9.2 Gross fixed capital formation in residential structures
9.14 Gross fixed capital formation in residential structures is often referred to as investment in residential construction. It is a key variable in any macroeconomic model, owing to its importance in explaining economic fluctuations. Residential construction tends to precede the business cycle and to react quickly to changes in employment, interest rates, inflation and consumer confidence.
9.15 Gross fixed capital formation in residential structures originates in the corporate, government and persons and unincorporated business sectors. Most of the activity in any given quarter is recorded in the persons and unincorporated business sector, largely reflecting the acquisition of newly constructed houses by households. Capital formation excludes the cost of land, since land is not a produced asset. Associated residential land flows are therefore excluded from GDP but are included as part of existing assets in the sector account's total non-financial capital acquisition.
9.16 Residential structures are assets that produce housing services. Where dwellings are used as a principal residence by individual owners – the case for the majority of the housing stock – those individuals are considered (in national accounting) to be unincorporated businesses producing housing services for their own final consumption (see 5.53 to 5.66).
9.17 On average, gross fixed capital formation in residential structures accounted for 24% of investment, or 5% of GDP in 2000. It includes three major elements:
- new residential construction;
- renovations; and
- ownership transfer costs.
New residential construction
9.18 New residential construction is the largest element of gross fixed capital formation in residential structures, encompassing single-family dwellings, semi-detached dwellings, row houses, apartments, condominiums, cottages, mobile homes as well as dwelling conversions and other costs (e.g., the value of acquisition costs).
9.19 In the IEA, productive activity is recorded at the time it takes place, commonly known as work in progress. Therefore, new residential construction is recorded on the basis of work put in place (WPIP), that is, the value of construction that took place during the reference period (quarter or year). It does not represent the value at the time of acquisition, but rather the volume of work completed during a given period, regardless of whether the final product is purchased or not. This is important, as the construction of a residential structure may extend over several months.
9.20 In the SNA 1993 it is recommended that newly constructed dwellings for sale be recorded as capital only when ownership is transferred, and prior to this point should be recorded as a work in progress inventory change. In the IEA the newly constructed dwellings for sale are classified to gross fixed capital formation in residential structures, under the sub-category change in work in progress inventory. In fact, the value of new housing construction item is categorized into three components: Change in work in progress inventory, change in inventory of completed dwellings and sales of new dwellings excluding land. On this point IEA differs only in presentation from the SNA 1993. This treatment was deemed to be both more useful to the user community and more consistent with associated financing activity.
9.21 In addition to the construction of new buildings, dwelling conversions are also included in new residential construction. Examples would be the conversion of a single-family dwelling into multiple dwellings, and additional housing units created from non-residential buildings or other types of residential structures.
9.22 New residential construction also includes all costs associated with the construction and sale or purchase of a building. These costs are as follows:
- federal and provincial taxes on new buildings;
- land preparation and development costs;
- engineering, architectural and development fees;
- builders' administration costs (including marketing and insurance costs) that are passed on to the purchaser;
- mortgage costs assumed by the purchaser (for example, mortgage insurance costs); and
- other costs (including acquisition costs).
9.23 Renovations to existing residential structures are the second largest element of gross fixed capital formation in residential structures. Renovations, also known as alterations and improvements, are made up of spending on additions, renovations and alterations, new installations and replacement of equipment.
- Additions are structural extensions to property (such as rooms, decks, garages, car ports, garden sheds) and swimming pools, fences, patios, driveways and major landscaping;
- Renovations and alterations involve work intended to upgrade the property to acceptable building standards, rearrange the interior space and modernize existing facilities without changing the type of occupancy such as remodelling rooms, adding or replacing doors and windows, renovating exterior walls, upgrading insulation and adding eaves trough;
- New installations involve the installation of equipment not previously in existence, for example, the installation of fixed electrical home appliances;
- Replacement of equipment is the installation of equipment that replaces an existing unit. It includes upgrading to a superior quality and conversion from one type to another (for example, the replacement of a roof, carpet, heating system or air conditioning system).
9.24 All of these activities change the value of assets or extend their service life.
9.25 The value of renovations to residential structures encompasses all costs associated with the work, including margins and taxes.
9.26 Renovations exclude repairs and maintenance. These items are included in personal expenditures on consumer goods and services. The difference between ordinary repair and maintenance work and improvement or renovation of dwellings is not always clear. According to national accounting concepts, ordinary maintenance and repair work merely serves to maintain capital in working order, without improving the performance or, in the case of dwellings, the overall quality of the dwelling. Renovation work constitutes an increase in the value of capital. In the case of dwellings, such work is intended to improve the overall quality of the dwelling or its service life. The enlargement of a dwelling is an improvement and a major change.
