Wednesday, March 09, 2005

Hot housing market starts to cool down - Canada

Single-family starts dip again in February


After three years of growth, Canada's hot housing market is losing some of its sizzle, with starts of single-family homes -- a bellwether for the industry -- falling for the second month in a row in February, new numbers show.

But just as the market looks to be slowing, two bank reports released yesterday conclude that housing affordability improved in the final quarter of 2004 and that Canada's aging population is buying and hanging on to their family homes in increasingly large numbers.

"We are going into a different era in the housing market," Bank of Nova Scotia chief economist Warren Jestin said yesterday. That new era, he said, will spell the end of the strong growth that typified recent years, although he said housing markets will remain "buoyant."

"Things will certainly be much better than in the early nineties," he said during a briefing on the housing industry.

Figures for new home starts released yesterday by Canada Mortgage and Housing Corp. show a modest bounce back last month, with annual starts hitting 214,900, a 5.6-per-cent increase from the weak numbers posted in January. But beneath the headline number is evidence that real estate's record run is coming to an end.

Last month's performance fell well below expectations and was driven by the volatile multifamily category, which climbed more than 16 per cent. In contrast, singles fell by 2.4 per cent. All numbers are seasonally adjusted.

Bob Dugan, chief economist at CMHC, said that when actual urban starts for the first two months of this year are compared with 2004, the multiple category is slightly ahead, but single starts are 7.9 per cent off last year's blistering pace.

"It certainly is a sign that the market is slowing," Mr. Dugan said.

That's an outlook shared by most watchers of the housing industry. During recent years, lifetime low mortgage rates, a strong job market and a huge pool of first-time buyers propelled the housing industry to new and at times unexpected highs. Now, it looks as if the gradual descent back down to earth has begun.

"We've probably peaked," Scotiabank economist Adrienne Warren said yesterday. "I don't think we can outperform last year."

Royal Bank of Canada economist John Anania said the retreat was inevitable given the pace of the country's population growth, although he noted the current run lasted about 12 months longer than almost anyone expected. "We just can't keep going at exceptionally high levels," he said.

Mr. Anania pointed out that even at the slower pace, 2005 is still shaping up to be an above-average year.

Phil Soper, chief executive officer of Royal LePage Real Estate Services Ltd., said a breather in the housing market will be welcome news for buyers. High demand and lack of supply have left buyers "caught in a bit of a whirlwind of upward pricing pressure," Mr. Soper said.

This year, he predicted, those buyers will "get a better shot" as the market becomes more balanced.

Still, the years of growth in the housing market have put home ownership at the highest levels in a generation, Ms. Warren at Scotiabank said.

A report released by the bank yesterday estimates 67 per cent of Canadians own their own home, up from 65.8 per cent at the time of the last census in 2001. That increase, Ms. Warren finds, is a reflection of a strong economy and the narrowing of the gap between borrowing costs for the average home and average rental rates.

But her study found that the country's aging baby boomers, now in the prime period of life for home ownership, have also pushed that rate up. As well, the study finds that improved health and increasing lifespan are prompting seniors to hold on to their homes for longer. Between 1996 and 2001, the percentage of households headed by someone 75 or older jumped by four percentage points, the largest increase in any age category.

As the baby boomers age and the "baby bust" enters its prime home-buying years, the report concludes that demand for entry-level homes will decrease in the next decade and the move up-market will gain momentum.

Also yesterday, RBC released its regular report on housing affordability. It found that lower borrowing costs improved affordability in the fourth quarter in many parts of the country. Even so, the bank, like others, concluded that the market for first-time home buyers in Canada is pretty much exhausted.

The bank found Vancouver remains the most expensive city in the country to carry the cost of a home, followed by Toronto, Montreal, Ottawa and Calgary.


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