Starts … Not What They Used to Be

And I don’t mean the specific number of Starts, but the indicator in general.

In the GTA we have gone from a new homes market comprised primarily of Low Rise product types (detached, semi-detached, row townhouse) to one that now sees a majority of new home sales comprised of the High Rise variety (apartment, loft, stacked townhouse). It’s the “Big Shift”.

Now if we consider the various new home market “indicators” that are used to quantify various market conditions and therefore shed light on the performance, or direction of the market we generally come across these…..

And remembering that in 2000 Low Rise new home sales were about 75% and in 2011 they were only about 40% of the market, we need to consider the impact of that Shift in new home types on the indicators we use to evaluate various aspects of the new homes market.

In very, very general terms there are two different processes for selling, building, and closing new homes in the GTA…

If we look only at the very general timing of our typical housing market indicators we get something like this (again very general)….

If you compare how these indicators work for each process you notice that the difference is generally an issue of timing between the two development forms. I won’t consider the timing differences of the approvals process from land purchase to commencement of a sales process as that does not effect the other indicators and can obviously vary widely.

In the low rise process, Sales, Starts, and Completions happen closer together – often within 1 year of each other. In the high rise process, Sales, Starts, and Completions are stretched out to as much as 5 years as you generally have to first achieve certain pre-sale levels and then build an entire multi-unit building prior to completions and closings.

So in the past, when low rise development accounted for the vast majority of units, an indicator like Starts could suffice whether you were speaking about the housing market (ie sales performance), or whether you were speaking about completed new homes hitting the resale or rental markets, or whether you were simply tracking economic activity from construction. The timing was such that one indicator – Starts – kind of covered it all.

But now with high rise product types accounting for the majority of units being developed, our indicators need to become a bit more specialized. The timing of Sales, Starts, and Completions has stretched to the point where one indicator can’t quantify the entire process. So depending on the questions you are attempting to answer, or the decisions you are making, or the market analysis you are evaluating, you need to ensure you have the right indicator(s) on which to base your conclusions.

More GTA new home sales and completion data coming soon so check back or sign up to be notified when new posts are made.

About Steven Hurst

VP Analytics, RealNet Canada
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