Housing starts rebounded in the second half of 2009 and will strengthen in 2010, according to Canada Mortgage and Housing Corporation’s first quarter Housing Market Outlook, Canada Edition*.

Following a total of 149,081 units in 2009, housing starts are expected to be in the range of 152,000 to 189,300 units in 2010, with a point forecast of 171,250 units. In 2011, housing starts will be in the range of 156,400 to 205,600 units, with a point forecast of 175,150 units.

“Canadian housing markets will benefit from improving economic conditions and low mortgage rates,” said Bob Dugan, Chief Economist for CMHC. “As well, measures recently announced by the Government of Canada to support the long-term stability of Canada’s housing market will help moderate housing activity as some potential buyers will have to save a larger down payment or consider a less expensive home.”

Mr. Dugan also noted that the existing home market has shifted from a buyers’ market, at the beginning of 2009, to a sellers’ market. The relative lack of new listings for existing homes has pushed some of the demand into the new home market, which helps explain the forecast for higher housing starts activity in 2010.

The strong pace of MLS®1 sales seen in the second to fourth quarters of 2009 reflects, in part, activity that was delayed in the previous two quarters. The pace is not likely to be sustained as pent-up demand is exhausted and financing costs increase with anticipated higher interest rates later in 2010. As a result, existing home sales will be in the range of 455,350 to 509,900 units in 2010, with a point forecast of 486,700 units, and then move slightly lower in 2011 to be in the range of 426,300 to 494,600 units, with a point forecast of 469,950 units.

With an improved balance between demand and supply, the average MLS® price is expected to remain close to the average in the last quarter of 2009, for most of 2010, and then rise modestly in 2011.

Moishe Alexander’s Review

Economic Overview:

Economic Growth Eases as Demand for Labour Remains High

Halifax, Nova Scotia - Credit Smudge9000, Flickr Creative Commons

Moishe Alexander says the economic fundamentals in Halifax have been solid over the past few years but the economy is beginning to show signs of change. Economic uncertainty will result in more moderate economic growth and more modest levels of employment growth, in spite of the fact overall employment in Halifax remains very strong. After rising two per cent in 2007, employment reached near record levels midway through 2008. Growth has moderated, however, to 0.7 per cent as of August 2008 and growth is expected to remain near one per cent over the next two years.  The unemployment rate is just over five per cent and is forecast to remain near this level over the next 18 months. Metro Halifax is experiencing a high level of economic activity. Demand for construction labour has been boosted by both commercial and residential construction projects.  Commercial projects include retail developments at Dartmouth Crossing and Russell Lake West, new hotel construction and a new parking facility at the Stanfield International Airport, to name a few.  Residential construction has remained very active in the city with near record levels of units under construction. All told, the demand for construction labour pushed employment in the industry to nearly 15,000, a record level, in the peak summer months of 2008.  Other projects supporting the economic output in Metro Halifax include new aerospace contracts, new defense contracts for upgrading navy ships, ongoing demand for Information Technology professionals and spin off demand for services from nearby oil and gas exploration projects. The shipping industry, however, continues to experience reduced levels of activity at the Halifax ports. In spite of forecasting reduced activity in both residential construction and home sales, sustained economic activity and strong employment will help bolster housing demand at relatively healthy levels in historic terms.

The working population is aging in Halifax at a fairly rapid rate. In 2000, there were approximately 100,000 people between the ages of 25 and 44 employed in the city. At the same point in time, there were only 56,000 people employed between the ages of 45 and 64. As of 2008, the number of people employed in the younger age group declined seven per cent to just over 93,000. Over the same time period, the number of employed people between the ages of 45 and 64 grew to over 81,000 – an increase of 46 per cent. This is the result of several factors including natural aging, strong migration into Halifax and sustained or rising demand for labour in the city.

Interestingly, the unemployment rate in the older age group is significantly lower than the younger group. It was recorded at approximately 3.5 per cent in 2007 compared to 5.2 per cent for the 25 to 44 year old age group.

