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Moishe Alexander’s review of the Charlottetown CA Rental Market and CMHC Outlook Report fall 2008

February 18, 2009 — Moishe Alexander’s review on how the current world economy and Canadian economic turndown is affecting the Charlottetown CA Rental Market

Moishe Alexander’s Review

Highlights

Charlotte, PEI - Credit dmealiffe, Flickr Creative Commons

Moishe Alexander says Charlottetown’s vacancy rate in the Fall of 2008 was 2.3 per cent, down from last year’s level of 4.3 per cent. The overall average rent increase in the Charlottetown CA was 2.2 per cent in 2008. Within the CA, the highest average rent was $637 in the Downtown area, while the peripheral area posted an average rent of $613.

Rental Market Survey:

Vacancy Rate Declines in October 2008

Moishe Alexander says the vacancy rate for apartment structures containing three or more units in the Charlottetown CA had risen for five consecutive years, after recording a historic low of 1.8 per cent in 2001. However, beginning last fall this trend was reversed. The momentum has carried through into 2008. In October 2008, the average vacancy rate was almost cut in half to 2.3 per cent, from 4.3 per cent during the same period last year. This trend indicates that the demand for rental accommodations remains healthy in the Capital Region. The October 2008 survey aggregated the rental information for 3,790 rental units in the Charlottetown area, which was essentially unchanged from the 2007 figure of 3,795 units. Of the 3,790 units surveyed, only 86 were vacant, compared to 163 vacant units during the same period last year. The 2008 survey revealed that vacancies among two-bedroom units, which make up the majority of the local rental universe, were down with only 54 vacant units, compared to 107 units last year. As a result, the vacancy rate for two bedroom units dropped to 2.2 per cent from 4.5 per cent last year. Among the other unit types the change was less dramatic. Three bedroom + units recorded the second largest variance, as the vacancy rate for these units fell from 6.5 per cent last year to 3.1 per cent in 2008.
With less than 90 new rental units eligible for the survey this fall, and only about 40 in 2007, a decline in the vacancy rate was anticipated. The reduced level of rental construction over the past two years was the result of a rising vacancy rate from 2001 to 2006. The reason for the aforementioned increase in the vacancy rate was that during this period over 450 rental units were completed in the Capital region. This represents a substantial increase in supply above the annual average of 70 rental starts. As a result of this increase in supply, the vacancy rate rose from the near record low of 1.8 per cent in 2001 to almost 5.0 per cent in the 2006 survey. Despite the decline in rental starts the development community has remained active during the past three years, building multiple unit projects targeted towards the homeownership market.
The most striking change in vacancy rate at the zone level was the fact that Zone 1 (the downtown core) posted a lower vacancy rate than Zone 2 (Peripheral). In recent years Zone 2 has posted a lower vacancy rate than the downtown area, due to limited rental stock in the area. Although the vacancy rate for the peripheral area of Charlottetown fell to 3.0 per cent from 3.9 per cent in 2007, it was not enough to match the decline posted in Zone 1. Zone 1 posted a vacancy rate of 1.9 per cent down from 4.5 per cent last year.

Average Rents Inch Higher in 2008

Moishe Alexander says overall, the average rent in Charlottetown was $629 per month in 2008. For the third year in a row, CMHC is measuring the change in rents for existing structures. Focusing on existing structures excludes the impact of new structures added to the rental universe between surveys and conversions and provides a better indication of the rent increase for existing structures. For the Charlottetown CA, the average rent for all bedroom types in existing structures increased by 2.2 per cent in October 2008 compared to a year ago. This year’s increase of 2.2 per cent is significantly more than the 1.0 per cent increase allowed by the Island Regulatory and Appeals Commission (IRAC), which manages residential rental increases on the Island. The most likely reason for the difference between the recorded and the allowable rental increase is the increased competition among tenants for the most desirable units. Now that all of the projects built over the past five years have been fully absorbed by the market, landlords will have little cause to offer rental incentives or rent reductions. Also, landlords will be looking to increase rents to make up for the high heating costs experienced in the 2007/2008 winter due to the rapid rise in the price of heating oil.
There was a fairly significant difference in the increase in two-bedroom rents recorded in Zone 1 (Downtown) compared to Zone 2 (Peripheral). In Zone 1, the average two-bedroom rent advanced by 4.9 per cent, while in Zone 2 the increase was a more moderate 0.6 per cent, as measured by the fixed sample.

