Ottawa Housing Predictions for 2008 - and Review of 2007

Affordability was the key element in new home sales. With the average price of a new single detached home in Ottawa priced way beyond what first-time home buyers and many others could afford, the majority of new homes sales were in the multiple-unit category - town homes, apartments or semis.

In our 2007 Mid-Year Update, we proposed 3 ways of getting around this affordability barrier. New home buyers could either :

1. Buy a used home instead;
2. Buy a new home in Gatineau, Quebec;
3. Buy a new home in one of Ottawa's bedroom communities.

The re-sale market also had a bumper year in 2007; in fact, the best year ever. Sales through MLS increased by 5.8%. Re-sales are the biggest competitors to sales of Ottawa's new homes, and the used market is about three and a quarter times bigger than the new homes market. The most attractive type of home for most buyers - a single detached home - was also considerably less expensive in the re-sale market - on average $307,000 versus $397,000 for a new home - which accounts in no small part for the boom in re-sales.

Housing starts in Gatineau actually fell in the last three quarters of 2007, showing a decrease in that period alone of 56% over 2006. It applied to multiple housing units (-72%) as well as single detached homes (-8%). However, the entire past year showed total residential sales down by only 5% from the previous year (CMHC).

As in Ottawa, the decrease in detached homes was offset by increases in semi-detached homes and multiple housing units like Townhomes and apartments. More starts by far were recorded in Aylmer (a gain of 20% over 2006) versus Hull or Gatineau sectors, suggesting an anticipation by Aymler builders that the influx of Ottawa buyers would continue. Housing starts of single detached homes in the entire Gatineau sector fell by 44%.

There appears to be a direct correlation between the introduction of the most competitive lower-priced homes in Ottawa by Mattamy Homes, and the dramatic drop in Gatineau new home sales during the second half of 2007. The move by Mattamy may have caused Ottawa residents, who would otherwise have bought a new home in Gatineau due to the previously lower prices, to buy from Mattamy in Ottawa instead. If so, then Mattamy is one of the few Ottawa home builders who were able to compete with lower Quebec prices and stem the flow of sales that had previously been taking place across the provincial border.

The quest for affordable new homes has led builders and buyers to the city's furthest periphery in search of less expensive land. The increase in new home starts by location for 2007 tells the full story :

Ottawa Centre, Nepean, Kanata, Orleans, Gloucester - down by 45.3%
Ottawa East - beyond Orleans (Cumberland, Russell, Clarence) - up by 54%
Ottawa West - beyond Kanata (West Carleton) - up by 8.5%
Ottawa South - beyond Nepean & Gloucester (Goulbourn, Rideau, Osgoode) - up by 123%

The total number of new home starts was distributed this way :

Inside Greenbelt: 12.2%
Western Suburbs: 28.5%
Eastern Suburbs: 22.7%
Southern Suburbs: 36.7%
Source: CMHC

Here again we see the effects of Mattamy's entry into the Ottawa market, with their accelerated activity in Ottawa South and Ottawa West.

It should come as no surprise that Minto Homes are still the largest home builder by far in Ottawa, since they have dominated the market over a fifty year period. Nor is it a surprise that Mattamy Homes has so quickly risen to tie with Claridge for third place after only two years in Ottawa, since they are the biggest home builder in Canada, and entered the Ottawa market with planned and professional panache, as well as a large range of innovative designs and marketing knowledge gained in bigger and more competitive markets across the country.

The following Table illustrates the market positions of Ottawa's leading home builders at the end of 2007, and forms the basis of their commitment to new homes starts in 2008.

Our initial prediction for 2007, made at the end of 2006, was that mortgage rates would rise in 2007 by 0.75%. Although slow to do so, in mid July the Bank of Canada began to raise rates with a 0.25% increase. The US Bank rate however, instead of increasing as anticipated, began to decrease, as the facts about their housing market and mortgage foreclosure crisis became known, and fears of an impending recession began to take root.

Anticipating that the Bank of Canada would now hold firm in response to US rate cuts, rather than them increasing the Canadian rate, we revised our initial prediction down to a 0.5% increase for 2007.

But nobody fully understood the appalling breadth and depth of the US Mortgage crises until later in the year, or that the US response to stimulate their economy would include rate cuts of such unprecedented amounts, and such a dramatic devaluation of their dollar against other currencies. The effect on the Canadian economy has already been significant. As the Canadian dollar rose to, for a period, actually exceed the value of the US dollar, Canada's manufacturing sector cut back considerably, as their previously marginal competitiveness was wiped out by their now much higher prices, leading to shut-downs, layoffs, and what may be the precursor to the end of large scale manufacturing in Canada.