Ownership transfer costs
9.27 The category ownership transfer costs is the third element of gross fixed capital formation in residential structures. It includes all costs associated with the transfer of a residential asset from one owner to another. These costs are as follows:
- real estate commissions;
- land transfer taxes;
- legal costs (fees paid to notaries, surveyors, experts, etc.); and
- file review costs (inspection and surveying).
9.28 Table 9.3 shows the working level detail for investment in residential structures
Annual estimation methods and data sources
9.29 Estimates for benchmark years (t-4 and t-3) and non-benchmark years (t-2 and t-1) for gross fixed capital formation in new residential construction are produced using the same methods and data sources. Only renovations and ownership transfer costs (see paragraphs 9.32 through 9.36) use different sources of information for the two periods. It should also be noted that estimates for the current years (t-2 and t-1) are not subject to the Input-Output Tables balancing process.
9.30 Gross fixed capital formation in residential structures is estimated for both the business and government sectors. The government share accounted for less than 0.6% of the total in 2000. New residential construction is first estimated for the economy as a whole. The availability of detailed data on the government sector allows for the direct estimation of new residential construction for government and the balance is allocated to the business sector.1 Government data are taken directly from government financial statements obtained from the Public Institutions Division. Included in this item are expenditures on non-profit housing2.
New residential construction
9.31 New residential construction consists of two sub-elements: work put in place (WPIP) and other new construction. Each item has its own estimation method. In 2000, the value of WPIP represented 82% of the value of new residential construction and 40% of total gross fixed capital formation in residential structures. Other new construction consists of new residential construction of cottages, mobile homes, building conversions and acquisition costs such as taxes and land development costs.
9.32 WPIP corresponds to the value of construction of single-family dwellings, semi-detached dwellings, row houses, apartments and condominiums realized during a given period. The construction of those residential buildings may have started a month ago, six months ago or even two years ago (to a maximum of 21 months). As an example, the estimation of WPIP in June 2005 included the value of construction realized in June 2005 for all residential buildings for which the construction started between October 2003 and June 2005. However, not much of the October 2003 vintage construction would be reflected in the data by June 2005, except in the case of large multiple housing projects, (such as apartment buildings).
9.33 The Investment and Capital Stock Division (ICSD) is responsible for calculating WPIP based on housing starts, the average value of building permits and WPIP coefficients. The value of starts in a given period is estimated by combining housing starts from the Starts and Completions Survey of the Canada Mortgage and Housing Corporation (CMHC) and the average value of starts using the reported value from the Building Permits Survey. The value of building permits includes material, labour and overhead costs. It excludes the cost of land but may include some acquisition costs. This value is corrected to account for the fact that building permits systematically underestimate the final value of the dwelling.
9.34 The value of starts does not only correspond to the construction activity in the current month, but also to the progress of construction projects launched in previous months. The work may extend over a period of 21 months. The Investment and Capital Stock Division (ICSD) distributes the value of starts over these months. This operation is made using a vector of WPIP coefficients which combines the number of months needed to complete each start3 with the percentage of construction added during the construction period4.
9.35 For the estimation of the vector of WPIP coefficients, information from Canada Mortgage and Housing Corporation on completed dwellings by construction duration is used. The distribution of work completed by construction duration is derived using a special data compilation from the Canada Mortgage and Housing Corporation (Flows and Stocks of Fixed Residential Capital).
9.36 Other new construction also has several sub-categories, all prepared monthly by province and territory by Investment and Capital Stock Division. Estimates for cottages, conversions and mobile homes are calculated using data from the Building Permits Survey.
9.37 Acquisition costs include the federal tax on goods and services, provincial sales taxes, land developer fees and other acquisition costs.
9.38 The Goods and Services Tax (GST), applies to sales of dwellings, conversions, cottages and mobile homes. This federal tax on sales of new dwellings (single-family, semi-detached, row houses, apartments and condominiums) is calculated using data from the Canada Mortgage and Housing Corporation (CMHC) and the tax rebate file (from the Canada Revenue Agency). The value of new home sales is the product of the number of houses sold and Canada Mortgage and Housing Corporation prices, adjusted to the fair market value from the GST rebate file. The federal tax on conversions, cottages and mobile homes is obtained by applying the GST rate to their respective values.
9.39 The second item in acquisition costs is the Provincial Sales Tax (PST), calculated in the same way as the GST for provinces, where a tax equivalent to the GST applies.
9.40 Thirdly, land development costs are associated with the development of infrastructures that make the land usable, such as new streets and electrical power, water and sewage systems. These data are obtained annually, by province or territory, from the Public Institutions Division, which obtains them from provincial and local governments.
