I just sat through a presentation at the Hardlines Conference in Mississauga by an economist from the Canada Mortgage and Housing Corporation, Ted Tsipkopoulos, where he presented that organization’s view of the future of the renovation business in Canada over the next year.
“Renovations are a $60 billion market,” says Ted Tsiakopoulos, economist with the CMHC. But he also says that number will not move much over the next year. Growth in the renovation market is slowing. “When incomes are growing, people invest,” he says, referring to one of the key drivers in renovations—the economy. But that is not the case in the current economy and so, along with three other influencers of this market, housing trends, demographics and credit markets, the economy is not cooperating for healthy growth.
Of the housing market, Tsiakopoulos says it is about to flatten and will also dampen the rate of growth in renovation spending. That’s because homeowners usually rely on growing equity to finance at least part of their renovation. But, good news for renos, the slowdown will appear more in the multi-unit housing industry.
But back to the economy; it is slowing overall. “We are certainly not in recession,” says Tsipkopoulos, “But there is a lot of uncertainty.” In the US, in Europe, even in China, there are issues that remain unresolved, the most important in Canada being simply confidence. When consumers are worried about their future, they cut back on their consumption. The result? Big ticket spending in Canada has been cooling off and that includes higher end renovations.
Tsipkopoulos says it’s consumer debt that may be the most important dampener on renovations, however. Recent CMHC reports suggest the debt to income ratio is over 160 per cent. That makes it very difficult for homeowners to justify more spending unless it is absolutely essential.
What about credit? As it has been for a while, it remains cheap and that has certainly been helpful in making spending rather than saving decisions easier. But again, credit is not growing as it was in the past and consumers are more likely to pay down debt, not increase it. “Mortgage rules have tightened up, too,” says Tsipkopoulos, which slows credit on the other side of the ledger.
Renovations are definitely a regional business. Here’s CMHC’s take on the economic conditions across the country:
Conditions seem to be holding up better in the West, says Tsipkopoulos. “Western Canada is growing faster.” Almost all the job growth in Canada is happening in the West, in BC, Sask and Alberta. What is it about the West? One factor is the emerging markets that need exponentially more energy resources, a market that the West has managed to tap into better than the East.
And demographically, “There is still a magnetic pull west in Canada.”
The most hopeful signs for good news in the East is the return of a strong US economy. There are signs that things will get better in the US but that will only really be seen after the November election.
Tsipkopoulos concluded with a list of things to watch to understand what the future holds: He says, on the downside, what will make a big difference is the possiblity of Europe blowing up, the US staggering under its heavy debt and the slower growth of the emerging markets. He also points to the tendency for consumers to continue delveraging and for developers of major products to launch fewer projects.
If you are looking for a silver lining here’s where to point your attention:
1. The orientation of public policy. Watch to see if governments slow down their austerity programs in favour of more growth oriented policy.
2. The US labour market. If it improves, the East, at least, improves.
3. The relationship between Income and pricing. The better the ratio, the more spending by consumers is possible.
Conclusion: Modest growth. Income and job growth.