Newest Rental Stock Now Fully Absorbed

Moishe Alexander says according to the 2008 survey, renters again showed a preference for the newer, high-end units. This trend continues to be the norm in most markets. For apartment units built after 2000, the vacancy rate was 0.3 per cent which is well below the overall average of 2.3 per cent. These new units continue to record the lowest vacancy rates despite the fact that they also command the highest average rents at $854 compared to the regional average of $629. It is also interesting to note that most of these new units although unheated, continue to command the highest rents.
Structures built before 1940 were the least popular of all units surveyed this year with a vacancy rate of 3.4 per cent. However, the rents that these units command places them in the third grouping below units built after 1990. These units are able to achieve higher rents than some newer units because the majority of these units are located in the Downtown Core, which continues to be a popular location with renters.
Most Expensive Rents Record Lowest Vacancy Rate

Moishe Alexander says when broken down into rent ranges, the October 2008 Survey showed that like the 2007 results, there was no obvious pattern. This varies from previous years where there was an inverse relationship between average monthly rent and vacancy rate. For the second year in a row, apartment units in the Capital Region that rented for between $700 and $799 per month had the lowest average vacancy rate at 0.9 per cent down from 2.5 per cent last year. It is interesting to note that the highest recorded rent range, $800+, posted the largest decline in vacancy rate, falling from 6.5 per cent last year to 1.7 per cent in 2008. The 2008 result is a more expected outcome, as traditionally the rental demand is strongest for the newest and most expensive apartment units. The vacancy rate for units in the $500-$599 range also posted a significant change, declining from 4.9 per cent last year to 2.3 per cent this year.

Largest Buildings Continue to Remain Popular with Renters

Moishe Alexander says according to the 2008 Rental Market Survey, the largest apartment buildings in the Charlottetown area command the highest average rents and enjoy lowest vacancy rates. In the October survey, apartment buildings in the Charlottetown area, with between 50 and 99 units posted the lowest vacancy rate at 0.4 per cent, which was well below the overall vacancy rate of 2.3 per cent. The second largest buildings in the area, ranging from 20 to 49 units, also fared well in this year’s survey with a vacancy rate of 0.6 per cent. The largest buildings also command a higher average rent than the smaller structures. Buildings with 50 to 99 units had an average rent of $725, while the smallest structures, those with three to five units recorded an average monthly rent of $583. The escalation of rents from smaller to larger buildings is logical given that more amenities are offered to tenants as the building size increases. These features such as elevators, underground parking and common rooms raise the operation costs for the landlord, which in turn are passed on to the tenants.

More Units Available

Moishe Alexander says in addition to the vacancy and rent data that is collected each year as part of the annual Rental Market Survey, landlords and property managers were asked about rental unit availability.  The apartment availability rate in Charlottetown declined this year to 4.0 per cent. This is 1.7 percentage points higher than the apartment vacancy rate. Availability rates by bedroom type are also higher than the vacancy rate with differences ranging from zero to 2.9 percentage points.

Homeownership Remains Attractive

Moishe Alexander says many factors have an impact on rental demand in any given market. This includes, but is not limited to employment growth, migration patterns, interest rates and shelter costs. Employment growth has posted a slight improvement from the 2007 level which is expected to continue to the end of the year. During the first three quarters of 2008, the increase in employment can be attributed mainly to the public service and finance/ insurance sectors. Employment in the construction sector started to decline in 2008 as numerous large non-residential projects came to an end. The main benefit of the elevated employment levels in the Captial Region is that it continues to be the most attractive job market in the province. This has lead to the continued trend of urbanization in the province, as Islanders continue to move to the capital region from more rural parts of the province. Positive net-migration has been one of the main factors contributing to the sustained demand for housing in the capital region. The results from Statistics Canada’s 2006 Census revealed that the Charlottetown CA recorded a population gain of almost 1,400 people or 2.4 per cent, from 2001 to 2006. In addition to the Census, Statistics Canada produces a series of data based on income tax returns (Tax Filer Data) that details the migration patterns by county on an annual basis. The results of this survey reveal that in any given year about 70 per cent of the people moving to the Capital Region are coming from elsewhere in the province. It also shows that of the remaining 30 per cent, the vast majority are coming from another major urban centre in Canada. These results seem to confirm that there are a number of ex-Islanders moving home to either retire or finish their careers. Another benefit this trend provides is that many of the people returning home are coming from much higher priced housing markets, which has resulted in the accumulation of equity. This provides a partial explanation for the increase in the new home price recorded over the past five years.