9.41 Finally, other acquisition costs include a range of expenditures related to the construction of new dwellings. These include mortgage-related costs (such as the cost of mortgage insurance), promotion and marketing costs and other administrative costs incurred by the contractor (insurance, maintaining an office, etc.) as well as architectural and engineering fees. These data are supplied by Investment and Capital Stock Division on a monthly basis, and are based on the Building Permits Survey and the Starts and Completions Survey from Canada Mortgage and Housing Corporation.
9.42 Renovations include expenditures on structural modifications which do not create a separate dwelling but which prolong the service life of a building or add to its quality. Renovation expenditures are calculated for owner-occupants, landlords, cottage owners and renters.
9.43 Until 2002, estimates of spending on renovations were drawn from the Homeowner Repair and Renovation Survey (HRRS) results. This survey was discontinued and the Survey of Household Spending (Survey of Household Spending) is now the main source of information used to produce estimates for benchmark years and for the first projection year (t-2). The results from this survey are examined in light of other indicators such as renovation permits and sales of building materials. Finally, estimates for the last projection years (t-1) are obtained by summing quarterly estimates (see paragraph 9.47).
Ownership transfer costs
9.44 Ownership transfer costs include several sub-categories. The largest consists of real estate commissions, which are commissions paid to real estate brokers and agents. A value was established in 1992 by analysing the GST file obtained from the Tax Data Division. Since 2000, annual benchmarks have been established using the Annual Survey of Service Industries: Real Estate Agents, Brokers, Appraisers and Other Real Estate Activities and the Survey of Household Spending. Estimates of real estate commissions are also based on the monthly report of listings through the Multiple Listing Service (MLS) of the Canadian Real Estate Association. This report provides monthly data, by province, on the number of houses sold and their average selling price.
9.45 Land transfer taxes which are real estate taxes levied by provincial or local governments, are produced on an annual basis by the Public Institutions Division, which obtains them from those governments.
9.46 Legal costs include professional fees or commissions paid by the dwelling purchaser (fees paid to notaries, surveyors, experts, etc.). File review costs are the inspection and surveying costs borne by the purchaser. In both cases, these costs are calculated as a proportion of real estate commissions, the proportions being drawn from the Survey of Household Spending.
Quarterly estimation methods and data sources
9.47 For most of the above categories, the quarterly methodology is identical to that for benchmark years, since the information sources are readily available on a monthly basis. However, there are some exceptions. Land development costs are estimated quarterly following the trend in housing starts. Renovations are based on sales of building supplies from the Quarterly Retail Commodity Survey (QRCS), building permits for alterations from the Building Permits Survey and building materials from the Wholesale Trade Survey (Monthly). Finally, quarterly land transfer taxes are obtained by applying the rate of growth of real estate commissions to the last quarterly benchmark.
Provincial and territorial estimation methods and data sources
9.48 Provincial and territorial estimates are produced at the same level of detail as the estimates for Canada as a whole. In fact, in most cases the national estimate is built up from provincial estimates. The exceptions are renovation expenditures and ownership transfer costs.
9.49 For renovation expenditures, three sources of information are used to produce provincial and territorial estimates. These are the Survey of Household Spending, the Building Permits Survey and a provincial allocator of renovation expenditures produced by the Investment and the Capital Stock Division (ICSD). The advantage of the Investment and Capital Stock Division allocator is that it allows for exceptional events such as the implementation of a government incentive. It combines two elements:
- the importance of the housing stock of each province and territory relative to the total; and
- the value of renovation permits in each province and territory coming from the Building Permits Survey.
9.50 As to ownership transfer costs, data from the Multiple Listing Service (MLS) of the Canadian Real Estate Association, the Survey of Household Spending and the Survey of Annual Real Estate Agents, Brokers, Appraisers and Other Real Estate Activities serve as provincial and territorial distributors.
Deflation – Estimates in real terms
9.51 The new construction series are deflated using price indexes reflecting the price paid by purchasers. Expenditures on renovations are deflated using an index of the cost of renovation work (price of materials and labour costs). Ownership transfer costs are deflated using price indexes constructed from the average sale price of existing homes sold, based on data from the Multiple Listing Service (MLS) of the Canadian Real Estate Association. Table 9.4 provides details on the deflation method by category.
2. The construction of residences and dormitories for universities, houses and sleeping cabins in public parks and for coast guards, as well as embassies, consulates, government properties and barracks are part of government non-residential construction.
4. For example, for the construction of a single-family dwelling being built over three months, 35% of the value of construction is completed in the first month, 37% in the second month and 28% in the third month. It is possible that the total construction period may extend over 21 months.
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