Comments Off

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

Comments Off

Moishe Alexander’s review of the Gatineau 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 Gatineau Housing Market

Moishe Alexander’s Review:

Pace of residential construction to moderate in 2009 after peaking in 2008

Gatineau Quebec - Credit Abdallahh, Flickr Creative Commons

Moishe Alexander says This year will end with more housing starts than in 2007 in the Gatineau area. Already, for the first nine months of the year, the CMHC survey results show that starts are up 2 per cent compared to the same period in 2007. This upward trend is expected to continue in the fourth quarter and bring the annual starts total to 3,000 units, for an increase of almost 8 per cent over 2007.

Moishe Alexander says Only in 2009 will construction begin to ease in the Gatineau area. In fact, there should be 400 fewer starts in 2009 than in 2008, which will bring the number of new units back down to 2,600. As Canada’s economic growth will be weaker than anticipated this year, consumers will be more inclined to save. However, the area’s economic structure, about 40 per cent of which is based on the public sector, and the strong job creation observed since the beginning of the year will maintain housing starts at high levels in the Gatineau area. In fact, their volume will be above the average for the last ten years.

Gatineau residents will be busy in 2009

Moishe Alexander says A closer look at the Quebec part of the Ottawa-Gatineau census metropolitan area (CMA) reveals that the economic fundamentals remain strong for the moment. In the past year, almost 10,000 jobs were created in the area, two thirds of them full-time. This is good news for the real estate market, as it is mainly these jobs that fuel potential demand. Another benefit for the housing market is that the employment gains were registered mostly in the public service, a stable and well-paying sector, as well as in the professional and technical services and trade sectors. Slight decreases were observed, however, in the communications, transportation and construction sectors. Overall, the good performance of the labour market brought down the unemployment rate to slightly less than 5 per cent in the last few months and raised the employment rate to 70.3 per cent in September—the best result in the province.
Moishe Alexander says The economic boom enjoyed by the National Capital Region will continue to stimulate real estate activity in 2009. Employment will grow, but at a slower pace, and will be driven in part by the implementation of the Quebec government’s infrastructure plan, under which the Outaouais region will receive $200 million for roadwork from now until the end of 2009. The health and social services sector will also generate employment, thanks to a 4.5-percent budget increase. In the federal public service, the slowdown of the Canadian economy could make it difficult for the government to balance the budget and cause it to stop in the wave of hiring that began in the area a year ago. The impact of such a measure would be limited, though, as retirements will continue to increase in this sector, leaving the door open to more hiring.

Moishe Alexander says On the external economic front, Gatineau will manage to escape the international turmoil. Given its limited economic trade with foreign countries, the area will be fairly immune to the global ups and downs. In fact, the Outaouais region only has about 70 exporting companies whose products represent just 1 per cent of the overall value of Quebec’s exports of goods. Even if the economic conditions south of the border are barely affecting the Gatineau regional economy, they will have effects on certain industrial sectors, including lumber and pulp and paper, which are currently going through a very difficult period. Finally, the recent weakening of the Canadian dollar will help certain exporting companies do relatively well.

Net migration still positive in the area

Moishe Alexander says Since 2001, the Gatineau region has recorded net positive migration. For the last five years, the annual average number of in-migrants has exceeded 11,000, while the annual average number of out-migrants has remained constant, at about 9,000.  Net migration reached 2,203 people in 2007 and should remain close to 2,200 people in 2008 and 2009.  Newcomers will come mainly from other regions of Quebec and from other countries. The Gatineau area will still attract people from other provinces, particularly Ontario, but will see as many individuals leave.
Moishe Alexander says The wave of Ontarians crossing the Ottawa River that was observed at the beginning of the decade has lost some momentum since 2006. Finally, good employment prospects in the area, compared to other Quebec regions, will keep attracting people to Gatineau in 2009. However, Quebecers settling in the National Capital Region are increasingly opting for the Ontario side of the CMA.  In 2007, more than half of them chose the west bank of the Ottawa River. This trend is pushing down net migration, which would be otherwise higher in the Gatineau area.
Moishe Alexander says Positive net migration, combined with natural population growth, will add about 3,500 people to the Gatineau area population in 2009.  Favourable labour market conditions and a new government policy to progressively increase the international immigration target for Quebec to 55,000 people by 2010 (from the current level of 49,000 people) will help keep net migration positive. Numerous advantages granted to parents of preschool-age children, such as parental leaves, child benefits and the new subsidized child care spaces that will be created over the next four years, will quicken the pace of family formation—families with their own housing needs.

Single-detached houses losing ground to multiple family housing

Moishe Alexander says The impact of the price increases in the last few years and the moderate growth of the Canadian economy will be greater for single-detached housing construction, especially in the upper-range segment. Buyers will be pickier; they will be looking for more affordable homes, such as semi-detached or row houses, or for existing properties. Tighter credit conditions will also reinforce this trend, with Canadian financial institutions now demonstrating more caution before granting credit to lenders. While multiple-family (semi-detached, row and condominium) housing starts will increase by 8 per cent this year, single-detached home starts will only rise by 1 per cent. Despite the expected decline, multiple housing starts will see their market share increase, from 46 per cent five years ago to over 67 per cent in 2009. The faster rise in the average price of single-detached houses caused demand to shift toward more affordable housing types. In 2007, the gap, at the time of absorption, between the average prices of singledetached and semi-detached houses was over $91,000, compared to $60,000 four years earlier. For firsttime buyers, the type of housing that they must choose is more obvious.

Moishe Alexander says As a result of this price gap, multiple housing will stay popular. Semidetached and row home building will remain stable next year, while apartment construction should moderate slightly. It is anticipated that the volume of new condominiums will remain significant in 2009, despite a decrease in the rental housing segment. In fact, over the past few years, the supply of rental housing for seniors has increased more rapidly than the population aged 75 years or older.
The vacancy rate for this type of housing is on the rise, making waiting lists a thing of the past. The anticipated completion of over 400 retirement housing units in 2009 will strengthen this trend and could lead to a temporary reduction in starts. As well, units are managing to be absorbed within less than eight months after completion.  The strong demand for affordable homes will keep the semi-detached housing price curve above inflation.  The price of single-detached houses will climb again in 2009, but at a rate similar to the Consumer Price Index (CPI).
Moishe Alexander says Since 2007, Aylmer has been the sector with the highest volume of starts, and the same will hold true in 2009. In 2001, Aylmer ranked last in terms of housing starts among the three large sectors of the municipality of Gatineau but has since been steadily gaining in popularity. Improvements made to the road network and the redevelopment of many lots along the new major thoroughfare (Des Allumettières Boulevard) are attracting buyers.

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.

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64287/64287_2008_B02.pdf