Ottawa Housing Predictions for 2010 - and Review of 2009

The results of the surge in buying was that prices of homes in Canada rose by 13.6 percent in the twelve months ending in September. The media even suggested that the Bank of Canada might have to think again about its promise to hold down the bank rate to a historically low level, because mortgage rates were too seductive for prospective buyers to ignore. Only the unusual strength of the Canadian dollar against the greenback restrained the Bank of Canada from raising interest rates on lending, because it would continue to hurt the manufacturing sector, by making Canadian exports more uncompetitive. Left to their own devices, banks chose to raise rates ever-so-slightly.

TD Bank's variable mortgage rate rose to 3.050 percent - still low enough for housing sales to surge. (ING Direct and Home Trust offered a 5-year closed mortgage rate of 3.99 percent). Who could resist their seductive overtures!

Prices rose month after month in reaction, and much of the lower-priced housing was quickly sold out. It also created a rewarding prospect for speculators to ignore the fickleness of the stock exchange and buy real estate in a rising market instead. It was the best hedge against inflation and promised higher profits than from any other type of investments. That in turn created a price tsunami, causing other buyers to jump into the market before they might become excluded by prices rising in excess of their budgets.

In the resale homes market, price increases were reinforced by dwindling inventories. It was the best third quarter ever for re-sales. Shortages of existing homes for sale and lengthening possession dates of new homes caused some home buyers to cruise residential areas in their vehicles for signs of private sales, for fear they might be left out of the market. The buying frenzy raised the question of whether the Ottawa housing boom was really over.

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.

CMHC's October housing analyses revealed that while total housing starts registered in the Ottawa Census Metropolitan Area declined from 586 units in September 2008 to 475 (so far in 2009) September sales increased - particularly for single detached homes.

Part of that increase resulted from a spillover from the limited inventory of used homes (the number of re-sales in August jumped by 18.5 percent), and also from a reduction in the construction of condo apartments. In short, the demand for houses exceeded supplies, and it became a sellers market. (Re-sales in Vancouver catapulted by 117 percent over the same period last year, resulting in bidding wars). So prices rocketed still higher.

The main reasons for the heavy demand were the lowest-ever mortgage rates and increased consumer confidence that Canada was emerging from the economic crisis, plus the resultant shortage - all of which triggered rapidly rising prices in September. The following chart reveals the pattern of housing starts by areas, with the greatest number of sales and constructions taking place in Barrhaven (South-West Ottawa) and the opening up of Kanata Lakes in the west.

Nevertheless - even as new home sales continued to increase and smaller single detached houses continued to be bought - the trend in registration of new housing starts continued to decline in the fourth quarter of 2009 to a level experienced at the end of 2005.

Whereas total construction of mid-rise and high-rise condo apartment buildings declined, mass marketers like Minto and Richcraft filled the apartment gap by starting construction on suburban low-rise apartment complexes (described as flats). First-time home buyers continued to choose semis and town houses - particularly in Kanata. And Barrhaven in Nepean accounted for over half the total sales. The runner up in numbers of starts and sales was Riverside South in Gloucester.

Re-sales rose to their highest level ever recorded for the nine-month period in 2009 (at 5.4 percent above the same period in the previous year), while listings declined by 11 percent - reinforcing the sellers market and pushing prices of new and used homes even higher (thus replicating the huge pent-up demand versus tight supply conditions experienced at the peak of the housing boom in 2000).

The inevitable result was that prices grew much faster than the inflation rate. Average prices in Barrhaven and Nepean jumped by 9 percent to 12 percent respectively. Condo apartment prices averaged at close to $250,000 compared with the new average housing price of $306,561 (now much higher). Bungalows were a bigger seller than previously by over 13 percent, with an average price of $310,000.

A significant new trend emerged as home prices rocketed still higher. It was a desperate attempt by builders to find new ways to shrink homes for the mass market, so that first-time home buyers could still afford to buy them. That goal was achieved with single detached homes (as well as town houses) being reduced in size to around 1100 Sq Ft to 1200 Sq Ft. Some features had to be eliminated - like separate dining areas (that became merely a corner of an ever-shrinking living room) and also one (or even two) of the bathrooms - bringing us back to the out-of-date one-bathroom house of the pre-1960s.