Through the first three quarters of 2008, inflation, as measured by the Consumer Price Index, was up over three per cent in Halifax following the previous three year average of just over two per cent. Average incomes had been growing at a rate in excess of inflation in recent years in Halifax however the trend stopped in 2008. After growing over five per cent in 2007, average weekly earnings growth moderated to just over two per cent in 2008. The average annual wage in Halifax is just over $36,000 as of August 2008.  Moderate employment growth and wage growth combined with rising home prices will contribute to somewhat reduced levels of housing construction and sales in 2008 and 2009.

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.

New Home Market:

New Home Construction to Decline

Moishe Alexander says New home construction levels declined in 2008 and activity will moderate further in 2009. Singledetached home construction has been relatively strong throughout 2008 compared to last year, while multi-residential construction has been weak due to a significant reduction in apartment-style unit starts.

Demand for new single-detached housing increased along with higher demand in the existing homes market in 2008. A record year for existing home sales in 2007 depleted inventory and this encouraged buyers and builders to construct new homes to meet demand. This has driven single starts up 12 per cent through the first three quarters of 2008 compared to the same period in 2007. Expect this demand to soften in the final quarter of 2008 and into 2009. Single starts will decline in the fourth quarter and this will reduce the 2008 total to 1,175 units which is just below last year’s level. In 2009, single starts will decline further to approximately 1,025.

There are several reasons for the expected drop in single-detached construction. The demand for existing homes has cooled and inventory has increased. This will mean that buyers will have more selection in the existing homes market and less need to seek out new construction. In addition, buyers are facing increased economic uncertainty, weaker economic growth and slower employment and wage growth which will result in reduced demand for new housing.

Rising costs of labour, materials and development have been contributing to rising prices for new homes. New home prices have increased by an average rate of ten per cent annually since 2001. The rising costs and the resulting higher prices are also contributing to reduced demand for new single-detached homes. Expect price growth to slow to below four per cent in 2008 and to below three per cent in 2009 with the average single-detached home price reaching $345,000 and $355,000 in 2008 and 2009 respectively.

Multi-residential construction has cooled considerably in 2008 due to fewer semi-detached and apartmentstyle starts. Row housing is one area that actually saw strong growth in 2008 and this is expected to grow nearly 30 per cent by the end of the year. While row housing starts will decline in 2009, the forecast of 165 new units remains well above the historic average. Semi-detached starts however will remain lower in 2008 and stay flat in 2009.

There have been relatively few apartment-style units started in 2008. In fact, 2008 and 2009 will record only 700 apartment style starts per year. The decline in new apartment starts is due at least in part to the overall economic environment and weaker economic growth, but is also due to larger scale projects with longer periods of construction. In 2007, there was a record level of nearly 1,800 apartment units under construction. While this number has decreased in 2008, it remains quite elevated at over 1,500 units. With the reduced numbers of starts, this means that projects have been taking longer to complete. One reason is the scope of the projects but another key reason is demand and competition for labour resulting in various project delays. The demand for labour is further challenged by increasing levels of non-residential construction in Metro Halifax.  Offsetting the weakness in multiple starts is fairly sustained demand.  Demographic trends toward increasing numbers of smaller households will mean demand for smaller residential units will continue.  Furthermore, the rising prices of single-detached homes and the rising overall costs make apartments an attractive alternative.

