Ottawa Housing Market - Mid-Year Status Check for 2008

Just as we were protected last year against the excesses of the U.S. sub-prime mortgage scandal by the more sober attitude of CMHC, so we are also protected against the far-reaching effects of easy lending tactics by some U.S. banks. Most troublesome are US investment banks and mortgage lenders like Bear Sterns, Lehman Brothers, Fanny Mae and Freddie Mac whose shares lost 50% of their value on the stock exchange, due to foreclosures. The latter two hold $12 Trillion in US mortgages.

There was even a major run on New York banks in June by people who were in fear and panic of a coming worldwide depression - the likes of the Savings and Loans scandal in the United States or, even worse, the old days in 1929 when a considerable number of small investors preferred to keep their money safe under their mattresses instead of depositing it in scary banks. Who can blame them after the sub-prime mortgage fiasco!

One result of the US housing collapse is that CMHC no longer offer mortgages with 40 year amortizations, as they were encouraged to do to keep the Canadian housing market expanding by lending money to people whose ability to afford a home may have been only marginal.

So subsequent ripples that continued after the housing bust in the U.S. had a salutary effect on our own mortgage lenders. Nevertheless, you can still obtain a 35-year amortization - although home buyers should be warned that they pay more for their house in interest rates the longer they take to pay off their mortgage.

As for other economic factors, the mortgage rate is where it was one year ago. Strong employment numbers still trigger new (and used) home sales. In fact, Ottawa's unemployment level was recently at its lowest level in 19 years. Jobs grew by about 4,700 over the previous month at the end of 2007, bringing local employment up by 38,900 since the beginning of last year.

Retail sales increased by 3.7% in 2007 (over 2006). And further domestic growth is expected to accelerate in 2008 by another 3.2%. That is good news for both Ottawa retailers and also Ottawa's commercial property owners with a vacancy rate of only 2.4% - one of the strongest retail sectors in Canada.

New home construction rose by 15% last year. And new home starts are up this year by about 5.5%. Real GDP growth is at 2.9%. Personal income per capita is now $40,024 (compared with $39,622 in 2007 and $38,181 in 2006). Ottawa's population continues to expand marginally. Nevertheless, unemployment did rise to 6.2% (from 5.7% in 2007 and 5.2% in 2006).

CMHC continued to inform us that "Townhome starts post a solid performance in May." No surprise! Although it appears that nearly everyone wants a single detached home, fewer and fewer home buyers can afford to pay their ever-rising prices.

By mid-year Ottawa's home builders had commenced construction of 36% more townhomes than at the same period in 2007. And year-to-date apartment starts almost doubled. Even starts on those expensive Singles rose by 6% after an initial drop - which suggests that some buyers who can afford them took a few months to adjust to rising prices. Detached home starts were 8.4% higher compared to the same time last year.

Caution reminds us not to expect another 35% sales increase as happened in 2007. Indeed, with speculators at the forefront of our minds - yes, in real estate as well as commodities - we attributed 2007's unexpectedly huge increase mostly to professional and amateur property speculators.

Even your own neighbours may have been buying the odd local resale house and then flipping it over to skim off a few thousand dollars from the rising market. So caution prompted us to consider low-balling anticipated growth in 2008 - even dropping our previous forecast to reflect the jump in real estate speculation. Fortunately, we stuck to our guns with an increase of approximately 5% this year over last - which is where it is in Ottawa right now.

Ottawa's new homes market is supported by strong employment, particularly in the public sector. And there is stable consumer confidence in the nation's capital, with its higher education levels and higher household incomes. That is particularly so of Nepean, where home builders registered 140 new building starts, of which nearly half were townhomes.

The most significant growth was in West-Carleton, Clarence-Rockland and Russell with increases in starts totalling 238.6% or 149 dwellings (64 townhomes in West-Carleton and 34 condo apartments in Clarence-Rockland). That reflects a trend - described by CMHC as "increasingly strong" - towards higher density; no doubt because of significantly higher prices for single detached houses.

Gloucester was the second biggest recorder of double-digit volumes of new housing starts. Close to half of its new homes are single detached dwelling units. Residential starts in Golbourn and Kanata were also relatively high. Not surprisingly, starts declined in more expensive central areas of the City, Rockcliffe Park and Vanier compared with the previous year

Mid to late Summer is, of course, a holiday period when so many prospective new home buyers have other pressing issues on their minds. But it should come as no surprise to see home sales pick up again in September, despite mixed signals on whether the Bank of Canada will raise its lending rates as a consequence of inflationary pressures like energy costs and the prices of some foods.

Or will they continue to keep them unchanged in order to stimulate the economy? It seems to be a 50/50 chance at this moment in time. Nevertheless, the signs are there for interest rates to begin rising once again. And when they do, home buyers will be eager to begin locking in to favourable rates before the long climb upwards in a new cycle commences once again.

India was the first major economy to raise its interest rates last month, due to inflation that is now running at 12%. And GIC rates have been moving ever so slightly towards the higher side of 3% to 4% once again. So everything is bound to change.

But, fortunately for us in Ottawa, circumstances continue to remain unchanged thus far.

On the other hand - after increases in housing starts by 43% in the first quarter of 2008 - Gatineau's home builders appear to be discouraged by sales after their initial exuberance, and starts fell by 13% in the second quarter of the year. That left 623 housing starts 7% up on the same period in 2007.

And multiple housing starts fell by 18% in the second quarter compared to the same period last year. That is considered to be significant since it is the first decline in four years. CMHC reports that apartment construction decreased by 30% and semi-detached homes by 16%. Conversely, row-housing construction grew by 33%. Even so, multiple housing starts were greater by 14% than in the same period last year.

It should be emphasized that actual sales may not coincide with new construction starts, since some types of housing may take longer than others to be absorbed by the market. Individual builders' starts are based solely on that builder's assumptions about the market's trend and, no doubt, on the time it has already taken to sell existing inventory.

As in Ottawa, starts of single family homes were down. A senior marketing analyst at CMHC remarked that "the level of activity during the second half of the year should be similar to the volume recorded in 2007."

Noticeably, starts - and presumably sales - were up in the Aylmer sector (whose residents are generally considered to be about 65% Anglophone, compared with Hull and Gatineau which is predominantly Francophone and where starts fell dramatically).

That points to continued imigration from Ottawa to Aylmer of people who can either no longer afford to pay Ottawa housing prices or are astute enough to recognise they can obtain better value for their money in Quebec.

It is significant that, in Ottawa, it is sales of the lower priced townhomes and condominium apartments that dominate - although builders are registering construction starts of more detached homes than previously, when home buyers showed reluctance to pay the greatly increased prices. Very likely the heavy price increases of that type of dwelling also in Aylmer has resigned them to having to pay more.

Sales of single family homes dropped in the Toronto market, no doubt because of heavier price increases. While Ontario starts to June were 26% higher than in the same period of 2007, they dropped severely in July.

Ottawa, however, to some degree insulated thus far from the economic turbulance in Southern Ontario brought about by job losses as a consequence of the rapidly shrinking manufacturing sector, bucked the trend and experienced a small growth in starts into July.

While clearly, the peak of the housing boom has passed, it may take a while longer for the effects of the increasingly weakening Canadian economy to be widely felt in this city.

We give the last word to CMHC's regional economist, who states; "While a backlog of apartment sales commencing construction will keep starts elevated this year, a slowing economy, rising mortgage carrying costs and more balanced resale markets will dampen the pace of new home construction moving closer to 2009."