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Moishe Alexander’s review of the Sherbrooke 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 Sherbrooke Rental Market

Moishe Alexander’s Review

Highlights

Moishe Alexander says the rental apartment vacancy rate went up again in the Sherbrooke census metropolitan area (CMA). After climbing by 1.2 percentage points in 2007 to 2.4 per cent, the vacancy rate continued to increase in 2008, reaching 2.8 per cent. The rental market has been easing for five years. The estimated change in the average apartment rent was 2.1 per cent between the October 2007 and October 2008 surveys in the Sherbrooke CMA.

Higher vacancy rate in 2008

Moishe Alexander says According to the results of the latest CMHC Rental Market Survey conducted in 2008, the rental apartment vacancy rate1 went up again in the Sherbrooke census metropolitan area (CMA). After climbing by 1.2 percentage points in 2007 to 2.4 per cent, the vacancy rate continued to increase in 2008, reaching 2.8 per cent. As shown in Figure 2, the rental market has in fact been easing for five years.

In the other CMAs across the province, the vacancy rate increased only in the Trois-Rivières area (from 1.5 per cent in 2007 to 1.7 per cent in 2008). The vacancy rates fell in the Montréal CMA, the Gatineau area and the Saguenay CMA, to 2.4 per cent, 1.9 per cent and 1.6 per cent, respectively, for decreases of 0.5, 1.0 and 1.2 percentage points. It was in the Québec area, however, that the market was the tightest, with fewer than 1 per cent of the apartments vacant there.

Supply remains stable but demand moderates

Moishe Alexander says The vacancy rate increase in the Sherbrooke CMA in 2008 resulted from a moderating demand and stable supply. The number of units in the rental housing stock dropped by 6 per cent in the CMA (from 32,891 units in 2007 to 30,842 units in 2008), but this decrease was mainly caused by the withdrawal of retirement home apartments from our 2008 survey universe. Given this change, supply effectively remained fairly stable between 2007 and 2008 (-1 per cent). At first glance, the stability of the rental housing universe may seem surprising. In fact, between our October 2007 and October 2008 surveys, just over 300 traditional rental apartments were completed, which should normally have increased supply on the market. However, as mentioned earlier, the rental housing stock decreased by 300 units.

This does not necessarily mean that there were fewer rental units on the market this year than last year. It is possible that a number of buildings had to be temporarily withdrawn from the survey universe, as they contained fewer than three rental units. This can occur when one of the apartments in a three-unit building is occupied by the owner.  On the demand side, migrants who come to an area, whether from other areas of Quebec or elsewhere, are definitely one of the main factors. In fact, most newcomers to an area choose to rent when they arrive.

Preliminary data2 show that fewer immigrants planned to settle in the Estrie area in 2008. At the end of the first half of 2008, the data showed a decrease of 7 per cent compared to the same period in 2007 (about 40 fewer people). Should the data turn out to be accurate, the decline in immigration in 2008 could therefore be partly responsible for the increase in the vacancy rate this year.  In addition, still attracted by the abundance of job opportunities out West, people from Sherbrooke may have continued to move there, lowering net migration in the CMA and weakening potential demand for rental units.
Another factor that may have contributed to the rise in the vacancy rate is the fact that the labour market has been less favourable to young people since the end of 2007, which may have caused some of them to delay leaving the family home, further moderating demand for rental apartments.

Impact of homeownership

Moishe Alexander says As we have already mentioned, the proportion of vacant rental units has been increasing for a few years now in the Sherbrooke CMA. In recent years, sales of existing and new homes have remained strong, suggesting that many renter households made the transition to homeownership, which therefore pushed up the vacancy rate.

In fact, young households now account for a slightly smaller share of rental market clients, as indicated by the 2001 and 2006 census data. It is likely that a greater number of young households are now moving straight to homeownership and bypassing the rental market, also contributing to driving up the vacancy rate. While there are no data to confirm or refute this hypothesis, many younger people may have been attracted to buying homes, such as condominiums, which are more affordable. In fact, sales of new and existing condominiums increased significantly in 2007 and 2008 in the Sherbrooke CMA. It should also be mentioned that financing conditions are still favourable to home buying, such that young households can consider becoming homeowners.

Market easing for larger units

Moishe Alexander says As was the case last year, bachelor units posted the least tight conditions on the rental market, with a vacancy rate of 4.9 per cent in 2008. As well, the market eased for apartments with three or more bedrooms, with the vacancy rate increasing by 1.4 percentage points between the last two October surveys (1.4 per cent in 2007, versus 2.8 per cent in 2008). The decrease in the number of immigrant families, often larger than families who are native to the area3, may have contributed to the increase in the percentage of unoccupied units in this category. The vacancy rate for two-bedroom apartments also rose, but to a lesser extent.

