Ottawa Housing Market - Mid-Year Status Check for 2009

Such low interest rates - due to reductions made by the Bank of Canada - have created greater affordability, despite price hikes by builders that began once again after hesitation in the new year, when many builders at first reduced their prices.

The fragile balancing act between a buyers or a sellers market in housing has now swung very gently from benefiting buyers towards benefiting builders again - largely because builders cautiously limited the numbers of their new starts to avoid large inventories in an environment of uncertainty.

The volume of new starts fell for the third consecutive month and new construction dropped by 8.4 percent in June.

Despite the perception by consumers that prices of items are rising - like food - in fact inflation is at an unusual level below zero, as a consequence of lower mortgage interest rates, lower gas prices, and lower automobile prices. While this is not expected to last long, runaway inflation is considered unlikely within the next three or four years.

Another swing of the pendulum took place from a previously overwhelming market preference for townhouses to a drop in sales of towns, whereas sales of single family homes increased by 5.8 percent. The key was affordability, with a fair number of smaller affordable singles being designed and marketed by several builders. Many are basic starter homes for first-time buyers. (New starts of towns and semis fell by 23.6 percent).

Statistics of new housing starts and sales naturally show an up-tick in downtown and central areas whenever even one mid-rise condo apartment building comes on the market - now a rarity because of limitations of available land. The result is that even some of the smaller executive-type low-rise projects and more modest ones are quickly sold out. (We describe as "Central" any neighbourhood north of Hunt Club Road, where prices have now risen beyond the reach of many new home buyers).

Statistics also reveal that most new home sales now take place in South-West Ottawa and points east of Orleans, because of greater availability of land in those areas.

While CMHC currently maintain that their 2009 forecast is on track and that sales for the year are likely to be more moderate than last year's sales, we believe it is now too close to call as to whether sales will end modestly up or down compared with last year.

Our prediction for 2009 saw our mortgage rate indicator decreasing to 3.5% over the course of the year. However, as of April 25, the Bank of Canada rate had been cut to a previously unthinkable 0.25%. With most major lenders unable to bear the public relations stain of failing to pass on cuts to consumers, our mortgage rate indicator fell to 3.38%. As of July 14, it had fallen further, to 3.18%. The indicator is composed of the average rate advertised by about 28 different financial institutions for a Closed, Variable Rate Mortgage.

As previously described, the health of the Ottawa new homes market has been enabled largely by the historically low interest rate. This, coupled with the Bank of Canada's assurances that the rate will remain stable at least until mid-2010, has provided buyers the confidence needed to make a buying decision.

Its important to realize however, that the interest rate cut has not really decreased the cost of owning a new home; rather, despite the increases in new home prices, it has kept monthly mortgage payments relatively flat.

For example, a year ago, in July, 2008, when our mortgage indicator was at 4.34%, the monthly payment on a $300,000 home was about $1459.00 (5% down-payment, 30 year Amortization Surcharge and mortgage insurance premium included). In July, 2009, that payment should have been $1266.00 - 14% less than last year - due to the drop in interest rates. However, that $300,000 new home now costs about $345,000, with essentially the same monthly mortgage cost as last year. With the rate for longer-term mortgages beginning to increase, our new prediction for 2009 sees the mortgage indicator largely remaining flat for the rest of the year, which suggests that new home prices should behave in much the same way.

This assumes, of course, that the financial climate continues to improve, as the government claims it will, rather than worsens.

The major factor, when discussing affordability, is whether or not one is actually employed in the near future.

In general, Ottawa's jobless rate had increased to 6.1% by mid July, the highest in nearly 4 years, and a 13% increase over last year. Officially, almost 27,000 local jobs have been lost since last November, with many more "unofficial" job losses added to this.

We raised significant issues in our 2008 Year-end Report with respect to the health of Ottawa's two major sectors - government and technology.

While government has been on a hiring spree, to prepare for the expected attrition due to retiring boomers, we suggested that a possible majority government of the Conservative Party would lead to the shifting of Ottawa-based government jobs elsewhere. There are no new indications that change this expectation. We also suggested that, whatever political party formed the next government, excessive spending and tax cuts by the current government would force any new government to sharply curtail growth in the Civil Service and the programs it administers.

At that time, however, we had no reason to believe that the government would continue to increase their spending, or so lavishly. Their current budget deficit of almost $156 billion over the next few years means that any government will now have to raise taxes and cut costs. The last time we faced these circumstances, immediately after Mr. Mulroney's Conservative Party had lost the election, the Civil Service was cut by 45,000 jobs - most of them in Ottawa.

The technology sector faces no less uncertainty. Having never recovered from the tech melt-down of 2001, and then the recession that followed after the 9/11 attacks, Ottawa's technology cluster has been shrinking ever since. With the demise of Nortel, any expectation that their R&D capacity will do anything but drastically shrink is unrealistic, regardless of who buys it. That leaves only 2 large telecom players - Mitel, and Alcatel-Lucent.

Alcatel-Lucent is based in the U.S. and Europe, and has a presence in Ottawa only because of its historic acquisitions. With the disappearance of the Ottawa telecom cluster, there will be less reason to maintain a local presence, insofar as the cost advantage of Ottawa engineers versus U.S. or European engineers will be offset by there no longer being a large enough pool of local engineers available to hire. This, coupled with poor telecom sales worldwide due to the global financial uncertainty, argues for the company to consolidate their operations in the U.S. and Europe to save costs.

The recent decision by the City of Ottawa to purchase their new phone system from U.S- based Cisco Systems, rather than Ottawa-based Mitel, can be expected to have significant implications for the growth of Mitel, and its ability to increase employment in Ottawa. Not just in terms of the single sale - as significant as it is - but because, if any company can't make a convincing case to its local government - given the obvious benefits to the local economy - it serves to curtail sales elsewhere. The City's decision serves therefore to further erode the local technology cluster, and undercut technology employment in the City.

While its true that by July, the housing market had apparently begun to recover, with an increase in sales and prices, there are those that suspect a "dead cat bounce" effect in play.

A dead cat bounce is a figurative term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement, with the connotation that the rise was not an indication of improving circumstances in the fundamentals of the stock.

This aligns more closely with the Schiller prognosis, that suggests U.S. home prices will not bottom-out until 2011. In Ottawa, if the Bank of Canada does increase the rate a year from now as anticipated, some of those that bought homes at this year's higher prices may not be able to meet their new monthly mortgage commitments. This should lead to increased supply locally and, therefore, falling prices.

Our sense is that there is risk particularly for those buyers who are currently without equity, and those who do not have superior job security.

If you are upsizing, downsizing or moving horizontally, as long as you already have significant equity in your existing home, you should be able to weather any negative consequences that may or may not arise.

If you do not have work-place seniority, or work in a business vertical dependant on U.S. buyers, you probably should hold-off until there is less financial uncertainty, because we really are in un-chartered waters currently.

That being said, the Ottawa market continues to exhibit a remarkable resiliency, that is often baffling and counter-intuitive. Over the last 2 years, despite company closures, the collapse of the manufacturing sector, the volatility of commodity prices, layoffs, political instability, and the global financial meltdown, prices of Ottawa new homes continue to increase, and people continue to buy them.

It brings to mind a comment made of Canada itself - "it works in practice, but not in theory".