The North American Construction Markets

‐2002.04.10／

In the United States, housing starts peaked in 1999 with 1.64 million new units built. In the following year, new starts were only slightly lower, at 1.57 million units.

The US economy experienced a slowdown last year. During the second half of 2001 - and in particular after the terrorist attack on New York in September - a more pronounced weakening of the construction activity could be observed. It is estimated that approximately 137,000 housing starts may have been "lost" in the wake of the attack.

In spite of these unfavorable circumstances, home sales in the United States held up remarkably well. The decline of housing starts from an average of 1.62 millions (at annual rates) during the first three quarters of 2001 to an average of 1.57 million in the last quarter was less severe than has been anticipated by many analysts. In 2001 as a whole, American home builders still managed to erect 40,000 more housing units - that is a total of 1.61 million - than in the previous year.

A stimulating monetary and fiscal policy in the United States has been most beneficial to the economy in general and to the housing market in particular. A series of interest rate cuts and tax reductions helped to keep consumer confidence high and the housing market reasonably healthy. Following the September 11 attack on New York, mortgage rates have moved down by about 15 basis points. Fixed-rate home mortgages can now be obtained at 6.5 percent or lower, and one-year adjustable rate mortgages are available at less than 5 percent.

Residential real estate transactions that are lost in the shortterm are generally regained down the line. This catch-up phenomenon explains - at least partially - why the demand for new houses has been much stronger during the fist quarter of this year than it would have been prior setback. Expressed at an annualised rate, 1.65 million new housing units have been started during the first three months of 2002. This is an increase of 5.1 percent compared to the previous quarter. The jump in multi-unit starts amounted to almost 20 percent. Parallel to the new housing market, building permits and sales of existing homes have also progressed nicely.

Prospects for a substantial economic rebound in 2002 and 2003 are good. Nevertheless, fundamental demographic factors in the USA are pointing to a weaker housing market in the years to come. The US population is growing very slowly and the average age is rising. The construction jump during the first quarter of this year, caused by the catch-up demand, is unlikely to be carried over to the remainder of this year. On an annualised basis, the average number of starts during the next three quarters of 2002 will be in the vicinity of 1.57 million, representing a decline of 4.8 percent compared to the first quarter. For 2002 as a whole, residential housing starts may be around 1.59 million, down 1.2 percent from the previous year. For 2003 the number may be still lower at approximately 1.56 million. An additional contributing factor to this predicted decline is the prospect of rising mortgage rates.

Housing Starts

1.64mil

1.57mil

1.61mil

1.59mil

1.56mil

The figures above cover only (i) single family housing units and (ii) multifamily housing units. Not included are (iii) mobile homes, which contributed about ten percent - or some 160,000 units as of 2001 - to the overall residential housing market. During the past few years, the multifamily segment experienced noticeable advances. On the other hand, construction of single-family dwellings declined moderately and mobile home construction declined significantly by almost 50 percent between 1999 and 2001. Back in 1999, mobile homes still made up over 17 percent of the overall number of housing units built in that year.

The Canadian housing market is about one-tenth of the American size. In recent years, it performed somewhat better than the US market. Starts of new housing units in 1999 stood at 150,000. It increased to 152,000 in 2000 and 163,000 last year. The strong trend continued this year. Housing starts surged to a staggering 175,000 units during the first quarter of 2002 (expressed on an annualized bases). As we expect some slowdown in activity later this year, starts for this year as a whole may drop to 161,000 units. The same number is again expected for 2003. Similar to the United States, the Canadian housing market is driven by low borrowing costs and a hectic activity in the apartment and townhouse segments. Furthermore, unseasonably warm weather in Central Canada was a boon to the building industry.

The Canadian housing market is concentrated in just a few provinces. Ontario is leading with a 45 percent share. The Toronto Metropolitan area alone accounts for over one-quarter of the country's total market. Ontario is followed by Alberta with an 18 percent share and Quebec with a 17 percent share.

The strength of the present Canadian housing market is centered in Ontario, where starts are now close to the peak level of the housing boom of the late 1980s.

Non-residential construction is not using wooden building materials to the same extent as residential construction. Nevertheless it still is an important contributor to the wood industry's overall demand. Non-residential construction in the USA reached a relatively high value of US$ 179.8 billion in 2000 but fell 10.3 percent - to US$ 161.1 billion - in 2001. Poor corporate profits and rising vacancies pulled commercial and industrial construction lower.

Industrial vacancy rates hit a new record of 10.1 percent, while office vacancy rates climbed to 11.0 percent - the highest level in four years. Dallas, TX stands out with the highest vacancy rate at 24.4 percent while Washington, DC has the lowest rate at 4.7 percent. Only construction projects by governments recorded a modest increase last year.

Canadian office vacancy rates are generally lower than in the USA. Nevertheless, they moved up last year, reaching a national average of 7.3 percent as of year-end. Cities lying well above this average include Montreal and Vancouver (in excess of 8 percent) and cities with a particularly tight supply of office space include Ottawa (1.7 percent) and Winnipeg (5.3 percent).