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.
Regionally
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.
Great article.
It has certainly been slower this past year then the year before for us and I don’t expect it to get back to the boom of the past few years any time soon. As to point number 1, I think the Bank of Canada is not going to reverse it’s decision to lower house prices any time soon. Growth does not seem to be their priority at this time, witness their changes to mortgage lending (not that this is a bad thing for future home owners, a good idea in fact to encourage new homeowners to save for a decent down payment first) and asking Canadian’s to lower their debt. Funny though, they ask us to start paying down debt, yet freak when there is less spending and purchasing going on. You just can’t make those boys at the BOC happy:)
The slowing down of home purchases in some provinces, the lowering of home values in others, will likely make a homeowner thing more then twice before embarking on a large reno. I haven’t heard but Contractors in Vancouver may be feeling this already?
Slower home sales/lower prices may too put a damper on folks getting their homes up to scratch prior to selling.
On the other hand, if people are not selling their existing home to move up, as often as they were, it could prove to be a mini boom to the smaller renovators. If you are facing staying in your smaller home for longer then you once thought, you may be thinking of an addition, or finishing that basement or adding that extra bathroom.
I’m at a loss as to what points 2 and 3 mean for contracting… anyone?
I think so far public policy is striking the right balance between fiscal austerity and stimulus spending. The big issue that is about to rear its very ugly head is federal government spending. I have a feeling the next auditor’s report will not look favourably on how the Harper government has spent its money and we won’t have the deficit reduction we were hoping for, which will put a damper on confidence.
Most important is the new home market. I am sure it will slow and new home subtrades will start drifting into the renovation market and depress prices, as if they could be any more depressed. You’ll need better marketing than every to separate yourself from the cheap competition.