The Stabilization of the building market in Canada

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The Stabilization of the building market in Canada

Rakhra, A. S.; Wilson, A. H.

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THE STABILIZATION OF THE BUILDING MARKET I N CANADA

by A.S. Rakhra and A.H. Wilson

ANALYZED

Presented at

CIB 84 9

Third International Symposium on Building Economics

Ottawa, Ontario, Canada. _{N R C}

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Reprinted with permission

DBR Paper No. 1226

Division of Building Research

Price $1.00 OTTAWA

Rech. BSPim. C N R C - I C 1 5 T

Key words

Construction i n s t ' a b i l i t y / Canada/ National energy p o l i c y / s t a b i l i z a t i o n measures

SYNOPSIS

Almost t e n y e a r s ago t h e Economic Council of Canada examined t h e problem of f l u c t u a t i n g l e v e l s of c o n s t r u c t i o n work performed i n t h e

country and made recommendations designed t o b r i n g more s t a b i l i t y i n c o n s t r u c t i o n . Few of t h e s e reconrmendations were followed.

T h i s paper examines t h e problem of c o n s t r u c t i o n i n s t a b i l i t y i n Canada i n r e c e n t years. E f f e c t s of c a n c e l l a t i o n o r postponement of

megaprojects i n t h e energy f i e l d on c o n s t r u c t i o n a c t i v i t y a r e analyzed. The impact of v a r i o u s government i n t e r v e n t i o n s t o c o u n t e r a c t t h e r e c e n t downturn i n b u i l d i n g a c t i v i t y i s discussed. Some g e n e r a l conclusions a r e drawn.

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I1 y a presque d i x a n s , l e C o n s e i l Bconomique du Canadh s ' e s t pench'e s u r l e probleme des f l u c t u a t i o n s dans l e domaine de l a c o n s t r u c t i o n % t r a v e r s l e pays, e t a p a r l a s u i t e propos'e une s k i e d e

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o b t e n i r une p l u s grande s t a b i l i t C . TrZs peu d e c e s recommandations o n t & t 6 s u i v i e s .

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THE STABILIZATION OF THE BUILDING

MARKET I N CANADA

A.S. Rakhra and A.H. Wilson

INTRODUCTION

A c h a r a c t e r i s t i c f e a t u r e of t h e c o n s t r u c t i o n i r ~ d u s t r y a l l o v e r t h e w o r l d i s i n s t a b i l i t y 3 c i n t h e v a l u e o f work performed. O f t e n , p e r i o d s of booming c o n s t r u c t i o n a c t i v i t y a r e f o l l o w e d by p e r i o d s of d e c l i n e . S e a s o n a l v a r i a t i o n s add t o t h e s e c y c l i c a l changes. T h i s phenomenon o f "boom" and " b u s t " , i s l e s s common i n o t h e r i n d u s t r i e s s u c h

as

m a n u f a c t u r i n g a n d s e r v i c e s ; i n t h i s r e s p e c t , c o n s t r u c t i o n i s d i s t i n c t from o t h e r s e c t o r s of t h e economy.

The i n t r i n s i c i n s t a b i l i t y i n c o n s t r u c t i o n c a n r e s u l t i n s e r i o u s r e a l c o s t s t o s o c i e t y i n t h e form of h i g h c o n s t r u c t i o n c o s t , i n f l a t i o n a n d unemploymentr I n s t a b i l i t y c a n a l s o l e a d t o m i s a l l o c a t i o n o f r e s o u r c e s and unequal d i s t r i b u t i o n of income, which may r u n c o u n t e r t o p u b l i c views of e q u i t y . Concerned w i t h t h i s problem o f i n s t a b i l i t y i n

c o n s t r u c t i o n , t h e Prime M i n i s t e r of Canada, i n J a n u a r y 1972, r e q u e s t e d t h e Economic C o u n c i l o f Canada (ECC) t o u n d e r t a k e a d e t a i l e d s t u d y o f c o n s t r u c t i o n a c t i v i t y . The s t u d y was t o f o c u s on t h e f o l l o w i n g (1):

-

t h e r o l e of t h e c o n s t r u c t i o n i n d u s t r y a n d i t s e f f e c t s orr t h e r e s t of t h e economy;

-

t h e consequences o n t h e c o n s t r u c t i o n i n d u s t r y of c h a n g e s i n ' g e n e r a l economic a c t i v i t y , p a r t i c u l a r l y c y c l i c a l phenomena a n d t h e a b i l i t y o f t h e i n d u s t r y t o meet u r b a n needs;

-

t h e impact of government p o l i c l e s on t h e s t a b i l i t y of t h e c o r ~ s t r u c t i o r r i r r d u s t r y

.

