Posted by: Daryl & Wendy Ashby | July 4, 2010

Fulcrum Fundamentals

The acquisition of a building permit takes place fairly early on in the home construction process. From the time the builder gets the permit, it can be months — even years — before the buyer moves into the new home.

Construction crews are now ramping up to put into action the permits that City Hall has been busy issuing. According to Statistics Canada, the value of permits in March was $1.07-billion, a 14.9% gain compared to the $928-million number in February. Once again, the volatile multi-family sector made a major contribution to the numbers.

The recent rise in home sales appears to be feeding through to a rise in permit values.

“I think [the rise] makes sense, given what we’ve seen in sales,” says Robert Kavcic at BMO Capital Markets Economics. “We’ve seen sales rebound pretty sharply in most major cities. It makes sense that construction activity follows sales” as builders try to take advantage of increased buying activity.

However, as interest rates rise and the HST kicks in for those in British Columbia and Ontario, home sales are expected to moderate in the second half of this year.

“I think going forward, though, you could see sales activity level off; it might pull back a little bit because … a lot of demand is being pulled forward right now,” says Mr. Kavcic.

Given that “typically in the data you see about eight months’ lag between sales and starts,” it can be hard to predict which way the market will head. Mr. Kavcic says housing starts (when a structure’s foundation gets poured) are running ahead of the rate of new household formation.

“Maybe there is a little bit of over-building right now, but at the same time, there is a lot of pent-up demand coming out of the recession; [in the long run] that supports our thesis that strength is going to taper off a little bit later in the year,” says Mr. Kavcic.

At the national level, the value of permits rose 12.2% in March to hit $6.3-billion. According to figures from Statistics Canada, this rise follows four months of declines. March numbers now put building permits a hefty 38.9% above the same month in 2009. Statistics Canada noted that the increase was mainly in multiple-family and also industrial building permits.

The value of permits issued by municipalities hit $1.5-billion in the multi-family sector. This number represents a 53.6% hike from February and is the highest level seen since July 2008. Twenty-six out of 34 census metropolitan areas registered gains in the total value of permits. Both Vancouver and Calgary recorded significant hikes in the value of permits — respectively 48% and 44.7% month over month.

Permits for single-family homes across Canada remained constant at $2.7-billion (though they declined in Alberta and Ontario).

The numbers out this week from the United States are from slightly further down the housing construction chain. Pending home sales, i.e. those still at least a couple of months away from fruition, rose 5.3% in March from the previous month. This was a little ahead of the 5% rise anticipated by the markets. Comparing the numbers to March 2009, there has been a 23.5% rise in pending home sales, following February’s 19.5% year-over-year rise.

“The strength in [pending] sales in March can largely be attributed to federal tax incentives that are set to expire at the end of April, bringing transactions forward in an attempt to close before the tax credit expiry,” notes Ian Pollick, portfolio strategist at TD Securities. “This bodes well for existing home sales, as 80% of pending home sales turn into existing home transactions within two months’ time. However, even if existing home sales were to rise by 4% or 5% in April, that would still leave the selling rate slightly below the average seen in the second half of 2009

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