Selective Cuttings

Job creation and housing starts in Canada

July 8, 2013

A sharp surge in Canadian housing starts in May was recent headline news. The seasonally adjusted annual rate of housing starts reached 200,000 in May, a 14% jump from April’s 175,000. Meanwhile there was another economic news headline:  a surprisingly strong jobs report, with 95,000 new jobs created in May. So this naturally raises the question: is this just a coincidence or there is indeed a relationship between housing starts and job creation?

Housing starts and job creation

The chart shows the trend of annual changes in employment and single family housing starts in Canada from 1991 to 2012. Over this period, though created jobs are more volatile than housing starts, they generally move in the same direction, with some short period exception in 1992 and 2011.

In the U.S. job creation is one of the strongest variables driving housing starts. One of people’s first priorities after securing their income is to secure an independent living situation. In Canada, this trend also seems to hold true. The above chart shows the trend of annual changes in employment and single family housing starts in Canada from 1991 to 2012. Over this period, though created jobs are more volatile than housing starts, they generally move in the same direction. Furthermore, the two data series have a correlation coefficient of 0.43, indicating, to some extent, housing starts and job creation are at least statistically related.

However, this does not necessarily mean there is a causal relationship between these two economic indicators. Are income effects and consumer confidence from created jobs causing changes in housing starts? Or are the same macroeconomic trends just influencing these two data trends in a similar fashion? While there is no clear mechanism for job creation to be prompting housing starts, certainly overall consumer confidence is a strong factor in a builder’s decision to start construction. And having a secure income is a pre-requisite for obtaining a mortgage (at least in Canada). So there seems to be a good story for the addition of new jobs to be a good indicator of new construction. And in economics at least, having a good story is half the battle to making your case.