Resale Market:

Declining Existing Home Sales and Moderate Price Growth

Moishe Alexander says after a record setting year in 2007, MLS® sales have cooled in 2008 and activity will remain subdued over the forecast period. The average price for an existing home in Metro Halifax continues to rise and while price growth will slow it will still remain positive throughout the forecast period. In 2007, MLS® sales grew over 11 per cent but through three quarters of 2008 have fallen over seven per cent. They are forecast to remain down seven per cent in 2008 with approximately 6,450 sales and to fall a further four per cent in 2009 to 6,200. In spite of the decline this year, the number of MLS® sales remains very near previous record levels recorded in 2002 and 2005. Demand for existing housing remains fairly strong, but will moderate over the next 12-18 months. Recent wage growth and overall strong employment levels combined with strong household formation have contributed to demand for housing in general. The existing home market is attractive to many due to the relatively lower prices compared to new construction and the often more established surrounding neighborhoods. In terms of price, the average price of an existing home has increased rapidly in recent years and is now forecast to be $235,000 in 2009. For a new home, however, the average price is forecast to be $355,000 in 2009 which is more than 50 per cent higher than an average existing home.

Over the forecast period, existing home sales will continue to face the challenges seen in 2008. Sales have fallen from record highs due to slower economic growth which has resulted in slower employment and wage growth. Rising home prices and rising housing-related costs are contributing to weaker demand as is some general economic uncertainty.  For these reasons, sales will decline in the medium term.

After doubling in the past ten years and averaging nearly eight per cent growth in the past five years, existing home prices will grow more moderately over the forecast period.  Expect a further six per cent growth in 2008 to $228,000, while in 2009 price growth will slow to three per cent to $235,000 due to lower demand and sales.

An expected increase in the number of listings will also put downward pressure on price growth as potential buyers find more stock to choose from. New listings will increase over four per cent in 2008 and a further one per cent 2009.  These increases follow a four per cent decrease in new listings in 2007. Active listings have increased even more with a 14 per cent increase in August 2008 compared to August last year.

With listings on the rise and price growth easing , the overall resale market has been trending away from sellers’ market conditions and moving more into balanced market conditions over the past couple of years. Expect this trend to continue and the possibility of shifting to buyers market conditions late next year.

In spite of rising inventory and more modest levels of sales, the average time to sell a home has decreased in 2008 from 89 to 84 days-on-market.

Rental Market:

Vacancy Rates and Rents to Rise in Short Term

Moishe Alexander says expect apartment supply to increase over the next 12 to 18 months as near record levels of residential units under construction complete or near completion. Before rising to 3.2 per cent in 2009, expect vacancy rates to drop below three per cent in 2008. The current year drop will be due to delays in the availability of units under construction, whereas in 2009 these new units will be added to the supply and exert upward pressure on vacancy rates. During the same forecast period, expect average rents to rise in response to rising construction and operating costs. Average rents will rise just in excess of the rate of inflation at approximately three per cent both this year and next.

In 2007, there was an average of nearly 1,800 apartment units under construction. While this figure has declined to approximately 1,500 units, it stands as the second highest level ever of units under construction. This in turn will result in hundreds of new rental units being added to the market and will put upward pressure on vacancy rates in the medium term.

Offsetting the increase in supply, will be continued demand for rental units. Demographic shifts towards higher numbers of smaller families will continue to impact demand for small units and apartment living. The rising cost of new and existing homes will also make rental units an attractive alternative.

Further offsets to the impact of increasing supply will be weaker employment growth and weaker wage growth. As employment and wage growth moderate, demand for rental units will remain strong as apartments will be seen as an alternative to homeownership.  Continuously rising costs of labour, materials and development will contribute to higher construction costs for builders while higher prices for heating fuel and utilities will contribute to higher operational costs for landlords. These rising costs will in turn lead to rent increases in excess of the rate of inflation over the next 12 to 18 months. An average two-bedroom unit will rent for approximately $830 in 2008 and rise to $855 in 2009.

