Homebuilding in North America
An Economic Snapshot
The construction industry is a vital economic engine and an indicator of strength. Homebuilding adds significantly to the gross domestic product (GDP) of a country, and when the industry is down, so too is the economy. The cyclical nature of the homebuilding industry can significantly affect a country’s economy.
Not only is homebuilding a significant contributor to a nation’s economic performance but the decision to build or purchase a home is often indicative of personal financial performance, as it is likely to be one of the most significant investments a person will make in their lifetime. Investments in real estate are relatively stable investments, despite market ebbs and flows.
Residential construction is an industry that primarily constructs single-family homes that have ground-to-ceiling walls, with no units above or below. The industry is involved in a range of activities from building and construction to management, alterations, reconstruction, maintenance and repair, remodelling and home improvements.
In North America, homeowners have a reasonable expectation that their home will meet basic health and safety standards, regulations and codes and will represent good value for the money that has been invested.
Construction is both a complex service and an industry that manufactures, and as such, codes have been established to ensure consistency. These standards help to ascertain industry best practices. Industry-leading performers are industry compliant while at the same time able to reconcile a project’s vision, budget and timeline.
Organizations like Canadian Home Builders’ Association (CHBA) and the National Association of Home Builders provide a voice for the industry. These member-driven groups represent contractors, manufacturers, suppliers, insurance and lending providers and other industry players to ensure that people have access to affordable and safe housing that meets a minimum quality standard.
Associations achieve this by lobbying the government locally, provincially and federally in Canada and on a local, state and national level in the U.S. By making homebuilding a government priority, the output quality is consistent, and the industry is regulated to ensure health and safety, as well as economic viability.
There are two ways in which housing contributes to a country’s GDP: by residential fixed investment such as homebuilding or remodelling and housing services such as rent. In 2013, real estate construction achieved profits of just under $1 trillion and represented over five percent of U.S. GDP, while housing services represented over ten percent of GDP.
Home ownership is a very important part of the American Dream. The recession, which originated in the housing sector, was a blow to homebuilding and sent economic ripples across other market segments. Housing prices crashed, and hundreds of billions of dollars worth of home value was lost.
There were also widespread job losses which all but eliminated the disposable income of many, diminished consumer purchasing power and ultimately affected demand and profitability. Weak economic conditions lead to periods of conservative spending which depletes demand, especially for housing.
Approximately seventy percent of economic activity in the U.S. relates to personal consumption, and in times of economic constriction, this can severely stunt a nation’s economic performance. This is the motivating factor for injections of government stimulus and reduced interest rates, as these mechanisms encourage consumer activity.
A return to economic strength often manifests in two ways: rising numbers of housing starts and building permits issued. When times are good, increases in home sales and construction activity are early indicators that reflect the market’s return.
Just as residential construction influences the strength of the economy, several economic factors affect the performance of the homebuilding sector. Lending rates, availability of supply, levels of demand and employment rates can all stifle or spark industry growth.
Residential construction is highly fragmented with many industry players, large and small. In the U.S., there are seven major markets: Sun Belt, Central, Southeast, Mid-Atlantic, Midwest, West and the limited entry Northeast market, each of which has companies with specializations and niche markets to serve.
Given that homebuilding is a sector with low capital intensity, the barriers to entry in the industry are reduced. Construction is labour-driven not capital intensive. In 2016, wages accounted for nearly fifteen percent of total industry revenue. Labour drives value in the industry through knowledge and skills, as opposed to capital investments such as equipment, the value of which depreciates over time.
Construction is a sustainable career choice, but there is a multitude of issues facing the industry, chiefly among which is aging workforce. In Canada, over one million people find work in the residential construction industry alone. This accounts for over $58 billion in wages and supports $128.7 billion in economic activity, and soon demand for skilled labour will outweigh supply.
Upwards of seventy percent of Canadians are homeowners, with a total of $4 trillion in assets. Though this seems like a well-performing market, many problems lie ahead. Not only is there is a lack of skilled labour available in Canada, but as more workers retire, with them retires their industry expertise that cannot be easily replaced.
The outlook in Canada varies on a province by province basis, as detailed by construction labour market information organization BuildForce Canada. In British Columbia, nearly 40,000 workers are set to retire over the next decade. The same goes for Alberta which is slated to lose 36,000 construction workers to retirement. Even with job losses in the oil sands, this is going to be difficult for both provinces to address.
Saskatchewan has experienced modest gains in residential construction, requiring the addition of 2,200 jobs. There will be 9,000 retirees in Saskatchewan over the next ten years. With 4,000 workers being released from these substantial projects, it could help offset skilled labour retirement concerns in Saskatchewan.
Manitoba is expected to see nineteen percent of the construction industry retire over the next decade, while demand continues to grow for home building, renovations and non-residential construction. Infrastructure projects and ongoing work in Ontario are driving the construction market there in a relatively positive note for residential construction over the next decade.
The biggest difficulty for Ontario will be to replace the 86,000 workers who are planning to retire over the next ten years. From Quebec to the East Coast, the potential for growth varies, especially as many huge projects reach completion.
There is a downward trend in Quebec, as well as a bleak forecast for Newfoundland and Labrador, a market which is relying solely on renovations in both residential and infrastructure to sustain the construction industry in the provinces.
It will be difficult for Newfoundland and Labrador to offset the loss of twenty percent of the industry to retirement over the next ten years. This is no different for Nova Scotia, which is experiencing an eighteen percent decline in construction activity.
As Canada’s oldest population, Nova Scotia may find it difficult to address labour concerns without strategies to attract workers from outside of the province. Otherwise, it is not likely to offset the anticipated twenty-eight percent retirement rate in the same period.
Prince Edward Island is seeing an influx of immigration resulting in a need for new homes, and this is driving growth in both residential and non-residential activity. A growing population could serve the province well, as twenty-six percent of its construction workforce will be retiring over the next decade.
As a retiring workforce continues to deplete labour resources, both the industry and the government must take a leading role in attraction efforts, as well as education and retraining to encourage the next generation of workers to careers that help serve as the backbone of the national economy.
The Canadian construction market has suffered weak growth recently because of poorly performing commodity prices, a steady unemployment rate, high personal and household debt levels and ballooning home prices in larger markets, behind which is the potential threat of a housing bubble.
According to credit rating agency Moody’s Investor Service, there is a positive outlook for the North American homebuilding sector in 2017. This general optimism is attributable to low interest rates and consistent demand. Moody’s also indicated that increasing mortgage rates, demand for skilled labour and financing issues could be cause for concern and warned of the challenges that could come.
Home prices are expected to rise slowly and in many areas. In areas of slow to minimal growth, greater effort needs to be made to reconcile demand with available supply, which is true of both housing and the labour force that powers the industry. Without labour and expertise, the homebuilding industry, the communities it builds and the economies it supports will not stand a chance.