Published by the CIPS Network of the National Association of REALTORS®
Third Quarter 2003
Canada: Attractive Bricks and Mortar
By Roberty Linney
The last time interest rates in Canada were at the levels posted today, Elvis Presley was on a tour of Canada playing to sold-out shows in Ottawa and Toronto. Teenagers bought 45 RPM records—not CDs, and a new home sold in a major city for less than $15,000.
Those low interest rates, combined with a strong economy and consumer confidence, have helped fuel the real estate market in Canada for more than four years. Now economists—and Canada’s Finance Minister—are predicting that those positive signs are changing.
The old supply and demand trick There is no doubt, however, that bricks and mortar remain a highly attractive financial and long-term investment for Canadians, and for international investors interested in Canada. A mid-year report issued by Royal LePage Real Estate Services Ltd. (a wholly owned subsidiary of Brascan Financial Corporation) says east and west coast markets in Canada have seen some of the heftiest price appreciation year over year. Those markets continue to be driven by the tight inventory and ongoing strong demand that were the motivating forces behind rising property values.
Inventory is also a challenge for investors looking for recreational or coastal properties. “In 2003, there will be four Canadians seeking recreational properties to every one cottage owner who plans on selling, and this scarcity of supply continues to exert pressure on property prices across the country,” says Sherry Chris, Executive Vice President of Royal LePage.
Multi-million dollar listings are no longer unusual in some popular recreational areas, especially in the Muskoka region just north of Toronto. “Low interest rates, people redirecting their investment dollars from the stock market into recreational real estate, and Americans buying slices of Canadian recreational paradise are the compelling factors that are sustaining demand, sellers’ market conditions, and higher property prices in most recreational markets,” adds EVP Chris.
In some major urban markets such as Toronto, Ottawa and Calgary, the trend is towards more balanced conditions after record sales levels in 2002. Chris goes on to say that “Rising inventory is restoring normal healthy conditions to these markets meaning a decline in multiple offer situations.”
Resale and New Home Sales Markets Rising
In May 2003, the number of resale homes that changed hands through the MLS® system in the country’s 25 major markets rose 3.6 percent to 23,839 seasonally adjusted units, compared to April, according to statistics released by The Canadian Real Estate Association. The average price of a residential home in Canada rose 7.3 percent year over year to $220,525, surpassing the previous record set in April by 1.6 percent.
One of the “market correcting” indicators was the number of new listings. Across Canada new listings on MLS® increased 8.3 percent in May.
Housing Starts Mixed
Another sign of a moderating Canadian housing market were housing starts in May. The Canada Mortgage and Housing Corporation reported a drop of 4.7 percent from the month before. The seasonally adjusted annual rate for housing starts in Canada hit 197,900, reflecting what the government agency described as “robust activity” in the residential sector. That’s down from April’s 207,700 and slightly below the 200,000 rate expected by most economists. The report marks the third consecutive monthly decline in housing starts and the first time since January that the annual rate has slipped below the 200,000 level.
But year-to-date, CMHC says, housing starts are up about 2.4 percent from 2002. Starts on multiple units—which include apartments and condominiums—were down 9.1 percent in May, but for the year so far, the rate of housing starts for multiple units is up 12.5 percent from the same period a year earlier.
Major Cities on the Move
The Royal LePage second quarter analysis of the Canadian market says despite the rising Canadian dollar, Americans continued to pursue real estate opportunities in a number of major Canadian cities, especially Montreal and Charlottetown. And, in Vancouver, investors returned in force in the second quarter, snapping up condominiums and single-family homes in some suburbs, following a noticeable absence from the market for several years.
After several years of heated activity, the condominium market in Toronto has begun to cool, as much of the demand driven by renters has been satisfied. However, other centers, such as Ottawa, Regina, Vancouver and Victoria report strong condominium activity.
Residential Market Fundamentals Solid
Is the momentum leaking from a Canadian real estate bubble? Economists say it may be a boom, but it’s not a bubble because the characteristics of the residential market show solid fundamentals.
The Canadian Imperial Bank of Commerce, through CIBC World Markets, has released a report called “Banking on the House” that says the current run-up in Canadian home prices which began in 1998 has added an average of $43,000 in net worth for Canada’s 7.5 million homeowners. In the U.S., house prices in major markets are up as much as 50 percent after inflation, double the increase in previous real estate booms. By comparison, Canadian house prices are up 16 percent after inflation, still short of the peak they hit in 1989 before the last real estate bust.