A few y e a r s l a t e r , f e a r s were e x p r e s s e d t h a t t h e i n i t i a t i o n o f s e v e r a l "megaprojects" i n t h e errergy f i e l d would d i s t o r t t h e market. T h i s d i d n o t happen b e c a u s e t h e p r o j e c t s were e i t h e r c a n c e l l e d o r postponed d u e t o f i n a n c i a l and economic corrditiorrs. I n a d d i t i o n , t h e dowrtturn i n g e r r e r a l economic a c t i v i t y i n 1981 a n d 1982 l e d t o a s i g n i f i c a n t d e c l i n e i n c o n s t r u c t i o ~ r a c t i v i t y , e s p e c i a l l y t h e r e s i d e n t i a l

component. Cbvernments a t v a r i o u s l e v e l s h a v e s i n c e i n t e r v e n e d i n t h e market t o s t i m u l a t e t h e b u i l d i r r g i n d u s t r y .

T h i s p a p e r w i l l d i s c u s s r e c e n t c o a s t r u c t i o r r i n s t a b i l i t y i n Canada, some of t h e recommendations of t h e ECC r e p o r t , t h e problem of

m e g a p r o j e c t s , t h e e f f e c t s of t h e r e c e n t downturrr i n b u i l d i n g a c t i v i t y , and t h e i n f l u e n c e of v a r i o u s r e c e n t government i n t e r v e n t i o n s i n t h e b u i l d l r ~ g market.

CONSTRUCTION INSTABILITY I N CANADA

C o n s t r u c t i o n i n s t a b i l i t y , because of t h e n a t u r e of t h e i n d u s t r y , i s found a l l o v e r t h e world. In Canada, c o r r s t r u c t i o n i n s t a b i l i t y is compounded by e x t r e m e w e a t h e r c o n d i t i o n s . Among t h e O.E.C.D.

c o u n t r i e s , Canada r a r ~ l c s above t h e median i n i r r s t a b i l i t y o f

c o ~ ~ s t r u c t i o n . In s t a b i l i t y is much h i g h e r i n t h e r e s i d e n t i a l s e c t o r

*

I n s t a b i l i t y i s d e f i n e d a s d e v i a t i o n s o f t h e v a l u e o f c o n s t r u c t i o n o u t p u t i n c o n s t a n t d o l l a r s from l o n g term growth p a t h , e x p r e s s e d e i t h e r i n a b s o l u t e d o l l a r s o r i n p e r c e n t a g e o f t h e t o t a l v a l u e o f c o n s t r u c t i o n o u t p u t .

t h a n i n t h e n o n - r e s i d e n t i a l s e c t o r i n a l l t h o s e c o u n t r i e s e x c e p t West Germany. While t h e r e is a c l e a r correspondence between t h e growth

rate of c o n s t r u c t i o n a n d t h e g r o s s n a t t o n a l income o f a c o u n t r y , t h e r e

i s no such correspondence between c o n s t r u c t i o n i n s t a b i l i t y a n d t h e o v e r a l l i n s t a b i l i t y o f t h e c o u n t r y ' s income.

C o a s t r u c t i o n i n s t a b i l i t y i n Canada, a s measured by a n n u a l d e v i a t i o n o f c o n s t r u c t i o n o u t p u t from i t s growth t r e n d , i s shown i n f i g u r e 1.

There a r e v a s t changes i n c o n s t r u c t i o n i n s t a b i l i t y from one y e a r t o a n o t h e r .

