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Moishe Alexander’s review of the Kingston Rental Market and CMHC Outlook Report Fall 2008

February 24, 2009 — Moishe Alexander’s review on how the current world economy and Canadian economic turndown is affecting the Kingston Rental Market

Moishe Alexander’s Review

Highlights

Moishe Alexander says Kingston’s vacancy rate for apartment buildings with at least three units dropped from 3.2 per cent in 2007 to 1.3 per in 2008. As a result the local rate is now at its lowest level since 2002, when the rate was 0.9 per cent. The matched sample average rent for two bedroom apartments in existing structures in Kingston was up 3.1 per cent from last year. Cost gap between owning and renting has widened and along with economic uncertainty is contributing to lower vacancies.

Kingston’s Vacancy Rate Posts Largest Decline Among Ontario Centres

Moishe Alexander says According to the biannual rental market survey conducted in October 2008 by Canada Mortgage and Housing Corporation (CMHC), the Kingston Census Metropolitan Area (CMA) average vacancy rate in privately initiated rental apartments with three or more units dropped from 3.2 per cent in 2007 to 1.3 per cent in 2008. As a result, the local rate is now the lowest vacancy rate since 2002 when the rate was 0.9 per cent.  Of the 15 CMAs surveyed in Ontario, Kingston had the third lowest vacancy rate behind Greater Sudbury (0.9 per cent) and Barrie (1.2 per cent). This tightening rental market in Kingston is primarily due to the fact that while demand has been increasing, the supply of rental units has remained relatively flat.  There was no new rental construction in Kingston this year.

A number of factors have increased rental demand putting downward pressure on vacancy rates. First, according to recent surveys conducted by CMHC on homebuying intentions, fewer renter households have been in the market planning a home purchase in recent years. This story was supported by lower ownership sales in Kingston throughout 2008. In essence, the weaker local economy in Kingston has slowed the movement of renters into homeownership market. In fact, healthy job growth in the lower paying service employment sector helped support demand for rental accommodation.  Generally, lower earning households possess a weaker financial capacity to successfully generate downpayment for a new home.  Another factor is increasing enrolment at both Queen’s University and St. Lawrence College, as students are traditionally a strong driver of rental demand. On the supply side, between January and October 2008, there were only 54 rental units absorbed into the Kingston rental market, down from the 155 units recorded during the same period last year.

Downtown Vacancy Rate Declines

Moishe Alexander says The areas of “old” Kingston (Zone 1) registered the second lowest vacancy rate in 2008, indicating that apartments remain harder to find in the core than in the suburbs. The average vacancy rate in the down-town area dropped from 4.3 per cent in 2007 to 1.2 per cent in 2008.  During the second half of 2008, fulltime employment among youth has been particularly strong. Generally, the youth population tends to occupy entry-level rental accommodation typically closer to shops and schools. Therefore, the decline in vacancies in downtown Kingston, particularly among older rental units (built between 1960 and 1974) and less expensive rental units, is evidence of vibrant youth-driven demand in this zone.

In Zone 2 (which encompasses Polson Park, Calvin Park and Portsmouth Village) the vacancy rate retreated again to 0.9 per cent, down 0.4 percentage points from the previous year. For two consecutive years, this zone has registered the lowest average vacancy rate across the entire Kingston CMA.

Meanwhile, in suburban Zone 3 (Kingscourt, Rideau Heights, Glenarden, and Strathcona Park) the vacancy rate declined 1.6 percentage points to 1.7 per cent from October 2007. A similar drop in average vacancy rate occurred in Zone 4 where the rate fell from 4.4 per cent in 2007 to 1.9 per cent in 2008.

High-End Rental Units Becoming More Popular

Moishe Alexander says An emerging trend in the Kingston CMA rental market is the declining vacancy rates at high-end rental units.

The lower priced units recorded the highest vacancy rates in the CMA.  With strong overall employment growth year-to-date, renters in October showed higher preference for affluent rental units. Furthermore, the proximity to public services tends to support the demand for these up-scale rental units.

