Ottawa Housing Predictions for 2009 - and Review of 2008

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All that is left from the housing boom are recriminations, because of the way that overbuilding in the US has led to deception, fraud, and hundreds of thousands of mortgage foreclosures, resulting in the biggest global financial crisis in history.

This crisis has, in turn, led to Canadians losing $20 billion a year from frauds in which one million investors have seen their hard-earned savings evaporate through greed, incompetence, and lack of foresight on the part of banks, mortgage lenders, property evaluators, investment salespeople, and all the usual suspects.

But for anyone with a memory as long as 15 years, or even as short as 7 years, it must seem that neither the financial sector nor investors have learnt anything from past failures.

In November, with the signs now obvious to all that Canada was already in an economic recession, a poll showed that one-third of Canadian home buyers believed that home prices were bound to fall. As for consumer confidence in the financial sector, it had evaporated with all the losses.

Even now it is not easy to describe who were the beneficiaries of the housing boom - other than home builders, manufacturers of building materials, sales people and bank executives. While banks have themselves failed, bailouts by taxpayers have ensured the comfort of bank executives, leading to accusations of government aiding the very people that are responsible for the crisis, while innocent dupes have lost their homes.

The fact they had been able to obtain them only through confidence tricks by real estate salespeople and mortgage lenders, who deliberately targeted vulnerable (and naive) consumers, raises questions about the lack of consumer protection.

By the end of 2008 one-third of all homes for sale in the US were repossessions now owned by banks. Sadly for their previous owners, they were put on the market again for as low as half their original price. Sad because, at that valuation, their original owners could probably have afforded to carry the burden of their mortgage payments.

Unfortunately for them, they had bought when real estate prices were already pushed up far beyond their real values.

American-style high-risk mortgages aimed at potential home-buyers who couldn't otherwise afford to purchase a home, crept across our borders in 2007, encouraged by the government, but, in an about-face, were then banned by the same government in June, 2008, under pressure from regulators.

As much as $56 billion worth of high-risk 40-year mortgages were sold, representing more than half of all new mortgages approved by trust companies, banks and other mortgage lenders, at that time. Approximately ten percent were lent with no deposit required.

The Globe and Mail reports that American insurer AIG, after lobbying through a former party insider, was given access to the Canadian market - "where some of the world's highest insurance rates are charged".

In 2006, in the government's first budget, they had announced that "not only would Ottawa guarantee the business of U.S. insurers, it was doubling the guarantee to $200-billion".

AIG aimed to "service the neediest - immigrants, the self-employed and those with blemishes on their credit scores".

Despite criticisms by current and former Bank of Canada officials that the practice of high-risk 40-year mortgages created issues of financial stability for the country, and "stoked [already] soaring house prices", "these consequences appear to have been anticipated by [n]either the government or the financial institutions pushing high-risk mortgages on the public".

Responding to concerns about risk, AIG maintained that "In terms of exposure to the [Canadian] government, the practical likelihood of AIG, an organization with $800-billion in assets, ever coming to the government for anything as it relates to a claim is not nil, but it is as close to nil as it possibly could be."

AIG has since had to be bailed out by the US government to prevent its bankruptcy, with an initial injection of US $150 billion. The Financia Post reports that, to date, "The federal government, through Canada Mortgage and Housing Corp., has plans to buy as much as $75-billion in mortgages from banks."

Latest figures by the Canadian Bankers Association show that of 3.9 million mortgages in Canada, 11,362 were behind in payments by at least three months (as of September 2008). The numbers of arrears in the US are as much as six and a half times greater, however, so in comparison, the condition in Canada is currently relatively benign.

That being said, the Bank of Canada has warned that our perilous economy could result in double the number of default rates from vulnerable households who may not be able to meet their debts, thereby leading to more bank foreclosures as the crisis cascades through the system over the next few years.

Sales of existing condominiums dropped by 24.6 percent, and freehold homes by 36.5 percent in 2008, compared with a year earlier. Despite that, prices of resale homes in Ottawa rose by 11.7 percent for condominiums and 5.7 percent in the case of single family homes; bringing the average price of multiple-unit homes to $221,379 and single detached homes to $309,434.

According to CMHC, the Ottawa housing market was "balanced" at year-end. In other words, neither solely a buyers market nor solely a sellers market.

Once again, it would seem that Ottawa is fortunate in the conservatism of Canada's financial sector. Canada's economic fundamentals are strong, we are told, and are, in Ottawa, very largely backed by the Public Service Sector. Housing inventories are trending lower and residential building starts are expected to decline in 2009 to be more in line with normal demographic needs.

