Real Estate Trends for 2008

FRED: Welcome to the Scotiabank “Find the Money” podcasts. I’m Fred Ketchen, Director of Stock Trading for Scotia McCleod. These monthly podcasts call on some of Scotiabank’s most knowledgeable experts to help you make the most of your money. Here we’ll discuss strategies designed to put you in the financial driver’s seat.

Today we’re joined by Phil Soper, President and Chief Executive Officer of Brookfield Real Estate Services and Adrienne Warren, Senior Economist at Scotiabank. We’re going to talk about new trends and geographic highlights in the real estate market, the effects of the U.S. economic downturn and an outlook for 2008. Adrian, let me begin with you. Can you give us an overall picture of the residential housing market in Canada in this past year 2007? What areas of the country really stood out as market leaders in your mind?

ADRIENNE: Well overall it’s been an extremely buoyant housing market in Canada, particularly if you look at the downturn we’re seeing in the U.S. right now, or really generally the softening conditions globally. While we’re seeing pretty good strength across the country, with most provinces seeing increases 5% to 10%, it’s really the western provinces that stand out. These are the areas that are benefiting from booming resource activity, generating many jobs, and they’re seeing inflows of population from other provinces. The big winners last year; Saskatoon and Edmonton, where prices increased about 40% to 50%.

FRED: Phil, from a demographic standpoint, are you seeing any shifts in who’s doing the buying?

PHIL: We have seen a tremendous change in the buyer demographic pool over the last few years. Most significant is the enormous growth of single female buyers, particularly over the last five to ten years. In fact Royal LePage research found that currently 37% of single, never-before married before women over the age of eighteen, own their own home which is up from 30% last year.

FRED: And what do you think the driving factors are in this shift?

PHIL: I’d tribute it to a rise in single female buyers changing economic and professional landscape, also a shift in the mindset of women and the accessibility of the real estate market. Today more women are in professional positions and are receiving higher salaries than in previous decades. In fact, women make up more than half, 55% of doctors and dentists for example, up from 43% in 1987. Not only have women’s salaries changed, but their mindsets have changed as well. Today a woman buying a house on her own is viewed as financially savvy and an independent woman investing well, as opposed to an oddity. And lastly the combination of the housing market, a healthy housing market, new flexible financial products, affordable interest rates and an increase in the condominium market, which have been favored by single women, has made it easier for that target market to enter real estate.

FRED: Adrienne, I can’t help but mention what’s been happening in the U.S, we hear about it everyday, do you see the trend of price declines spilling across the border?

ADRIENNE: No, I do not Fred. First off yes, we are seeing a slowdown in the U.S. economy and that is bound to spill over to Canada to some extent. Our economies are closely tied; they’re our biggest trading partner, but to the extent of us seeing price declines that are occurring in the U.S. right now, I think the odds are relatively low. This is really for a couple of reasons; from one perspective if we look at construction, the Canadian housing market is not overbuilt; I think a lot of builders have learned their lessons from the late 1980s. They’ve kept stock at historically fairly well contained levels. If we look from a household perspective, households look like they’re in pretty good shape whether we look at their leverage, we look at their carrying costs… I guess the final point if we look at the sub-prime mess that’s causing a lot of problems in the U.S. right now. Canadian market is much less exposed; sub-prime lending has really been about 5% of our market in recent years compared to 20% in the U.S.

FRED: Are Canadians over-leveraged when it comes to their homes, here in Canada?

ADRIENNE: By and large, I don’t think so. Certainly there are always those households at the margins that may be over-extended, but if we look at broad measures of household leverage such as the amount of equity they have built up in their home, if we look at carrying cost, mortgage interest cost overall, Canadian households actually appear in pretty good shape. I think from this perspective that they’re not over-leveraged and the market’s still looking pretty good.

FRED: You’re starting to make me feel very comfortable here, Adrienne. What about commercial activity in Canada?