Interest rates having remained low over the past few years continued to remain fairly steady during the past year. While rates are expected to edge up slightly over the forecast period, this should not be enough to dissuade potential homebuyers.
The strong demand for all forms of housing over the past five years has pushed up the cost of single-detached homes much faster than average rents in Charlottetown. When the most recent expansion in the housing market began in 2001, there was a small difference between renting and owning in terms of monthly payment.  However, due to the aforementioned price increases, the gap between the two is now fairly substantial and as a result many renting households looking to purchase a home will find making the switch more difficult financially.

Vacancy Rates Expected to Decline

Moishe Alexander says as a result of lower levels of rental construction in 2008 and the recent uncertainty in the economic environment the average vacancy rate is expected to fall again in the 2009 survey. The average apartment vacancy rate is expected to decline to the 2.0 per cent range in October 2009, as in-migration continues and the level of new rental construction remains low.

Rental Market Forecast:

Rental Rates to Increase in 2009

Moishe Alexander says with declining levels of rental construction, continued in-migration and a larger than average allowable rent increase in 2009 expect to see an increase in the average rent next fall. The Island Regulatory and Appeals Commission (IRAC) has approved a 9.0 per cent allowable rent increase for heated units in 2009, and many landlords are expected to take advantage of this to make up for increased oil costs experienced during the 2007/2008 winter.  Although fewer new high-end rental units are expected to hit the market in the short-term, compared to the past five years, average rents are still forecast to advance by 4.5 to 5.0 per cent in 2009.

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64375/64375_2008_A01.pdf

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Moishe Alexander’s review of the Charlottetown CA Housing Market and CMHC Outlook Report fall 2008

February 8, 2009 — Moishe Alexander’s review on how the current world economy and Canadian economic turndown is affecting Charlottetown CA Housing Market

Moishe Alexander’s Review

Housing Market to Moderate in 2009

Charlottetown, PEI - Credit dmealiffe, Flickr

Moishe Alexander says starting in 2001 the Charlottetown housing market posted seven years of impressive growth that mirrored the national trend. Some of the key reasons for this increase in activity were low interest rates, low vacancy rates, steady employment growth, positive in-migration, and relatively low home prices. However, in 2005 rising vacancy rates and new home prices started to have a negative impact on the demand for new properties. The increase in multiple unit starts also created a situation where there was a temporary oversupply of rental units that was not fully absorbed until the end of 2007. However, one area where new construction has continued to remain strong is multiple units intended for homeownership. A key reason for the increased activity in this part of the market is the relative lower cost of semi-detached units compared to single-detached homes.  Despite the forecasted increase in semi-detached units over the next two years it is expected that the overall housing market will moderate over the forecast period.

Employment growth is forecast to post a slight improvement from the 2007 level and remain positive through the end of 2009. During the first three quarters of 2008 the increase in employment in Charlottetown can be attributed mainly to the public service and finance/insurance sectors. Employment in the construction sector started to decline in 2008 as numerous large non-residential projects are coming to an end. The net result of the increased employment levels is that the capital region is more attractive for job seekers when compared to other parts of the province. This fact has lead to the continued trend of urbanization in the province, as Islanders continue to move to the capital region from more rural parts of the province. Positive net-migration has been one of the main factors contributing to the sustained demand for housing in the capital region. The results from Statistics Canada’s 2006 Census revealed that the Charlottetown CA recorded a population gain of almost 1,400 people or 2.4 per cent, from 2001 to 2006. It also showed that within the CA, the Town of Stratford posted the largest population gain during this period, with an increase of over 700 people or 12 per cent.  This helps explain the substantial increase in new construction in the Stratford area and why the Town of 7,000 residents is able to rival the City itself for annual single-detached starts. In addition to the Census, Statistics Canada produces a series of data based on income tax returns (Tax Filer Data) that details the migration patterns by county on an annual basis. The results of this survey reveal that in any given year about 70 per cent of the people moving to the capital region are coming from elsewhere in the province. It also shows that of the remaining 30 per cent, the vast majority are coming from another major urban centre in Canada. These results seem to confirm the local theory that there are a number of ex-Islanders moving home to either retire or finish their careers.