This led immediately to an inflationary trend which has forced the Bank of Canada to begin a series of aggressive rate cuts that have only just begun.

2008 began with market madness on stock exchanges as a US economic recession was even more widely anticipated, which would in turn have significant effect on all other economies, particularly the economies of the UK, China and certainly Canada. The most ominous prediction was made by billionaire market speculator George Soros, who stated that it would be "very difficult to avoid" recessions in the both the US and the UK.

However, both of those economies were hard hit by the sub-prime mortgage scandal, whereas Canadian financial institutions had been far more cautious with their own lending, thus avoiding a similar scenario here.

The Canadian economy is still at significant risk however, although the fallout may differ on a regional basis. While the economy as a whole may not shrink overly this year, due to increases in sales of commodities, natural resources and energy, Ontario and Quebec cannot avoid being hit hard. The exorbitantly high Canadian dollar has already led to the decrease in orders of manufactured goods and equipment from US customers, our largest market. And of course, we can expect Canadian operations of threatened US corporations to shrink considerably. All of this means job losses, higher prices and a higher rate of inflation.

Except that this is Ottawa, rated recently as "Canada's most sustainable large city" by Corporate Knights Magazine. Employment is up, and growth is expected to be as high as 2.7% this year. Government is in the process of the largest wave of hiring in a generation, and Ottawa, being a "knowledge economy" rather than one based in manufacturing, is expected to avoid most of the problems associated with a higher dollar.

All of this is to say that there appear to be no threats on the local horizon that are dire enough to effect the current state of the new homes market. Builders evidently agree, as their new home starts have increased in January, 2008. And the re-sale market boom just keeps on going. For example, a very modest 1000 sq ft semi-detached home, about 80 years old, and located in Central Ottawa, was listed this January for $330,000.00. It sold before ever being shown, for $350,000.00. A comparable home in the same neighbourhood had sold for just $35,000.00 only 20 years previously.

A recent study by the Federation of Canadian Municipalities concludes that "the housing crunch is no longer just a problem for low income and indigent people... the cost of buying a home is rising much faster than [middle-class] incomes of people with good jobs, single people, and couples with, and without, children." Many people - particularly first-time home buyers - "are increasingly at the mercy of external factors like wage interruptions, interest rate increases, downturns in the economy and other problems that might leave them unable to pay mortgages (as has happened in the US and the UK, and as we anticipated might occur here a year or two ago).

The study emphasizes that "the average price of a home sold in Ottawa last year was about $280,000. That was up about 6% over 2006, and up roughly 35% since 2001, while incomes for all families and single people in Ottawa have actually declined in real terms since 2000.

All of this is to say that while it may appear to still be a "business as usual" sellers' market, changes will need to occur in order for the current market to be sustained. In fact, even now, most long-established Ottawa home builders are becoming more cautious about raising prices, and some are even reducing prices on larger single family homes as a result

Ottawa has long been considered a rather sedate and conservative city with cautious home buyers. By and large, the new homes industry has been led by local home builders with limited exposure to other markets, and little demand from consumers for them to change the tried and true formulas they have used to market new homes for a generation.

But with the cost of detached homes beyond the reach of first-timers, focus is now primarily on relatively lower cost multiple unit construction at the farthest edges of the city.

This shift requires a degree of innovation from local builders, who haven't faced any type of paradigm shift since the 1970's. It also coincides with the entry into the Ottawa market of Mattamy Homes, active in dozens of communities across the country, and Canada's largest home builder. After just two years in Ottawa, Mattamy is now the third largest builder in the Region, and vying for second place, which we expect it will achieve this year.

Unlike most local builders, Mattamy has faced these new (to Ottawa) challenges in other communities, and developed innovative solutions that appealed to buyers, and this accounts for their significant success in the Ottawa market thus far.

Larco Homes has also innovated their designs for middle-market new home buyers. So has Richcraft with their Tall Town Homes and Urbandale with their Jazz Terrace Homes. In Gatineau, Brigil Homes and Junic have increased their sales by providing good values in Terrace Homes for singles and young couples, while Chabitat has focused on small affordable detached homes for retirees, quite different in style from those in Ottawa.

While smaller homes and multiple unit construction are effective in addressing affordability issues, the cost of land is a significant factor also. As such we see increased housing starts, and plans for more, at Ottawa's periphery, where land is much less expensive.

