TORONTO, Nov. 7 /CNW/ - A favourable outlook for non-residential
construction should go a long way to offsetting any pending slowdown in
residential homebuilding in Canada, maintaining the industry's position as a
major driver of domestic growth, according to the latest Real Estate Trends,
released today by Scotia Economics.
    The Canadian economy is in the midst of an unprecedented post-war
construction boom. Adjusted for inflation, spending on construction projects,
including residential housing, non-residential buildings and engineering
structures such as roads and dams, has increased at an average annual rate of
close to six per cent since the mid-1990s, almost twice the advance in the
overall economy. The total value of construction investment will surpass the
$200 billion mark in 2007 for the first time ever.
    "The industry's contribution to the nation's overall economic well-being
is disproportionate," said Adrienne Warren, Senior Economist, Scotia
Economics. "Since 2003, the construction sector has accounted for fully
one-quarter of domestic output growth, double its share of the national
economy. More than 250,000 construction jobs have been created over this
period, or almost one in every five new positions."
    According to the report, residential homebuilding in Canada is levelling
off. Real residential construction expenditures stalled in the first half of
2007, marking the first time in almost a decade that the industry failed to
contribute to GDP growth. Housing starts will likely drift lower in the year
ahead as reduced affordability and rising mortgage rates dampen home sales and
builder confidence.
    For the time being, however, the broad construction sector will remain an
important contributor to growth. Renovation activity should remain buoyant
given record existing home sales this year. A nationwide resurgence in
commercial, resource and infrastructure investment will also help to sustain
the momentum. Investment in non-residential buildings and structures, at $114
billion in 2006, exceeds residential construction and renovation expenditures
by almost 40 per cent.
    "The factors underpinning commercial building are still quite
favourable," said Warren. "Office-based employment, including finance and
insurance, information-technology and professional services, has grown rapidly
in recent years. Pent-up demand is strong after over a decade of only modest
increases in new supply, and vacancy rates are tight."
    Nonetheless, builders may become more cautious regarding new projects,
given the large number of major developments underway. "By 2009-10 there will
be considerable new office stock, at which point vacancy rates should again be
on the rise," said Warren. "The recent tightening in global credit conditions
in the wake of U.S. subprime lending problems could also dampen expansion
plans."
    The outlook for the industrial sector is mixed, with manufacturers
scaling back plant expansions in the face of weak export sales and many major
resource projects nearing completion. Canada's institutional sector is also
lagging the recovery in commercial markets. While benefiting from rising
investments in educational and health care facilities, few new public
administration buildings are being constructed amid government outsourcing and
cost-cutting.
    Engineering construction, on the other hand, is expected to remain in
high gear. Governments at all levels are shoring up aging public
infrastructure, including roads, bridges, public transit and power utilities.
Energy and mining related outlays will continue to drive private sector
activity, underpinned by high commodity prices and strong global demand.
    "From a regional perspective, relative economic and demographic trends
suggest the hottest markets for both residential and non-residential activity
will continue to be found in the resource-rich regions in the West, East and
North," said Warren. "Many businesses in the manufacturing-dominated economies
of Central Canada may choose to focus on raising efficiencies through
modernization efforts and increased machinery & equipment investments as
opposed to generating additional capacity."

    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
developments, currency and capital market trends, commodity and industry
performance, as well as monetary, fiscal and public policy issues.