Vacancy rates up in almost all sectors of the CMA

Moishe Alexander says The vacancy rates in the west and central districts of the city of Sherbrooke increased in 2008. Having now surpassed 3 per cent in both districts. Among all the zones in the CMA, the west district posted the largest year-over-year vacancy rate increase (+1.7 percentage points). Students from the Université de Sherbrooke usually fuelled demand for rental units in that sector. While this policy had no impact last year, free public transit for students may have encouraged some to look further away from campus for an apartment that would better meet their needs. While the vacancy rate rose for all unit types combined, rental market conditions in the west district particularly eased for bachelor apartments, which are usually popular with students. In fact, the proportion of vacant units in this category jumped from 1.8 per cent to 7.9 per cent. In the former city of Sherbrooke, the east district recorded the smallest percentage of unoccupied units (1.9 per cent). In fact, it was in this district that the withdrawal of retirement home apartments from our survey universe this year had the greatest impact. In effect, by including retirement homes, the 2007 vacancy rate was much higher there. It should be recalled that our latest retirement home market survey report showed that many rental units were vacant in the east district.

The vacancy rates also increased

Moishe Alexander says year-over-year in the former suburbs of Rock Forest (from 1.2    per cent to 1.4 percent), Fleurimont (from 1.4 per cent to 2.1    per cent) and Ascot–Lennoxville (from 3.8 per cent to 5.1 per cent).  However, rental units in these sectors account for less than 25 per cent of the total rental housing stock in the CMA. Contrary to the other sectors of the CMA, the Magog area saw its vacancy rate drop to 2.9 per cent in 2008 (from 3.3 per cent in 2007). With the regional manufacturing sector experiencing difficulties, some renter families likely decided to postpone the purchase of a home. In fact, market conditions got tighter for units with three or more bedrooms, as their vacancy rate fell by 1.9 percentage points (from 4.8 per cent in 2007 to 2.9 per cent in 2008). With sales of existing singlefamily houses having fallen significantly in the area in 2008, larger apartments may have become the best compromise for renter families in the current economic environment. It is also possible that workers seeking better job prospects left the area, further moderating the rental housing demand.

Rents in 2008

Moishe Alexander says The estimated change in the average apartment rent was 2.1 per cent between the October 2007 and October 2008 surveys in the Sherbrooke CMA. Apart from onebedroom units, for which the average rent rose by 4.2 per cent, the other unit types recorded increases of around 2 per cent.  The average rent for two-bedroom apartments reached $543 while, for apartments with three or more bedrooms, the average attained $658. The average rents for bachelor apartments and one-bedroom units, for their part, rose to $368 and $437, respectively.

Older buildings bear the brunt of the easing rental market

Moishe Alexander says In the CMA, there were greater proportions of vacant units in rental structures built before 1990 (see Table 1.2.1). Buildings completed from 1960 to 1974 posted the highest vacancy rate (3.6 per cent).  Conversely, very few apartments were vacant in structures built from 1990 to 1999, which had a vacancy rate slightly above zero (0.4 per cent).

The trend observed in the last few years for smaller structures (with three to five units) continued, as they still posted the lowest vacancy rate (1.7 per cent). This result contrasted with that of residential buildings with 20 to 99 units, for which the vacancy rate was slightly below 4 per cent.

Rental affordability falls slightly

Moishe Alexander says CMHC’s rental affordability indicator4 is a gauge of how affordable a rental market is for those households which rent within that market. In 2008, the affordability indicator4 was 128, compared to 133 in 2007. While rental affordability has decreased, Sherbrooke area households continued to spend less than 30 per cent of their gross income on rent, as they have for the last ten years. In 1998, the indicator had dropped below 100, reaching 93.

In addition, a review of the data for two-bedroom apartments, which do account for over half of the rental housing stock in the CMA, reveals that affordable units remained the (from 3.3 per cent in 2007). With the regional manufacturing sector experiencing difficulties, some renter families likely decided to postpone the purchase of a home. In fact, market conditions got tighter for units with three or more bedrooms, as their vacancy rate fell by 1.9 percentage points (from 4.8 per cent in 2007 to 2.9 per cent in 2008). With sales of existing singlefamily houses having fallen significantly in the area in 2008, larger apartments may have become the best compromise for renter families in the current economic environment. It is also possible that workers seeking better job prospects left the area, further moderating the rental housing demand.

Rents in 2008

Moishe Alexander says The estimated change in the average apartment rent was 2.1 per cent between the October 2007 and October 2008 surveys in the Sherbrooke CMA. Apart from one bedroom units, for which the average rent rose by 4.2 per cent, the other unit types recorded increases of around 2 per cent.  The average rent for two-bedroom apartments reached $543 while, for apartments with three or more bedrooms, the average attained $658.  The average rents for bachelor apartments and one-bedroom units, for their part, rose to $368 and $437, respectively.

