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Moishe Alexander’s review of the Saskatoon 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 Saskatoon Rental Market

Moishe Alexander’s Review

Highlights

Saskatoon, Sask. - Credit Marbla123, Flickr Creative Commons

Moishe Alexander says the average vacancy rate in Saskatoon’s private apartment buildings with three or more units increased by 1.3 percentage points to 1.9 per cent in October 2008, up from 0.6 per cent in the 2007 survey. The average monthly rental rate for all types of suites surveyed in October 2008 saw a $129 increase from the October 2007 figure, reaching $761 monthly. Our forecast is for an increase in the average vacancy rate in 2009 to two per cent in October 2009. Expect an increase of $19 in 2009 bringing the average rent for a two-bedroom suite to $860.

NATIONAL VACANCY RATE DECREASED IN OCTOBER 2008

Moishe Alexander says the average rental apartment vacancy rate in Canada’s 34 major centres decreased to 2.2 per cent in October 2008 from 2.6 per cent in October 2007. The centres with the highest vacancy rates in 2008 were Windsor (14.6 per cent), St.  Catharines-Niagara (4.3 per cent), and Oshawa (4.2 per cent). On the other hand, the major urban centres with the lowest vacancy rates were Kelowna (0.3 per cent), Victoria (0.5 per cent), Vancouver (0.5 per cent), and Regina (0.5 per cent). Demand for rental housing in Canada increased due to high migration levels, youth employment growth, and the large gap between the cost of homeownership and renting. Rental construction and competition from the condominium market were not enough to offset growing rental demand.

The highest average monthly rents for two-bedroom apartments in new and existing structures were in Calgary ($1,148), Vancouver ($1,123), Toronto ($1,095), and Edmonton ($1,034), followed by Ottawa ($995), Kelowna ($967), and Victoria ($965). The lowest average monthly rents for two-bedroom apartments in new and existing structures were in Trois-Rivières ($505), Saguenay ($518), and Sherbrooke ($543).
Year-over-year comparison of rents in new and existing structures can be slightly misleading because rents in newly-built structures tend to be higher than in existing buildings. However, by excluding new structures, we can get a better indication of actual rent increases paid by most tenants. The average rent for twobedroom apartments in existing structures increased in all major centres. The largest rent increases in existing structures were recorded in Saskatoon (20.3 per cent), Regina (13.5 per cent), Edmonton (9.2 per cent), and Kelowna (8.4 per cent).  Overall, the average rent for twobedroom apartments in existing structures across Canada’s 34 major centres increased by 2.9 per cent between October 2007 and October 2008.
CMHC’s October 2008 Rental Market Survey also covers condominium apartments offered for rent in Calgary, Edmonton, Montréal, Ottawa, Québec, Regina, Saskatoon, Toronto, Vancouver, and Victoria. In 2008, vacancy rates for rental condominium apartments were below one per cent in four of the 10 centres surveyed. Rental condominium vacancy rates were the lowest in Regina, Toronto, Ottawa, and Vancouver. However, Calgary and Edmonton registered the highest vacancy rates for condominium apartments at 4.0 per cent and 3.4 per cent in 2008, respectively.  The survey showed that vacancy rates for rental condominium apartments in 2008 were lower than vacancy rates in the conventional rental market in Ottawa, Regina, Saskatoon, and Toronto. The highest average monthly rents for two bedroom condominium apartments were in Toronto ($1,625), Vancouver ($1,507), and Calgary ($1,293). All surveyed centres posted average monthly rents for two-bedroom condominium apartments that were higher than average monthly rents for two-bedroom private apartments in the conventional rental market in 2008.

SASKATOON RENTAL MARKET SURVEY

Average vacancy rate in Saskatoon edges higher

Moishe Alexander says Canada Mortgage and Housing Corporation’s rental market survey found the average vacancy rate in Saskatoon’s private apartment buildings with three or more units increased by 1.3 percentage points to 1.9 per cent in October 2008, up from 0.6 per cent in the 2007 survey.

The increase in the average vacancy rate is attributable to the movement of first-time homebuyers to the new and resale ownership market.  Increased selection in the resale and new construction markets has facilitated this move to home ownership. Prospective first-time buyers in 2007 had faced a lack of selection in the resale market due to sellers’ or accelerating market conditions. Through much of 2007 there was less than three months of supply of listings in the resale market.

