January 9, 2007

 

Blurb: Canadians are better housed than ever before. This year, the picture is likely to improve again.

 

Canadian housing will remain in relatively good shape during 2007

 

By Peter Diekmeyer • Bankrate.com

 

With 2006 now behind us, real estate industry stakeholders, like Canadians in general, are now starting to think about what’s in store in 2007.  The good news is that according to the experts, house prices and new home construction, both of which did well last year, will continue to do so, though at a slower pace.

 

“Canadian housing will remain in relatively good shape, underpinned by a still-healthy labor market and relatively low mortgage rates” wrote Bart Melek, a senior economist with BMO Nesbitt Burns, in a recent note to clients. Melek’s comments were in line with those of many experts, who have been trying to gage how Canada’s economy, which most agree should slow slightly this year, will affect the residential real estate and construction sectors.

 

Canadian real estate is more closely tied to the health of the overall economy than you would think, if you were relying solely on last year’s data. During 2006, despite the fact economic growth slowed slightly, residential real estate prices registered double-digit increases and housing starts were near an all time high.

 

However although disconnects between the state of housing and the overall economy sometimes occur during a given period, these bumps eventually even themselves out.  That’s because when Canadians are employed and their disposable incomes are rising, they tend to want to spend more. That’s especially true during times when interest rates are low, as they are right now.

 

As a result, with experts ranging from those at the Bank of Canada to many of the nation’s top economists predicting slower growth in 2007, it should come as no surprise that residential real estate price increases and housing starts are both likely to slow too.

 

More owners, less renters

The good news is that Canadians are now better housed than ever before. According to the Canada Mortgage and Housing Corporation, “…whether measured in terms of the improved features and physical conditions of their homes, or the increased rates of home ownership, Canadians have been the beneficiaries of substantial improvements.”

 

The CMHC recently summarized Canadian housing trends in a report titled “Canadian Housing Observer 2006.” (http://www.cmhc-schl.gc.ca/en/corp/about/cahoob/cahoob_001.cfm). The reports concludes that a “modest increase (3.3 per cent) in median real after-tax household incomes between 1990 and 2004, masks divergent trends for owners (up 4.5 per cent) and renters (down 4.8 per cent).”

 

Furthermore, much of the strength in housing construction in recent years is attributable to aging Canadians’ desire for bigger and better accommodations, not to a young, growing population, which tended to fuel much of the past growth.   

 

A slightly slower economy….

Whether this trend will continue is an open question. Much of the uncertainty is tied to how the Canadian economy will perform. These estimates vary. For example, according the National Bank of Canada, Canadian economic growth, which averaged 3.0% in real terms during the past three years, will slip to just 2.0% in 2007.

 

Must of this slowness will be due to economic weakness in our primary trading partner south of the border. The National Bank expects U.S. growth to come in at 1.9 percent in 2007, compared to average growth of about 3.4 percent during the past three years.

 

…would crimp housing demand growth only slightly

Yet according to numerous exports, slower economic growth will have only a slight effect on the housing sector. For example, the CMHC predicts that housing starts will fall to 210,900 units in 2007, compared to 227,900 this year.

 

“Record activity in Alberta is the main factor (behind increases) in housing starts this year, although starts are up in all western provinces and parts of Atlantic Canada as well,” said Bob Dugan, chief economist at the CMHC.  “In 2007, starts will resume their downward trend, when home ownership demand is dampened due to the continued erosion in pent up demand that built up during the 1990s and the rise in mortgage carrying costs.”

 

The expected drop in housing starts needs to be taken in perspective. For one, last year’s total was relatively high on a historical basis. Furthermore, since home builders are getting increasingly higher prices for their products, the production slowdown will affect them much less that it otherwise would.

 

Builders aren’t the only ones getting higher prices for the homes they sell. Canadians who sell existing homes also did extremely well in 2006. According to the Canadian Real Estate Association, the average price of a home sold via its Multiple Listing Service is expected to rise by 11.4 percent in 2006 which will take it to the $300,000 range. This is a huge increase considering the fact that inflation is currently running at less than 3.0 percent.

 

According CREA’s chief economist Gregory Klump, despite the slowing economy, the trend is likely to continue in 2007. However Klump expects that rising numbers of new listings will lead to a better supply-demand balance.  As a result, residential real estate price increases are likely to be more modest.

 

Peter Diekmeyer (www.peterdiekmeyer.com) is a freelance business and economics writer.

 

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