Some builders narrowed and shortened their building plots, so that the former 50ft x 100ft standard lot for tract detached family homes almost became a relic of the past. 18ft wide modules - that had become outmoded because of the necessity to stack them three stories high with almost endless stairs - reappeared. Some town homes began to be built on lots as narrow as 17ft. In short, new homes shrank in 2009 because price was the dominant factor in being able to sell them (in spite of the lowest-ever mortgage rates).

One result was that 40 percent of all home construction starts in the fourth quarter were for more "compact" single detached houses. A major question for 2010 will be what builders will be obliged to do next, as they continue to increase prices while the cycle of mortgage rates rises again, and home buyers pay more but get less for their money.

While the rise in sales of single family homes versus town houses might superficially suggest greater affluence, in fact it was achieved only by shrinking them to a minimum of around 1100 sq ft for lower income families, and also shrinking the lots of single detached homes to 30ft wide by about 89ft long. And - although some builders quoted the overall finished area of their designs in square feet, as if that living space was all on main levels - many now built one or more rooms in the basement because of less space on main levels. Given a choice of smaller detached homes or smaller town homes, there was a fifty-fifty split in demand.

Not surprisingly, far more people bought homes in the more affordable outer suburbs than in the city. That was partly due to unavailability of usable land in the core, and also a sharp decline in the construction of high-rise and mid-rise condominium apartments downtown. The decline in housing starts can be seen in the CMHC bar chart for 2008 and 2009 above.

Housing starts decreased by 15 percent in September in Aylmer, Hull & Gatineau, but were still up by 2 per cent year over year. Sales slowed down on the Quebec side of the Ottawa River at the same time as they became hot on the Ontario side. It resulted in unabsorbed inventories in Gatineau. And, unsurprisingly, builders of rental apartments reduced the numbers of their starts, particularly in Aylmer, when confronted by the continuance of low mortgage rates that encouraged buying instead of renting.

September 2009 turned out to be a critical month, boosted by the addition of 31,000 new jobs in Canada (so that Ottawa's unemployment figures shrank from 6.4 percent at the end of the second quarter to 4.8 percent). It was the first monthly gain in jobs since the global financial crisis.

The number of jobs in Canada as a whole increased for four out of five months in a row, suggesting that unemployment might have hit rock bottom in the beginning of the fourth quarter. Consumer and business confidence in the economy surged as Canada's domestic economy rebounded faster than economists had believed possible.

Most employment gains were for women aged 25 and over. And for the first time ever, more women were employed than men. This reassured prospective home buyers, who recorded the biggest number of home sales ever in Ottawa.

Canada showed signs of emerging from the global economic crisis ahead of other nations, with new job creations by the end of the third quarter of 2009. And retail sales were on the rise, leading to 69 percent of Canadian firms anticipating accelerated sales in the next 12 months.

But it was not all good news: the stronger dollar led to exports falling by 5.1 percent with declines in machinery, industrial goods and agriculture. Imports sank by 2.8 percent - even as manufacturing and construction provided more jobs. Since a third of our economy depends on foreign demand, that alone is likely to continue to restrain interest rates at their present level.

Since bank rates are typically raised to restrain inflation, and home prices skyrocketed in Ottawa at the fastest pace in 20 years, some analysts concluded that Bank of Canada Governor Mark Carney might use his powers "to slow the growth of bubbles in assets such as housing and stocks.". The question of "whether or not to act" to hike interest rates was in the wind. But so was a contrary question of whether cooling down exuberant housing prices was its mandate.

Nevertheless, it was Mr. Carney's low rate policy that was clearly fuelling the escalation in housing prices. But home prices are not included in official inflation statistics because they are not considered as outright purchases paid for all in cash: so the real inflation rate is obscured.

His view was that the housing market will cool off by 2011 and result in more home owners putting their homes up for sale - thus increasing available inventories and leveling out prices. But it was pointed out in The Financial Post the sharp increase in CMHC insured mortgages, so that buyers only needed to pay 5 percent down; and how Australia jacked up its interest rates by 3.20 points to spike the real estate bubble.