CMHC expect a correction in 2009 of approximately one thousand housing units.

CMHC attribute the recent housing boom to "pent-up demand", (rather than the removal of barriers to gaining a mortgage, and housing shortages).

Excess demand has apparently now decreased to a more realistic level. And, although it is predicted that the Ottawa housing market will remain strong in 2009, it is likely that without the previous high levels of price increases during the boom, speculators will turn to other investment vehicles, returning the Ottawa housing market to a more normal situation.

Registrations of new home starts by builders can be deceptive. They are an indicator of intent rather than actual sales. And footings or basements can be capped for a while instead of being built on. In fact, last October, most of Ottawa's starts had already been pre-sold (at least 60 percent), since they were mostly Claridge's high-rise and low-rise condo apartments on Edinburgh Common and Domicile's low-rise in Vanier.

The president of Monarch Homes predicted that some condominium projects that were counted as starts when ground was broken will end up being cancelled as sales continue to shrink.

According to the Canadian Home Builders Association, sales dropped much faster than builders had expected. The drop moderated in November however. Scotia Capital view the situation as a healthy reaction to the slowing economy. Rather than building up too much inventory - as U.S. home builders did when they created their housing crisis - some Ottawa builders appear to be moderating the pace of their operations.

It was again the city's periphery, where land is cheapest, that experienced the most activity, as value-conscious buyers were essentially forced out of established neighborhoods.

On a year-to-date basis, Nepean (Ottawa West) again recorded the greatest number of starts, with 1413 units breaking ground this year. In terms of growth, West Carleton (Ottawa South-West), Clarance-Rockland (Ottawa East) and Russell (Ottawa South-East) were the leaders, with almost 70 per cent growth and a total of 616 housing foundations. Following was Kanata (Ottawa North-West), with a 64 per cent increase.

Despite the anticipated slowdown, CMHC consider that the Ottawa market will remain above the previous 12-month average, with approximately 6,000 new homes built in Ottawa in 2009 (down from their forecast of 6,850 for 2008). They anticipate that "empty-nesters will continue to move into condominiums", and that single family homes will represent 39.1 percent of new home construction (compared with 42.6 percent in 2008).

CMHC maintains that employment levels are still supporting the home resale market, although they expect that market to shrink by 3.4 percent in 2009, due to fewer first-time home buyers (bringing the situation in line with levels last seen in 2004/5).

This is good news for Ottawa's home owners who plan to sell, insofar as Ottawa's sales-to-listing ratio in the resale market is greater than 0.55, making Ottawa a sellers' market.

However, the decline in the numbers of transactions should slow the growth in property prices. Price increases should grow closer to the inflation rate, which is forecast by the Conference Board of the City of Ottawa at 2.6 percent in 2009 (as at October 2008), providing another reason for speculators, (who would normally inflate prices further), to drop out of the housing market.

Housing sales are expected to decline by 4 percent in 2009, and the price gap between Gatineau and Ottawa housing is expected to narrow.

It is still not possible to assess whether, or by how far, real estate values will fall in Ottawa in 2009. The best guideline for the housing market as a whole is the following chart created by Yale economist Robert J. Shiller, which features "A History Of Home Values" from 1890 to the present time in the United States.

The current US housing boom and his predicted housing bust are clearly shown in the form of a graph. US real estate prices have already sunk about half way down the steep cliff illustrated therein, and are estimated to fall at least another 25 percent in 2009.

Shiller's prediction sees U.S. prices bottoming-out by 2011.

The following are the results of a study of average house prices and projections made by the Financial Post which predicts a drop of 20.5% in our net worth from October 2008 to October 2009 by means of falling home values:

Start date (Oct. 1999): $145,121
Peak (June 2008): $298,336
Current (Oct. 2008): $280,870
Predicted (Oct. 2009): $223,196

Our prediction for 2008 saw our mortgage rate indicator decreasing to 4.3% over the course of the year. In January the rate was 5.5%, at which point it steadily decreased to 4.3% in September, increased to 5.07% in October, and then decreased to 4.7% at years end, approximately where it was 3 years ago, at the beginning of 2006. The indicator is composed of the average rate from 28 different Financial Institutions for a Closed, Variable Rate Mortgage.

With the effects of the down-turn still to be realized, we expect that rates will continue to fall. A current US bank rate of 0.25% suggests that the Bank of Canada rate could conceivably be cut a further full-percentage point to 0.5%.

Whether this will reduce mortgage rates proportionately, is anybody's guess. If it does, then we expect our mortgage rate indicator to fall as low as 3.5% in 2009.