I n Canada, c o n s t r u c t i o n i n s t a b i l i t y v a r i e s n o t o n l y f r o m o n e p e r i o d t o a n o t h e r , b u t a l s o from one r e g i o n t o a n o t h e r . For example, i n t h e A t l a n t i c Region, c o n s t r u c t i o n i n s t a b i l i t y was e s t i m a t e d a t t h e r a t e o f 3% of a v e r a g e a n n u a l c o n s t r u c t i o n v a l u e between 1961-71, compared w i t h 7% i n Quebec, a n d 6% i n B r i t i s h Columbia. For 1951-60, t h e

c o r r e s p o n d i n g p e r c e n t a g e s were 3.5% f o r t h e A t l a n t i c Region, 5% f o r Quebec a n d 13.5% f o r B r i t i s h Columbia (1).

THE ECONOMIC COUNCIL'S ANALYSIS OF INSTABILITY I N CONSTRUCTION The r e p o r t p o i n t e d o u t t h a t c y c l i c a l i n s t a b i l i t y i n c o n s t r u c t i o n a c t i v i t y i n Canada was a major problem of t h e i n d u s t r y . On t h e a v e r a g e , i t was e s t i m a t e d a t 7% of t h e a n n u a l v a l u e of c o n s t r u c t i o n o u t p u t . C l a s s i f y i n g t o t a l c o n s t r u c t i o n e x p e n d i t u r e s i n t o t h r e e s u b - c a t e g o r i e s ( r e s i d e n t i a l , p r i v a t e n o n - r e s i d e n t i a l and government), t h e c o u n c i l r e p o r t e d t h a t between 1951-70, e a c h sub-category a c c o u n t e d f o r o n e - t h i r d of t h e i n s t a b i l i t y oE t o t a l c o n s t r u c t i o n e x p e n d i t u r e s ( T a b l e 1 ) . These s h a r e s , however, d i d n o t remain c o n s t a n t o v e r time. Durlng t h e 1950's f o r example, r e s i d e n t i a l c o n s t r u c t i o n c o n t r i b u t e d n e a r l y one-half and d u r i n g t h e 1960's government c o n s t r u c t i o n

accounted f o r t w o - t h i r d s of a l l i n s t a b i l i t y .

F i g u r e 1. Annual D e v i a t i o n s of Coilstructiotl Output from i t s Growth Trend, 1951-70

Source: ECC r e p o r t based o n d a t a from Canada ;rf,i e s t i m a t e s

T a b l e 1. C o n t r i b u t i o n of r e s i d e n t i a l , p r i v a t e n o n - r e s i d e n t i a l , a n d government c o n s t r u c t i o n t o i n s t a b i l i t y o f t o t a l c o n s t r u c t i o n e x p e n d i t u r e s 1951-70. 1951-60 1961-70 1951-70 (% ) (%

1

R e s i d e n t i a l 4 5 -5

3

3

P r i v a t e n o n - r e s i d e n t i a l 3 7 3 7

3

3 Government 1 8 6 8 34

-

-

-

T o t a l C o n s t r u c t i o n 100 100 100 Based on d a t a from S t a t i s t i c s Canada a n d e s t i m a t e s by t h e Economic C o u n c i l of Canada.

Sources of C o n s t r u c t i o n I n s t a b i l i t y

Four c a u s e s of i n s t a b i l i t y i n c o n s t r u c t i o n were f o c u s e d on: monetary, f i s c a l , demand and s u p p l y . The a u t h o r s o f t h e r e p o r t d e t e r m i n e d t h a t a more s t a b l e money s u p p l y could have reduced r e s i d e n t i a l c o n s t r u c t i o n i n s t a b i l i t y by 1 7 % between 1955-68. Among f i s c a l f a c t o r s , more s t a b l e nominal income t a x rates would have h e l p e d s t a b i l i z e income a n d , i n

