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Alberta residential construction surges


November 23, 2009
By Andy Bateman

November
23, 2009 – A report in last Saturday’s Calgary Herald, “
Alberta homebuyers return”,
brings good news for Alberta’s
homebuilders and aggregate producers.

“New home buyers from Grande Prairie to Lethbridge
are jumping back into the ownership market, despite the fact recessionary
clouds are still hovering.

Favourable conditions in
recent months–including low mortgage rates, inventory reductions and price
stabilization–have allowed potential homebuyers in Alberta and across the Prairies to re-enter
the market, says Lai Sing Louie, Prairie region economist for Canada Mortgage
and Housing Corp.

"As a result, the
fourth quarter outlook is more optimistic than our previous forecast," he
says, referring to the period from October to December.

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Predictions for housing
construction starts for the remainder of this year and next have been upgraded,
he says.

The construction gap
between 2008 and 2009 has closed dramatically in Alberta.

At the end of the January
to March period, detached housing starts were 43 per cent behind the same time
in 2008.

For April to June, the
difference had narrowed to 33 per cent.

Then came July to
September, in which the beginnings of a turnaround were more than just a bit
noticeable , with the gap shrinking to just 13 per cent. "The outlook for
detached construction up and down the province has improved because of
increased demand, declining inventory and less competition from the resale
market," says Louie.

After a weak first half
of 2009 when sales and construction struggled, the market began to pick up
speed. CMHC says that momentum will continue through 2010 –although it will
stay below the 10-year average.

The federal agency's
forecast is for just over 13,000 detached housing starts this year, likely
climbing 21 per cent to 15,800 by the end of next year.

But there is still some
fragility to the economy.

The employment issue
remains. While Alberta has the lowest
unemployment rate in Canada,
job creation is still spotty–especially in terms of full-time jobs, which are
vital to household formations and homebuying.

In the province's five
largest centres outside Calgary and Edmonton, employment
figures are mixed, thereby affecting new home construction.

Red Deer

Through the first nine months of this year, 1,200 new jobs
were created in the construction sector in Red Deer — bringing year-to-date
job gains to 2,400 as of September, says Statistics Canada.

"In Red Deer through September, the participation
rate was at 79 per cent, which is a positive for demand for housing," says
CMHC market analyst Regine Durand.

Construction investment
will also boost residential construction next year.

In May 2009, there were
$3 billion worth of construction projects valued at $5 million or more planned,
underway or recently completed in the Red
Deer region.

In 2010, 600 homes are
expected to break ground in Red Deer,
a 26-per-cent increase from 2009.

"With inventories
fully exhausted by mid-2010, builders will feel driven to start stocking up
again," says Durand.

"Stable prices and
economic growth will also fuel demand for new homes next year, and help the
market gain leverage.

"From a resale
market perspective, lower carrying costs on existing homes will continue to
boost MLS sales this year and next across central Alberta."

Throughout the region,
3,900 existing homes will likely change hands in 2010, a five-per-cent increase
from 2009.

"From a price
perspective, steady declines in resale inventories — combined with stronger
demand for housing — will spur price growth in 2010," says Durand.

With demand more in line
with supply next year, and lower inventories, the average MLS price will likely
climb to $280,000 next year — a four per cent gain.

Medicine Hat

Natural gas uncertainty
has also affected Gas
City's economy. Like Grande Prairie, it is
driven mainly by natural gas exploration and development.

"The natural gas
sector has experienced a slowdown in the last several months, a result of the
uncertainty of the impact of the new resource royalty framework, the economic
outlook and high shale gas levels in the United States," says CMHC
market analyst Lindsay Kendall.

The natural gas price
declined to about 66 per cent of last year's price, causing drilling activity
to remain low. Lower drilling activity, combined with the economic downturn,
has resulted in lower employment levels, says Kendall.

Employment declined by
2,500 jobs in September compared to a year earlier, with the labour market
shedding more full-time jobs in favour of part-time work.

Homebuilders will use
2009 to reduce production in order to manage their supply levels.

Figures from CMHC show
that under-construction levels have been falling month-over-month for 16
consecutive months, while inventory levels remain above one hundred units.

If supply levels–those
units under construction and in inventory–are sufficiently managed and given
economic recovery in 2010, single-detached starts are anticipated to pick up in
2010, says Kendall.

Lower demand due to
economic uncertainty– combined with near-record highs for active listings–had
the Medicine Hat
resale market favouring buyers in 2009.

"With more supply
and fewer sales on the market, price growth has begun to reverse, causing
potential buyers to wait to see if prices bottom out before signing a deed,"
says Kendall.

