TD: Unsold Condo Inventory A Concern

The construction industry was the second fastest growing industry over the last decade, according to a new report from TD Economics.

In fact, it has delivered major economic and job benefits to Canadians with 400,000 direct jobs created since 2002 – a tally surpassed by only the health care and social services sector.  The report states that if we consider knock on effects such as additional consumer spending from increased employment and the benefits that quickly cascade into other industries that offer support to building activity (i.e. suppliers, creditors, and real estate services) the employment gains are estimated at 800,000.

Even when the recession hit, the downturn in residential building was short-lived as record low interest rates drove a sharp rebound in late 2009 and early 2010. The real kicker was the introduction of the Government of Canada’s renovation tax credit. While the credit applied to renovations completed between January 2009 and February 2010, the benefits really gained traction in late 2009. We estimated that the renovation tax credit increased renovation spending by $4.5 billion in 2010, or 6% of construction activity.

Before the recession, Alberta led in the way of construction activity. However, since the recession hit, housing market activity has been soft and construction has yet to pick up significantly.

Unoccupied New Homes Hit Decade High

The report explains that there`s a risk surrounding the increasing trend of new home inventories in Canada, mostly condos. The number of newly completed but unoccupied homes has been at a decade high since mid-2009, and are just shy of levels experienced post the 1990’s housing crash. Looking at the number of units under construction (see chart below) points to a growing glut of unsold inventory of condominiums.

Source: TD

These factors, combined with an outlook for rising interest rates in 2013 and into 2014, will lead to a moderate drop in residential building activity and related jobs in the 2012-15 period.

Bottom Line

The Canadian construction activity was a major contributor to economic growth over the last decade. The pace of construction activity over the last decade was unsustainable, and led to a number of excesses that will need to be worked off. Governments have to now grapple with large deficits and the housing market has to work off a high level of unsold inventory.

On the bright side, strong business investment in nonresidential structures, led by a healthy profit environment, should help support a modest pace of building activity over the next three years. As such, our forecast for a annual average 3.5% decline in residential construction, a flat growth profile for government expenditures and an average annual growth rate of 6.0% for nonresidential construction suggest overall construction activity will grow by 1.7% over that time horizon.

Those are just a few of the highlights of the report. You can read it in its entirety here

One response to “TD: Unsold Condo Inventory A Concern

  1. At low interest rate, perhaps some people can jump on the SFH wagon? When the interest rate does rise in 2013/2014 as stated, there could be a portion of people can’t afford to buy a SFH and start to consider condos… given the house cost doesn’t drop too much at the time…

    A few of my friends were thinking of buying condo up in Kincora as an investment (starting $133 grand?)… if the condo supplies are that high, I wonder it may be hard for the landlord to rent out the place.

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