NOTE: as of April 25, 2009, 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%

CMHC economists remain optimistic regarding their growth forecasts, despite the gloomy global economic news, the worsening economy in the United States, and Canada's entry into recession.

They base their optimism on: anticipated interest rate cuts (as Canada's economy entered into recession, the Bank of Canada lowered the overnight lending rate by 75 basis points to 1.5 percent, the lowest rate in 50 years); on proposed government stimulus packages, and on a strong labour market.

CMHC anticipate 1.2 percent to 2 percent GDP growth in 2009. Mortgage rates are forecast to remain at close to 50-year lows (currently around 4.7 percent).

"Notwithstanding the increasing prices observed for the past several years, home buying remains within the reach of many households, which favours demand. Ottawa's economic fundamentals are being supported by the fact that its workforce enjoys one of the highest average incomes among Canada's major cities. Despite relatively strong economic fundamentals in Ottawa, new home construction has begun to moderate closer to expected demographic requirements."

Ottawa's economy centres on its two major sectors; government and high-technology. Both offer well-paid jobs for knowledge workers in a relatively stable environment. They account for 37 percent of Ottawa's total GDP. Median family income in Ottawa-Gatineau is consistently the highest among Canada's biggest cities.

In addition, Ottawa benefits from the rural agriculture sector, retail sales, construction, forestry and mining, tourism, manufacturing, services, and transportation. The Conference Board forecast for Ottawa's Gross Domestic Product is that it will be seventh highest among Canada's largest cities.

That was a cozy description of Ottawa before the global financial crisis. Today's is less rosy. Government programs and thus hiring has slowed since the current government took office in 2006, and the sharp drop in commodity prices and the decimation of the manufacturing sector does not bode well for Ottawa's technology sector, who are finding their markets have shrunken dramatically, and access to capital has all but disappeared.

CMHC's optimism also may not be realistic. First, although Interest rates have been cut by the Bank of Canada to historic lows - in order to provide market stimulation - Banks are beginning to undercut this by denying or delaying the passing on of cuts to home buyers, in order to maintain their own bottom-lines.

Second, proposed government stimulus packages appear largely to focus on infrastructure projects. These take years to plan and tender, and in any case would tend to benefit larger cities, manufacturing and industrial areas - everything Ottawa is not.

Third, the "strong labour market" alluded to by CMHC does not completely reflect Ottawa's current tenuous reality. As a "two-company town", (government and tech), labour is at considerable risk.

The current government has made clear their predisposition not only to "smaller government", but also to the notion that western Canada is being denied its fair share of government largesse. If, as they expect, they receive a parliamentary majority, expect Ottawa's government sector to shrink - through attrition, downsizing and the transfer of government departments elsewhere.

If, on the other hand, the main opposition party is elected, expect at best some shrinkage through attrition, due to the current financial deficit as a consequence of previous tax cuts.

With respect to the technology sector, some of the largest players are already down-sizing, or have left the city completely. We can expect more to follow this example, as U.S markets continue to dry up.

Moreover, in a report distributed by The Canadian Advanced Technology Alliance (CATA) and attributed to investment house Wesley Clover, "Canada's IT and Telecom sector is in serious trouble, and the "Ottawa Telecom Cluster appears to be the hardest hit so far."

The report concludes with the dire statement that many factors "have now combined to result in Ottawa losing the necessary 'critical mass' to sustain and build a cluster of successful technology companies, able to collaborate with others in the region and around the globe to achieve business success internationally".

This appears to suggest that "Silicon Valley North" is now in its "sunset phase", which means fewer technology jobs, and a reduction in Kanata real estate values.

While common sense dictates that the best thing for us to do in such challenging circumstances is to sit tight and do nothing, governments urge us to keep spending in order to prevent the economy from slipping deeper into recession. They are, even now, making it easier for us to borrow and spend even more.

But nobody in their right mind buys a house when their employment is at risk, and prices are still near the top of the market.

Are there currently opportunities for new home buyers? Certainly there are, since prices are beginning to marginally decrease, and new home designs are always becoming more refined. Is it prudent to buy now, rather than wait six months, to see which way the wind is blowing? Only if you have found the home of your dreams, and you are financially stable (or what passes for that these days...).

Otherwise, our advice is to sit tight. There is simply not enough information available to support any degree of risk at present. And, if Schiller is correct, the market still has a way to fall.

While the situation is unlikely to grow to the extent of bank foreclosures in the US, we have yet to see any real analysis of what the fall-out will actually look like here, once job losses and their effects fully take hold.

Perhaps the bright side, as Prime Minister Harper has suggested, is that this is a wonderful investment opportunity.

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