t u r n , t h e demand f o r r e s i d e n t i a l c o n s t r u c t i o n . On _{t h e government} s i d e , a s t a b l e e x p e n d i t u r e on highways and s c h o o l s would have reduced i n s t a b i l i t y c o n t r i b u t e d by o t h e r government e x p e n d i t u r e s . With r e g a r d t o demand f a c t o r s , a p a r t i a l r e s c h e d u l i n g of b i g c o n s t r u c t i o n p r o j e c t s by owners would h a v e r e d u c e d i n s t a b i l i t y i n i n d u s t r i a l c o n s t r u c t i o n by one-third. F i n a l l y , a f l e x i b i l i t y i n s u p p l y f a c t o r s s u c h as i n d u s t r i a l o u t p u t p r i c e s a n d c o n s t r u c t i o n p r i c e s would h a v e reduced i n d u s t r i a l i n s t a b i l i t y c o n s i d e r a b l y .

Recornmendat i o n s of t h e ECC Report

The r e p o r t l i s t e d s e v e r a l recommendations. Those r e l e v a n t t o t h e b u i l d i n g i n d u s t r y a r e l i s t e d below.

( I ) The g o a l o f more s t a b l e growth i n c o n s t r u c t i o n a r o u n d i t s long-term growth t r e n d s sllould be pursued by a l l i n v o l v e d i n t h e b u i l d i n g i n d u s t r y , t a k i n g a c c o u n t of r e g i o n a l

d i f f e r e n c e s .

( 2 ) Simultaneous peaking of major c o n s t r u c t i o n p r o j e c t s s h o u l d b e a v o i d e d , a s f a r a s p o s s i b l e .

(3) F e d e r a l , p r o v i n c i a l a n d m u n i c i p a l governments s h o u l d d e t e r m i n e t a r g e t r a t e s of growth f o r t h e i r d e p a r t m e n t a l s p e n d i n g o n c o n s t r u c t i o n , i n c l u d i n g j o i n t programs, a n d p u r s u e t h e s e t a r g e t s a l o n g p a t h s a s s t a b l e a s p o s s i b l e . ( 4 ) A f e d e r a l investment levy and i n c e n t i v e program s h o u l d b e

i n t r o d u c e d t o a c h i e v e more s t a b l e c o n s t r u c t i o n growth i n t h e p r i v a t e s e c t o r , e x c l u d t n g housing. The l e v i e s a n d i n c e n t i v e s s h o u l d be a p p l i e d o n l y d u r i n g s p e c i f i e d c o n s t r u c t i o n p e r i o d s . ( 5 ) The f e d e r a l s a l e s t a x o n b u i l d i n g m a t e r i a l s s h o u l d b e a b o l i s h e d .

(6) Low-income h o u s i n g e f f o r t s s h o u l d b e o r g a n i z e d a n d f u n d e d by v a r i o u s governments s o a s t o e n s u r e a smooth growth p a t h o v e r a p e r i o d o f t i m e . ( 7 ) F e d e r a l a n d p r o v i n c i a l m i n i s t e r s o f l a b o u r a n d manpower s h o u l d e s t a b l i s h , and s t u d y t h e f i n d i n g s o f , t a s k f o r c e s o n s u c h i s s u e s a s c o n s t r u c t i o n w e l f a r e a n d p e n s i o n p l a n s , a p p r e n t i c e s h i p and t r a d e s t r a i n i n g , problems a s s o c i a t e d w i t h s e a s o n a l i t y o f c o n s t r u c t i o n , a n d u n i f o r m c o n s t r u c t i o n r e g u l a t i o n .

(8) S t a t i s t i c s Canada ( a f e d e r a l government agency r e s p o n s i b l e f o r c o l l e c t i n g and d i s s e m i n a t i n g d a t a ) s h o u l d u n d e r t a k e t h e g a t h e r i n g a n d p u b l i c a t i o n o f improved i n £ o r m a t i o n o n

c o n s t r u c t i o n a c t i v i t y and p r o s p e c t i v e demand from a l l s e c t o r s of t h e economy.

( 9 ) The f e d e r a l government s h o u l d p r o v i d e f i n a n c i a l encourgement t o t h e N a t i o n a l C o n s t r u c t i o n I n d u s t r y Development Foundation (now d e f u n c t ) t o e n a b l e i t t o s p o n s o r o r c o n d u c t economic r e s e a r c h on s p e c i f i c c o n s t r u c t i o n problems and needs.