One need only view our listing of the  Top Ten Most Affordable New Homes  in each new housing category, to see where the opportunities are for 2008.

Mattamy Homes leads the pack with Townhomes in their communities on the Western edge of the city - Barrhaven Mews, Fairwinds, and their first Ottawa mixed mega-community, Half-Moon Bay. Tartan Homes offers excellent value for semi-detached homes in Stittsville and Ottawa South, with Tartan, Claridge, and even Minto offering low-cost Terrace Homes in Stittsville, Ottawa West and Ottawa South-West respectively.

If you are committed to a single, detached home, Mattamy and Minto dominate the affordable category of 3 bedroom homes, wherever on the edge of the city you wish -North-West, West, South, South-West or East. And four bedroom homes at the low-end, in a wide variety of locations, are offered by Claridge and Urbandale, in addition to Mattamy and Minto.

High and low-rise Condos are available somewhat closer in to Ottawa Centre, since condo communities have a smaller footprint, and land costs therefore comprise a smaller proportion of the total. Richcraft offers a variety of affordable designs at Place des Gouverneurs (St. Laurent and Ogilvie), while Charlesfort, Tamarack and Claridge all offer low-end condos in the Downtown area. Both Minto and Claridge offer similar condos in the West End.

Once existing communities are sold out, we can expect that the availability of more affordable homes will be dependant on the acquisition of land by builders even further afield.

Indeed, Minto has a mixed mega-community planned to border on the southern edge of Manotick. Local residents are resisting, however, concerned that the new community will double the population, without the supporting infrastructure, and will therefore, in only a year or two, change the nature of the village forever. Thus far, Manotick residents have caused Ottawa City Council to reject Minto's existing plans, a decision that Minto is appealing at the provincial level. If the appeal record remains consistent, we expect that Minto will win their case, since their plan meets City requirements, even if it doesn't yet align with the wishes of Manotick residents.

Just as far South but a little more to the West, Mattamy Homes has acquired land to build their second mixed mega-community, on the western edge of the village of Richmond. Less organized or affluent than those of Manotick, Richmond residents are more rural than suburban, so it will be interesting to see their reaction to Mattamy's plans, which, given the scale, will have a similar impact on Richmond as Minto's community will have on Manotick. It will also be interesting to see whether Mattamy, given their broader experience, has a different approach to winning over the local village community than that used by Minto thus far.

We ended 2007 with a December cut to the Bank Rate (and thus mortgage rates) of 0.25%. This cut brought our mortgage interest rate indicator from 5.39% in January 2007, past a high of 5.72% in November, down to 5.56% in December, (after the rate cut). The indicator is composed of the average rate from 29 different Financial Institutions for a Closed, Variable Rate Mortgage.

Since then, a January rate cut of a further 0.25% has lowered the indicator to 5.31% . We anticipate that there will be cuts totaling another 1% by the end of 2008, (although there may be fluctuations up or down throughout the year), bringing our interest rate indicator down to approximately 4.3%, a level we have not seen since the Fall of 2005.

Everyone's situation is different, but its clear that home builders are trying to find ways to ensure they can provide new homes that Buyer's can afford, while still maximizing their profit. Clearly, first-timers are destined to live on the edge of the city, where the only truly affordable new homes exist. This means a long commute, by Ottawa standards, for many, so don't forget to factor in transportation costs when evaluating what you can afford.

For people moving up or laterally, the reduction in demand for higher cost single detached homes may mean that good deals will increasingly become available, as Builders find it more difficult to clear inventory of mid-priced homes. This may be the year when the price of new detached homes begins to move closer to the price of resale homes.

There may also be opportunities in Aylmer. The drop in Gatineau sales last year, despite the huge increase in (Aylmer) starts, means that builders probably have inventory they are not moving, so might perhaps be motivated to price them more enthusiastically.

Since the new communities bordering on Manotick and Richmond won't be developed for, probably, another 18 to 24 months, Buyers will need to set them aside for now, and review our Listings of new homes available currently, in order to discover the best opportunities for 2008.

And while we expect mortgage rates to finish the year a full percentage point lower than in January (absent unforeseen circumstances), this does not suggest that new home purchases should therefore be delayed, since we can be sure that Builders will fiddle with prices constantly, raising and lowering them as market conditions change.

As we usually say - if you find the home you love, that meets your needs and that you can afford, then buy it. If not, then wait until you do.

We wish you the best for 2008!