Text Size   Tell Someone Bookmark Us

Ottawa Housing Market - A Review of 2006 and Predictions for 2007

Read our 2007 Mid-Year Status Report HERE >>

New homes sales in the past year showed a surprising reversal of the expected gradual decline in demand from the peak period of the housing boom. Whereas new home sales in 2005 were 3,731, in 2006, sales climbed instead to 4,248 - an increase over the previous year of 13.8% (versus 17.9% for Canada as a whole).

Slightly more than half those sales were for low-rise condo apartments and small, affordable downtown high-rise condo apartments. As much as 80% of growth was represented by affordable Terrace Homes and townhouses in the outer suburbs. About a third of these were sold in the West & North-West suburbs; another third in the South-West; and somewhat less in Ottawa East.

That was largely because of continued very low mortgage interest rates and the strong employment situation; also because of a surging demand by first-time home buyers for affordable condominium Terrace Homes and freehold Townhouses.

Used homes sales in Ottawa were 13,783 last year, compared with 13,088 in 2005 - an increase of 5.3%. It was a record-breaking year for Real Estate brokers and salespeople.

There is always an interesting balance between new and used home sales, which can fall to either market depending on the desirability of inventories, consumer preference, and the acuteness of prices and marketing of new home builders.

That last year's housing sales showed greater growth in the new homes sector appears to have resulted from the number of low-cost walk-up Terrace Homes that were built. Low-Rise apartment and townhouses sales were 14.3% higher last year over 2005; detached houses 10% higher.

While Canada's new housing prices have risen an average of 11.9% a year over the past 25 years, (Re/Max's current Real Estate Survey), in 2006, prices rose by 10.7% (Statscan's New House Pricing Index). That is similar to the UK, where house prices rose by 10.5% last year. In Ottawa/Gatineau, however, the increase was "only" 3.3% (compared to Calgary at 42.4%). As a result of the continued price-hikes in previous years of the housing boom, the purchasing trend is clearly towards more "affordable" housing. That includes walk-ups as well as very small apartments designed for young singles in high-rise developments downtown.

You can view the lowest-priced designs in each housing category on our Home Page

First-time home buyers should bear in mind that the 6-year housing boom we have been experiencing in Ottawa is exceptional. Never have interest rates been so low in the past one hundred years. It was low interest rates that triggered such unusually strong housing sales - not just in Canada but also in Europe and the United States. Excessive demand resulted in a steep rise in housing prices, and many home buyers had to wait between six months and a year for a builder to construct and make available the home they wanted.

That is not typically the case anymore.

Examination of economic trends in the US often serves to inform predictions as to what may occur in Canada. The graph below showing the steep rise in U.S. home prices, is based on research by Yale economist Robert J. Shiller

Shiller's data shows that U.S housing prices doubled between 1950 and 2005, making price increases associated with the housing booms of the early 1970s and the 1980s look like tiny blips in comparison.

The curve from 1997 - if it can be so described - is an almost perpendicular line - an 83% price increase (adjusted for inflation). The point he makes is that there appears to be little relationship between the cost of homes in the U.S, and the actual cost of building materials and labour. This suggests that in the United States at least, home buyers have been carried away by the "irrational exuberance" of the times, and the consequent high demand for housing has resulted in record breaking prices.

Notwithstanding those Canadian investors in real estate who, no doubt, helped to push up prices, the huge advantage of low mortgage rates was that they enabled many of even the youngest apartment renters to become first-time home buyers with monthly mortgage payments barely exceeding the rent they had been paying. They also benefited from acquiring their first major investment.

As well as former tenants, the increasing number of immigrants settling in Ottawa, who were able to obtain employment fairly easily because of a buoyant economy, also pushed up demand.

As did the move-up market of existing home owners who found they could obtain an unusually high price for their old home, which they then traded up for a bigger, or more luxurious, or more costly one in a more desirable location.