Meanwhile, warnings in the fourth quarter of a new sales tax on homes priced from $400,000, spurred sales of homes priced in the high $350,000 level (before further price increases might qualify them for the impending Harmonized Sales Tax). And townhouses priced below $300,000 were being snapped up by desperate home-buyers (and doubtless by speculators too) before they rose out of reach.

Encouraging economic news in October sent rising oil prices and gold to even new highs. And it was believed that the peak in oil supplies will be reached in 2020 - so that home builders, owner-occupiers and new buyers may soon be confronted by the problem of how to heat their homes and pay higher gas prices at the pumps - which, in turn, may influence where families live. It was all part of the paradox of rising home sales during the biggest economic crisis since 1929. It resulted in a thought-provoking series of Canadian TV documentary films predicting "the end of the suburbs."

The series argued that declining oil supplies and rocketing fuel prices are bound to trigger massive population movements out of some suburbs and into the cities, and that abandoned suburban real estate will fall into disuse and disrepair and become the slums of the future - as has already happened in California and other parts of the United States.

That grim prognostication was intended to remind us of what happened there. Paradoxically, our lower bank rate is returning us to the same situation that brought on the crisis both there and here in the first place. Sub-prime mortgages were embraced by the government as a means to provide homes for more people, until they were warned of the dangers of making home purchasing easier for people who couldn't actually afford to buy them.

Although our government backed down, it was not soon enough to avoid some damage: 25 percent of existing mortgages are sub-prime, and some others are for a 40 year repayment term (no longer offered). Now, instead of new sub-prime mortgages as the engine driving us towards that end, we have extraordinarily low mortgage rates intended to achieve the same purpose.

Perhaps we would be wise to rethink the desirability of that goal by viewing what was still taking place in the United States by August, when analysts at Credit Suisse reported that foreclosures could evict from their homes 12.7 percent of homeowners with mortgages. About 53 percent of sub-prime borrowers in the US had negative equity in their homes in 2009 because of fallen housing prices (expected to rise to 63 percent in 2010). Foreclosure filings exceeded 300,000 per month for the sixth straight month - the numbers being largely related to the unemployment of 15 million Americans.

It is significant that California has some of the highest bank foreclosure rates in the United States, because it was recently the sub-prime mortgage capital. One mortgage underwriter there admitted that only about 30 percent of applicants looked like good prospects. Her assessment is reflected by findings in the UK that 70 percent of all repossessions could be accounted for by "sub-prime mortgage lenders who gave loans to people with bad credit records".

New mortgage regulations proposed in the UK are intended to ensure that banks and credit card companies lend money only to people who can afford the repayments.

Although most Canadian banks are not big risk-takers gambling on a worst-case scenario that government will bail them out of their mistakes, they are in business to make a profit in whatever ways they can. The problem is that - like in the United States - home buyers may not understand their agreement, or be aware of the holes in the law that limit lenders' and builders' responsibilities to consumers.

Home inventories are likely to be even further depleted by the middle of 2010 - particularly with the urge to buy before the unpopular HST makes them even more expensive. And some members of the public still can't resist the opportunity to catch hold of cheap money when the banks throw it at them. But if the Bank of Canada feels it has done its bit to spur the economy by the end of June, the most likely scenario from July is likely to be one described by one Ottawa realtor; "If you didn't buy at the beginning of the year, then you really missed out. There's no inventory left, and prices are heading higher as everyone scrambles to make a purchase before rates spike."

It may then be that, as the bank rate rises, and mortgage rates with it, the lack of cheap money and housing inventories could finally cool the housing market down to a more normal level, and the housing boom we have experienced may finally be over.

On the other hand, the improvement in employment in Ottawa will likely support a stronger housing market at the next seasonal buying cycle in the Spring of 2010, aided by inventory shortages that may lead to longer waiting times for new homes to be built, and a spillover from that dilemma into the used homes market which will increase the volume of sales in used homes - just as shortages of existing inventories are likely to lengthen queues at new homes sales centres - with the inevitability of more price increases as a consequence, and a threat of runaway inflation. (CMHC anticipate housing starts for 2009 will reach 141,900 and rise to 164,900 in 2010).

There is even a possibility that the Bank of Canada will be obliged to hold down bank rates if the United States has to - resulting in another hectic year of increasing sales and home prices as more home buyers are seduced into obtaining low-rate mortgages.