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64267/64267_2008_B02.pdf

Moishe Alexander’s Review:

New Home Market

Single starts slip in 2008 but maintain historically high levels

Saskatoon, Sask. - Credit Stephen Glauser, Flickr Creative Commons

Moishe Alexander says Saskatoon single-detached housing starts will see a slight decline in 2008, slipping to 1,250 starts, 16 per cent less than the 1,485 starts seen in the market of 2007. In 2009, our forecast calls for 1,000 single-detached starts as the market responds to reduced demand, rising inventories, and competition from the resale market. Price escalation from previous years will be a dominant factor leading demand lower. Notwithstanding the expectation of a reduction in starts, this outlook is above the average number of starts seen in the 10 years prior to 2007. The momentum in single starts which built up in 2007 continued into the first five months of 2008 and is slowly abating in the fall.  Investor money has now evaporated.

Wide choice on the resale side is diverting demand from new construction.  Builders are turning to the task of completing and selling the homes presently under construction. Job growth, wage gains and positive net migration will continue to support new housing and ensure a gradual cooling of the market. In August, year-to-date single starts are close to even with last year at this time but monthly starts have been lower than last year for the past three months.

Bedroom communities attracting home buyers

Moishe Alexander says to the end of August, areas surrounding the city of Saskatoon have captured just over 30 per cent of the total housing starts compared to a 26 per cent share at the end of August 2007. The bulk of these starts have occurred in the town of Warman with 247 starts. Total housing starts in Warman include 111 apartment units. Looking at only single-detached units, Warman again captured the bulk of the starts with a 12 per cent share of the total single housing starts in the CMA. Warman is a popular choice for homebuyers because of its close proximity to employment opportunities offered in the north end of Saskatoon.

Single-detached absorptions are climbing as builders complete units and homebuyers occupy these new homes. To the end August, absorptions of units started in 2007 are up 37 per cent compared to this time in 2007. Average absorptions have topped 100 units monthly compared to an average of 84 units monthly throughout 2007.
At the present rate of absorption, the supply of single units at various stages of construction as well as complete and unoccupied is sufficient to last about 12 months. This is down slightly from the August 2007 figure of 13 months. The combined effect of slower starts and increased absorptions has reduced the total supply on a month over month basis over the last three months.

Average price to reach $380,000 in 2008 and $415,000 in 2009

Moishe Alexander says at the end of 2008, we forecast the average price of a new single-detached home will be $380,000 followed by a nine per cent increase to $415,000 in 2009. Expect price increases to moderate in 2009 as increased competition from resale housing takes hold and construction moderates. Labour costs combined with higher land development costs are the primary contributors to the upswing in average price thus far. In recent months, however, labour shortages have tapered off with the recent decline in single-detached starts. The continued moderation in starts in 2009 will result in a weaker pace of price growth moving forward.
Currently, the year-to-date average price of a new single-detached home is over $350,000, up close to 33 per cent over the average price recorded in the first eight months of 2007. There is a shift upwards into higher price ranges. All price ranges above $250,000 have seen an increase in the number of absorptions while lower price ranges have seen declines. So far, in 2008, the $300,000 to $349,999 range has captured most of the absorptions, reaching 24 per cent of the market.  In the $300,000 to $349,999 price range, year-to-date absorptions of 195 units are 150 per cent over last year at this time.

Saskatoon New House Price Index decelerates in 2008 and 2009

Moishe Alexander says Statistics Canada’s New House Price Index (NHPI) measures the increase in the price of a house where the detailed specifications pertaining to each house remain the same between two consecutive periods. We expect gains will be more subdued than 2007 as we move forward. Our forecast calls for a 22 per cent increase in the total NHPI in 2008 followed by a modest 1.5 per cent rise in 2009.

According to homebuilders, the 2007 increases were a reaction to the rapid escalation of existing home prices. Demand had shifted from resale housing and builders raised their prices as supply dwindled.  These market conditions have now reversed course and our forecast anticipates a reduction in price gains as the market softens. A 22 per cent increase in 2008, with a further slowdown in price gains to 1.5 per cent in 2009, reflects these changes in the market.

Multi starts slow in 2009

Moishe Alexander says Momentum will carry multiple starts (including semi-detached, row, and apartment units) to 1,150 units in 2008 as builders exceed the pace recorded in 2007. A rising inventory will force developers to slow production to 800 units in 2009.