Kingston’s Average Rents Trending Up

Moishe Alexander says Tighter Rental Market Conditions translated into average rent increases of between 1.9 and 3.5 per cent across all bedroom types and zones.  This was different from last year’s experience, when some areas recorded small declines. Hence, the average rent for a two-bedroom apartment in existing structures increased by 3.1 per cent, well above the 2.6 per cent increase in the overall cost of living index.

Interestingly, however, the October 2008 survey shows both the rent increases and vacancy rates in Kingston exhibited similar trend among all the zones. Although the area of Zone 4 remains home to the highest rents, there appears little difference between the downtown and outlying areas.

Rental Market Outlook

Moishe Alexander says As a result of increased concern among potential first time home buyers about the Canadian economic outlook, coupled with no new additions of purposed built rental stock , the apartment vacancy rate in Kingston is expected to remain relatively low at 1.5 per cent in October 2009. The average two-bedroom rent is projected to advance by 2.8 per cent. Although an overall slow job market is anticipated for 2009, job creation among the lower paying sectors will remain strong and contribute to additional tightness in the rental market.

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64671/64671_2008_A01.pdf

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Moishe Alexander’s review of the Kitchener and Guelph Rental Market and CMHC Outlook Report Fall 2008

February 24, 2009 — Moishe Alexander’s review on how the current world economy and Canadian economic turndown is affecting the Kitchener and Guelph Rental Market

Moishe Alexander’s Review

Highlights

Moishe Alexander says The average vacancy rate in the Kitchener CMA moved lower to 1.8 per cent. In the Guelph CMA, the average vacancy rate moved higher to 2.3 per cent. A number of factors which include a younger population, immigration, employment and less movement of renters to homeownership contributed to the change in rental demand. Rental housing demand will increase slightly in 2009. The vacancy rate will edge lower to 1.6 per cent in the Kitchener CMA and to two per cent in the Guelph CMA.

Minimal Changes in Rental Demand in Kitchener and Guelph

Vacancy Rate Lower in Kitchener/Higher in Guelph

Moishe Alexander says Demand for rental apartments in the Kitchener and Guelph CMAs moved in opposite directions. A small increase in demand contributed to a decline in the average vacancy rate for privately initiated rental apartments in the Kitchener CMA to 1.8 per cent from 2.7 per cent in 2007.  In the Guelph CMA, demand eased and the vacancy rate increased to 2.3 per cent from 1.9 per cent last year.  Although higher, the vacancy rate this year was still well below the levels seen in the five-year period between 2002 and 2006 when the vacancy rate averaged close to 3.3 per cent.
A number of factors, both demographic and economic, contributed to the changes in rental demand. In both Kitchener and Guelph, these factors include a younger population, strong immigration, youth employment, little employment growth and less movement of renters to homeownership.

Lower First-time Buyer Demand

Moishe Alexander says Many renter households took advantage of low mortgage rates throughout this decade and the longer amortization periods after 2006 and as a result, pent-up demand is largely satisfied and fewer renter households are planning to buy a home. House prices continue to rise and are discouraging some renter households from moving into homeownership. Some renter households may delay their home purchase as a consequence and remain in their rental accommodation for a longer period.

This lower first-time buyer demand is more pronounced in the Kitchener CMA as the difference between owning a home and renting an apartment is higher. In the Guelph CMA, steady job creation coupled with low borrowing costs enabled a lower but steady movement of first-time buyers into home ownership.

Population Characteristics Affect Demand

Moishe Alexander says A young population, a high level of immigration and declining household size contributed to the increased rental demand this year in the Kitchener CMA. These factors also kept demand in the Guelph CMA at a relatively strong level.

According to the 2006 Census, the Kitchener and Guelph CMAs have young populations compared to the Ontario average. Younger households are more likely to rent than older age groups. A large student population and a strong high-tech sector have contributed to the high youth presence and strong demand for rental housing. As well, many young people who gain full-time employment will move out of their parental home into rental accommodation. In the Kitchener CMA, while overall employment for those aged 15-24 has fallen, more than 1,200 full-time jobs in this age group have been created in the CMA in the last year encouraging youth household formation. In the Guelph CMA, while overall employment for those aged 15-24 has declined marginally, full-time jobs in this age group have fallen, limiting the formation of youth rental households.

