BUSINESS

A BUYING SPREE

Canada’s real estate market shows signs of life

ANDREW WILLIS August 28 1995
BUSINESS

A BUYING SPREE

Canada’s real estate market shows signs of life

ANDREW WILLIS August 28 1995

A BUYING SPREE

BUSINESS

Canada’s real estate market shows signs of life

There is a real estate boom this summer in Moncton, and Patrick Darby of the Royal Bank of Canada is partly responsible. But the banker is not handing out mortgages. Instead, he is the manager of a new telephone service centre that will hire 700 people over the next four or five years. Darby has already put 140 people on the payroll since May, and the Royal Bank is just one of 23 telephone service businesses that have created almost 3,800 telecommunications jobs in New Brunswick since 1992. Those jobs have given the local housing market a dramatic boost: the average price of a twostorey, three-bedroom home in Moncton is now $90,000, compared with $78,000 a year ago. Tie 15-per-cent increase in home prices in Moncton marks one of the biggest jumps in Canada: over the past year, home prices have remained stable or have fallen in most of the country. But the same combination of job growth, relatively low mortgage rates and an ample supply of real estate that has spurred Moncton’s market is now expected to boost house prices in many other regions.

After a protracted slump, sales of new and existing homes are on the rise. Home sales nationally were up 7.4 per cent in July over the previous year, according to a report released last week by the Canadian Real Estate Association. It was the first time this year that sales have risen over 1994 levels, and the trend is expected to continue. In a recent study, the Royal Bank found that in the second quarter of 1995, houses were more affordable than at any time in the past 10 years. Based on the recent downward trend of mortgage rates, even more Canadians will be able to own homes heading into 1996. The only exceptions to the trend are in British Columbia, where prices in Victoria and Vancouver are already sky-high and are prompting the flight to more affordable communities.

It is the creation of new jobs that has pumped up Moncton’s house prices, and a report by Toronto-based Clayton Research Associates Ltd. indicates that other major cities, particularly Toronto and Calgary, could soon experience the same phenomenon. Toronto lost 9,000 jobs last year, but Clayton senior vice-president Patricia Arsenault predicts that the city will gain 65,000 jobs in 1995 and 45,000 in 1996, with most of the growth in the service sector. “The full impact of this job growth has not yet been realized,” Arsenault says. ‘Tighter rental markets are also starting to make home ownership more attractive.” Among other major centres, Calgary is expected to sustain its momentum, with the workforce growing, according to Arsenault’s estimate, by 15,000 this year and 8,000 in 1996. That compares with 9,000 new jobs created last year. Vancouver’s employment growth is expected to cool slightly, with a forecast of 21,000 new jobs in 1995 and 14,000 jobs next year. In 1994, the city gained 34,000 new jobs, which triggered a vigorous round of real estate sales.

But the employment picture is not so rosy across the country. Ottawa’s real estate market has been hit hard by the pending layoffs of more than 15,000 federal civil servants in the region. As a result, the average price of a four-bedroom home in south Ottawa is down to $196,000 from $220,000 last July. David Landry, a Toronto-based vice-president with Royal LePage Real Estate Services Ltd., says: “Ottawa’s real estate market has stalled, but we have seen the worst. High-tech companies are giving the area a lift, and once the government cuts are done, people will get on with their lives and come back into the market.”

Meanwhile, in Quebec, a buoyant real estate market is widely anticipated to run aground on the upcoming referendum. House prices in Montreal, which have been stable in most neighborhoods, were up 12 per cent over the past year in the exclusive Westmount area: a four bedroom, two-storey home is listed for sale at about $475,000. Real estate agents say Westmount remains the neighborhood of choice for Quebec’s business elite, and has the same cachet with any executives moving to the city. But Royal LePage’s Landry, who lived in Montreal for 10 years, says that in recent weeks the market has entered a slump that will probably last through this fall’s expected vote on Quebec’s sovereignty.

