Housing starts, rate bumps, and a changing mix of singles and multis
Due to rising mortgage rates, expectations for housing starts in the United States and Canada have been revised downwards. Nevertheless, the housing starts statistics are holding up fairly well so far.
In the United States, the monthly average of unit launches increased by +8.5% since the beginning of the year, although the last monthly level was -14.4% compared to the previous month, rising from 1.810 million units in April to 1.549 million units in May. The upcoming June results will provide a clearer indication of whether there is still support for a decent number of housing starts this year.
In Canada, the monthly average is -12.4% year-to-date compared to Jan-May 2021, but the individual month of May was quite strong, 287,000 SAAR units. The number of 287,000 was the highest for any month so far in 2022 and the best since last November, when 306,000 units were launched.
In Canada, 2021 home starts hit a new annual high of 271,000 units, and even under the most fortuitous of circumstances, it never seemed likely they would hit such a high again in 2022.
In addition, potential buyers are now struggling with higher mortgage rates.
The calculation illustrating the dissuasive aspect of rate hikes is simple.
A 100 basis point increase (where 100 basis points = 1.00%) in the mortgage interest rate increases the annual payment on $100,000 of outstanding principal by $1,000.
A 300 basis point increase in the mortgage interest rate raises the annual payment on $100,000 of unpaid principal by $3,000.
A 300 basis point increase in the mortgage interest rate raises the annual payment by $15,000 on $500,000 of outstanding principal.
The above isn’t quite accurate, as there are capital reductions from month to month, but it’s pretty close. In the third example above, an additional $15,000 to the annual after-tax (i.e. “disposable”) income of a family or individual is a lot of money.
As for those who have bought a house in the past few years, committing to a variable rate mortgage, but thinking that the rates will surely not deviate much from a normal level, they must shake their heads at the potential dilemma in which they might find themselves.
The charts and tables below present the usual summary of housing start information in the United States and Canada, with highlights presented in the accompanying boxes.
Implications of the composition of residential construction
A particularly interesting new chart, Table 1, shows the percentage of residential openings in major US cities that are in multi-family structures (eg, apartment or condominium towers) as opposed to single-family dwellings.
While multi-unit residences have become dominant in Canadian urban centers, they are over 50% in only about a third of US metros.
One of the reasons singles make up a larger share of the “total” in the United States is that their count includes townhouses, except where a group of units share a single HVAC system. North of the border, townhouses are designated by Canada Mortgage and Housing Corporation (CMHC) as multi-unit buildings. But the townhouse registration anomaly is only part of the story.
The United States has a history of building relatively more singles due to several other factors. For example, in America, mortgage interest deductibility has encouraged larger purchases (eg, a property with a yard as opposed to a condo). Canadians have never had this personal tax relief.
A trend before the pandemic, and one that is sure to reappear in the future, city planners have embraced mixed projects, with an abundance of meeting places (theaters, bars, restaurants, etc.) as a means of achieving a life more animated. and a safer atmosphere downtown, especially at night.
Canadian cities have certainly embraced this concept. The multiples as a proportion of the total are around 90% in Montreal and between 85% and 90% in Toronto and Vancouver.
In the United States, the top five cities for multiples as a share of the total for the whole of 2021 were New York (77.2%), Philadelphia (75.6%), Seattle (71.3 %), Boston (71.0%) and San Francisco (68.4%) (see Table 1).
The other six US cities where multiples accounted for more than half of the total number of new unit openings last year were San Diego, Miami, Los Angeles, Denver, Minneapolis-St. Paul and Austin.
The issue of single versus multiple has significance for other building types that will receive a boost. If the preponderance of work is single-family on the perimeter of a city, this will favor road works, sewer and water activities, K-12 educational institutions, strip malls and infrastructure necessary (e.g. fire stations).
For multi-residential towers, there will be openings of nearby or shared retail and hotel rooms and calls for expansion and extension of metro or LRT rapid transit to serve new intersection hotspots.
Alex Carrick is chief economist for ConstructConnect. He has given presentations throughout North America on construction prospects in the United States, Canada and around the world. Mr. Carrick has been with the company since 1985. Links to his many articles are posted on Twitter @ConstructConnxwhich has 50,000 subscribers.