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

http://www.cmhc-schl.gc.ca/odpub/esub/64447/64447_2008_A01.pdf

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Moishe Alexander’s review of the Saguenay 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 Saguenay Housing Market

Moishe Alexander’s Review

Economic and demographic conditions

Moishe Alexander says in the Saguenay census metropolitan area (CMA), the labour market has been experiencing a slowdown for the past few quarters. In fact, following a loss of 175 jobs in 2007, the CMA saw 245 more jobs disappear from January to August 2008. This decrease in the number of employed persons resulted from a forestry crisis that forced several plants to shut down and also from the high job levels observed in the area in 2004 and 2006. These high employment levels were attributable to the labour demand from a few major industrial projects, including the construction of the Péribonka IV hydroelectric dam and the expansion of the Alouette plant in Sept-Îles. Since these projects have been completed and the next major industrial projects—construction of a new plant in Jonquière by Rio Tinto Alcan and the Eastmain-1-A–Rupert– Sarcelles hydroelectric power station by Hydro-Québec—are only at their preliminary phase, many workers are now unemployed. The projects will pick up the pace starting in the summer of 2009 and will reach their cruising speed in 2010. It is therefore expected that the number of jobs in Saguenay will decrease between 1.8 to 2.2 per cent in 2008. Despite this decrease, the employment level, at 69,000, will remain above the average of 68,000 for the last 10 years. In 2009, employment should pick up slightly.

Moishe Alexander says The Saguenay CMA economy has strengthened in recent years with the announcement of major investment projects, such as the widening of Highway 175 and the modernization of the Rio Tinto Alcan plant. In addition, the gradual increase in retirements seems to be having an impact on net migration, as there are more and more quality jobs for young people, who are no longer forced to leave the area. For the first time since the year 2000, the latest interregional migration statistics1 indicate a positive result for the 25 to 44 years’age group.  However, net interregional migration remains negative overall. At the interprovincial level, the CMA is also facing a deficit, although smaller.

Moishe Alexander says Lastly, only international migration has shown positive results since the beginning of the decade, but these levels are far from sufficient to offset the departures to other Quebec areas or other provinces. It is therefore expected that total net migration will go from -794 in 2007 to -600 in 2008 and then to -450 in 2009. Still on the demographic front, household formation remains positive, despite the decline in the population. The aging of the population, as well as divorces and separations, are the main reasons. In the Saguenay CMA, about 350 households will be formed annually over the next five years.

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.

Residential construction to stay strong in 2008 and 2009

Moishe Alexander says For a fourth straight year, starts will be on the rise in the Saguenay CMA in 2008. In fact, after reaching 464, 485 and 685 units in the last three years, respectively, total starts in the area should attain 800 units in 2008.  This will be an increase of 17 per cent over 2007 and the highest result for the Saguenay CMA since 1991, when 955 starts had been enumerated. In 2007, both the freehold home segment2 (+35 per cent) and the rental housing segment (+58 per cent) had fuelled the growth. Since the first segment was very active last year, a small gain is expected in 2008. The construction of a building with more than 200 apartments in Chicoutimi will cause the second segment to post a greater increase and will account for 29 per cent of all starts in 2008.

Moishe Alexander says Given that financing conditions remain attractive, that the number of existing homes for sale is limited and that employment is at a historically high level, a slight decrease in expected in 2009. Construction should therefore get under way on 720 units, or 10 per cent fewer than in 2008.

Level of freehold home building will be high

Moishe Alexander says As mentioned earlier, freehold home building has been increasing significantly for the past few years. From an annual average of 265 units from 2000 to 2005, starts rose to 315 and 318 units in 2005 and 2006, respectively, and then to 430 units 2007. The last time that such a high volume was recorded in the Saguenay CMA was in 1997, after the flooding. At that time, many homes had been destroyed or damaged, resulting in a need to rebuild. The environment in which the market has evolved in recent years is therefore quite different and is instead based on solid economic fundamentals.

Moishe Alexander says In 2008 and 2009, the impact of these economic factors will remain positive. Despite the job losses registered since the beginning of the year, the labour market continues to benefit from several major industrial and infrastructure investment projects. As these projects are not dependent on the global economy, they will support the labour market over the next few years. Net migration will keep improving, which will lead to an increase the number of potential buyers and, as a result, a greater demand on the overall housing market. Lastly, mortgage rates should fall slightly, which will extend the attractive financing conditions of recent years.