ADRIENNE: Well we expect the residential market to cool somewhat in Canada, and we expect commercial activity will lead. For one, the pickup we’ve seen in commercial activity has tended to lag the pickup we saw in the housing market. So there’s still a lot of pent up demand for new office space in Canada and there’s still a somewhat limited supply. There was very little commercial market building occurring through the 1980s and 1990s, particularly in the first part of the 2000s. Given that the time it takes for new commercial stock to come on to the market, we’re looking at probably another couple of years of very strong activity; probably rising commercial market rents of stable to even slightly lower have vacancy rates. Once again I think you’re probably looking at the best activity occurring in the west.

FRED: We’ve experienced the longest and strongest post-war era housing boom. How has Canada sustained this growth in the real estate market?

ADRIENNE: I think what’s particularly interesting this time around, especially compared to the housing booms we had in the sixties, the seventies, the eighties, is that this time we have an alignment, of favorable economic trends and demographic trends. I think the strong economic trends in Canada are well known; we have a booming economy benefitting from a global commodity, a strong demand and rising prices environment, we’re leading in G7 output growth this decade, employment growth, we have a generational low unemployment rate, a record high employment to population ratio. All of those things are certainly good news for the housing market. But at the same time a factor that may be underestimated in its importance is that we’re also seeing very favorable demographic trends in Canada. We’re looking at over this decade acceleration and population growth, largely owing to increased immigration flows to Canada. In fact, we actual lead G7 in population growth this decade. This essentially reverses the trend that we had seen through much of the 1990s with slowing population growth and softening housing demand. So again that growing population is very good news for housing demand. We’re seeing more households looking for houses, we’re seeing record homeownership rates, and we’re seeing population growth across all provinces. So I think when we bring together the economic strength and the demographic strength, this is what accounts for the sustainability of this now near-record housing boom.

FRED: Well we briefly mentioned what’s been happening in the U.S. What effects, if any, can we expect from the U.S. slowdown and the financial market volatility that we’re seeing?

ADRIENNE: Well I think you have to assume that the spillover from weaker U.S. growth is bound to slow the Canadian economy and slow employment growth to some extent. So we’re essentially looking at a little bit softer demand for housing in Canada, particularly when it’s reinforced with some decrease in affordability we’ve seen in recent years. Looking from a financial market’s perspective, I think you have to assume that the volatility in financial markets creates another level of uncertainty on the housing market, which will tend to dampen housing demand and could lead possibly to slightly tighter lending standards overall. But by and large, we’re also looking at lower short-term interest rates as a result of all this volatility in financial markets. So to some extent you can see a little bit of support coming through there.

FRED: Well, let’s look at the year ahead Adrienne. What do you see happening in the Canadian real estate market and can we expect more of the same?

ADRIENNE: I think maybe not more of the same. We’re looking at a good market, not great, a bit of a slowdown, a little bit lower construction, a little bit lower sales volumes, prices moderating maybe to the 5% level as conditions in general in the market become a bit better balanced.

FRED: Well Phil, can you add to what Adrienne has just told us? What do you see Canadians facing this year?

PHIL: Canadians can expect to see the balanced conditions will prevail throughout 2008, the housing market should return to more normal environment, versus the highly skewed seller’s market that has been around for the better part of this decade. In practical terms, that means that buyers should be able to shop around versus having to leap on the first house that they come across and try to do a deal. And a return to reasonable conditions such as conditional financing or business or building inspection; something that has been taken out of the deal-making over the last decade. While Canadians will continue to see our neighbors to the south experiencing a very strained housing market, they can expect that our market will not follow the same path. The stumbling American economy will of course impact us, but Canada’s solid economic foundation should prevent the housing market here from retracting. Our forecasts are that prices should continue to appreciate and we’re forecasting an estimated rate of 3.5% up nationally in 2008, whereas the numbers of homes trading hands will drop off slightly with resale volume activity expected to dip from record levels down by about 4%.

FRED: Phil, Adrian, thank you both for explaining what we’re experiencing in the current real estate market and why, and what Canadians can expect in the year ahead. We hope that this information has been helpful in increasing your understanding of Canada’s real estate market; current and future.

Thank you for joining us. I’m Fred Ketchen, for more information; please visit your local Scotiabank branch. We’d love to have the opportunity to talk with you.