Housing’s refreshing spring boom

James Fleming May 30 1983

Housing’s refreshing spring boom

James Fleming May 30 1983

Housing’s refreshing spring boom


James Fleming

For the analysts sifting nervously through the maze of incoming data on the nation’s economic health, the figures emanating recently from the crucial housing industry have been heartening. In the past six months the once moribund sector has displayed a new vitality in response to lower interest rates and with the aid of federal and provincial mortgage subsidy and grant programs. Housing starts increased to a seasonally adjusted annual rate of 175,000 in the first quarter of

1983 compared with 96,000 in the same period last year. Across the nation sales are on the upswing, having climbed by 48 per cent in April 1983 over April 1982. In most areas prices have either stabilized or increased slightly. In the process, consumer confidence is gradually being restored. And the beneficial spin-off effects of the boom are already helping to resuscitate the myriad industries that rely on home building, from lumber mills and architectural firms to furniture and appliance makers.

Still, there is increasing uncertainty about the future performance of the sector, which is traditionally instrumental in leading the way out of economic downturns. For one thing, some industry analysts are concerned that

the housing surge seems to have lost some of its vigor, particularly since federal Housing Minister Roméo LeBlanc recently announced the ending of the Canadian Home Ownership Stimulation Plan (CHOSP), under which home buyers were given $3,000 grants. Still, most experts contend that the present upbeat trend will continue. But they disagree on whether it will result in a price explosion.

Michael Galway, executive director of the Canadian Institute of Public Real Estate Companies, is one of the more skeptical analysts. Says Galway, whose

organization includes most of the nation’s largest real estate developers: “I’m a little fearful that the recovery [in housing] might be slipping.” His concern arises partly from the fact that Ottawa is ending the CHOSP grants, which, according to federal figures, contributed nearly $750 million to help 250,000 Canadians buy homes since the program was started in June, 1982. The decision to stop making the grants, he said, could mean that the “steam may go out of the housing upturn.”

The statistics for one bellwether area, Toronto and its outlying bedroom communities, give substance to Galway’s concern. During the first quarter, he says, there were about 1,400 new house sales per month in the area. But for the first two weeks in May, when sales

would normally increase, the figure dropped to a monthly rate of 800. As a result, Galway fears that the industry is suffering a “short-term hiatus.”

More optimistic views are held by Claude Root, vice-president of real estate at the Royal Trust Corp. of Canada. He is confident that there is a strong, sustainable housing recovery under way across the country, with the notable exception of Alberta. That province, he points out, entered the recession later than other regions and it is now suffering from a slumping oil industry, and it is suffering, as well, because the pre-

vious westward migration of Canadians has been reversed. But in general, he says, an upturn is under way. “The buying public,” says Root, “is coming out of its shell.” During the recession, he adds, “prices abated to the point where houses were more realistically priced, they became affordable, and that drop, coupled with the intérest rate factor, has brought buyers who were otherwise disqualified onto the market.” Root cites a Royal Trust survey which shows that the average price of a detached two-storey house in the fashionable Kerrisdale district of Vancouver slipped from $275,000 in April, 1982, to $240,000 in October, 1982. Then it climbed back up to $265,000 on April 1, 1983. At the same time, a similar house in Moncton, N.B., cost $77,500 in April,

1982, dropped to $73,500 in October, then climbed to $75,000 last April. Root says that there is a remarkable similarity in the trends throughout Canada. Overall, he says, prices have increased only slightly since January.

Another Royal Trust survey confirms a fact that was painfully obvious to many Canadians in 1982: most of them could not afford to buy a home. The average price of resale homes in the second quarter of that year was $74,522. Because of the then stratospheric fiveyear mortgage rate of more than 19 per cent, coupled with the assumption that the carrying cost of a home should equal 30 per cent of a family’s gross income, only 29 per cent of Canadian families qualified to buy a home. But in the first quarter of 1983 the average home price was $77,371 and the fiveyear mortgage rate was 13.44 per cent. As a result, 47 per cent of Canadian families qualified for a home purchase.

Root is reluctant to make long-term forecasts, particularly because of the continuing uncertainty about the future of interest rates.

He is convinced that the present upward trend will continue for the rest of the year.

Added Root: “People are still waiting to cash in on another boom environment, but I don’t think that’s going to occur again. I think we will see a more orderly, predictable market unfold.”

Most analysts agree with Root’s assessment. Alan MacGillivray, president of the B.C. Council of the Housing and Urban Development Association of Canada, said that there has been an upturn in the province, although apartment starts are still stagnant. But he, too, downplays the likelihood of a major escalation of home prices in the future. Instead, he predicts a “gradual, controllable increase” of between five and 10 per cent by the end of the year. But Frank Clayton, of Toronto-based Clayton Research Associates, declared that “in 1984, prices will move up fairly rapidly.” There will be a “short-lived price explosion,” he predicted.

In the meantime, the increase in housing starts is also aiding the building trade. John Sandusky, vice-

president of the Housing and Urban Development Corp. of Canada, says that there has been a definite increase in jobs in the housing construction trade this year. That upturn is welcome, since unemployment in the field stood at about 30 per cent in December, 1982. The effects of the housing upturn in North America are currently having the sharpest impact on the lumber industry. In response to increased demand, Canadian lumber is nearing record prices on the commodities market. Last week lumber sold for $232 (U.S.) per 1,000 board feet, after more than a year of hovering at roughly $130, $15 below the profit-yielding level.

Current prices are now high enough to generate profits again for Canadian sawmills. And John Friesen, editor of Madison's Canadian Lumber Reporter, based in Vancouver, estimates that sawmills are operating at 75 to 100 per cent of capacity, compared to 65 to 70 per cent last year. Similarly, in New Brunswick’s Miramichi River valley seven of eight major sawmills have restarted operations, lured by the prospect of renewed profits.

The improving fortunes of Canada’s lumbermen depend largely on the housing market in the United States, which imports more than half of all Canadian lumber sold. U.S. housing starts increased by 40 per cent in the first two months of the year, creating a rapacious appetite for building materials, but that hunger has, at least temporarily, been sated. The commerce department reported last week that new housing starts fell by eight per cent in April from the previous month. Still, the April figure represents a 64-per-cent increase over the same month last year. And many experts consider the decline temporary, citing an unusually heavy rainfall during April as one cause.

Still, even the most ardent optimists remain concerned that burgeoning government deficits might lead to heavy borrowing that would clog the money markets and drive up interest rates. But the smart money seems to be betting that the upward trend is unlikely to fizzle, at least in the near future.

With Carol Bruman in Toronto and David Folster in Fredericton.

Carol Bruman

David Folster