Sue Kirchhoff
USA Today

A home in Altadena, Calif., is offered at a reduced price. The housing slump’s impact on future consumer spending is a subject of increasing debate.

WASHINGTON — Will the housing slump level consumers?

Economists are debating whether a sharp drop in home sales and price appreciation will depress consumer spending, which is about two-thirds of the economy. The theory is that a sharp rise in home equity helped push spending up faster than income starting in the late-1990s until last year. Now, as the housing market sours, consumers not only feel less wealthy, but have less equity to use for other spending.

Some businesses say they are already seeing the fallout of falling home sales and what could be the first dip in national median home prices since the late ’60s.

“All you have to do is look at those states that have the most distress in housing; you have the biggest decline in auto sales,” says Mike Jackson, CEO of AutoNation, the nation’s largest auto retailer.

“In the first quarter, while industry sales were down 4%, California and Florida were down 14%. What’s different about California and Florida? It’s clearly housing. Both markets were overstimulated,” Jackson says.

Others call a recent rise in credit card debt another sign that consumers are having to find other, higher-cost means to support their spending.

However, Jim Paulsen, chief investment strategist for Wells Capital Management, notes that mortgage equity withdrawal peaked in 2005. Since then, the housing market has tanked, but overall consumer spending has held up, growing at a nearly 4% annual pace in the past six months. He thinks home equity gains may have supercharged the housing market by letting people trade up to better homes, but they didn’t rev up other parts of the economy.

“It massively ballooned housing, and when it went away, it busted it, but I don’t think it’s done much for consumption,” Paulsen says.

Wealth effect boosts spending

Home values can play into consumption a couple of ways. Rising appreciation makes those who own homes feel wealthier and reduces the need to save for the future. The Congressional Budget Office in a January report said research indicates an increase in home value increases consumer spending every subsequent year, with estimates ranging from $20 to $70 in increased spending for every $1,000 increase in price.

Consumers also have the ability to tap equity through refinancing, home equity lines of credit or other loans. There is less consensus on the impact this has had or could have on spending.

Former Federal Reserve chairman Alan Greenspan and Fed economist James Kennedy in a recent paper estimated that consumers pulled an average of $530 billion in “free cash” from their homes annually from 1991-2005. Of recent cash-out refinancings, 17% was used for personal consumption and 27% to pay other obligations. The paper noted the impact of the housing market in lower savings.

Goldman Sachs economist Jan Hatzius in a recent research note asked why consumer spending had been so robust despite the fact mortgage equity withdrawal has dropped from $908 billion in 2005 to $646 billion in 2006. He pointed to offsets from the rising stock market, strong income growth and the fact that wealth effects will be felt with a lag. Hatzius estimates real growth in consumer spending will slow to 2% to 2.5% for the rest of 2007.

Cash-outs have not stopped

Some caution that while mortgage equity withdrawal has declined, it’s hardly disappeared. Mortgage giant Freddie Mac says consumers cashed out $70.5 billion via refinancing in the first quarter of 2007, compared with $77 billion at the end of 2006. Most of those pulling cash from their homes owned them more than three years and had average appreciation gains of 24%. Freddie Mac expects cash-outs to keep declining, though staying above historical averages for many months.

Housing wealth effects “play out gradually, and there’s great debate about exactly how large they are,” says Scott Hoyt, economist at Moody’s Economy.com, saying the impact will be felt in the second half of 2007 and into 2008.

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, cautions that future cash-out refinancings could get tougher as the housing market stumbles. Problems could also worsen if the turmoil in the subprime mortgage sector hurts the mortgage bond market.

“A weaker housing market exerts a negative effect, but only a small one, on consumer spending,” Congressional Budget Office director Peter Orszag said Wednesday. “In the absence of a substantial further fall in housing prices, we expect the effect on consumer spending to remain relatively small.”

Builders are taking more time on existing projects, leading to an overall slowdown in building

Gerry Bellett
Sun

CMHC analyst Robyn Adamache said demand remains strong despite moderating housing starts and house sales.

B.C. housing starts cooled off during the first four months of this year by falling 11 per cent below last year’s pace to 10,091 units, Canada Mortgage and Housing Corp. reported Tuesday.

CMHC said Greater Vancouver starts dipped even more, dropping 22 per cent during the same period to 5,757 units.

But CMHC analyst Robyn Adamache said homebuyer demand remains strong — despite moderating housing starts and house sales — and expects 2007 house construction activity will end the year near 2006 levels. She said labour shortages have forced builders to take more time on existing projects.

Greater Vancouver Home Builders Association CEO Peter Simpson said he was not too concerned with the CMHC findings and also expects this year’s total of new homes built in the Lower Mainland will be close to those built last year.

“We knew the figures for the first five months of last year were exceptionally strong and we told the media not to get too excited because they would moderate during the year,” Simpson said.

“And that’s what happened. Five months does not a year make. We ended the year where we had predicted at 18,700 housing starts. This year we’ll be a little down at somewhere around the mid-18,000 mark.”

Simpson said the number of new housing units built in the GVRD peaked in 2004 at 19,435. Since then the industry has been on a plateau with an average of about 18,800 units being built in 2005 and 2006.

