Home builders and renovators must look for trickle-down optimism in 2016

Executives of the largest real estate developers and builders may be re-adjusting return expectations on their Canadian real estate investments, but they remain confident that 2016 will be ‘another positive year’. That’s the conclusion of a national industry survey published recently by international accounting firm KPMG.

While admitting the drop of oil prices will play a role in regional adjustments, the survey suggests large scale foreign investment will be attracted to Canada “to take advantage of both opportunities to acquire real estate [and] a currency play should the Canadian dollar recover some of its lost strength.” Furthermore, survey participants feel “Canada is also considered a ‘safe haven’.”

‘Who you are’ is as important as ‘where you are’
At issue for home builders and renovators beyond the economic fortunes of specific regions of the country are demographic shifts that will impact the future direction of the residential market across Canada, according to Lorne Burns, Industry Leader, Building Construction and Real Estate for KMPG. Burns references CMHC data, saying “Over the last 30 years, the highest growth rate in any family housing unit is that owned by a single individual. Not couples, but one individual.”

Even so, home ownership is often postponed by many now entering or new to the job market. According to the survey, “Millennials, who witnessed the impact of the financial crisis on housing, are either currently unable or unwilling to purchase a home or have at least decided to delay the purchase. Many Millennials see home ownership as an anchor that limits their mobility rather than as an aspiration. Additionally, many do not have the credit to qualify for a home loan, as the average credit score for college grads with a Bachelor’s degree is just four points above the minimum required to obtain home loan.”

“You’re seeing it at both ends of the age spectrum,” says Burns. “People are getting married later, they’re living single, and at the other end of the baby boomer spectrum you have single, maybe widowed or separated individuals who are living on their own.”

Land costs will restrict single family home building
In order for single-family home construction activity, and indeed average house size, to increase inside urban areas, Burns feels there has to have an abundance of affordable land. “In any of the major Canadian markets, that is usually the constraint. In Toronto and Vancouver for example, if anything you’re seeing single family homes being assembled and turned in to multi-family. I don’t know if I’ll ever see a single-family development in the City of Vancouver proper in my lifetime or the next several lifetimes.”

Consumers continue to party-on, with debt
The KPMG survey comments that recent shocks to Canada’s economy that began in the oil patch have been mitigated by high consumer activity. “Consumers continued to spend at a steady pace in 2015, despite the unemployment rate rising above 7.0 percent.”

The risk to this positive big picture that has trickle-down potential to smaller players in the residential construction industry is the high level of debt currently carried by many Canadians. Borrowing rates are at low levels, despite regular warnings of up-trends. And as the on-paper value of many homes increases, dramatically in some cities, equity lines of credit are funding improvements or expansions to homeowners’ ‘castles’ as well as other consumer purchases that enhance their lifestyle.

Hopefully the survey is correct about 2016 and the party will continue. The solid footing offered by the home building and renovation industry is something on which the country’s economy relies.

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