Another benefit this trend provides is that many of the people returning home are coming from centres with much higher priced housing markets, which has resulted in some accumulating large amounts of equity. This also provides a partial explanation for the substantial increase in the new home price that has been recorded over the past five years. This trend of positive netmigration is expected to continue over the forecast period, and will continue to provide support for the local housing market.

While the local housing market has been performing well above average since 2001, it is expected to continue to moderate from the peak level of 2004. Despite the expectation that both in-migration and interest rates will remain favorable in 2008 and into 2009, these will not be enough to counter a slower growing local economy. As such it is expected that the construction of both single and multiple starts will not match the level set in 2007.

Rental Market:

Vacancy Rate to Decline in 2009

Moishe Alexander says the vacancy rate should post a moderate decline in 2008 due to a combination of steady demand for rental accommodations and a general decline in the construction of new rental units in the Charlottetown area. This will result in the vacancy rate inching down to 4.0 per cent in October of this year from 4.3 per cent during the same period last year. In October 2009, it is expected that the vacancy rate will decline once again to 3.8 per cent, due to further declines in the supply of new units. However, demand will continue to be supported by in-migration. Expect a larger than average rent increase in 2009 due to the nine per cent allowable rent increase for heated units, that was approved by the Island Regulatory and Appeals Commission in late 2008. Together these will result in average two-bedroom rents of $670 and $700 in 2008 and 2009 respectively.

Resale Market:

MLS® Sales Will Not Match the Peak Level Set in 2007

Moishe Alexander says the number of residential MLS® sales in the Charlottetown area is expected to decline over the next two years, due to the current economic environment. Since the start of the most recent economic cycle in 2000, the number of resale transactions in the Charlottetown area has only dropped below 500 sales once, and this is not expected to occur in either 2008 or 2009.  While the level of sales is expected to decline from last year’s level it is important to note that 2007 recorded the highest level of sales on record for the capital region.  Despite the aforementioned variables working against the local market, there are still aspects that will provide demand for existing properties. Employment growth is expected to remain positive over the forecast period, interest rates should remain low and the rising cost of new homes will help provide support for MLS® as homebuyers opt for existing homes.
Average price growth is expected to take a breather in 2008 after increasing almost $30,000 in the last two years alone. This appreciation in local real estate was partially the result of increased activity in the Stratford area were the homes tend to be newer and as a result more expensive. There was also increased demand for properties with water frontage or water views, which tend to command the highest prices in the province. Expect the average MLS® sales price to grow by a more modest four per cent in 2008 before slowing to one per cent growth in 2009.

New Home Construction Poised to Slow

Moishe Alexander says New home construction in the Charlottetown CA will slow in 2008 and again in 2009, due to a decline in most unit types. Semi-detached units, for the homeownership market will remain relatively strong over the next two years. During the first three quarters of 2008, semidetached starts maintained momentum from 2007, due mainly to their popularity with first-time buyers and this trend is expected to continue over the forecast period.  As first-time buyers show a clear preference for new homes compared to existing homes, and with the rising cost of a new singledetached homes, many first time buyers will look to the semidetached market.
Single starts, although slowing from the near record pace set in 2004, have continued to remain at above average levels. This decrease can be partially attributed to rising new home prices which have caused some potential buyers to opt for the resale market. The influx of people moving to the Island however should partially offset this and result in the construction of 275 new units in 2008 before slowing to 225 in 2009. Rental starts have been on the decline every year except one since reaching a 15 year high in 2002 with 143 units. This has been due in part to a rising vacancy rate which reached 4.3 per cent in 2007, from the almost record low of 1.8 per cent in 2001. With the vacancy rate expected to stay near the four per cent mark over the forecast period, expect to see developers continuing to focus on multiple starts for the homeownership market. As such, rental starts are expected to remain below the ten year average over the forecast period.

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64263/64263_2008_B02.pdf