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Ottawa Housing Predictions for 2011 - Mid-Year Status Check

Housing prices tended to stagnate in the first half of the year, except in neighbourhoods of greatest demand where they continued their relentless climb. The same thing applied to home builders' starts - except in multiple-unit homes (town houses and condo apartments), the housing type on which demand centred.

Nevertheless, housing starts in general are expected to decline in volume by about 10 percent less than in 2010. There was already an 8 percent drop in building starts in April, during which even town house construction declined.

Seventy percent of residential construction in Ottawa took place outside the Greenbelt in the areas of Nepean, Cumberland and Gloucester.

Demand for multiple-unit homes continued to outpace all other residential types of housing in Ottawa because of the preponderance of first-time home buyers tempted to move out of rentals - despite comparatively low rents - by extraordinarily low mortgage rates.

Another reason for demand in town homes and condo apartments is the number of empty-nesters downsizing. Economists have been anticipating a surge in baby-boomers selling their high maintenance family houses and replacing them with smaller ones, and now it seems that surge is being felt by the Ottawa housing market. The trend is expected to continue.

Nevertheless, apartment construction declined by 69.4 percent; Semis by 40.9 percent; and Single Family Homes by 21.4 percent - whereas the volume of on-going townhouse construction rose by 32.4 percent in April.

Market saturation is considered to have already been reached in Gatineau, where it seems that everyone taking advantage of low mortgage rates has now done so. Building starts are expected to decrease by about seven percent compared with the previous year. The same is expected to apply to the resale market in Gatineau. Together, this means that Gatineau continues to offer new home buyers opportunities that are but a distant memory in Ottawa.

Home prices in the US fell by another 3 percent in the first quarter of the year, showing that real estate prices have still not bottomed-out there. The number of American home owners who paid over-the-top prices during the housing boom, and are committed to paying off mortgages far higher than the value of their homes, is now estimated at almost one-third (28.4 percent). And the volume of US bank foreclosures continues to rise. There are now 18 million empty homes in the United States as a consequence.

Whether this is a foreshadowing of what awaits Canada, should the economy fail to grow, unemployment continue to rise, and mortgage rates begin to increase, is anybody's guess.

Regardless, there is no doubt that the U.S. housing market presents opportunities for Canadian buyers looking for a second home in warmer climates.

Despite its continuing slow decline, Ottawa's housing boom has lasted for nine record years, defying what has often been described as a seven-year housing cycle, while other housing markets all over the world have shrunk. On the other hand, it means that home prices have continued to rise, allowing many to always raise the specter of a price bubble that is bound to burst eventually, and indeed, recent indicators are said to point to a severe housing correction in Canada.

This might well happen when mortgage rates rise, as they are certain to eventually, which may then be the catalyst for a glut of townhouses dumped on the market by first-time home buyers who are unable to meet higher mortgage payments at the end of their term, or if they are committed to variable rates that begin to rise relentlessly.

It is widely agreed by economists that home prices are way out of alignment with household incomes. The ratio of prices to incomes has risen by as much as 50 percent from its historical average of 3.5. So, since household earnings are unlikely to rise at that pace, it follows that house prices will have to decline. But economists are frequently wrong.

According to the Royal Bank of Canada, smart people are renting instead of owning. The cost of owning a two-story house in Ottawa consumes 40.9 percent of pre-tax household income and its share of income will increase when bank rates rise.

The question hovering on everyone's lips is when the Bank of Canada will increase its lending rate. What is holding them back when the rise in the price of oil has increased other commodity prices like food, resulting in inflation? The answer seems to be the high Canadian household debt situation and the continuing high U.S. unemployment rate, which indicates that the U.S. economy on which Canada depends, shows no sign of revitalization.

At the end of May, the Bank of Canada announced it would not increase its lending rate for the time being for fear of stalling Canada's economic recovery. The average family debt in Canada was approximately $100,000 by the end of last year, when some 174,000 households were behind in their mortgage payments. And credit card companies are remorselessly pushing up that number by offering cash at high repayment rates of around twenty percent to those who can least afford it. A drop in consumer spending is anticipated as a consequence.

In Canada, pockets of demand continued their own rise which contributed to price hikes - like in Greater Vancouver, where a shortage of development land has enabled astronomical prices - or a steep rise in building starts, like, for example, for expensive condominiums on Toronto's shore-front, due to anticipated demand from downsizing baby-boomers, empty-nesters and off-shore investors wanting a safe-haven for their capital.

The point cannot be over-emphasized - "real estate is local." While Ottawa has continued to move sideways economically - due largely to stable public sector employment - rather than to decline like many other Canadian metropolitan areas, this appears to be about to change.

We have long pointed out the probable link between relentless increases of Ottawa new home prices, and stable public sector employment. With the recent election victory of the federal government, and their stated intention to remove their budget deficit in record time through program cuts we expect job losses certainly through attrition, but also through direct lay-offs. Indeed, this has already begun across multiple departments, agencies and crown corporations. The Canadian Centre for Policy Alternatives suggests that this will continue. In order to meet its own projections, the government will need to trim about 33% of its workforce - as many as 40,000 job losses are expected through attrition, and another 40,000 through lay-offs, although this may take several years to acheive. As many as half may be Ottawa based - and this is sure to trickle-down to the private sector.

What effect will this have on the Ottawa housing market? It appears from the significant drop in building starts that home builders are already responding to and anticipating reduced demand, and are therefore shrinking inventories. In the immediate term, prices should remain as they are, but, as demand dries up, prices will inevitably begin to fall, as builders are driven to actually compete for buyers, rather than, as has been the case for many years, simply state their terms to buyers competing for new homes.

Should the housing bubble scenario play out as many expect, where the cost of home ownership exceeds what a sufficient number of new home owners can afford - because of either or a combination of job losses and interest rate hikes - then expect new home prices to fall, as builders compete with sellers of nearly-new homes in better locations, who are extremely motivated to sell to the declining number of home buyers.

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