Moishe Alexander says The tightening of the rental market in the last few years is another factor that must be taken into account. This should stimulate the construction of duplexes in 2008 and 2009, since the rental of the second unit provides these homeowners with a certain income.  The limited supply on the resale market will also boost the construction of freehold homes, as some households will be prompted to opt for a new house after not being able to find a property that suits them on the existing home market. We therefore forecast that 450 freehold homes will be started in 2008, or 20 more than in 2007 (+5 per cent). These new dwellings will include 375 single-detached houses and 50 duplex units. Most will be built in the boroughs of Jonquière and Chicoutimi, and a few, in La Baie and Saint-Honoré. In 2009, even though a slight slowdown is anticipated, the freehold home starts volume will remain high, with 420 such new units expected, or 7 per cent fewer than in 2008.

Retirement home segment supporting rental housing construction

Moishe Alexander says The construction of rental housing, with the exception of retirement homes, continues to be very limited in the Saguenay CMA. Until 2005, this was understandable, since the vacancy rate was still above 4 per cent, so there was no significant need for new units. Since then, however, the vacancy rate has been steadily falling. According to the latest results (April 2008), this rate stood at 1.8 per cent, which would normally stimulate apartment construction. But this is not the case, and it is not expected to be case in 2008 or 2009. The fact is that current construction costs— including the land—are such that it is difficult for developers to offer rents that would be competitive with average market rates, making it hard to rent out the apartments. In addition, with the aging of the population, another segment is taking over, namely, retirement housing.

Moishe Alexander says Since 2002, 51 per cent of all rental housing units started in the area had been intended for seniors. In 2008, this share will rise to 70 per cent, with the construction of the fifth phase of an existing residence in Chicoutimi (an expansion with over 200 apartments). In 2009, construction could get under way on another retirement home, this one with just under 200 units. These projects arose in part from the fact that the vacancy rate for apartment retirement homes in Chicoutimi stood at 0 per cent in October 2007. In all, it is expected that 330 rental housing units (including those intended for seniors) will be started in 2008, or 43 per cent more than in 2007. In 2009, there should be a slight decrease in activity, as 280 starts of this type are anticipated (-15 per cent).

Little movement on the rental market

Moishe Alexander says The aging of the population, the constant improvement in net migration and the good performance of the labour market in recent years have led to a greater demand for rental dwellings and, as a result, a tighter a rental market. This caused the vacancy rate to fall from 5.6 per cent in 2004 to 2.8 per cent in 2007. In addition to these factors, there should slightly more CEGEP students in the area in 2008. Supply, despite only a very small rise, should meet these new needs and, for this reason, we do not expect the market to ease significantly in 2008.  In fact, the vacancy should reach 3 per cent this year, compared to 2.7 per cent in 2007. For 2009, we are anticipating a slightly greater increase in supply as a result of the tighter market, while demand should, at the very least, be maintained. Consequently, the vacancy rate will reach 2.9 per cent in 2009.

Condominiums gaining a foothold in the area

Moishe Alexander says Condominiums seem to be taking root in the Saguenay CMA housing market. While their numbers are rather limited (some 20 new units annually since 2006), this is a tenure option that meets the needs of specific client groups. While their relatively low prices attract first-time home buyers, their low maintenance appeals to retiring households. They are very well suited to older households wishing to remain homeowners but for whom maintaining a property is becoming a burden. Given that the aging of the population will only intensify, activity in this market segment should at least be maintained in the short term. For the moment, the fact that new and existing homes are not as expensive here as in other large urban centres across Quebec, where condominiums are well implanted, is probably the main reason for the limited number of condominium starts in Saguenay. In 2008 and 2009, foundations should be laid for about 20 units of this type.

Fast growth in prices to affect existing property sales

Moishe Alexander says Sales of single-family homes3 reached a peak in 2007 in the Saguenay CMA.  In fact, 1,303 homes were sold through the Service inter-agences / Multiple Listing Service (S.I.A. / MLS)® during the past year, or 51 more than the previous record set in 2005 (1,252 transactions). In 2008, a slowdown is expected, even though the economic and demographic conditions will remain favourable. The reason is that singlefamily home prices have risen significantly in recent years, and this is starting to cause some hesitation among potential buyers. The average price effectively went from $94,346 in 2003 up to $136,913 in 2007, for an increase of 45 per cent in four years. For several years now, sellers have had the edge in determining prices, on account of the limited supply and a strong demand. Consequently, we are seeing price hikes well above inflation. Since the situation will not be any different in 2008, 1,230 sales are anticipated, and the average price should reach $150,000 (+10 per cent).

Moishe Alexander says In 2009, the sales volume will be essentially the same as in 2008, as the factors supporting demand will remain solid. However, inventories are expected to rise slightly in the price ranges that are in competition with the new home market. This should cause the market to ease, somewhat lessening the pressure on the average selling price in this range.  We therefore expect that singlefamily homes will sell for an average of $160,000 in 2009 (+7 per cent).

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64283/64283_2008_B02.pdf