By David Hatton - Business Edge
Published: 01/05/2006 - Vol. 6, No. 1
The Canadian residential real estate market will remain hot in 2006, although experts are expecting it to cool off in the second half of the year.
"You're going to see a slight easing of listings going through the Multiple Listing Service (MLS), but transactions should still reach their third-highest annual record in 2006," says Gregory Klump, chief economist for the Canadian Real Estate Association (CREA).
"We had a real combination of low interest rates, strong employment and overall consumer confidence that came together to create excellent market conditions in 2005," he says. "That will continue probably for the first two quarters of 2006, but then you will start to notice an adjustment."
Klump says that even if the Bank of Canada does decide to raise its overnight lending rate again, that will create only moderate pressure on rates.
Bank of Canada officials raised the key overnight lending rate - the interest rate major banks pay to borrow money - three times late last year.
Most financial institutions passed the increase on to their customers, boosting five-year mortgage rates a half percentage point to the current 6.3 per cent from 5.8 per cent last July.
The central bank is scheduled to review rates again this month and could announce another change Jan. 24.
In a recent report, CREA predicts that 484,025 properties would be sold in 2005 through MLS in Canada, a five-per-cent increase from the 461,112 sold in 2004.
The report forecasts that 458,050 properties will be sold in Canada in 2006, a decline of 5.4 per cent.
Tsur Somerville, a professor at the Sauder School of Business at the University of British Columbia and director of the Centre for Urban Economics and Real Estate, says a strong resource sector is currently boosting Canada's overall economy.
"As long as the oil and gas industry is strong you will continue to see good housing numbers," he says. "Interest rate increases from the Bank of Canada are still not that high. Buying a home is still with-in reach for the average Canadian."
Despite a bullish condominium sector, Ontario MLS sales are forecast to decline by 6.4 per cent to 185,225 in 2006. CREA estimates 2005 sales as 197,950, an increase of 0.3 per cent from 2004's sales of 197,354.
The peak of Ontario's real estate market activity was in 2003 and it has been trending gradually downward ever since, says Bob Dugan, a senior economist with the Canada Mortgage and Housing Corp. Most of the province's recent growth, he adds, is in the condominium sector.
Just before Christmas, the Greater Toronto Home Builders' Association (GTHBA) said high-rise condominium sales accounted for 41 per cent of the total 40,339 new homes sold during the first 11 months of 2005.
The news release noted the high-rise sector was up 31 per cent over 2004, compared with a 10-per-cent decrease in the low-rise housing market, which is defined as single-detached, semi-detached and townhouse homes.
"Condos are always popular with new immigrants, Baby Boomers and empty-nesters," Dugan says. "You will always see demand, but this sector will also soften slightly during the later part of '06."
The CREA report predicts MLS sales in B.C. will be up 10.9 per cent to 106,850 in 2005 from 96,385 in 2004. It forecasts a sales decline of 4.5 per cent in 2006 to 102,000.
"British Columbia will always be one of the more popular areas in Canada because of immigration patterns. Immigrants will traditionally settle in major centres like Vancouver, Toronto and Montreal," Somerville says. "First they will go into apartments, then after several years buy a home of their own."
Somerville says the B.C. market may be affected by a shortage of skilled trades in the coming year, as Vancouver prepares to stage the 2010 Winter Olympics. Venues are under construction in numerous parts of the city and at Whistler.
"Your skilled trades will usually go to whoever pays the best. If Vancouver is under pressure to get ready for the Olympics it could have an effect on residential construction starts," Somerville says.
The pattern is expected to be similar in Alberta, which also experienced a strong growth in sales in 2005.
The CREA report predicts Alberta's 2005 sales will be 64,750, up 12.7 per cent from 2004's sales of 57,460. It forecasts 2006 sales at 63,450, a decline of two per cent.
Klump says that Alberta currently has such a strong resource sector that the forecast decline will probably not have a noticeable effect.
"There's nothing to worry about in Alberta. Even with the adjustment in the market, it has such a powerful economy that you will hardly notice anything," he says.
CREA is predicting sales of 8,250 MLS listings in 2005 in Saskatchewan, up one per cent from 2004's sales of 8,172. It foresees a decline of 5.5 per cent in 2006 to 7,800 sales.
It is also forecasting 2005 sales of 12,625 in Manitoba, an increase of 4.4 per cent from 2004 when there were 12,098 sales.
It forecasts Manitoba's 2006 sales at 11,900, a decline of 5.7 per cent.
Winnipeg developers are facing a looming shortage of land available for development that could force prices upward until the 3,000-acre Waverley West subdivision is finished in the southwest portion of the city.
Public planning documents for Waverley West show seven neighbourhoods connected by tree-lined bike paths and parks. Most of the homes are expected to be heated by geothermal energy.
"We're excited. It should be such a well-designed place by the time it's finished," says Ruthe Penner, president of the Winnipeg Real Estate Board. "There are so many environmentally friendly touches, you're going to feel really close to nature."
The big question, however, is how quickly the subdivision can be built.
Officials of the city, which owns a major portion of the land, have promised extensive public consultation but some residents are growing increasingly frustrated at what they see as a tardy pace.
Details on density guidelines are scheduled to be unveiled later this month. Construction is expected to begin in 2007 and the entire project should be completed by around 2030.
Penner says she had breakfast in December with Manitoba Premier Gary Doer, who questioned her extensively about lot shortages in Winnipeg.
"There are still little subdivisions available about 10 to 20 minutes drive outside of the city in the meantime," Penner says. "We are running out of space quickly though, that's for sure."
Elton Ash, regional executive vice-president for Re/Max of Western Canada, says he believes prices across the country will increase an average of about two to five per cent in 2006. Projections range from a low of zero in the London-St. Thomas area in southwestern Ontario to a high of 10 per cent in Western Canada.
Ash says the past few years have been marked by tight inventory levels in the housing industry. "As new listings come into the marketplace, you will see less upward pressure on housing values and an easier pace. It should be a good market, just slightly less frantic."
The strongest part of the market in 2006 will continue to be luxury homes, Ash says, although he adds that the definition of luxury changes depending on the city. A luxury home in Vancouver might start at $1.5 million, while prices would be significantly lower in Regina or St. John's.
Royal LePage Real Estate Services says the average price nationally for a house in 2006 will increase six per cent to $271,800.
"In the coming months that strong market will be tempered by the public perception of slower market conditions and very small rate increases from the Bank of Canada," says Royal LePage president and CEO Phil Soper.
The biggest percentage increases will come in Western Canada, according to the Royal LePage forecast.
In Edmonton the average price will increase eight per cent to $218,200 while in Calgary it will increase nine per cent to $283,400. In Vancouver the average house price will increase seven per cent to $469,770.
The forecast sees a four-per-cent increase to $364,000 for the average sale price of a house in Toronto and a five-per-cent increase in Ottawa to $270,900.
Winnipeg and Regina remain among Canada's most affordable cities for houses.
The cost of an average house in Winnipeg is forecast to increase seven per cent in 2006 to $152,000.
Regina prices are also expected to increase seven per cent to $138,000.
(David Hatton can be reached at hatton@businessedge.ca)