Still, industry experts say that buyers looking for a house in Canada will find plenty of choices on the market. Michel Laurence, an Ottawabased economist with Canada Mortgage and Housing Corp., says if no new homes were built, and no existing homes were put up for sale, it would still take 10 months for the supply of houses now for sale or rent on the market to be bought up, based on the average demand for housing. Montreal is the most saturated market—there is enough supply available to meet the needs of buyers for the next 23 months. Says Laurence: ‘We are at the high end of the supply side of the equation. While we are seeing sales of existing homes recover, new housing has not responded to improved mortgage rates and lower prices.” But fewer new homes are being built in Canada, and Laurence predicts that the drop in supply will gradually balance the market. The CMHC recorded 95,700 housing starts in July, down 16 per cent from the previous month and the lowest level of new-home building seen since September, 1982, the depths of a recession. For one thing, buyers are being drawn to the real estate market by declining mortgage rates. In the past six months, lenders have dropped the average conventional five-year mortgage rates to 8.95 per cent from 11 per cent, which means the payments on a $100,000 mortgage have dropped by $138 to $824 a month. Rates are expected to fall further, with some economists calling for a return to the seven-per-cent level seen in late 1993. Clayton’s Arsenault says: “Interest rates may spike up slightly around the Quebec referendum, which would slow the market, but the overall trend in mortgage rates is downward.”

As a result, the cost of paying a mort-

Source: Royal LePage

gage is frequently less than the cost of renting in most cities, according to a study by Royal LePage. In the Winnipeg suburb of Maples, for one, a three-bedroom bungalow costs about $90,000, a price that is almost unchanged over last year. A buyer with a 25-per-cent down payment would make monthly mortgage payments of $535 on a fiveyear mortgage for a home in Maples, although he would also have to contend with property tax; renting a similar property would cost $800 a month. A dramatic exception to that rule is the high-flying Vancouver market. A bungalow in the bedroom community of North Delta, B.C., would cost $215,000, and mortgage payments would be $1,280 a month, compared with a rental cost of $1,100.

Such high prices, however, are beginning to strangle the residential real estate markets of Vancouver, where the average price of a home is $316,000, and Victoria, the second most expensive city in British Columbia with an average house price of $213,000. Sales slowed by 40 per cent in Vancouver in the first seven months of this year, and by 36 per cent in Victoria. At the same time, the number of homes listed for sale jumped in both cities. Larry Ferster, a Vancouver-based Royal LePage vice-president, says: “Vancouver and Victoria markets are now flat, and we have seen a decrease in overseas interest. Any buying that was going to come from Hong Kong is now complete.”

But the relative economic strength of Vancouver throughout the recession has made it into Canada’s priciest address. The most expensive homes in the country are in Vancouver’s Westside neighborhood, where a standard four-bedroom home averages $675,000, up $25,000 in the past year, and a five-bedroom, three-bathroom house with a library or atrium and two-car garage is going for $890,000, up from $840,000 last summer. Such prices are unattainable for most working Canadians. The Royal Bank housing study found that the average pretax household income for Vancouverites is $42,062, and 50 per cent of that paycheque is required to pay the mortgage, utilities and property taxes. In Alberta and the Altantic provinces, the most affordable regions, just 30 per cent of income is taken up by the demands of home ownership.

While the Vancouver and Victoria housing markets are expected to chill, the recent increase in urban prices is pushing up demand for property in smaller towns. Ferster says that many sellers— including young people in search of better lifestyles, and elderly homeowners—are leaving Vancouver and Victoria and moving to the interior of the province or to towns on Vancouver Island. In the process, they are pocketing healthy capital gains. Some communities are already feeling the impact of that shift, with the price of a four-bedroom home in Prince George, B.C., up 34 per cent in the past year to $187,000. But prices have remained stable in other popular alternatives to British Columbia’s big cities—towns such as Penticton and Nanaimo. There, average home prices are $173,000 and $190,000, respectively. Ferster says; “You reach a point where people want to take the equity out of their home. That option is more attractive when the B.C. interior is so affordable.” Whether they are trading up or just starting out, few buyers can resist the lure of lower prices.

ANDREW WILLIS