In the 12 months ending June 30, 2007, more than 3,000 immigrants made their new home in the Kitchener CMA. Due to a high employment rate and relatively more affordable home prices and rents compared to the GTA, immigrants find the Kitchener CMA an attractive place to live. A large proportion of persons new to Canada will initially rent as it takes time to gain employment, establish a credit rating and save for a down payment.

Moishe Alexander says Smaller household size added to the demand for rental housing. According to the 2006 Census, one-person, lone-parent and couples without children households increased at a higher rate than couples with children households. A higher percentage of these smaller-sized households rent. The oldest baby-boomers are now in their sixties and many are looking to downsize. Renting is a viable option.

Resilient Local Economies

Moishe Alexander says The local area economies have remained resilient despite uncertainty in global financial markets and a weak US economy.

Although job growth has slowed in the Kitchener CMA, employment has remained at a high level. Job uncertainty and less confidence in the economy have delayed some renter households’ decision to purchase a home. However, for the first three quarters of 2008, employment in the Kitchener CMA grew by 2.4 per cent compared to the same period in 2007. All of the job gains were in full-time employment. While the goods-producing sector continues to be a drag on the local economy, the services sector continues to add jobs.

In the Guelph CMA, employment has remained at a high level with job growth of more than six per cent in the first ten months of this year compared to the same period in 2007.  With strong job growth in the 25-44 and 45-64 age groups, some renter households in these age groups were able to purchase a home.

Condominium Apartment Completions

Moishe Alexander says Condominiums are a more affordable type of housing compared to single detached homes and are a viable alternative to renting for first-time buyers. More than 80 condominium apartments were completed in the Guelph CMA this year. First-time buyers and empty-nesters, who may otherwise have rented an apartment, are attracted to this type of ownership housing. In the Kitchener CMA, only 50 condominium apartments were completed in the same period.

Rent Growth Below Inflation

Moishe Alexander says The percentage change of average rent from fixed sample is 0.9 per cent for a two-bedroom apartment in the Kitchener CMA and 1.6 per cent in the Guelph CMA. This measure is strictly based on structures that were common to the survey sample for both the 2007 and 2008 surveys. For the Kitchener CMA, this increase was well below the Residential Tenancies Act (RTA) guideline for 2007 of 1.4 per cent.  As well, this increase was below the inflation rate. In the Guelph CMA this increase was slightly above the RTA guideline for 2007, but below the inflation rate.

Rental Supply Declines In Kitchener

Moishe Alexander says At 174, the number of purpose-built rental apartments completed in the Kitchener CMA since June 2007 was somewhat lower than usual. Over the last five years, the number of new rental apartments completed has averaged about 650 annually.  Despite this additional supply, the private rental apartment universe decreased by 184 units because some apartments were converted to other uses. With more than 800 rental apartments under construction currently, completions next year will be more in line with the longerterm average.

No purpose-built rental apartments were completed in the Guelph CMA since June 2007. As a result, the private rental apartment universe remained unchanged this year.

Low Vacancy Rates for One and Two-Bedroom Apartments

Moishe Alexander says The vacancy rate for all bedroom types of rental apartments decreased in the Kitchener CMA The majority of private rental apartments are one and two-bedroom units. These two unit types accounted for 93 per cent of the total apartment rental universe and have the lowest vacancy rate at 1.8 per cent. The one-bedroom apartment vacancy rate edged lower to 1.8 per cent from 2.2 per cent a year ago, while the two-bedroom apartment vacancy rate declined more significantly from 2.9 per cent to 1.8 per continent

Moishe Alexander says A more than 100 unit decline in the supply of two-bedroom apartments combined with increased rental demand pushed the vacancy rate down to this level, the lowest since 2001. The widening gap between the average principal and interest payment for a resale home and the average two-bedroom rent has impacted some renters’ interest in moving into homeownership. With the more diverse financing options available after 2006, many first-time buyers were able to enter the resale market earlier than would normally have been expected, resulting in lower demand for homeownership from current renters.

