Housing Data Analysis

13 min read

Housing Cycle

Challenges on Housing CycleSome degree of uncertainty lies surrounding how the housing cycle is assessed and how it impacts a local real estate market. Investors are unclear as to how the different stages of housing inventory development factor into their property market analysis. The media at times exaggerates or neglects to this crucial factor when reviewing a market and it’s direction.

Clarifying Housing Development

Plan on Clarifying Housing DevelopmentProvide an overview of how the stages of the housing cycle are determined and the role they play in determining a market’s potential. Research and analyze the short-term and long-term housing cycle inventory changes in the residential sector. We conduct various data analysis and develop numerous insights through data visualizations on a market’s health.

Putting Data into Perspective

Putting Real Estate Data into PerspectiveAs the real estate industry evolves to adapt to a technological age ridden with data, investors with a traditional background are facing a challenging environment where they are inundated with numerous data. Investors are often grappling with how to decipher and analyze the large amounts of data. Our job is to bring clarity to help them make clear decisions.

Clarity Through Insight Analysis

Housing Inventory Data AnalysisConsumers were provided with clarity and a deeper understanding of housing inventory data analysis and their resulting impact. Simple and prudent advice allows investors to grasp the data in an easily digestible format. Investors can correlate the various metrics and data in order to make informed decisions on their future invesmtents.


The Stages of New Home Development and Their Economic Relevance

Housing is a key part of Canada’s economy. Aside from real estate, it significantly affects several other industries like banking, construction, and employment. Essentially, people are more inclined to purchase new homes when the economy is strong and stable, and they are less inclined to invest in new housing in a weak economy. Hence, it is generally agreed that the rising or decreasing numbers in home or residential construction is indicative of the country’s overall economic health.

Economic Impacts of Residential Construction in Canada

Today, the home construction industry remains a vital pillar of the local and national economy by providing jobs, producing incomes, and spurring economic activity across Canadian communities. According to the Canadian Home Builder’s Association (CHBA), one in 18 workers in Canada is employed, whether directly or indirectly, in housing development. The industry is one of the biggest employers in the country, credited for supporting over a million jobs in new home construction as well in renovation and repair in 2016. That same year, the residential construction industry paid wages totaling $59.4 billion. It also yielded more than $138 billion in investment value, and 48.4% of the amount came from the construction of new homes.

Housing Starts

Housing starts is a critical economic indicator. It reports the actual number of new home development projects which started construction during a specific period (usually on a monthly basis).

Economic Significance of Housing Starts

Monitoring housing starts is a global practice observed in Canada because of its direct impact on the country’s housing industry, specifically on market inventory, demand, supply, and pricing.

An increase in housing starts is generally attributed to the public’s growing demand for more housing options. In order to meet this demand, the home construction sector may require more manpower to sufficiently accommodate the surge in home development projects and other housing-related activities. Consequently, additional employment opportunities may be made available to the people, which is a sign of economic prosperity. Moreover, a rise in the number of house starts may also eventually lead to higher demand for various products, including appliances, pieces of furniture, and furnishings, among others.

The rising demand for new home development may also result in an increase in housing prices as well as in the costs of housing projects.  When demand is high, and supply is low, the resulting price is something which the target market is willing to pay for.

Just as the growth in housing starts is perceived as a sign of a thriving economy, its decline could mean that the economy may have slowed down. Furthermore, in a worst-case scenario, a sustained decrease in housing starts could mean that an economic recession is looming. The continued contraction in housing starts could cause a ripple effect that could potentially impact related industries and other areas of the Canadian economy.

Housing Starts in Major Cities

Housing starts may vary from one area to another. Some areas have seen significant increases in the reported starts of new home constructions while declining numbers were reported in other regions.

