Canada's Housing Boom has Lasted Almost 10 years

Written by Posted On Monday, 03 March 2008 16:00

Canada's current housing boom is the strongest and longest in the country's history, and is still "remarkably buoyant," says Adrienne Warren, chief economist at Scotiabank . Despite the housing downturn in the United States, last year Canada set an all-time record for resale home sales. Most economists don't think 2008 will match those levels, but the market continues to be healthy across the country.

"Between 1998 and 2007, average inflation-adjusted home prices have soared some 65 per cent, easily besting the 32 to 65 per cent appreciation of the prior three housing cycles of the 1960s, 1970s and 1980s," says Warren. "At their peak in 2005, U.S. real home prices had increased a cumulative 48 per cent from the 1995 trough."

She says the current housing boom is "going on 10 years, whereas the prior three cycles ranged from five to six years. It has also outlasted the housing booms experienced in many other advanced economies this decade."

A report by the Conference Board of Canada says that home prices in Canada have been rising continuously for the past 15 years.

The report, by Valérie Poulin, says the risk of softening prices in some markets in Canada is increasing. "On the one hand, fundamentals remain solid in Canada: unemployment is low, immigration is high, and the vacancy rate for apartments is low," says Poulin. "But on the other hand, years of relentless house price increases mean affordability is waning. At the same time, the risk of a U.S. recession is mounting, and Canadian economic growth is expected to weaken, particularly in Central Canada." She says those factors will cause some potential buyers to postpone their decisions to buy.

Canada Mortgage and Housing Corp. predicts that house prices will grow by 5.2 per cent in 2008 -- a pretty good increase, but not as good as the 10.6 per cent growth seen last year. It says the number of MLS sales will fall off last year's record level by 3.9 per cent. National real estate firm Royal LePage expects a 3.5 per cent price increase, and a four per cent drop in resale activity.

On the new home front, "the housing market is now out of breath," says Poulin. "Satiated pent-up demand and slower economic growth is leading to what is expected will be a long slowdown in the housing market."

The Conference Board says building material costs are cutting into the residential construction industry's profits. "The U.S. housing market collapse has lead to surplus production in the wood industry, bringing lumber prices down," says Poulin. But she says that's offset by "double-digit economic growth in emerging markets and their insatiable appetite for commodities and resources," which is "cranking up energy and mineral prices." She says steel prices are up 15 per cent from their 2002 level, and cement is 16 per cent more than what it cost five years ago. Since 2002, increases in material costs have surpassed revenue growth for builders, and "with house affordability decreasing and new housing demand shrinking, contractors will be unable to pass all future price input hikes on to consumers," says Poulin.

Warren says that multi-family construction will perform better than the single-family new home market. "Renovation activity, which lags the trend in home resales by one to three years, will outperform new construction."

She says that from a supply standpoint, "Most Canadian (resale) markets are still in seller's territory, in which prices would be expected to rise faster than inflation. Yet, some of the hottest markets in recent years, including Edmonton, have become much better balanced due to a flood of new listings. Based on a combination of job growth, housing supply and affordability, among this year's potential outperformers are Saskatoon, Regina and Winnipeg in the west; Sudbury, Hamilton, and Quebec City in Central Canada, and St. John's to the east."

And what are the chances of a U.S.-style housing meltdown hitting Canada?

"Tighter lending guidelines for developers and a lower level of investor participation have reinforced a more cautious approach among home builders," says Warren. "Households, for their part, are not over leveraged. Home equity as a share of real estate assets has been steadily building this decade, as price appreciation outpaces the rise in mortgage obligations. Canadian households also have little direct exposure to sub-prime lending, which has accounted for only about five per cent of domestic mortgages in recent years, compared to over 20 per cent in the United States."

However, Warren says a deeper U.S. downturn would hurt Canada's economy, particularly in Central Canada, and could have a larger than expected impact on real estate activity.

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Jim Adair

Jim Adair has been writing about Canadian real estate, home building and renovation issues for more than 40 years. He is the former editor of Canada’s leading trade magazine for real estate professionals, as well as several home building, décor and renovation titles. You can contact him at [email protected]

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