Despite the recent drop in home sales, Canada's housing market should remain buoyant during the rest of this year, but developers face more difficulty securing loans for projects, analysts say.
A recent Canadian Real Estate Association (CREA) report shows home sales declined 13 per cent to 75,467 in the first quarter of this year from 86,728 in the same period in 2007.
Saskatchewan and Manitoba are expected to enjoy the highest sales growth, while B.C. and Alberta remain strong, although down from previous years. But Ontario sales and new-home listings will slow down as a result of sub-prime mortgage defaults and other economic woes south of the border, economic analysts say.
Gregory Klump, chief economist for the Ottawa-based CREA, says the U.S. sub-prime mortgage crisis has kept affordability within reach for a great number of homebuyers, because sales are still strong - albeit down from near-record levels in the last year.
"It's also been keeping demand strong by way of low mortgage rates, in combination with extended amortization rates," Klump says.
New listings climbed 5.5 per cent to 158,207 in the first quarter from 150,510 a year ago. But March new listings fell 1.8 per cent to 55,948 from 56,960 in the same month last year.
"I see a modest slowdown for development in the next year," says Maureen Enser, national executive director for the Urban Development Institute, a national non-profit association of the development industry.
"Western provinces - B.C. in particular - will still be very strong. The Ontario market is going to soften for a couple of years."
Enser says Ontario-based banks, which have felt more of an impact from the sub-prime meltdown because they have fairly close ties to the U.S., are restricting developers' access to capital and likely to demand higher pre-sales, which refer to units sold before construction begins.
Klump says lenders have not taken the same get-tough approach with homebuyers because of reduced interest rates. As a result, he says, prices are still rising, but not as quickly as last year.
Don Campbell, who heads the Calgary-based Real Estate Investment Network (REIN), says many cities have overbuilt their residential inventories.
REIN represents 3,120 investors with $4.2 billion worth of residential holdings across Canada. The group sells research to investors, banks, developers and other industry insiders, but does not sell properties.
"Right now, there's a lot of fear in the market," says Campbell, adding sophisticated investors with a long-term view are continuing to buy properties as prices dip. But speculators - especially Toronto condo owners - are starting to panic, fearing that condo values may be headed for a big downturn.
"Investors have been hoping for a buyer's market again," says Campbell. "And now that it's here, people are quite fearful of it."
Alberta and Ontario have underlying fundamental economic strength that will allow their real estate markets to grow, he adds, but Central B.C. faces major issues because of the pine beetle epidemic and resulting job losses over the next five years. He is targeting an 11-per-cent increase in Alberta's average price this year, which is about double many analysts' forecasts.
"It's going to be one of the quieter years in Alberta and then we'll see it take off again next year - Edmonton more quickly than Calgary," says Campbell.
CREA predicts Saskatchewan will have the largest average-price increase in the country - 18.5 per cent to $206,700, from $174,405 in 2007.
"Saskatchewan is on fire," says CREA's Klump. "They're benefiting, as is Manitoba, from the standpoint of international immigration as well as intra-provincial migration.
"Sales activity in Saskatchewan continues to rise. New listings are able to keep up. Manitoba and Saskatchewan, as a result, have the tightest markets in all of Canada."
Klump says Manitoba's average price will face the second-largest hike, 12.2 per cent to $189,900 from $169,189, which is down slightly from the 12.6-per-cent hike a year earlier.
Ontario's average price is expected to rise 6.3 per cent to $318,300 from $299,544 last year. Alberta sales and price hikes will continue to fall. After spiking 35 per cent in mid-2006, the year-over-year average price will go up four to six per cent in 2008.
"After the first quarter of 2007, (Alberta) sales began to erode and they have been on a declining trend since," says Klump.
He and Adrienne Warren, a senior market analyst with Toronto-based Scotiabank, attribute Alberta's cooling prices to reduced affordability.
Warren adds Ontario will fall below her forecast national average price increase of four or five per cent this year because Central Canadian markets are more exposed to the fallout in the U.S. and the robust loonie.
Warren and Klump agree that every province will still experience a price gain this year.
However, Douglas Porter, the deputy chief economist for Toronto-based Nesbitt Burns, says in a recent research note that Canada's housing boom is "officially over."
"The slowdown in activity has taken the steam out of prices," he writes.
Porter points out the first-quarter average price gain of 5.5 per cent was half of last year's 11 per cent, and down from approximately 10 per cent in each of the previous five years.
He attributes a modest four-per-cent ascent in resale prices in March to sharp first-quarter sales declines in Calgary (39.7 per cent), Edmonton (34), Toronto (22.2) and Vancouver (17.1).
But Porter is not predicting doom and gloom for the Canadian market.
"While (an average six-per-cent price hike in major cities in the first quarter is) a significant comedown from the hot pace of the past few years, that's still light- years away from the hefty declines in prices in most major U.S. markets," writes Porter.
Reductions in Canadian manufacturing exports to the U.S. and employment growth will also dampen housing activity here, adds Scotiabank's Warren, but problems in the American housing market are specific to the U.S.
"Our housing markets are in much better shape, so we're not likely to see the home-equity losses that Americans are seeing," says Warren.
She believes Canada is probably coming to the end of a "strong and long" housing cycle. As buyers stop speculating and face higher costs relative to income, she anticipates the country will experience a lull in affordability.
She also predicts the hot Saskatchewan and Manitoba markets will begin to cool off as prices rise, as was the case with Calgary and Edmonton in the previous year. But new-home construction will probably remain on pace with last year in Saskatchewan and Manitoba, because of pent-up demand and building-time lags.
Benjamin Tal, a senior economist with Toronto-based CIBC World Markets, says prices in some pockets of Western Canada could actually fall.
"The sub-prime story is part of the overall economic story," he says, adding the U.S. recession will hit Ontario and Quebec hardest.
But the sub-prime crisis will probably limit Canadian developers' access to capital.
"(Developers) feel the pain because their (interest-rate) spreads are much higher now," says Tal. "Therefore, it's more expensive (to build) and banks are much more cautious now."
UDI's Enser says Ontario developers are worse off because they are more closely linked to the U.S., but British Columbia projects feel an indirect effect because major banks are based in Toronto.
"For developers, there's just a little bit more conservatism," says Robert Fung, president and CEO of the Salient Group, a Vancouver-based development firm. "(People) financing projects are tending to go with better-known developers - more quality developers, with a track record."
Fung, whose firm redevelops downtown heritage buildings, says he is pursuing new projects in suburban city and town centres because Vancouver's housing prices, the highest in the country, make it harder to build more in the core.
UDI's Enser predicts B.C. housing prices will soften and developers will require more time to sell out their projects, but demand will remain strong.
"It's come down to more of a medium-sized flame," she says of the B.C. market. "But there's still a very strong flame."
CIBC's Tal uses a similar analogy for Canada as a whole.
"The party's over," he says. "But the lights are still on."
(Monte Stewart can be reached at monte@businessedge.ca)
