2017 and Ottawa’s Residential Construction Industry

Stock traders like to say that if you want to know what lies ahead, then you look to the left of the chart to see what has happened in the past because there is a 40% to 60 % probability that the current trend will continue. Hopefully this statistical probability will not hold for Ottawa’s residential construction industry, because the past few years have been challenging. This trend began with the Conservative Government’s decision to balance the federal budget and one of the tools used to achieve this was a reduction in the size of the federal public service. At the national level, many would describe this as admirable and necessary but at the city level, Ottawa has had to pay a rather high price. It wasn’t just the magnitude of the job cuts that caused an industry decline but also the fact that it dragged on for so many years coupled with the manner in which union agreements required that notifications be made.

The Conservative government’s 2012 austerity budget promised to cut 19,200 jobs. A high percentage of these jobs were spread across Canada and most of them were achieved through attrition so it didn’t have any real impact on the new home construction market in Ottawa. In fact Ottawa produced 6,026 housing starts that year which wasn’t far off the 10 year average of 6,207.

Housing starts are always a lagging indicator because purchases occur 8 – 12 months prior to a home being occupied. As a result, new home purchases made during 2012 when a positive consumer attitude remained, resulted in an increase in housing starts during 2013 coming in at 6,560 units, an 8% increase.  But 2013 also saw another series of federal job cuts totaling approximately 3,500 positions that were mostly in Ottawa and there was a lot of coverage in the local media which began to erode confidence. Another negative factor affecting consumer confidence was a requirement for the federal government to notify all employees in any given category that jobs were going to be eliminated. This often resulted in thousands of employees being notified that their position was being considered for elimination when in fact only a few dozen positions might have been on the block.

By the end of 2014, the impact of job cuts, then totaling approximately 26,000 positions began to take its toll and Ottawa consumers were cutting back on major capital expenditures. As a result, housing starts that year fell to 5,762 units representing a 12% decline. During 2015 a further 3,000 positions were eliminated and the required notifications were duly made resulting in a further 14% decline, down to 4,972 units. Housing starts hadn’t been this low since 2005. From 2013 to 2015 the total decline in Ottawa housing starts was 25%.

From all available information, it appears that a further 3,000 positions were eliminated by the government in 2016 and the long term program would see another 3,000 positions eliminated during 2017. If this occurs, the total number of jobs cut since the program was initiated in 2012 will reach 35,000. Only time will tell if the Liberal government will follow through with these plans. The final December housing statistics are not yet available but it appears that 2016 starts will be approximately equal to 2015.

Following the federal election in October 2016 there was hope that the new Liberal government might be required to create jobs in order to administer the much discussed infrastructure program. Unfortunately nothing of substance has occurred on this file and it would appear that few new positions will be required.

There are some serious concerns with recent changes to mortgage rules introduced in October and November. These require homebuyers looking for an insured mortgage to pass a “stress test” and qualify for a mortgage rate at the five-year Bank of Canada posted rate — which is typically much higher than the rate offered by banks. Another change requires buyers to put a larger down payment on houses worth more than $500,000. Housing analysts believe that those mortgage rule changes will result in first-time home buyers losing between 10 and 20 per cent of their purchasing power.  Whatever the number, the result will be that first-time home buyers must come up with bigger down payments and qualify for higher-rate mortgages. This likely means they will have to buy cheaper houses, or just continue to rent. The result of these changes will create the most difficult year for first time home buyers in a decade.

Ontario’s new Cap and Trade system introduced in January is a complicated program spanning the activities of numerous Ministries and it would take a small army of accountants to calculate what the precise financial impact on a new home might be. But given what we know so far, all that can be said is that it will increase the price of a new home by $5 – $10,000.

 

Fortunately Ottawa has been blessed with a high tech sector created primarily by the former City of Kanata and after some difficult years when the North American high tech bubble burst, it is again demonstrating significant growth that could offset federal employment declines. There is every reason to think that 2017 will be the beginning of a major recovery in Ottawa’s employment and new home construction sectors – even without the help of the federal government.

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