To the end of August, multiple starts are up 45 per cent compared to this time in 2007. Apartments have dominated production in 2008 with 589 units started; more than double the 2007 starts level seen at this time last year. Most of these apartments are condominiums designed for seniors and offer such features as elevators and underground parking.  However, new markets have opened for homebuilders involved in row housing condominium development.  Due to the rising price of singledetached housing, some first-time homebuyers have turned to the row and semi-detached dwelling style as a more affordable homeownership alternative. Expect row housing to be the second most popular form of new multiple housing, after apartments in 2009.

Supply of multiple units reaches historically high levels

Moishe Alexander says as of August this year, total supplies of multiples were in excess of 1,400 units at various stages of construction or completed and unoccupied. This figure is more than 55 per cent higher than last year at this time.  As multiple starts will remain at an elevated level in 2008, we expect the supply of multiples to remain in the 1,000-unit range throughout this year with an eventual decline in 2009 as starts fall off and units are completed and absorbed. At current rates of absorption, the supply of all types of multiple units is sufficient to last almost 29 months, close to the 28-month supply seen in August 2007.

Most of the multi supply is in the construction stage with apartment style units dominating the mix. The number of apartments under construction is now almost double the number seen at this time in 2007.  There are just over 360 row units in the construction stage.

Industry reports abundant supply of land

Moishe Alexander says Saskatoon land developers have reported there are 1,850 lots at various stages of development within city limits and an additional 1,200 lots in communities surrounding the city. According to developer’s estimates of land absorption rates, this represents a three-year supply.  Given the length of time required to plan and develop raw land, this suggests a balanced market situation.  However, shortages may develop for lots in more desirable subdivisions or price ranges.

RESALE MARKET

Resale market sales fall off in 2008 and 2009

Moishe Alexander says Saskatoon resales will decline almost 20 per cent by the end of 2008 with a further 11 per cent reduction occurring in 2009. Notwithstanding 2008’s forecast decline, resales will still be in excess of the ten-year average of 3,170 sales. Saskatoon’s resale market is coming off a surge of activity in 2007 that saw sales increase almost 30 per cent over 2006 and resulted in the highest number of resales ever recorded.  By the end of August 2008, year-todate sales were down 18 per cent, while seasonally adjusted monthly sales were down 33 per cent compared to the same month in 2007.

Investor demand played an important role in the 2007 upswing but the bulk of this money is now absent.  The industry reports that sellers are holding firm at prices that were common in 2007. Buyers, on the other hand, have adopted a wait and see approach, hoping for a price adjustment following the steep price gains of the last two years. In-migration, rising weekly earnings and other favourable labour market conditions will support demand for resale housing but the sales trend is clearly slowing.

Saskatoon will see 8,500 listings processed in 2008 followed by 7,000 new listings throughout 2009. In August, year-to-date new listings were up 41 per cent compared to last year at that time. New listings are on the rise as seniors move into newly constructed condominiums and others take possession of their new single-detached units. In addition, some investors are now liquidating their holdings in the resale market. Some of these newly listed properties are recently completed new homes. Thus, builders are finding they are competing against their own product. Faced with this challenge, builders will limit price increases on future building contracts.
The combination of the escalation in new listings and slow sales has led to high active listing inventories. Active listings have more than doubled over the August 2007. Although new listing activity will slow in 2009, we expect active listings will remain elevated moving forward.

A further result of record listings and slow sales is a decline in the sales-to-active listing ratio to 8.3 per cent. The seasonally adjusted trend is down more than 30 percentage points on a year-over-year basis and down close to three percentage points on a month-over-month basis.  These low ratios mean that relatively few buyers face a large number of homes available for purchase. The result is a market that favours the homebuyer.