There was also a move-down market of older people who were happy to relinquish the burden of maintaining a bigger home by downsizing into a bungalow or an apartment. And there were new family formations which motivated young couples to move to a bigger home more suited to a family. All that movement continued through 2006.

And, in a powerful testament to the utility of trickle-down economics, also contributing to demand was the effect of Baby Boomers purchasing not only a new primary residence for themselves, but also assisting their children financially to buy their own first homes.

As with the "irrational exuberance" of the stock market, many people also were afraid to be left out of home ownership, or of having to pay much higher prices later on.

And perhaps the exuberance was not excessive - but rather a wise decision to own property while they could manage to afford it.

Last year's predictions by financial analysts - that the market would make a soft landing despite the then declining demand and affordability - were countered by economists like Robert Shiller, who suggest the excesses of the current boom could, in the United States, have far more dire consequences.

And signs of this are beginning to emerge. As of the writing of this article, 10 per cent of subprime loans in the US are now more than 90 days late - higher than at any time since the recession of 2001. Subprime loans are those made to borrowers that carry increased risk, and thus inflated rates and steep fees. This trend is expected by analysts to gradually worsen.

Subprime loans have become enormously popular in the US, and have led to record levels of home ownership. Fuelled by lower prime rates and tax breaks that allow homeowners to deduct mortgage interest payments from their taxable income, the amount of these loans tripled to $650-billion (U.S.) between 2000 and 2005, and they now account for 23 per cent of all home mortgages.

Estimates suggest that as many as one in five of subprime loans will end up in foreclosure, eventually causing 2.2 million Americans to lose their homes and destroying $164-billion in household wealth.

Only seven months ago, The Economist - an internationally respected financial journal- wrote of; "The danger of a global house price collapse." They pointed to the housing mania "plastered on the front of virtually every American newspaper and magazine over the past month" (May 2006). "We have been warning for some time," they wrote, "that the price of housing was rising at an alarming rate around the globe, including America." Available data suggests that while excesses are evident locally, they are an appreciable order of magnitude lower than the US, or Canada's most inflated market, Calgary/Edmonton.

According to a Re/Max real estate survey published in January, Ottawa's residential market prices increased 297% in 25 years - 112.5% of the national average of 264%. The major reasons that Ottawa housing prices increased so much - according to Re/Max - are the buying power of Baby Boomers and the steady influx of new-comers into the region.

Ottawa's price increases exceeded those of Greater Toronto. (Barrie's were the highest in Canada at 372% over the past 25 years).

While the price of Ottawa new homes increased only 3.3% over 2006, (the lowest of Canada's major cities), this obscures the fact that Ottawa's price increases, since 1997, are already the highest in the country! (except, strangely, for Regina, which is roughly the same, and putting aside the aberrance of Calgary/Edmonton).

So whereas Schiller describes the enormous 83% price increase experienced in the US since 1997, Statscan pegs Ottawa's price increase for new homes at 61.3% since 1997.

On the other hand, according to the 2007 Housing Affordability Survey undertaken by Demographia International, which rated 159 major urban areas in six English-speaking countries, Canada comprises 7 affordable markets, including Ottawa. (Six areas in Canada were considered to be "moderately unaffordable").

However, they refer to a "Housing Affordability Crisis" in the past 10 years. The extra cost of housing, they say, could reduce purchasing power considerably and lead to less economic growth and job creation in future. Some lower income households may well be unable to afford anything but a more modest home, if they're lucky! The survey refers to what they term as the "decoupling of house prices from incomes," which could reduce home ownership significantly in the following years. In other words, actual prices of homes will bear no relationship to the income level of typical families.

Meanwhile, the average Ottawa resident spent 30.8% of their income on housing. Banks generally set the ceiling at 32%, for mortgage entitlement.

The question of whether low interest rates will continue still hangs in the air. Conventional wisdom tells us that such low bank rates can't last for ever - and we have been anticipating for at least two years that they will "soon rise sharply". Higher interest rates, in addition to rising housing prices, mean that more and more prospective home purchasers will be prevented from buying the home they want, since it is out of reach.