Few of t h e s e recommendations w e r e f o l l o w e d by t h e v a r i o u s governments and p a r t i e s i n v o l v e d . An i n t e r d e p a r t m e n t a l committee l e d by the

f e d e r a l Department of P u b l i c Works t r i e d t o i n i t i a t e a c o m p u t e r i z e d C o n s t r u c t i o n I n v e s t m e n t I n f o r m a t i o n System b u t i t s e f f o r t s f a i l e d i n t h e a b s e n c e o f a d e q u a t e funding.

The i s s u e o f c o n s t r u c t i o n i n s t a b i l i t y a g a i n s u r f a c e d i n e a r l y 1981, when c o n s t r u c t i o n a c t i v i t y began t o s h r i n k , and i t became a h o t i s s u e i n 1982 when h o u s i n g s t a r t s h i t t h e l o w e s t l e v e l i n more t h a n

20 y e a r s (125,900 u n i t s ) , and s e v e r a l e n e r g y p r o j e c t s i n w e s t e r n Canada were postponed o r dropped. It i s w i d e l y b e l i e v e d by t h e b u s i n e s s and economic community i n Canada t h a t r a p i d l y r i s i n g p r o j e c t f i n a n c i n g c o s t i n 1982 (when t h e prime l e n d i n g r a t e was 19%) a n d t h e f e d e r a l government's N a t i o n a l Energy Program (NEP) were t h e two major r e a s o n s f o r c a n c e l l a t i o n o f t h e m e g a p r o j e c t s . It i s d i f f i c u l t t o d e t e r m i n e s e p a r a t e l y t h e c o n t r i b u t i o n of t h e s e two f a c t o r s ; i t i s a l s o d i f f i c u l t t o s a y t h a t t h e s e were t h e o n l y f a c t o r s r e s p o n s i b l e . A s h a r p d e c l i n e i n i n t e r n a t i o n a l o i l p r i c e s c o u l d a l s o b e blamed. THE NATIONAL ENERGY PROGRAM (NEP)

I n October 1980, Ottawa u n v e i l e d t h e NEP, a n e n e r g y package t h a t i n c l u d e d p r i c i n g r e g i m e s , f i s c a l measures, e x p e n d i t u r e programs, a n d d i r e c t f e d e r a l a c t i o n t o a c h i e v e t h e f o l l o w i n g g o a l s ( 2 ) : ( 1 ) e n s u r i n g s e c u r i t y o f s u p p l y a n d independence f r o m w o r l d o i l m a r k e t s ; ( 2 ) e s t a b l i s h i n g a n a t i o n a l c l a i m o n t h e o w n e r s h i p a n d b e n e f i t s of a n expanding p e t r o l e u m i n d u s t r y ; and (3) implementing a p r i c i n g a n d r e v e n u e s h a r i n g regime c o m p a t i b l e w i t h t h e f e d e r a l government's f i n a n c i a l r e q u i r e m e n t s . The b a s i c u n d e r l y i n g a s s u m p t i o n o f t h e NEP w a s a c o n t i n u e d i n c r e a s e i n world o i l p r i c e s , which d i d n o t happen. O i l and g a s p r i c e s f e l l

s h a r p l y i n 1983, i n t h e wake o f a n i n t e r n a t i o n a l o i l g l u t . The immediate e f f e c t of t h e NEP was t h e a c q u i s i t i o n of s e v e r a l foreign-owned o i l a n d g a s companies by Canadiawowned companies. These a c q u i s i t i o n s , i n v o l v i n g b i l l i o n s of d o l l a r s , were f i n a n c e d mainly t h r o u g h b o r r o w i n g f r o m f o r e i g n i n s t i t u t i o n s ; t h i s p u t p r e s s u r e

on Canadian exchange r a t e s (3.4) a n d i n t e r e s t rates. I n c r e a s e d t a x e s on t h e d o m e s t i c s a l e of o i l and g a s l e d t o h i g h e r d o m e s t i c p r i c e s . The h i g h i n t e r e s t r a t e s slowed down b u i l d i n g a c t i v i t y .