For example, as seen in Table 1, the numbers of new home constructions in three cities in Western Canada are noticeably different from each other. Vancouver, the largest city in British Columbia, has the largest population scale, and it comes as no surprise that the demand for housing in this area is quite high. As of January 2018, as many as 2,599 new housing units reportedly started construction in this city, which is 94% higher than the housing starts recorded within the same month last year. Cities like Calgary and Edmonton have also seen significant surges in housing starts, growing by 52.8% and 60.50%, respectively, in just one year.

housing cycle starts in western canada
Source: CMHC & Statistics Canada

While the three cities in Western Canada have seen an increase in housing starts, the numbers of three cities in Southern Ontario are in an apparent decline. Ottawa, the country’s capital, has the most significant drop in housing starts, decreasing by 24.6% in January 2018 after only a year. It is followed by Toronto, the largest city in Southern Ontario, which reported a decrease of 21.5% between January 2017 and 2018. Within the same span of time, housing starts in the Hamilton also fell by 9.6%.

housing cycle starts in southern ontario
Source: CMHC & Statistics Canada

Building Permits

A building permit is a certification issued by municipalities which serve as a formal approval to start a housing construction activity. Its issuance is one of the initial stages of the home construction process.

In Canada, a building permit survey is conducted on a monthly basis to gather data on construction plans. Roughly 2,400 municipalities take part in this survey, encompassing around 95% of the Canadian population. Even though the remaining 5% of the population does not participate in this survey, their non-inclusion has a minimal impact on the significance of the results.

The Importance of Building Permits

The Canadian Mortgage and Housing Corporation (CMHC) uses the data gathered from the monthly building permit survey to compile housing starts data and completion reports. Aside from that, building permits are also necessary for determining the capital expenditure on housing constructions. Reports based on these permits reveal how much industry players are willing to spend to meet the current demand for housing. The data on building permits are also required in the computation of quarterly and annual net capital stock estimates. And in cases where the residential building is categorized into different components (e.g., walls, levels, roof, etc.), building permit data is also critical in measuring the building’s component depreciation.

Building Permits of Major Cities

Tables 3 and 4 provide data on the building permits issued in several cities situated in Western Canada and Southern Ontario, respectively.

Building Permits in Western Canada
Source: CMHC & Statistics Canada
Building Permits in Southern Ontario
Source: CMHC & Statistics Canada

Housing Under Construction

Once building permits are issued, construction activities may now commence. The CMHC also reports projects under construction at the end of every period.

Projects are classified as under construction once they fall in any of the known construction phases. The stages of development may include (but is not limited to) the following:

  • grading
  • site preparation
  • the foundation works
  • building structural designs
  • framing
  • roofing
  • window and door installation
  • system integration (e.g. electrical, plumbing, water system, etc.).

Impact of the Construction Stage on the Canadian Housing Market and Economy as a Whole

The commencement of a residential construction indicates a movement in the housing market. But what impact does the construction stage actually have on the Canadian housing market and the economy as a whole?

An increase in construction brings about various positive effects on the housing industry and the economy.  One of the main benefits of construction is the provision of more housing units in the country. The surge in residential construction projects means that the industry is able to supply the increased need for residential dwellings. Moreover, if the construction or real estate development of a new project in a certain location is carefully designed and adequately carried out, then it may also potentially increase property values in that area. New constructions may also open the possibility for the inflow of more infrastructures. Investors, therefore, may now be more inclined to pour their capital into the market.

For example, a  building a mixed-use residential and commercial center in a five-hectare area.  could positively impact the economy because doing so brings in more investors, adds more job opportunities, and improves quality of life. As a consequence, the values of properties around this particular project is expected to increase as well.

The Effect of New Construction on Housing Prices

Do prices always increase when there is a new development in the area? Well, not necessarily. During the construction stage, housing prices do not always go up or down. The impact of new construction on prices varies and it depends on the relationship between supply and demand.

Housing demand may come in various forms, including:

(1) current buyers looking to purchase a new home;

(2) anticipated demand from newly-formed households looking for a home; and

(3) the demand that is created because of the new development. This can originate from local or foreign markets.

