of the attention.
Sports facilities are another bullish market. From football stadiums in Regina and Hamilton to hockey arenas in Markham and Quebec City, the quest for the casual and rabid fan’s entertainment dollars is readily apparent.
The new football stadium in Hamilton will first host soccer matches as the Toronto region hosts the Pan and Parapan American Games in 2015 and there are other venues and sites that are either underway or about to start for those events.
In institutional construction, there will be an ongoing need for more medical facilities to provide care for seniors over the next several decades. This was the kind of work that was brought forward during the government’s infrastructure stimulus program in 2009 and 2010.
On the heels of that big push, there is the inevitable letdown. The “aftermath effect”, combined with the current emphasis on austerity, is pushing hospital and school projects back somewhat in public-sector short-term planning.
Industrial work is being impeded by the rise in value of the Canadian dollar. Not least among the causes is the fact the U.S. – through its quantitative easing programs (i.e., printing money) and low interest rate policy – is consciously lowering the value of the greenback.
Foreign exchange traders are betting on Canada as a safe haven for their investment funds.
Canada’s auto sector is making solid sales gains, but future investment dollars will depend on how pleased the Detroit Three firms are with their latest union wage agreements. Pay scales for both seasoned veterans and new hires, reductions in “legacy” costs and quality of work will all figure in such an assessment and help determine how much investment will take place here as opposed to other international sites.
A great deal of manufacturing activity is tied to the housing sector. Renovation work will hold up pretty well, but with new home starts retreating, the demand for some building materials will be kept in check.
The resource sector component of industrial work awaits an improvement in global commodity prices.
The same can be said for much of engineering construction. One difference is that engineering work is heavily weighted towards oil and gas activity. The world price of oil, hovering near $100 U.S. per barrel, remains high – thanks to geopolitical risk in the Middle East and North Africa – justifying major projects in the Oil Sands and off the coast of Newfoundland.
For natural gas, a depressed price level inhibits investment. This may be about to change.
Hydraulic fracturing of shale rock has greatly increased the reserves of gas that can be recovered.Â More supply means lower prices, but it also lifts demand. Home and industrial usage is on the rise, plus nuclear and coal-fired power stations are giving way to natural gas-fired units.
Emerging economies are also eager to buy low-cost natural gas. That’s the incentive behind major liquefied natural gas (LNG) project proposals not only in Canada but in Qatar, Australia and even the United States.
There are some mega hydro-electric power projects that will be getting underway shortly in Canada. All the necessary agreements have been signed between the Newfoundland and Nova Scotia governments for the Muskrat Falls station on the Lower Churchill River in Labrador to begin this fall. There will eventually be a sequel, a Gull Island station, which will be even bigger.
Manitoba and B.C. are two other provinces where hydroelectric projects are inching towards start-ups. Low natural gas prices are creating some political fallout. Opposition parties are pointing out that electric power export sales are no longer as assured as in the past.
Canada may find it harder to export hydro-generated power if the U.S. brings on a host of new electricity plants based on gas-fired generators.
View the complete Canadian put-in-place construction forecasts in PDF format.
To view the Canadian put-in place construction forecasts by sector in PDF format, please click on the individual links:
All new construction by region
New residential building construction by region
New non-residential building (ICI) construction region
New commercial building construction by region
New industrial building construction by region
New institutional building construction by region
New engineering construction by region