Business

Housing heats up

Low loan rates are fuelling a fragile recovery

JOHN SCHOFIELD November 11 1996
Business

Housing heats up

Low loan rates are fuelling a fragile recovery

JOHN SCHOFIELD November 11 1996

Housing heats up

Business

Low loan rates are fuelling a fragile recovery

Ken Lane is fed up. Ever since he moved out of his parents’ Halifax home 11 years ago, the 33-year-old communications consultant has enriched a succession of landlords by dutifully paying his monthly rent. But with mortgage rates now at their lowest levels in 30 years, Lane figures it is finally his turn to become a property owner. The thought actually crossed his mind six years ago, but rates then were twice what they are now, and Lane was worried about layoffs at Maritime Tel and Tel. His fears were confirmed in 1995 when his boss handed him a severance package. Today, he is working on contract at Canadian Forces Base Halifax, and the future still seems hazy. No matter—he has decided to take the plunge. “Interest rates are the driving factor,” says Lane, who last week was still shopping around. “It’s certainly not job security.”

Lane’s entry into the world of home ownership should help to bring a smile to the bespectacled face of the nation’s chief banker, Gordon Thiessen. For the past 18 months, the governor of the Bank of Canada has been steadily trimming interest rates in a determined effort to invigorate the country’s lethargic economy—expected to grow by only 1.5 per cent this year. The central bank dropped its key rate by a quarter point last week to 3.5 per cent, and some analysts believe it could go lower at any time. The chartered banks have followed suit, reducing their prime rates to five per cent—a level unseen since 1956. At long last, the housing market—the most interest-sensitive sector of the economy—is shaking off its stupor. Across Canada, sales of existing homes rose a respectable 21 per cent during the first nine months of the year compared with the same period in 1995. The recovery is sweeping the country, with the number of homes sold in September up over last year in all but one of the 25 largest cities. “You really started noticing it in the past two months, and especially in the past couple of weeks,” says Calgary realtor John Byma. “It just seems to be snowballing.” The demand for new homes is also gaining momentum. Housing starts, which last year sunk to a dismal 111,000, are expected to rise 11 per cent this year.

The upswing has everything to do with affordability. The monthly carrying cost of a 25-year, $100,000 mortgage at the five-year rate has dropped by more than $240 since the beginning of 1995. The savings on a one-year loan are even greater—topping $300. In direct response to those lower rates, the value of mortgage applications across the country has soared. The most recent figures from Canada Mortgage and Housing Corp. show that in the first three months of 1996, applications totalled $67 billion, $21 billion more than in the same period a year earlier.

But the cost of money is only half the story. Lower housing prices have also helped to boost demand, especially in southern Ontario and Vancouver, where rampant speculation in the late 1980s pushed prices beyond the reach of many aspiring homeowners. In Toronto, the price of an average home has dropped 28 per cent since 1989 to

about $199,000, says Simon Dean, president of Royal LePage Real Estate Services Ltd. In other parts of the country, housing prices have risen a modest five per cent on average over the past seven years, to $150,944.

That combination of moderate prices and cheap mortgage rates is drawing tens of thousands of first-time buyers into the market—most of them former tenants like Tom and Sandra Stevenson of Calgary. “Now just seemed the opportune time because of the interest rates, and also because we found the right house,” says 25-year-old Tom, an environmental consultant. Nationally, CMHC estimates that 37 per cent of renters can now afford to buy a home—an all-time high. The increase in affordability has been most dramatic in the country’s largest city. In 1990, an average Torontonian needed to earn about $80,000 a year to purchase a house, says Will Dunning, a senior market analyst with CMHC. Today, an income of $40,000 is sufficient. Dunning says that lower mortgage rates have had the greatest impact in such cities as Calgary, Toronto and Saskatoon, where rental vacancy rates are at or below one per cent. In those cities, first-timers make up as much as 70 per cent of all home buyers. Nationally, the figure stands at about 50 per cent, compared with the traditional rate of 35 to 40 per cent, says Peter Norman, an economist with the Bank of Montreal.

Tight rental markets in some areas have set off a chain reaction that benefits the entire housing industry. As rents rise, home ownership becomes increasingly attractive, especially with rates so low. An increase in the number of first-time buyers boosts demand for lower-priced housing, helping to stabilize or lift prices and prompting existing homeowners to move up to larger, more expensive houses. As the supply of resale homes shrinks, builders construct more new housing. That virtuous circle is already taking hold in healthy markets like Saskatoon. The typical resale stock of about 1,000 listings there has fallen below 600, and houses put up for sale often attract more than five offers, says Bob Redpath, an agent with Re/Max Saskatoon. “I feel sorry for our customers, because some of them don’t have much time to make up their minds,” he says. The brisk demand for homes has pushed the average sale price from $81,719 in 1994 to $87,276 in September. And true to form, builders are busier.

Elsewhere, the housing outlook is not quite so rosy. For one thing, sales of existing homes nationally have levelled off over the past year at about 300,000 units, despite the continued drop in interest rates, says Pedro Antunes, an economist with the Conference Board of Canada, an Ottawa-based think-tank. And housing starts are still far below the so-called natural level of 160,000 a year that would be expected based on population growth and other demographic factors. The 111,000 starts logged last year were the industry’s worst performance relative to the size of the population since the Second World War. This year’s total will likely hit 123,000, and CMHC predicts 132,700 starts next year. “The industry remains in a very fragile state,” says John Kenward, chief operating officer for the Canadian Home Builders’ Association. If the pace of new home construction continues to lag, Canada could eventually face a housing shortage, the Bank of Montreal’s Norman warns.

Kenward says that the increasing burden of land-development fees and taxes, which add about 20 per cent to the price of a house, is partly to blame for the industry’s malaise. But there are more severe problems standing in the way of a full housing recovery. Foremost among them is the country’s stubbornly high unemployment rate, 9.9 per cent in September. “Even if rates are dropping, if you don’t have a job, you’re not going to buy a house,” says Antunes. He adds that the shortage of jobs for young people has forced many to continue living with their parents, sharply reducing the number of new households being formed and dampening the demand for homes.

Weak income growth has also reduced the demand for housing, says Michel Laurence, a senior economist with CMHC in Ottawa. Statistics Canada reported last week that average weekly earnings in August rose 2.6 per cent from a year ago. After inflation and taxes, however, purchasing power has actually declined in Canada in recent years, says Norman. And the Conference Board says that its index of consumer confidence declined slightly in the third quarter of 1996. “Canadians just don’t see the job market improving, and they remain nervous about their own financial positions,” said Paul Darby, director of the board’s economic services group.

The impact of strong consumer confidence has been evident in the housing market south of the border for several months. In September, sales of existing homes in the United States exceeded four million units for the seventh consecutive month, a record. New-home sales are at their highest levels in a decade. A boom may yet be in store for Canada, but it could be two years away, says Peter Andersen, a Toronto-based economic forecaster.

The good news is that the Conference Board expects both wages and consumer confidence to rise in 1997, which should fuel more buying activity. And while the average age of first-time buyers is rising—the national average is 35, compared to 32 four years ago—the idea of owning a home remains enticing. In a recent CMHC survey, 81 per cent of Canadians aged 25 to 34 agreed that housing is a good investment. Among potential first-time buyers, respondents ranked pride of ownership as even more important than a home’s investment value. Like Ken Lane, an increasing number of renters are taking advantage of lower mortgage rates to buy into that dream.

JOHN SCHOFIELD

ELAINE FLAHERTY

MARY NEMETH