The i n t r o d u c t i o n of t h e NEP l e d t o a d i s p u t e between t h e p r o v i n c e o f A l b e r t a a n d t h e f e d e r a l government o f Canada o v e r o i l a n d g a s p r i c e s and revenue s h a r i n g arrangements. According t o i n d u s t r y a n a l y s t s , t h e u n c e r t a i n t y c r e a t e d by t h e s i t u a t i o n f o r c e d s e v e r a l o i l r i g companies t o move t o t h e United S t a t e s (3). T h i s l e d t o a d r a s t i c d e c l i n e i n c o n s t r u c t i o n a s s o c i a t e d w i t h d r i l l i n g a n d o i l a n d g a s

d i s c o v e r i e s .

The d i s p u t e between t h e governments o f A l b e r t a a n d Canada a n d t h e d e t e r i o r a t i n g economic s i t u a t i o n f o r t h e o i l and g a s i n d u s t r y l e d t o t h e abandonment o r s u s p e n s i o n o f o i l s a n d s m e g a p r o j e c t s , r e s u l t i n g i n a l o s s of $25 b i l l i o n of i n v e s t m e n t i n c o n s t r u c t i o n machinery and equipment and thousands o f j o b s ( 3 ) . I n J u l y 1981, I m p e r i a l O i l

suspended t h e Cold Lake P r o j e c t . I n A p r i l 1982, t h e Alsands p r o j e c t was abandoned. The companies i n v o l v e d w e r e f o r e i g w o w n e d a n d d i d n o t q u a l i f y f o r e x p l o r a t i o n g r a n t s provided by t h e NEP.

The b i g g e s t impact of t h e c a n c e l l a t i o n o f energy p r o j e c t s was f e l t i n A l b e r t a . I t s economy s u f f e r e d t h e l a r g e s t d e c l i n e i n growth r a t e s i n c e 1971.h Between 1971 a n d 1980, t h e real d o m e s t i c o u t p u t o f A l b e r t a grew a t

an

a v e r a g e r a t e of a b o u t 6%, b u t between 1980-82, i t d e c l i n e d by a n a v e r a g e r a t e o f 4% b e f o r e t h e d e c l i n e slowed i n 1983. The unemployment rate s h o t up t o 10.7% i n 1983, from 3.8% i n 1981. Housing s t a r t s f e l l 3 1% between 1981-82.

It i s . h a r d t o prove t h a t t h e d e t e r i o r a t i n g economic s i t u a t i o n i n A l b e r t a was e n t i r e l y d u e t o t h e NEP. The o v e r a l l r e c e s s i o n a r y

s i t u a t i o n i n n a t i o n a l and world economies was a l s o r e s p o n s i b l e . But t h e d e c l i n i n g s i t u a t i o n i n A l b e r t a was a c c e n t u a t e d by t h e

NEP,

a s c a n be shown by F i g u r e 2. I n t h e middle of 1982, when h o u s i n g starts i n a l m o s t e v e r y o t h e r p r o v i n c e were i n c r e a s i n g , i n A l b e r t a t h e y were d e c l i n i n g . They c o n t i n u e d t o d e c l i n e even i n 1983 when t h e n a t i o n a l economy began t o expand.

The f o r e g o i n g d i s c u s s i o n o n t h e d e s t a b i l i z i n g e f f e c t s o f t h e NEP d o e s not t a k e i n t o a c c o u n t t h e long-run b e n e f i t s t o Canada from i n c r e a s i n g d o m e s t i c ownership of t h e petroleum i n d u s t r y .

KECENT STABILIZATION MEASURES

The 1980-82 p e r i o d i n Canada was c h a r a c t e r i s e d by r a p i d l y r i s i n g i n f l a t i o n , unemployment and i n t e r e s t r a t e s . Faced w i t h r a p i d l y

d e c l i r ~ i r ~ g h o u s i n g s t a r t s , and a n a l a r m i n g (lumber of d e f a u l t s on h o u s e mortgage payments, t h e F e d e r a l , and s i x o f t h e t e n p r o v i n c i a l

governments, took measures t o s t a b i l i z e t h e b u i l d i n g market. These measures, w i t h o n e e x c e p t i o n , were d i r e c t e d a t s t i m u l a t i n g t h e demand f o r new and e x i s t i n g housing. One measure was aimed a t s t i m u l a t i n g c o n s t r u c t i o n o f r e n t a l u n i t s .