Affordability Indicator

Moishe Alexander says According to CMHC’s rental affordablility indicator, affordablility in Kitchener’s rental market increased this year. The rental affordability indicator in Kitchener stands at 108 for 2008, up from 101 in 2007. The 2007 indicator was the lowest level of affordability Kitchener has seen in the thirteen years for which the indicator is available. The rental affordability indicator is not available for Guelph due to a lack of required data for that centre.
Rental Market Outlook: 2009

Moishe Alexander says Rental housing demand will increase slightly in 2009. The vacancy rate will edge lower to 1.6 per cent in the Kitchener CMA and to two per cent in the Guelph CMA. In the Kitchener CMA, demand for rental accommodation in 2009 will be boosted by immigration, rental household growth and little movement into homeownership. Migrants will continue to be attracted to the CMA due to its relatively stronger economy compared to other Ontario CMAs.

On balance, population will increase by 2,500 next year due to international migration. Immigrants represent more than 50 per cent of the net population increase due to migration. They tend to rent when they first move to Canada. Due to the expected lower job growth and uncertain economic conditions, more renter households will delay their plans to move into homeownership.  Although the gap between average rent and average mortgage carrying cost will narrow somewhat in 2009, the number of rental households will continue to grow. In the Kitchener CMA, with few new condominium apartments being built, younger, downsizing and aging households have little alternative but to rent.  On the supply side, with more than 800 rental apartments under construction in the Kitchener CMA, rental completions will be more in line with the historical average in 2009. This increased supply will partially offset the higher demand.  In the Guelph CMA, although 177 rental apartments are currently under construction, no new rental apartments will be completed by next October. With higher demand and no new supply, the rental market will tighten. On the other hand, with more new condominium apartment completions next year, some renter households will be able to move to ownership housing in this more affordable type of housing. As well, due to less than optimistic job prospects, some youth will remain in their parental home longer.

Moishe Alexander says With the vacancy rate in both CMAs expected to be below its 20-year average in 2009, there will be slightly more room to raise rents. In both CMAs, rent increases in 2009 will be in line with the Residential Tenancies Act guideline for occupied units of 1.8 per cent.

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64399/64399_2008_A01.pdf

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Moishe Alexander’s review of the Sherbrooke Housing Market and CMHC Outlook Report Fall 2008

February 24, 2009 — Moishe Alexander’s review on how the current world economy and Canadian economic turndown is affecting Sherbrooke Housing Market

Moishe Alexander’s Review

Sherbrooke CMA housing starts and MLS® sales to fall in 2009

A slightly less favourable labour market in 2009

Moishe Alexander says In 2007, the labour market in the Sherbrooke census metropolitan area (CMA) was characterized, among other things, by the creation of over 2,000 jobs (+3 per cent) and a significant decrease in the number of unemployed individuals.  Personal disposable income per capita had in fact increased by 5.3 per cent. However, things changed slightly in the first nine months of 2008: the area now shows a small loss of 375 jobs, or 0.5 per cent, compared to the same period last year. The drop in full-time jobs was solely responsible for this loss, as part-time jobs posted a small gain (+0.7 per cent). The Bank of Canada now expects Canada’s economic growth to moderate in 2008 and 2009. Consequently, the Sherbrooke labour market will be slightly less favourable this year and next, which will not be without implications for the Sherbrooke housing market.  Still, the economic outlook for 2009 does appear brighter. Public investments included in the Quebec government’s infrastructure plan should somewhat stimulate the regional economy. Numerous employers, such as the CHUSFleurimont, CGI and Charles River Laboratories, will also be seeking new talent during this period.

Mortgage rates

Moishe Alexander says Mortgage rates are expected to be relatively stable throughout the last quarter of this year, remaining within 25-50 basis points of their current levels. Posted mortgage rates will decrease slightly in the first half of 2009 as the cost of credit to financial institutions eases. Rising bond yields, however, will nudge mortgage rates marginally higher in the latter half 2009. For the last quarter of 2008 and in 2009, the one year posted mortgage rate will be in the 6.00-6.75 per cent range, while three and five year posted mortgage rates are forecast to be in the 6.50-7.25 per cent range.

Net migration in the CMA expected to decline slightly in 2009

Moishe Alexander says In 2007, net migration in the CMA was about 1,150 people, the highest level in the last three years. However, the same scenario is unlikely to occur in 2008, since the preliminary data1 show a decrease in newcomers planning to settle down in the Estrie area this year. After the first two quarters, this level was down 7 per cent, compared to the same period in 2007. In addition, still attracted by the abundance of job opportunities, many more people will head out West, which will lower net migration in the CMA. This year, 1,100 migrants will therefore be looking for dwellings (mainly rental) in the CMA, which will dampen housing demand.

