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Ottawa Housing Market - Predictions for 2006

Read our Review of 2006 and Predictions for 2007 HERE >>

Over 80 Ottawa new homes builders have been more or less successful as a result of the six-year-old housing boom of unprecedented proportions in which "all boats rose with the incoming tide." Now that the tide is receding, they have already re-examined their positions. The following are the main factors that triggered the recent Ottawa housing boom: 1.   The lowest mortgage interest rate in over a hundred years, which made new home ownership far more affordable;
2.  Eased bank restrictions on borrowing, in which home buyers no longer had to raise the capital for down payments themselves;
3.  Banks offered easy loans instead;
4.  Reduced monthly principal and interest payments competed favourably with higher monthly rents, encouraging masses of tenants to buy their own homes;
5.  An increased flow of newcomers to Canada obtained regular employment and were enabled to buy new homes from future earnings;
6.  Higher property values of existing homes encouraged a move-up market to new homes;
7.  Many of Ottawa's aging population were able to obtain high prices for their old homes and downsize to smaller new homes like bungalows or condominium apartments;
8.  A buoyant economy induced many people to spend money on high ticket items like SUVs and bigger new homes;
9.  A rosy employment situation and a cost-cutting business trend resulted in part or full-time employment for school-leavers so that 18-24 year-olds of both genders were enabled to leave their parent's home and buy automobiles and condominium apartments or lofts;
10.  New family formations encouraged purchases of new town homes too. It is impossible to forecast future trends with accuracy. But it is already clear that the 6-year-old housing boom has begun to decline. According to Canada Mortgage and Housing Corporation (CMHC) new home sales are expected to decline still further as house prices continue to rise and increases in mortgage rates make homes less affordable. The 2005 decline in residential construction continued into November, following a ten-month trend of lower demand for new homes. Meanwhile, the consumer trend to used homes from the huge inventory on MLS continued. Slightly reduced rents and lower vacancy rates in rental apartments, indicate the return of a preference by some people to rent rather than buy a new home. 1.  Sales of new homes in general have already declined by 31% - 38%, depending on location, price and type of homes;
2.  So far this year, Building Starts for Multi-Family homes dropped by 34%; Apartments by 38%; Semi-Detached by 31%; and Townhouses by 33%;
3.  Ottawa's used homes market (which is more than twice the size of the new homes market) showed an increase of 19.16% in its sales in the same period;
4.  Paradoxically, the inventory of used homes on MLS is higher than in the previous year. And the average duration that used homes remain listed on MLS has risen to 47 days, and 60 days at year-end;
5.  Average detached bungalow prices rose by 5 percent to $274,000 and 2-storey houses by 3.5% to $269,714;
6.  Several new home builders are offering incentives to buyers. They include Hardwood Floors in Living/Dining Rooms and Entrance Halls; Ceramic Floors in kitchen and bathrooms; Air-conditioning; 5 Appliances; 9ft ceilings in several new apartment buildings, and 9ft ceilings on the ground level of 2-story houses and bungalows, as well as Price Discounts posing as "Decorating Bonuses" or "Early Occupancy Bonuses"; December 2005 presents an ambiguous situation for Ottawa's new homes industry. Many buyers are waiting to see if (or when) prices will fall. The media capitalize on a perceived "housing bubble" expected to burst. During five of the peak years of the housing boom, new home prices rose on average by 9.5% a year, compared to the used homes market, where prices increased only 3.8%. The most recent price increases brought the average selling price of used homes up to $244,531.  Despite a similar economy, a different situation is occurring in the U.S. At the same time that new housing starts shrank in Ottawa by over 30%, U.S. housing starts rose by 3.4% (in August) and U.S. mortgage applications rose by 6%. Home prices in California have grown at an average rate of over 20% a year for the past five years. Buying a home in the United states has been described as "unaffordable for all but the most wealthy". Middle-class families, including teachers, firefighters and nurses, reportedly now have little hope of buying a property. CMHC and Ottawa Carleton Home Builders Association (OCHBA) statistics indicate the following declining situation concerning (a) Housing Starts; (b) Used Homes Sales; (c) New Homes Sales: Perhaps the most intelligent or reasonable interpretation of the present situation was made recently by media business analysts. It is that "we need several years of price stability to allow incomes to catch up with higher prices." If that is the case, by the time incomes do catch up with home prices, mortgage rates will probably have climbed to their "normal" average level of around 6% and discourage home-buying. In other words, the new homes industry would be back to where it was before the housing boom started. Except for price levels! The only comparable situation from which we might obtain some lessons was the housing boom in 1970 which fizzled out at the end of 1974. It was followed by approximately 8 years of struggle for the housing industry, and when an economic recession took hold in 1981, a number of well established home builders went under. Just as the recent boom was triggered by the lowest mortgage interest rates in over a hundred years, so the recession of 1980/1 was triggered by historically high rates of over 20%. As a result of pent-up demand, the new homes market began to pick-up again in 1982, but only in highly desirable locations. Despite all the bad news, we have to bear in mind that recent declines are largely as a consequence of new home builders losing about 20% of their sales to the used homes market, rather than from shrinking demand for housing. The actual shrinkage in consumer demand is only about 10%. This means that there are still buyers out there but, for any number of reasons, many of them prefer not to buy new homes from builders. The Economist magazine has predicted that the U.S. "housing bubble" will burst, and expect prices to fall there by about 20%. Canadian media have picked up on that recurrent story from time to time , causing some concern here. But Canadian economists have resisted all talk of there being a Canadian "housing bubble" at all. The big difference between the U.S. situation and ours is the greater amount of real estate speculation the U.S. engages in - as well as their having more disposable income. We tend to be more cautious here. Even so, most hot markets that soar dramatically have a habit of correcting themselves from time to time. The UK housing market was pushed up to extraordinary levels some years ago because of offshore speculators. In their more recent boom that coincided with ours, prices soared by over 27% in two years, until they sagged, and, by the middle of 2005, fell back to where they had begun. But in their case, housing prices are far, far higher than ours in Canada, and even fewer people can afford to buy their own home. In our case we are fortunate that Canadian mortgage rates are still only at the same level that triggered the housing boom in the U.S. - around 5%. But what seems inevitable is that the Bank of Canada will continue to increase the prime rate a quarter percentage point each fiscal quarter, which means that (barring unforeseen circumstances) mortgage rates will be at least 1% higher by the end of 2006. This means that for the average home priced at $250,000.00, the monthly payment (with a 10% down payment, for a closed, Variable Rate Mortgage, including mortgage insurance) will increase from approximately $1254.00 to approximately $1388.00 Despite all these clues, there are simply too many variables to predict the status of Ottawa's new homes market a year from now. To what extent will resolution (or lack of it) of the Softwood Lumber dispute with the U.S. effect Ottawa new home prices? Will the slowdown of housing starts increase competition in the Trades, thereby reducing the cost of building new homes? Will the mortgage rate increase cause a large number of new home owners to default on their mortgages, thus increasing the supply of lower priced used homes? Will the recent trend to used homes in any case further decrease demand for new homes, thus decreasing new home prices? All we can advise is (a) Know what you can afford, factoring in mortgage rate increases, and (b) with that in mind, don't be overly reticent to take the very real opportunities that still exist in the new homes market. Just as with investing on the stock exchange, there are often risks - however real estate prices, and thus the worth of your housing investment, always move upwards - in the long term.