Title: Those line-ups to buy new condos are here to stay

Sub-title: Affordability challenges, a shortage of prime lots and shifting demographics are pushing Canadians to think small.

 

Canadian housing sector data have been fairly straightforward in recent years with average sales prices climbing steadily upwards for both new and existing homes.  That is good news for homeowners, many of whom don’t like surprises regarding what is often their largest family asset.

 

True, some indicators such as unit sales have been trickling down recently. And experts are again predicting that Canada’s housing market will cool off this year (undeterred by the fact that last year’s gloomy predictions did not bear fruit).

 

That said, during the first quarter of 2008, a quiet change occurred in Canadian residential construction that experts say could signal a major shift in local real estate trends. For the first time in recent memory, new apartment, condominium and townhouse starts, exceeded single family home starts. Furthermore, according to one expert that trend is likely to continue.

 

“The demand for more moderately priced housing is clearly increasing. Since the start of the year, two multiple units have been started for each single detached home,” says Sébastien Lavoie, an economist at Laurentian Bank Securities. “Those line-ups that you often see when sales offices open for new developments are going to be with us for a long time.”

 

Land shortages and stiffening affordability

Adrienne Warren, an economist with Scotia Economics agrees. “Multiple unit residential construction starts have been creeping up in recent years. During full year 2008, starts in that sector should exceed single family home starts for the first time,” says Warren. “Furthermore, the trend will likely continue throughout 2009.”

 

Experts cite several reasons for the rising demand for apartments, condominiums and townhouses. In fact the rising appetite for these properties has been a major trend in urban areas for some time, due to the shrinking pool of prime land available for development. “In Vancouver, condominium starts can represent up to 80% of all housing starts,” says Warren. “And the situation there and in other markets is only going to get rougher.”

 

According to the Canada Mortgage Housing Corporation’s second quarter 2008 Housing Market Outlook, which was released last week, the economy is also playing a key role in the shifting demand. “Fundamentals will remain strong in Canada. Continuing high employment levels, rising incomes and low mortgage rates will provide a solid foundation for strong housing markets,” reads the report. “However continued growth in house prices, coupled with global financial instability, will dampen housing demand.” The upshot: home buyers are switching to less expensive options. Buried in the CMHC data is the prediction that although overall housing demand is expected to slow this year, multiple starts are actually expected to increase slightly.

 

Shifting demographics and tastes

According to Lavoie, declining affordability of current housing options and the lack of new land space available for development are not the only factors motivating rising demand for apartments, condos and townhouses.

 

“From a social and demographic point of view tastes have changed,” says Lavoie. “An increasing number of baby-boomer children are buying their first properties before coupling up with a partner and are turning to those “shoe-box” condos that just barely meet their current needs.” The rise of service-enriched condos for wealthier seniors and a shrinking tolerance among many for long work commutes are also driving demand.

 

Of course multiple unit starts represent only part of the housing market and the smaller part at that. By far the biggest dollars spent in new home construction are on detached single family homes and many forecasters are predicting that that sector will slow. Last week Canada Mortgage Housing Corporation predicted that overall starts will slip from 228,343 in 2007 to 214,650 in 2008.

 

Existing home sales are not expected to fare much better. Earlier this month the Canadian Real Estate Association forecast that national home sales will ease by 11.5 percent in 2008 to 460,900 units. Of course that isn’t as bad as it sounds. Overall sales really matter most to real estate agents, because they are dependent on them for their commissions. What matters more to Canadian families is the average selling price of new and existing homes. And those are expected to continue to rise, though at a slower pace than in recent years.

 

In fact even the overall drop in housing starts that the CMHC is predicting isn’t as bad as it may seem. The decline would come on the heels of a record year of new home construction starts and, if it occurs, it would only return new activity to more sustainable levels. In short, the relatively straightforward Canadian housing sector data of recent years are likely to remain that way for the foreseeable future.

 

The only complainers will be new condo buyers who will have to continue to brave those opening day line-ups.

 

 

Peter Diekmeyer is a Montreal based freelance business and economics writer

 

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