Net migration in the CMA should improve next year, however, as the Quebec government wants to substantially increase the number of immigrants by 2010. As interprovincial migration should still remain favourable to the Western provinces over the same period, only the increase in international migrants will help net migration rise in 2009 and get close to the 2007 level of 1,150 people.

Resale market to become more balanced

Moishe Alexander says The resale market in the Sherbrooke CMA stayed very active in 2007, with 1,918 transactions registered, for a 7-per-cent increase over the same period in 2006. The factors that likely accounted for this increase include healthy labour market conditions in 2007 and relatively low mortgage rates. The situation is very different this year: from January to September, MLS® sales are down by 5 per cent from the same period a year ago, with the decrease affecting mainly less affordable housing. This small decrease will not be erased by the end of 2008, such that MLS® sales will fall by 5 per cent for the year, to 1,820 transactions.

In 2009, the favourable financing conditions and improved labour market situation should help the resale market recover. As these economic changes will be occurring gradually and not all at once at the beginning of the year, MLS® sales will decrease by 2 per cent in 2009, to 1,780 transactions. Contrary to home sales, properties listed in the MLS® system from January to September were up 16 per cent compared to the same period in 2007 (1,160 in 2007, compared to 1,350 in 2008). These numbers have been rising steadily for the past five years. In fact, all housing types registered increases in listings, but especially condominiums (+40 per cent). The upward trend will also continue in 2008 and 2009, with active listings rising by 17 per cent this year to 1,365 units and by 8 per cent next year to 1,480 units.  Three factors effectively suggest that these increases will occur. First, with decreasing MLS® sales, homes will stay longer on the market. Second, a broader choice will prompt potential buyers to visit more houses before making a purchase, therefore lengthening the listing period. Third, new listings will also go up in the CMA and increase the housing supply. Given that sales and listings will follow opposite trends, the Sherbrooke CMA market will become balanced, with the seller-to buyer ratio2 reaching 8 to 1. This means that the power of sellers on the market will shift somewhat and that price increases will be less significant. The average price of properties sold through the MLS® system will therefore reach $186,750 this year (+1 per cent) and $188,600 in 2009 (+1 percent).

Moishe Alexander says In the first three quarters of 2008, the increase in the average price was in fact very small (half of a percentage point). This can be mainly explained by the decrease in the average selling price of homes in the upper price range ($250,000 or more) over the same period, which put downward pressure on the overall average price. This phenomenon occurred mainly in Magog and in the areas surrounding the city of Sherbrooke and therefore partly accounts for the small price increase noted to date.  The Magog resale market also stands out from the Sherbrooke CMA market in another respect. After three quarters, the number of properties sold (228) was 21 per cent below the same period in 2007 (288), and the MLS® average price was down by 3 per cent. There is every indication that Magog will end 2008 with decreases in both home sales and the average price3. In terms of sales, however, 2007 was a record year in Magog, relativizing this decline and minimizing its importance. In 2009, MLS® sales will remain stable in Magog, when compared to the 2008 level.

Housing starts to decrease in 2009

Moishe Alexander says In 2008, housing starts will increase by 16 per cent in the Sherbrooke CMA, from 1,318 units in 2007 to 1,530 this year. Both the singledetached and the multiple housing segments will contribute to this increase, but single-detached home construction will show better results. During the first three quarters of the year, foundations were laid for 580 single-detached houses, a historically high level. Strong employment growth in 2007 is one of the factors explaining this increased activity. However, the more moderate economic growth and job creation currently observed will have an impact on construction in this segment by the end of 2008 and on through next year. The new home market (as opposed to the resale market) usually reacts less rapidly to changes in economic conditions, as several steps must be completed before construction can begin, such as buying a lot and checking zoning bylaws. In 2008, 780 single-detached houses will be started, compared to 666 in 2007 (+17 per cent). In 2009, in addition to the moderating economic growth, increasing competition from the resale market, due to the rise in listings, will cause starts of this type to fall by 23 per cent to 600 units.
As for multiple-family (semidetached, row and apartment) housing construction in the CMA, starts were down 16 per cent after nine months of activity in 2008.  While semi-detached and row home building increased by 10 units (from 68 in 2007 to 78 in 2008), apartment starts fell by 20 per cent4 (from 459 units in 2007 to 367 in 2008).