That being said, however, it has been speculated that the bank rate in the United States may actually be lowered because of the drag on the economy of their enormous debt load, and the staggering implications of rate increases for mortgage foreclosures. If their rates drop, will ours?

The Bank of Canada has already cut its growth forecast, if only marginally, which suggests that we will continue to parallel, more or less, American Interest Rate Strategy, which may be affected by such variables as government policy on existing or new military actions and the 2008 presidential election.

When all is said and done, we anticipate, (barring unforeseen circumstances), a 0.75% increase in mortgage rates by the end of 2007.

NOTE: our Prediction for 2006 saw interest rates increasing by 1%. Our interest rate indicator increased from 4.34% to 5.39% over the course of 2006. The indicator is composed of the average rate from 28 different Financial Institutions for a Closed, Variable Rate Mortgage.

To judge from all available housing research, there appears to be no good reason why new home sales and used homes sales should not continue to edge upwards in Ottawa, and every probability that they will - despite CMHC forecasts of a steady decrease across Ontario as a whole, to the end of 2008.

Possibly the most significant factor in the Ottawa new homes market for 2007 is the introduction of a new builder to the region towards the end of last year. Mattamy Homes has been building all over Ontario for about 30 years and are now a powerful force to watch in Ottawa. Despite so far pre-selling in only one community - Fairwinds in Kanata- they have already become the 9th biggest home builder in Ottawa.

The reason can be seen when viewing the Lowest Price Homes in each category on our Home Page. For example, Mattamy Homes dominates in the lower priced niche for 3-bedroom detached homes and is a heavy competitor in townhouses too.

Mattamy appears to be aiming at the "affordable homes" market both with their 3-level townhouses and their detached houses on 36ft wide lots. They have also solved a significant problem in trying to build a house with a 2-car garage on a narrow lot without defacing the frontage.

Mattamy's successes in Ottawa with this strategy may discourage other builders from "exuberant" price increases this year. (They plan also to open a community in Barrhaven, South-West Ottawa, by Spring, 2007).

Changes to how mortgages are marketed in Canada may play into this strategy. While Canadian banks have had little prior exposure to the subprime mortgage market, the sector is expected to expand in this country in coming years, despite the apparently harsh U.S. experience. Where currently 24 per cent of U.S. mortgages qualify as high-risk loans, just 5 per cent of Canadian home loans fit that description.

Subprime mortgages make new homes more affordable by enabling lower monthly payments, and no money down. Predictions are that the Canadian subprime market will likely double in the next three years because of its profitability, and this may help prevent demand from decreasing for new homes in the lower price ranges.

All of the above factors suggest that new house prices in 2007 are unlikely to rise at a higher rate than in 2006. But that appears not to be the case with condominiums.

A condominium study by Genworth Financial expects Ottawa's new condo prices to grow at an annual average rate of 3.9% from 2007 to 2010, pushing average condo prices from their present level of $177,267 to $184,772 in 2007 and up to $206,587 in 2010.

They attribute that projected growth to "Pent-up demand, steady employment gains and healthy population growth." They forecast that cycle will continue to the end of the decade, and add that "there is no end in sight to the current cycle of strong demand."

To reflect the new focus on "affordability", we commence the new year by displaying on our Home Page the 3 Lowest Priced New Homes in each of the major Categories : Terrace Homes, Condo Apartments, 3-bedroom Detached 2-Storey Houses, 4-Bedroom Houses, Semi-Detached Houses, Bungalows and Townhouses.

Now you can see at a glance what Ottawa's lowest prices are for a home in these categories. And we display sufficient tangible information for you to gauge which is the best value.

Our up-to-date data base of Ottawa's new homes consists of well over two thousand different home designs in every category. But remember - we always recommend that, once having identified the homes you are interested in with HomesExplorer™, you double-check all details carefully with the builders, who may change prices or specifications at any time without notice.

We wish you a fruitful 2007!