The

f e d e r a l government i n t r o d u c e d two measures: t h e Canada R e n t a l Supply P l a n and t h e lom me ownership Plan. The f i r s t measure was i n i t i a l l y i n t r o d u c e d i n t h e November 1981 budget t o s t i m u l a t e

c o r r s t r u c t i o n of r e n t a l u n i t s i n t h e f a c e of r e c o r d low vacancy r a t e s i n many c i t i e s . The p l a n was expanded i n 1982. Under t h l s p l a n , i n t e r e s t - f r e e l o a n s of $7500 p e r u n i t were p r o v i d e d t o b u i l d e r s of r e n t a l u r ~ l t s u n t i l December 31, 1983. The second measure p r o v i d e d

URBAN HOUSING STARTS BY REGION YEAR TO YEAR PERCENT CHANGE

300- - - -- --

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150- ---A

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OUEBEC 115

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0 * - 1 IS1 ONTAR 10 200 - -.- A L B E R T A 100 -- - 0 \

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100

Clayton Research Associates Ltd., Toronto

cash g r a n t s of up t o $3000 t o buyers of newly-built homes and t o f i r s t - t i m e buyers of e x i s t i n g homes. E l i g i b i l i t y r e q u i r e d a p r i c e c e i l i n g of $150,000 i n Toronto, Vancouver, Calgary and Edmonton and $100,000 i n t h e r e s t of Canada.

The O n t a r i o government o f f e r e d a n i n t e r e s t - f r e e l o a n t o f irst-time

buyers of new homes. E l i g i b i l i t y a l s o r e q u i r e d a 10% down payment and a f i x e d p r i c e c e i l i n g of $115,000 i n Toronto and $90,000 i n t h e

r e s t

of t h e province. Five o t h e r provinces

-

B r i t i s h Columbia, A l b e r t a , Saskatchewan, Manitoba and Quebec

-

i n t r o d u c e d some measures b a s i c a l l y designed t o s u b s i d i z e mortgages t o s p e c i f i e d r a t e s . For example, mortgage r a t e s i n B r i t i s h Columbia were s u b s i d i z e d t o 12% on t h e f i r s t $60,000 of a f i r s t o r second mortgage, up t o October 1985. I n some p r o v i n c e s t h e s u b s i d y was r e p a y a b l e w h i l e i n o t h e r s , i t was not. A l l t h e s e measures had cut-off d a t e s ; t h e l a t e s t was October 1985.

IMPACT OF MEASURES FOR BUILDING STABILIZATION

A r e c e n t s t u d y by t h e Conference Board of Canada e s t i m a t e d t h e impact of government measures undertaken t o s t a b i l i z e t h e b u i l d i n g

market (5). Using t h e Medium-Term F o r e c a s t i n g Model, t h e a u t h o r compared t h e r e s u l t s of a s c e n a r i o w i t h government s t a b i l i z a t i o n measures w i t h one without t h e s e measures. The r e s u l t s of t h i s s t u d y i n d i c a t e d t h a t w h i l e t h e s e measures do s t i m u l a t e c o n s t r u c t i o n