"As a result, the
forecast calls for sales to fall in 2009. Price stabilization, combined with
economic growth, should bring buyers back to the market, increasing sales in
2010."

Lethbridge

Of
the seven largest centres in Alberta, Lethbridge is the only one
that is not directly driven by the oil and gas industry, relying instead on
food manufacturing.

This sector gained three
per cent from August 2008 to this August, says Statistics Canada — but it has
not helped with employment.

"This sector is
promoting economic activity in the Lethbridge region, although — like the rest
of the province — Lethbridge is experiencing unemployment, which in turn is
one factor contributing to lower demand for housing," says Kendall.

At the end of September,
the unemployment rate was 6.9 per cent.

Construction of
single-detached homes during the past three months boosted overall activity
levels compared to the first half of the year.

However, single-detached
homebuilders continue to control supply by cutting back on production compared
to the previous year, as inventory levels remain high by historical standards.

With further drawdowns in
inventory in order to manage supply levels — combined with a healthier economy
next year — should allow for housing construction starts to increase in 2010,
says CMHC.

In terms of resale
housing, recent price declines and low mortgage rates have boosted sales in the
summer months, while the amount of supply — or active listings — on the
market has declined.

"With these positive
signs, sales in 2009 are expected to decline by six per cent compared to
2008," says Kendall. "As the economy
improves next year — combined with signs of price stabilization — more buyers
are expected to hit the market."

Prices in 2009 are expected
to decline from 2008 levels.

Balanced market
conditions returned in the second quarter of this year, resulting in upward
price pressures.

As the economy moves into
positive territory, resulting in job growth, further upward price pressure is
expected in 2010.

Grande Prairie

Natural resource-based industries account for 20 per cent
of this city's economy.

The natural gas sector is
particularly important because it creates spinoff jobs in other areas of the
economy, such as wholesale and retail trade.

In September, the average
price for natural gas was down 60 per cent from a year earlier, leading to
reduced drilling activity.

The total number of
active drilling rigs to the end of the third quarter was down by one-half
compared to 2008, while the utilization rate sat at below 20 per cent.

As a result, employment
growth declined in the Grande Prairie-Athabasca region, which also encompasses
Peace River, Slave
Lake, High Level and
Whitecourt.

After the first quarter
of this year, average employment in the region stood at 132,600 people. But by
the end of September, it had declined to 131,700.

As in other centres,
homebuilders have focused much of their attention on reducing standing
inventory in response to weaker demand.

"Single-detached
starts activity has been lower in the first half of 2009. However, there have
been some signs of improvement since then as inventory levels have moved
lower," says Fang Qin, market analyst for CMHC.

in 2010, construction
starts of detached housing are expected to increase compared to 2009.

As for the resale market,
it will likely be next year before it improves because economic uncertainty has
held buyers to the sidelines for much of the year, says Qin.

This has also resulted in
higher inventory levels and softening prices in 2009. But the average price is
expected to stabilize in 2010 as the economy improves and supply levels move
closer to being balanced.

Wood Buffalo

Oilsands development is the main economic driver in Wood
Buffalo, which has Fort McMurray
as its population and administrative centre.

As of June, there were
more than $104 billion worth of projects either being proposed, under
construction or recently completed in the region, down $10 billion from
December 2008.

More than 91 per cent of
these investments were in the oil-sands.

With an economy anchored
solidly in oil — and with the price of oil improving recently from a low of
$39 US per barrel in February to $70 by September — some projects that were
placed on hold have restarted.

Others remain on hold or
delayed until economic conditions further improve.

There have also been
signs that employment in the region is starting to see some signs of recovery.

"Employment has
recorded five consecutive month-over-month increases to the end of
September," says Oin. "Correspondingly, year-to-date average
employment losses have been declining."

Unemployment has moved
lower to 4.6 per cent in September, down from 6.8 per cent earlier in the year.

As with all other centres
in the province, builders are reducing construction this year because of
stronger competition from the resale market, as well as an elevated number of
units under construction. "There have been some signs of higher starts
activity and this is expected to carry into 2010," says Qin.

Strong price growth in
recent years — coupled with economic uncertainty — contributed to a weak
level of activity in the first quarter on the resale market.

Although activity has
picked up since the summer, sales are expected to finish 2009 down from last
year.

An improvement in economic
conditions is expected to support higher sales in 2010.

Prices have been
decreasing year-over-year during 2009 because elevated supply levels have
persisted in the market for much of the year.

The decline in the
average price is not expected to reverse until 2010, in line with an expected
economic recovery”.