“We have to compare this to the 8,200 units built in 2000,” he said.

Jake Friesen, vice-president of the Pacific Region of Qualico Developments, said the reason for the drop in single family housing starts in the Lower Mainland was related to the lack of skilled tradesmen and a shortage of building land.

“I was reading a story in The Vancouver Sun today which quoted a furniture manufacturer talking about how he has to turn away orders just because he can’t produce. We’re not that different. We basically can’t deliver. Our company has taken an approach that we will not sell more than six months in advance simply because of the tight labour market compounded by a lack of land.

“If someone walks in today and says ‘I need a house’ I’ll have to say that’s a wonderful idea and I’m glad you want one because we’re in the business of supplying houses, but we’ve pre-sold everything for the next six months, therefore the land we do have we’re not offering for sale because of our policy,” Friesen said.

The demand for new homes was still strong, he said, but if we tell “someone you can have a home by Aug. 1, it’s good to keep your promise.”

Qualico builds an average of 175 homes a year in the Surrey, Pitt Meadows and Langley areas.

Friesen said he would much sooner have today’s problems than than “those times when there was plenty of labour and plenty of land but fewer orders.”

Analysts agreed Tuesday that housing construction across Canada is slowly cooling, but not enough to warrant worries of a U.S.-style housing collapse or to end the Bank of Canada’s concerns that rising housing prices could fuel inflation.

Home construction starts slipped one per cent last month to a seasonally adjusted annual pace of 211,900 from 214,000 in March, and were down 6.6 per cent from a year earlier, CMHC said.

Analysts noted the decline was fairly widespread, with starts decreasing in six of 10 provinces, the exceptions being Ontario, Saskatchewan, Prince Edward Island and Nova Scotia.

“Canada’s housing market is slowly starting to cool down as rising home prices eat into affordability,” said BMO Capital Markets economist Sal Guatieri, adding that housing construction will act as a slight drag on overall economic growth in the spring quarter.

But “the cooling in housing is also insufficient to allay the Bank of Canada’s concern that this area of the economy poses an upside risk to the inflation outlook,” he added.

© The Vancouver Sun 2007

Sector strong with skilled labour in demand

Ashley Ford
Province

New-home construction activity in Greater Vancouver continued its gentle cooling down last month, according to the latest numbers from Canada Mortgage and Housing Corp. released yesterday.

But housing experts say there is little to worry about. The sector remains strong and there is fierce competition for skilled labour.

“Yes, there is moderation in the market, but we knew this was going to happen,” said Peter Simpson, CEO of the Greater Vancouver Homebuilders Association.

“This year we are not going to see any large spikes or drops and will end up about where we were last year.” Simpson said building-permit numbers continue to rise and that augurs well for a continuing, strong but steady performance.

CMHC preliminary figures show that Greater Vancouver housing starts fell 22 per cent in the first four months of 2007, to 5,757 units, from the same period last year.

Single-detached starts declined by 40 per cent, to 1,214 units, while multiple-unit starts dipped 15 per cent, to 4,543 units.

“Although new construction and resale-market activity are moderating, homebuyer demand remains strong,” said Robyn Adamache, senior market analyst with CMHC.

“With unabsorbed new-home inventory levels still at historic lows, and demand solid, look for starts to end the year at near the same level as 2006,” Adamache said.

Also, multiple-unit projects, which account for the majority of new residential construction, are taking longer to complete due to labour shortages, keeping the number of units under construction high.

Year-to-date, housing starts in B.C.’s urban areas contracted 11 per cent to 10,091 units, compared to the same period a year ago.

© The Vancouver Province 2007

$2.96 billion in building permits granted

Derrick Penner
Sun

March building permit applications in B.C. jumped more than they had dropped in February.

Builders took out almost $1.1 billion in permits in March, 25.5-per-cent more than the $837 million they took out during a blustery February, which represented a substantial decline, Statistics Canada reported Monday.

And for the first quarter of 2007, builders were granted $2.96 billion worth of permits, about 16-per-cent more than during the same period of 2006.

Helmut Pastrick, chief economist for Credit Union Central B.C., said the increasing value of building permits also reflects inflation in the cost of construction, but even after factoring that in, “there is certainly more real [construction activity, [and] certainly on the non-residential side.”

Most of the building begun during the first quarter of 2007 was residential, with the $1.93 billion in permits issued accounting for 65 per cent of the total.

The $1.03 billion in permits for commercial buildings, factories and schools accounted for 35 per cent.

Housing starts, Pastrick said, appear to have hit a peak and are beginning to slip. “Non-residential is still on an upturn,” Pastrick added. “It’s demand driven.”

“Office vacancy rates are low, retail space rental rates are rising [along with] other commercial leases, hence that will induce more investment and more [commercial-building] space being created.”

Statistics Canada reported that while residential permit values were up in B.C., permits for single-family homes were down slightly. Carol Frketich, Canada Mortgage and Housing Corp.’s regional economist, said single-detached starts were down 41 per cent in Vancouver, compared with the first part of 2006.

© The Vancouver Sun 2007