The number of active listings has increased throughout 2008. Newly constructed townhouses and other units purchased by investors for rental purposes have also provided additional competition for landlords.

This has provided renters with alternatives to the primary rental stock, further contributing to the rise in average vacancy in private apartments.
Lowest vacancy rate found in Lakeview

Moishe Alexander says the average vacancy rate for all types of suites was as high as 4.7 per cent in the Southwest survey zone and as low as 0.9 per cent in the Lakeview survey zone.

Average vacancy was one per cent or less in the Nutana and Lakeview survey zones reflecting, primarily, the desirable locations of these areas.  The neighborhoods in these areas are close to the University of Saskatchewan and have easy access to major employers.

The largest increase in the average vacancy rate occurred in the Southwest and North survey zones.  Historically, the Southwest zone has been the first to experience any general decline in rental demand.

According to Census data, neighborhoods within this zone have some of the oldest rental stock in the city and, though rents are lower than other survey zones,
renters are willing to pay a premium to move to other areas. Further, industry sources have advised that lower income individuals in this area are doubling-up in the face of rising rents.

The North is a desirable area for households finding employment in the many businesses in that sector of the city, yet the average vacancy rate increased by 2.8 percentage points since the 2007 survey.

Industry contacts inform us that many renter households have moved into homeownership or moved to investor-owned rental accommodation.

Looking at average vacancy rate by suite type, the survey found that all suite types, except bachelor suites, experienced similar average vacancy rates ranging from 1.7 per cent in three-bedroom and larger suites to 1.8 per cent for one and twobedroom suites. Bachelor suites saw an average vacancy rate of 2.3 per cent, 0.5 per percentage points higher than one and two-bedroom suites. The average vacancy rate is traditionally higher in bachelor suites.  Bachelor suites are less in demand due to their smaller size. Threebedroom suites are more popular, on average, because they are larger and make it easier to double-up comfortably, thus reducing the rent paid by each household.

Availability rate increases 1.4 percentage points

Moishe Alexander says the survey studied the availability of suites in the Saskatoon CMA in October. A rental unit is available if the unit is vacant, or the existing tenant has given or received official notice to move and a new tenant has not signed a lease. Saskatoon rental apartments surveyed saw an increase in availability in this most recent survey. The availability rate in October 2008 was 3.2 per cent, up 1.4 percentage points from the 2007 survey.

Average rents increase $129 monthly

Moishe Alexander says the average monthly rental rate for all types of suites surveyed in October 2008 saw a $129 increase from the October 2007 figure, reaching $761 monthly. These increases have occurred because of the historically low average vacancy in 2007. Record net in-migration was a key factor behind the low vacancy rate in 2007. The rising gap between the cost of home ownership and renting through 2007 and the early part of 2008 also kept demand strong for rental accommodation. Bachelor suites experienced an increase of $83 in the average monthly rent. One-bedroom suites in all zones saw their average monthly rent increase by $111 bringing them to $675 monthly.  Two-bedroom average rent grew by $148 to arrive at $841 per month.  The average rent for three-bedroom and larger suites in all zones jumped $128 to $860 monthly.

The largest increase of $158 monthly for all types of suites took place in the Lakeview survey zone.

The West and North zones experienced an increase of about $150 monthly. The Southwest survey zone saw the lowest rental increase of $100 monthly.
The survey zones with the highest monthly average rent for all types of suites were Lakeview and Northeast Saskatoon with average rents of $831 and $824 respectively. Rental housing in these neighborhoods are in high demand due to their close proximity to the University of Saskatchewan and major sources of employment.

Highest one-bedroom rents found in Central zone apartments

Moishe Alexander says at $732 monthly, the mainly highrise apartments of the Central zone featured the highest average rent for one-bedroom apartments. Two bedroom average monthly rent was highest in the Northeast zone with rent of $945 monthly. Average monthly rent of $1,163 for threebedroom suites in the Northeast zone was the highest rent found for this suite type. The lowest overall average rent was in Southwest Saskatoon at $630 monthly. One-bedroom, two bedroom and three-bedroom average monthly rents were the lowest in Saskatoon. As stated previously, the Southwest zone rental housing stock experiences lower demand due to its condition.  Tenants in these neighbourhoods are highly mobile and have lower incomes restricting rent increases, thus contributing to maintenance and quality issues. The October survey included a measure that estimates the growth in rents for a fixed sample of structures and excludes newly built properties. This measure considers structures that were common to the survey sample for both the 2007 and 2008 surveys. The aim is a better understanding of rent changes in existing structures by excluding from the calculation the rents of newly built apartment buildings. Detailed information is contained in the methodology section at the end of this report.