Mortgage and Home Equity Loans Increasing
The increased equity and lower interest rates have prompted Canadian consumers to borrow against that increased home equity. The CIBC report says that has generated about $12 billion in added cash for Canadian consumers in the past two years alone. Also, Canadians’ use of home equity loans has generated $10 billion in additional borrowing. That’s only a fraction of the $450 billion (Canadian) increase in home equity withdrawal by U.S. households.
CIBC Economist Benjamin Tal says U.S. consumers are more motivated to borrow against their homes. Mortgage interest is tax-deductible in the United States, but not in Canada. Refinancing is also more expensive in Canada, because homeowners face high penalties based on the difference in interest rates for the remaining mortgage term.
The CIBC economist predicts the Canadian housing market will continue to grow between 5 and 6 percent a year, aided by mortgage rates that will remain low well into 2004.
Moderate Growth Predicted
Canada’s Finance Minister is one of those expecting consumer interest rates to stay at current historic low levels. In an Economic Update made at the end of June, Canadian Finance Minister John Manley says the government now expects the economy to grow 2.2 percent this year, down from its budget forecast of 3.2 percent growth.
The lower tax revenue generated by a slower economy, Mr. Manley noted, is being partly offset by lower-thanexpected interest rates, which reduce the cost of government debt, and by high energy prices. He also said Canada’s economic momentum will increase if the U.S. economy strengthens later this year. In 2004, the government’s revised forecast projects the Canadian economy will grow at a 3 percent rate, down from its earlier forecast of 3.5 percent.
“I think we can look forward to stronger U.S. growth. If it doesn’t happen, then of course it’s going to affect our expectations as well. And then we’ll have to go back… and see whether other measures need to be taken, either to ensure that we balance the budget or that we encourage economic growth,” the Canadian Finance Minister said.
Slowdown Foretold
Another of Canada’s major banks has also warned the Canadian economy has “run out of luck.” In its
quarterly update issued at the end of June, the Toronto-Dominion (TD) Bank says Canada is now facing sub-par growth for the rest of the year and the prospect of interest rate cuts from the Bank of Canada.
The Toronto-based bank said Canada’s economy—which contracted in April for the first time since September 2001—will likely grow at a slower pace than its U.S. counterpart. Economic growth in Canada has been outpacing that of the United States since 1998.
The TD Bank report blames Canada’s economic reversal of fortune on the combined impact of the SARS outbreak, the case of mad-cow disease in Alberta, and the increased value of the Canadian dollar. The chartered bank is forecasting annual economic growth of 2 percent this year and 2.8 percent in 2004,
compared with the 3.3 percent growth rate seen last year.
The bank update says the slower growth—and the rise of the Canadian dollar—will also likely result in the Bank of Canada reversing course and cutting interest rates by a quarter percentage point in each of its remaining fixed-date policy announcements in 2003. Earlier this year, Canada’s central bank raised rates twice in an effort to temper rising inflation.
Office Market Doldrums
One of the influences affecting Canada, according to Finance Minister Manley, is that slower economic growth outside the country continues to create uncertainty at home. Several recent reports suggest that has had an impact on Canada’s office real estate market.
The most pessimistic report from CB Richard Ellis says major Canadian office markets are in the doldrums with no significant recovery in sight for at least the next 12 to 18 months. Blake Hutcheson, President of CB Richard Ellis said, “the present demand continues to be weak and consequently, Toronto office vacancy rates have been rising; in the meantime, across Canada this is a tenants’ market and it will stay that way for some time.”
The Greater Toronto Area, which represents nearly one half of the total Canadian market in size, showed a 2 percent increase in the vacancy rate in the second quarter, to 15.1 percent currently from 13.1 percent a year ago, according to the CB Richard Ellis survey.
Turnaround in 2004
Royal LePage Commercial Inc. also released a report saying the earliest turnaround would be in the first quarter of 2004. “Leasing activity has been sluggish over the last three quarters, reflecting an uncertain Canadian economy that continues to be buffeted by the prolonged slowdown in the United States, the strengthening Canadian dollar and the added effects of SARS and mad-cow disease,” said Royal LePage in its report.
Canadian commercial REALTORS® say one factor having a significant impact on the office market is “shadow space,” or office space that is being leased, but is not being used. If shadow space were taken into account, the true office vacancy rate in Toronto would be 17 percent, not 15.1 percent, said CB Richard Ellis. In Canada, vacancy rates above 10 percent are considered more of a tenant’s market. The average space allocated per employee is now down to 210 square feet from 240 square feet a decade ago, according to CB Richard Ellis.
Robert Linney is Strategic Communications Manager for The Canadian Real Estate Association, responsible for research, advertising and information services including Web sites. He is also a veteran Canadian journalist and broadcaster, with experience covering business, economic and personal financial issues in radio,TV and newspapers.
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