The price may not yet necessarily change if the housing demand falls under the first form (i.e. current buyers) during the ongoing construction stage. All things equal, short-term impact of new construction may even cause prices to go down. However, if additional demand comes in the second form (i.e. additional demand from newly-formed households), the price could increase even while the projects are still under construction. Lastly, if the new construction project brings improvements to the area and sparks the interest of buyers or investors, then the price may continue to increase in the long run.

Projects Under Construction in Major Cities

The following tables below (Tables 5 & 6) provide the number of housing projects which are under construction in various cities in Western Canada and Southern Ontario as of January 2017 and 2018.

housing development research in western canada
Source: CMHC & Statistics Canada
real estate development market study in southern ontario
Source: CMHC & Statistics Canada

The Completion Stage

The CMHC refers to completion as the stage wherein all necessary phases of construction have been performed. In some cases, housing projects which are only 90% complete may also be considered as completed.

Impact of Completed Projects to the Overall Housing Inventory

Any positive effect brought about by a newly completed housing project may cause prices to increase in that particular location. Investors and home buyers have been observed in the past to be willing to pay more if it means being offered better options in the housing market. Buyers are more interested in areas characterized by high housing activities if they know that they will get to enjoy plenty of benefits there.

On the other hand, the lack of discerning effects could make a residential area less attractive to investors or home buyers. Overall, lesser housing activities have a low impact on the economy as a whole.

property development market study in western canada
Source: CMHC & Statistics Canada
property market research completions in southern ontario
Source: CMHC & Statistics Canada

Absorption

Absorbed projects refer to housing units which are already sold or rented. These units are officially no longer available in the market once an agreement has been made with and signed by the buyer. The CMHC uses the results of the “Market Absorption Survey” in producing regular reports on absorption. Relevant data on several key cities in Western Canada and Southern Ontario are shown below.

property market analysis of absorbed units in western canada

housing market analysis in southern ontario
Source: CMHC & Statistics Canada

Importance of Absorption Rates

Absorption rate refers to the rate at which housing units are sold or rented in a particular real estate market in a given time frame. It’s a very important statistic in the real estate industry because it provides an accurate assessment of the real estate market, and makes it possible to predict housing prices and sales activity.

There are three types of real estate markets: (1) markets for sellers, (2) markets for buyers and a (3) balanced real estate market for when market conditions are favorable to both parties.

Sellers Market

The absorption rate is vital for sellers because it gives them the current performance standing of the local market where their properties are located. In knowing the absorption rate along with other relevant information about the local real estate market, sellers can make an educated decision on whether to sell their properties or not.

It must be noted, however, that a high absorption rate is not entirely advantageous for sellers. Because it is a seller’s market, there will also be an increase in the number of competitors in the real estate market, and consequently, sellers may find difficulty in selling their properties because of the increased competition. Of course, this also means buyers have more housing options to choose from.

Buyers Market

Absorption rates are also significant to buyers. In knowing the absorption rate, buyers will have a better idea of how house currently on the market should be priced. Buyers can then determine if the residential properties they are interested in buying are either undervalued or overvalued. With this knowledge, buyers can make an educated and fair counteroffer.

A low absorption rate may not be entirely favorable to buyers. In a buyer’s market, a lot of potential buyers will surface because of the relatively low housing prices. This may mean one buyer will have to face stiff competition every time he or she finds suitable and affordable homes that’s for sale.

Balanced Real Estate Market

A balanced real estate market absorption rate is between six and seven months. Both buyers and sellers must be aware of the current market absorption rate in their local areas to help them make the best decisions on buying or selling a home. They must also learn all relevant information concerning the local housing market and consider other key factors (e.g., timing) as well.

The Takeaway

Research is always necessary when dealing with anything related to the real estate industry because it allows us to make confident and well-informed decisions.

Whether you are a buyer or seller, it is crucial to build your knowledge about the real estate market and to understand how housing variables behave. Go beyond the daily newspaper you read regularly and try to stay updated on housing-related news and events.  Make the effort to understand every stage of home development and fully appreciate their economic value.