Despite present shortages of housing inventories and serviced land, the ten largest builders and developers in Ottawa (including the City) own 70 percent of the vacant residential and commercial land supply. Richcraft and Urbandale jointly own 32 percent. Minto own 10 percent, Mattamy 6 percent, Monarch 6 percent, Claridge 5 percent, Brookfield Homes 5 percent, Tartan 3 percent, and City of Ottawa 3 percent. Obviously, ownership of raw land is fundamental to their business growth, and their concentration of land ownership is somewhat greater than in previous years.

So - since their applications for building permits for new home starts increased by 29.5 percent during the over-heated buying and selling last September - it seems that those major builders and developers anticipate further pent-up demand for some time to come.

And, given the scarcity of land, they are not willing to share. The executive director of the Greater Ottawa Home Builders' Association explained that larger developers are retaining their holdings for their own future use and are no longer willing to sell lots to small and medium-sized builders. "The taps have been shut off... starving the small and medium-sized builders out of business", he complained.

The City of Ottawa forecast that their land holdings will be sufficient for the next two decades, in accordance with Ottawa's projected growth rate. "The City anticipates that about 9 percent of its growth over the next 20 years will go to rural areas and most of that will be directed at villages", it was reported.

Higher new home prices drive thousands of Ottawa families into outlying municipalities such as Arnprior, Kemptville and Rockland, from where they commute to work in Ottawa every day. There is also fresh interest in Carleton Place, where builders like Brigil and Olympia already own new subdivisions and new highways are being constructed to cope with future commuting traffic.

Residents of Richmond who are fighting against suburban sprawl are finding it hard to accept a plan by Mattamy Homes that could double the size of the village - similar to Manotick residents still fighting Minto's plan which could turn it into suburbia. People who chose to live in villages beyond the fringes, instead of in suburbia, are naturally antagonistic to plans by developers to turn them into suburbs.

But builders don't see them through romantic eyes as quaint little villages, merely as unattractive and uneconomic rural anachronisms stranded by progress.

October 2009 was a record month in Ottawa with sales on MLS up 41.5 percent compared with the same the month in 2008.

Reasons were consumer confidence, supported by low mortgage rates which opened up a floodgate of pent-up demand. MLS's average prices were up 20.7 percent from the same month in the previous year.

The weighted average price rose 12 percent on a year over year basis, with an average national price of $341,079 (CREA) - while the average price for a new home in Ontario was $337,410. Inventories were at their lowest level for two years - down by 20.8 percent from their peak last October.

And new home buyers were on a waiting list while their homes were being built. The Canadian Real Estate Board's economist forecast prices to rise still further in early 2010.

According to Re/Max, "Purchasers realize that the best buying period in recent history is about to come to a close". But what of the risks? Personal bankruptcies in Canada have risen by 47 percent in the past twelve months, and this is before the interest rate hike anticipated for July, which will make a significant impact on any vulnerable home owners in Ottawa who are already too highly leveraged.

Job security in Ottawa may also turn out to be tentative. The demise of the telecom sector and the lack of anything to replace it as a major employer, has left Ottawa once again with most of its eggs in one basket - the Federal Government.

Ordinarily a stable employer to be sure, but the current government has just over-spent more money than at any time in history, and has committed to reducing that massive debt as quickly as possible not by increasing revenue, but by decreasing expenditures through program cuts. And where there are program cuts, there are sure to be cuts in the personnel that manage those programs.

We are unlikely to discover details of these cuts before the new Parliamentary session and budget, scheduled for the beginning of March. However, the last time a budget deficit of this magnitude occurred, inherited by the Chretien Liberal government from the prior Mulroney Conservative government, program cuts led to a reduction of about 40,000 Federal Government positions, approximately a quarter of which were Ottawa-based.

In spite of that, new buyers are left with a perception that they had better buy a home as quickly as possible, while they can still afford the price, and regardless of their job security or bank balance. It is therefore not hard to predict a desperate last-minute attempt by many to buy a home in the new year and the spring, before the anticipated mortgage interest rate cycle moves relentlessly up again and makes it even more difficult or even impossible to afford.