a c t i v i t y , t h e i r o v e r a l l impact i s modest. I n t h e beginning s i n g l e s t a r t s a r e i n c r e a s e d b u t m u l t i p l e s t a r t s a r e n o t a f f e c t e d a t a l l . L a t e r * i n 1984, t h e l e v e l of m u l t i p l e s t a r t s i s e s t i m a t e d t o be s m a l l e r w i t h t h e s t a b i l i z a t i o n measures t h a n i t would have been without them. This outcome i s t h e r e s u l t of demand and supply. The g r a n t s , i n t e r e s t f r e e l o a n s , and mortgage s u b s i d i e s t o home buyers i n c r e a s e t h e demand f o r owned-housing and thereby a l l o w i n d i v i d u a l s t o s u b s t l t u t e owned-property f o r rented-property. Or1 t h e o t h e r hand, supply f o r c e s i n t h e form of i n t e r e s t f r e e l o a n s o r l o a n s a t reduced r a t e s t o b u i l d e r s i n c r e a s e t h e p r o f i t a b i l i t y o f r e n t a l u n i t s . The study cor~cluded t h a t t h e p o s i t i v e impact of t h e Canada Rerrtal/Supply P l a n on m u l t i p l e u n i t s i s t o o s l i g h t t o c o u n t e r a c t t h e n e g a t i v e e f f e c t s on m u l t i p l e s of s i n g l e family housing. Furthermore, t h e mortgage-subsidy p r o g r a m have been rendered u s e l e s s by t h e r e c e n t d e c l i n e i n i n t e r e s t and mortgage r a t e s .

SUMMARY AND CONCLUDING KEMARKS

Recent government p o l i c i e s t o s t i m u l a t e housing a r e expected t o have some e f f e c t s i n t h e s h o r t run. S t a r t s of s i n g l e family homes a r e expected t o i n c r e a s e while those f o r m u l t i p l e u n i t s a r e expected t o decrease. In t h e l o n g run, s t a b i l i t y i n house b u i l d i n g w i l l b e brought about by market f o r c e s , e.g., i n t e r e s t r a t e s , income l e v e l s , d i s p o s a b l e income, and unemployment r a t e s . A s t a b l e growth r a t e i n t h e housing sub-sector (and i n t h e b u i l d i n g s e c t o r ) , cannot be

o b t a i n e d i n t h e m i d s t of r i s i n g unemployment, i n f l a t i o n and i n t e r e s t r a t e s .

Even b e f o r e 1981-82, whenever v a r i o u s governments t r i e d t o s t a b i l i z e b u i l d i n g markets through p o l i c y i n t e r v e n t i o n , t h e s i t u a t i o n d i d n o t improve. Arl example i s t h e i n t r o d u c t i o n of t h e A s s i s t e d Home

t h e e f f e c t s of government p o l i c i e s have been pro--cycle, r a t h e r t h a n counter-cycle, owing t o s e v e r a l l a g s between d e c i s i o n - t a k i n g ,

e x e c u t i o n , and f i n a l outcome. T h i s i m p l i e s t h a t complete s t a b i l i t y i n t h e b u i l d i n g s e c t o r cannot be achieved through government

i n t e r v e n t i o n . Moderate s t a b i l i t y c a n be achieved, i f i n t e r v e n t i o n s a r e p r o p e r l y timed.

REFERENCES

1. Economic C o u r ~ c i l of Canada, Toward More S t a b l e Growth i n

C o n s t r u c t i o n , Ottawa, 1974.

2. Energy, Mines and Resources Canada, The N a t i o n a l Energy Program 1980, Ottawa, 1981.

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3. Gilles RhGaume, "Alberta From Boom t o Burst", The Canadian B u s i r ~ e s s Review, Autumn 1983, pp. 9-13.

4. "Do Mega-mergers Drive up I n t e r e s t Rates?", Business Week, A p r i l 16, 1984, pp. 176-180.

5. Margaret Weppler, "Short-Term Expansionary Impact Expected From Housing Programs", The Canadian Business Review, Winter 1982, pp. 45-47.

This paper, w h i l e being d i s t r i b u t e d i n r e p r i n t form by t h e D i v i s i o n of Building hesearch, remains t h e copyright of t h e o r i g i n a l publisher. It should n o t be reproduced i n whole o r i n p a r t without t h e permission of t h e p u b l i s h e r . A l i s t of a l l p u b l i c a t i o n s a v a i l a b l e from t h e D i v i s i o n may be obtained by w r i t i n g t o t h e P u b l i c a t i o n s S e c t i o n , D i v i s i o n of B u i l d i n g R e s e a r c h , N a t i o n a l R e s e a r c h C o u n c i l of Canada, O t t a w a , O n t a r i o ,

KIA OR6.