For the Saskatoon CMA, the percentage change of average rent within a fixed sample was close to 20 per cent for all types of suites in all survey zones. Two-bedroom apartment average rents in all areas of the Saskatoon CMA increased 20.3 per cent while the average rent for one-bedroom suites increased 19.4 per cent.

Private rental market supply declines

Moishe Alexander says the attraction of homeownership relative to renting in recent years as well as other important factors have had the effect of reducing the size of Saskatoon rental market stock. According to Census data, rental units declined as a proportion of total dwellings between 2001 and 2006. While the number of private dwellings increased by 2.5 per cent, the number of rental dwellings increased by 1.5 per cent. CMHC’s annual Rental Market Survey shows that the Saskatoon privately initiated rental universe declined by 601 units between 2007 and 2008 because of rental unit conversion to condominiums, closure for renovations or demolition. In addition, there were a number of projects converted to public housing. There have been no additions to the private rental stock in the form of housing starts over the last year although there have been some new public housing and senior’s units added.

Rental Affordability Indicator

Moishe Alexander says CMHC’s rental affordability indicator shows a decline in affordability of Saskatoon’s rental apartments. The cost of renting a median priced twobedroom apartment increased 26 per cent in 2008, while the median income of renter households grew at 5.7 per cent. The rental affordability indicator in Saskatoon stands at 92 for 2008.

RENTAL MARKET OUTLOOK

Vacancy rate forecast to increase in 2009

Moishe Alexander says CMHC is forecasting an increase in the average vacancy rate to two per cent in October 2009. Renters are doubling-up in order to compensate for rising rents thus contributing to the slight increase in vacancy. In addition, newer investorowned condominiums are drawing off demand from existing rental projects. Saskatoon’s resale market is softening and price increases have slowed. This should lead to more rental households moving to homeownership. Notwithstanding the influence of the above factors that will reduce demand, Saskatoon’s employment continues to grow encouraging inmigration and supporting rental demand. 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 that saw 7,500 jobs created but the rental market will nonetheless benefit from this growth.

Rents rise at a slower pace in 2009

Moishe Alexander says competition from the home ownership market and condominium rental units will slow the pace of increase in average rents over the forecast period. Our forecast calls for an increase of $19 monthly in 2009, bringing the average rent for a two-bedroom suite to $860 by October 2009. The need to compensate for operating and maintenance cost increases experienced in previous years will be a factor behind the increase in average rents.

Condominium and other secondary rental units – Survey Results:

Moishe Alexander says the Saskatoon version of CMHC’s October Rental Market Survey, which covers private row and apartment structures with three or more units, now includes information on the secondary rental market. The additional information should help to provide a more complete overview of all rental markets in the Saskatoon CMA.

The survey considers the following types of units: rented single detached houses, rented double (semi-detached) houses, rented freehold row/town houses, rented duplex apartments, rented accessory apartments, and rented apartments that are part of a commercial or other type of structure containing one or two dwelling units. The methodology section at the end of this report provides more information on the Secondary Rental Market Survey.

The Province of Saskatchewan has recently initiated a program to encourage the creation of these types of units in private households.

Vacancy rate of rental condo apartments similar to purpose built rental

Moishe Alexander says table 4.3.1 provides information on the size of Saskatoon’s condominium rental apartment market. Of the 7,260 units condominium units sampled, 834 or 11.5 per cent were rental units. The average vacancy rate of 1.8 per cent in Saskatoon’s rental condominium apartments was similar to the vacancy rate of 1.9 per cent for purpose built rental apartments. At this time the size of the rental condominium apartment universe does not allow CMHC to determine the average rental rates for such units.

The survey found 11,766 households in other secondary rental units of various forms including single and semi-detached, row and other accessory suites.  Average rent for all of these types was $888. Average rents varied from $869 for accessory suites and $895 for row and semi-detached units. Average rent for single detached units was $890.

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64443/64443_2008_A01.pdf

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Moishe Alexander’s review of the Saskatoon CMA Housing 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 Saskatoon CMA Housing Market

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