Average resale price to increase 23 per cent in 2008 and 1.9 per cent in 2009

Moishe Alexander says our forecast calls for average price to reach $287,000 in 2008 and approach the $300,000 mark in 2009 as price gains cool from the 2007 pace. Higher listings and buyer resistance to higher prices will result in the relatively weaker price gains compared with 2007 for the balance of 2008 and 2009. The forecasted increase of 23 per cent in 2008 will be modest by comparison with the 45 per cent jump in 2007 but will still be one of the highest gains on record.

At the end of August, year-to-date average price is still on the rise with a year-to-date increase of 27 per cent.

Seasonally adjusted average price is up 15 per cent compared to the August 2007 figure but down slightly from the July 2008 seasonally adjusted average price.

RENTAL MARKET

Vacant apartments scarce in 2008 and 2009

Moishe Alexander says after falling to a low of 0.6 per cent in 2007, CMHC is forecasting an increase in the average vacancy rate in 2008 to two per cent followed by two per cent in October 2009. The average vacancy rate will vary widely across the city but all areas will see a tight rental market. The April rental market survey found there was an average vacancy rate of less than one per cent in the Saskatoon Census Metropolitan Area. Our forecast of two per cent average vacancy in October 2008 assumes there will be a decline in demand due to tenants moving to home ownership, lower in-migration and tenant households “doubling-up” in the face of mounting rents. In 2009, these conditions will persist, resulting in two per cent average vacancy rate in that year also.

Rents continue to rise in 2008 and 2009

Moishe Alexander says strong rental demand has given property owners and managers an opportunity to maximize rental income. Following an $85 increase to the monthly two-bedroom rent in 2007, our forecast calls for an increase of $167 in the two-bedroom monthly average rent in 2008 and a modest increase of $15 in 2009 bringing the average rent for a twobedroom suite to $860 by October 2008 and $875 in October 2009.  The re-introduction of renovated suites will contribute to the rental hikes. We expect the increase in average rent to slow in 2009 as household income begins to limit further rent hikes.

Both the City of Saskatoon and the Province of Saskatchewan have programs in place to encourage the building of market rental and affordable rental housing.

ECONOMIC OUTLOOK

Employment growth restricted by scarcity of workers

Moishe Alexander says CMHC is forecasting employment gains of 2,300 jobs in 2008 followed by 1,800 in 2009. These increases are considerably more subdued than the surge in employment seen in 2007, which saw 7,500 jobs created.  The escalation in housing prices relative to other western cities will slow in-migration and restrict labour force gains thus limiting employment growth. Unemployment will see a slight increase in 2008, yet remain low by historical and national standards.  Expect the unemployment rate to slip back to four per cent in 2009.  At the end of August, Saskatoon’s goods sector has dominated employment growth. Mining as well as oil and gas extraction have done the heavy lifting. Manufacturing and construction have also contributed.  Service sector employment has fallen off compared to the hectic pace of hiring seen in 2007. Retail trade and education employment numbers have been slipping since the beginning of 2008. Full-time employment has seen an increase so far in 2008 while parttime employment has been sliding.  Both younger and older age groups have benefitted from employment gains so far in 2008. There are early indications that the youngest age group may be seeing declines later in the year as this is the group most commonly associated with part-time work and the service sector.

Building permits show residential construction cooling

Moishe Alexander says the July year-to-date dollar volume of all types of building permits has seen a 51 per cent increase in 2008 compared to this time in 2007. The largest increases have occurred in the industrial sector followed by growth in the commercial sector.  The institutional and governmental permit volume saw the third highest increase. Although residential permits dollars have seen an increase of close to 13 per cent this year, the gains are far behind the 133 per cent increase recorded at this time in 2007. Considering the unit count of building permits issued to July, there has been a 5.8 per cent decline in total residential permits issued so far in 2008. Single-detached permits are up 2.2 per cent but multiple unit permits are down 1.3 per cent. Conversion permits are also down.

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64351/64351_2008_B02.pdf