Labour Force Survey Preview – August: Housing activity, a fading tailwind to job creation
Statistics Canada will publish the LFS report for the month of August on Friday morning. Given the accelerating economic momentum and the recent surveys revealing robust hiring intentions from companies, we expect a strong 20K month-over-month increase in total employment. Our call is also based on an expected rebound in public sector employment. Indeed, unusually large month-to-month pullbacks occurred during the month of July in the public administration (-10K) and education services (-32K) sectors.
This being said, it wouldn’t be appropriate to expect all industries to contribute to further improvement in labour market conditions. In particular, construction and real estate are two sectors poised to contribute less than before to total job creation in the coming months. Canada's multi-year housing boom, combined with increasing capital spending plans from governments, has led to the creation of numerous high-paid jobs. Thus, employment in the construction industry (including residential and non-residential) rose by 27% during the last decade, largely surpassing the 10% increase in total employment registered nationwide. There are 1.4M workers in the construction sector today in Canada. In comparison, employment in the real estate and leasing industry is significantly smaller (330K) and increased to a lesser extent (7%) during the last 10 years. Together, the percentage share of the construction and real estate sectors to total employment stands at an all-time high of 9.5%.
With stricter mortgage rules to access the homeownership market, new taxes curbing speculative real estate investments and the recent 50-basis-point increase in the BoC policy rate, the housing sector oversized contribution to Canada’s job creation has likely ended. Also, private non-residential building construction remains on a downtrend. Yet, employment in the construction industry has remained stable since late 2016, rather than declining, because the positive momentum in public infrastructure projects has succeeded in picking up the slack.
All in all, we thus expect employment in the construction industry to continue remaining stable. However, a pullback of employment in the real estate and leasing sector is more likely due to the lower level of resale transactions. Particularly, a decline seems to be in the cards for the province of Ontario as transactions on the resale market are down 24% on a year-over-year basis, led by a 39% decline in the GTA. The July data indicates that the impact of the cooling in resale market conditions on the labour market has begun: employment in the GTA’s finance, insurance and real estate industry was down from a year ago (-2.7%), a rarity. Also, a decline in employment in the real estate and leasing industry is more likely to occur as the province has more realtors on a per capita basis (about 1 per 177K residents) in comparison to B.C. (1 per 217K) and Quebec (1 per 490K).
In B.C., construction employment contributed to an unusually large 23% of total job creation during the last year, reflecting the record high pace of housing starts. As a result, the level of condo inventories has increased well above its historical trend. Home-building is thus likely to slow down, reducing the positive contribution of the housing sector to total job creation in the province. Also, realtors in B.C. are not immune to another temporary cooling like the one seen in the fall of 2016. Indeed, the new NDP government may announce new policies targeting housing affordability in the coming months (in the updated version of the 2017 budget on Sept. 11th or in the 2018 budget typically released in mid-February). In comparison to B.C., Quebec’s construction sector contributed to a smaller share of the increase in total employment during the last year (9%). The odds of a sudden loss of momentum in construction employment are low because most of the positive momentum seen in housing demand is driven by the domestic factors. For instance, Quebec registered by far the strongest increase in above-average-paid jobs during the last year (+93K), among the largest four provinces, propelled by gains in the services industries.
Finally, Alberta added relatively fewer above-average paid jobs than during the last year because of the continuous decline of employment in the construction industry (down 5.6% from a year ago and 9% from the peak reached in early 2015). The pace of residential home-building increased lately but it is not sufficient to compensate for declining non-residential investment in the commercial and industrial sectors. Most notably, low crude oil prices are limiting significantly the ability of companies in the oil patch to launch new large-scale investment projects.
In summary, the macroeconomic environment is becoming less supportive of the construction and real estate sectors. However, the shift in the engines of growth, particularly from housing activity to public infrastructure investments, is likely to help maintain the current level of employment in the construction industry. And although employment in the real estate and leasing sector is more vulnerable to a decline, its share in total employment is too small to have a significant impact on economic activity nationwide.