This 16-per-cent decrease in multiple housing starts may appear irreversible at first glance, but construction in this segment will end 2008 on the rise (+15 per cent), with 750 units, versus 652 in 2007, as two large rental projects are currently under construction. In fact, a 150-unit retirement home will soon be added to Magog’s rental housing stock, and some 50 social housing units are being built in Sherbrooke.

As in the case of the single-detached home segment, multiple housing starts will also fall in 2009. The construction of semi-detached and row homes and condominium units will not be as hard hit by the decrease in activity, thanks to their relative affordability. Supply of these housing types is rising sharply on the resale market, however, which should still slow the pace of building for these types of dwellings.
Construction should therefore get under way on around 100 semidetached and row homes and 125 condominium units next year, or about the same volumes as in 2008. In addition, two factors explain why fewer rental housing units will get under way next year. First, the vacancy rate increase between 2008 and 2009 (see next section) will prompt builders to slow the pace of rental housing construction. Second, the rental housing starts volume for 2008 is being inflated by the construction of a large retirement home and some new social housing units, which means that the level of activity in 2009 will not be able to exceed the 2008 results. About 400 rental housing units will therefore be started next year, compared to 500 in 2008.

Overall, multiple housing starts in the Sherbrooke CMA will fall by 13 per cent in 2009 (from 750 units in 2008 to 650 in 2009). However, large rental housing projects could still get under way (Sommet de la Santé, Carré 100T) next year, which would change the current forecasts.

Rental market easing but will remain tight

Moishe Alexander says Following the hike in the vacancy rate posted last year, from 1.1 per cent in 2006 to 2 per cent in 2007, the rental market will ease slightly in the Sherbrooke CMA in 20085. The current demographic and economic context is pointing to a more moderate demand in this market, at the same time as 300 new apartments should be added to the rental housing stock. The very slight increase in demand will be mainly caused by the decrease in net migration in the area and by moderate job growth for young people in the area. In these conditions, the vacancy rate will reach 2.1 per cent in 2008, up by one tenth of a percentage point over 2007.

The results of the latest CMHC Rental Market Survey (conducted in April 2008) are in line with the above-mentioned forecast. In fact, the rate increased slightly, from 1.4 per cent in 2007 to 1.6 per cent in 20086, which bodes well for the results of our next survey, to be released in December 2008.
In 2009, as is the case this year, the rental market will continue to ease slightly, with the vacancy rate climbing to 2.2 per cent. While few traditional rental apartments7 will be added to the existing rental housing stock, demand in this market will only be bolstered by the anticipated moderate gains in net migration and youth employment.

Although market conditions will be easing, the average rent for twobedroom apartments will increase by 3 per cent in 2008 and 2009, reaching $545 and $560, respectively. It should be recalled that, even if the vacancy rate is on the rise, the proportion of vacant two-bedroom apartments remains relatively low, putting upward pressure on rents.

Retirement home vacancy rate should increase

Moishe Alexander says According to the latest Rental Market Survey results for the Sherbrooke CMA, the retirement home vacancy rate climbed by 3 percentage points between 2007 and 2008 (from 4.5 per cent in 2007 to 7.5 per cent in 2008).

Weaker demand for units in retirement homes, combined with a supply that remained relatively stable, accounted for this increase. Two major factors suggest that the retirement home vacancy rate will continue to increase in 2008 and 2009. First, the slower growth in the population aged 75 years or older8, the main clients in this market, should curb the increase in demand. Second, about 350 new retirement housing units will be added to the market by 2009, for an 11-per-cent increase in supply compared to the 2007 level. Other projects are also being planned and could double the number of units to almost 700 by 2010. Given the surge in supply and the slowdown in demand, the vacancy rate will rise over the next two years in the Sherbrooke CMA.

You can find the entire report in PDF format through the following link:

http://www.cmhc-schl.gc.ca/odpub/esub/64295/64295_2008_B02.pdf