Housing starts may have become the most pivotal economic indicator for Canadian financial markets. And they've suddenly turned dovish. Again.
Housing starts dipped a surprising 6.6 per cent in August, to an annualized rate of 180,000, the lowest since April. The pace is pretty much in line with the country's annual rate of new household formation - and is down dramatically from nearly 230,000 a year ago, and nearly 200,000 as recently as May.
This matters to financial markets because it matters, a lot, to the Bank of Canada. Whereas the U.S. Federal Reserve Board is laser-focused on seeing the unemployment rate come down, Canada's central bank has a continuing obsession with managing Canada's overheated housing market downward. The bank has hinted that it might be willing to raise interest rates earlier in order to lean its monetary policy against housing's unhealthy excesses, if necessary.
The sizable step backward in starts last month makes that look much less necessary than it did a few months ago if, of course, the downward trend can be trusted.
But markets saw this movie before, in the tail end of 2012 and the first few months of 2013. Starts plunged 30 per cent in just five months, and then settled into a comfortable 175,000 to 180,000 range where they were more or less in balance with household formation. But just as this housing slowdown looked to have taken hold, starts surged again toward 200,000, renewing nervousness that the sector was again bloating dangerously. It's going to take a lot more than a single month in the 180,000 range to convince observers that the more moderate, sustainable pace is here to stay.
Of course, while housing starts are probably the best-known proxy for the state of the housing market, they're not the only measure. Others leave us with a muddled picture of how much the market has cooled.
Building permits surged more than 20 per cent in July (the latest figures, released Monday); residential permits have been generally trending upward all year, suggesting builders continue to anticipate strong demand. July home sales were at a 15-month high, having risen for five straight months - although the pace of the rise slowed markedly in July. Sales are flat compared with a year earlier, and are now slightly below their 10-year average.
The MLS Home Price Index was up 2.7 per cent from a year earlier - showing that already high prices continue to climb, albeit at a much slower pace than the 10-per-cent-plus rates seen in the years before the 2008-09 recession and again in the early stages of the recovery. Still, housing affordability (ownership costs as a percentage of household income) remains at historically strained levels, despite low interest rates.
The ratio of sales-to-new-listings is stable at 54 per cent, putting it "firmly rooted in balanced territory," the Canadian Real Estate Association said in its July report. But another measure of the supply-and-demand balance, the inventory of unsold homes on the market, remains above historical norms in most cities.
There are lots of positives there to suggest that the desired cooling of the housing market is under way - yet more than enough question marks to raise doubts that it will get there on its own. Until we see a lot more numbers along the lines of August's housing starts retreat, the Bank of Canada will remain skeptical - and the markets, by extension, will remain uncertain.