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This article came from CIBC Economics, was written on the 15th of November 2011 by Benjamin Tal.
House prices in Canada rose by 5.5% (year-over-year) in October following a 6.5% increase in September. This is the slowest pace of price appreciation since January.
Importantly, there is hardly any gap between the performance of the weighted price index and the un-weighted index, suggesting that the average price is not biased due to abnormal activity in large urban centres such as Toronto or Vancouver (Chart 1).
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During the first ten months of the year sales were up by almost 2% vs. the same period last year, while new listings were hardly changed.
By province, the largest increase was in Saskatchewan, followed by Ontario (Chart 2). Note that the pace of house price acceleration in British Columbia is softening.
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Mortgages outstanding are now rising by 7% (year-over-year), while the mortgage arrears rate has stabilized at close to 0.4%.
A glance at Chart 3 suggests that the market appears to be balanced from a supply/ demand perspective. But we also know that this balance can change very quickly.
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The decelerating pace of increase in home valuation is a positive development. At this rate house prices will stop rising by the 2nd quarter of next year and that’s exactly what we need to see in order to achieve an orderly return to equilibrium.
Our assessment is that relative to rent, income and demographics, house prices in Canada are over-shooting. But the fact that prices are overvalued today does not necessarily mean that they will crash tomorrow. After all, a violent market correction needs a trigger such as the sub-prime crisis, which ignited the US real estate meltdown, or abnormally high interest rates as was the case during the 1991 property crash in Canada. That is not on the horizon this time around. The Bank of Canada is very clear about its intention to move slowly, with the first rate hike not expected before late 2012. As well, any objective assessment of the quality of the existing mortgage portfolio in Canada reveals a relatively balanced mortgage market with a small segment of marginal borrowers.
Accordingly, while we do not see house prices crashing, we do believe that the housing market in Canada will stagnate in the coming year or two. Further out, the most likely scenario is that the eventual increase in interest rates will lead to a modest decline in prices (probably in the magnitude of 10%). But given relatively modest rate hikes and the current balanced affordability position, the more significant adjustment will be in housing market fundamentals that are likely to catch up with prices in the coming years — paving the way for a healthier housing market later in the decade.
Indeed a flattening in house prices in the next year or so is a necessary condition for such a soft lending scenario. If the pace of house price increases accelerates during that period, then twelve months from now the likelihood of a violent price correction will be higher than it is now.
This article appeared on the Canadian Real Estate Magazine site and was written by the Editorial Team.
Canadian Real Estate Magazine takes a look at the investment opportunities in Kamloops.
Set in the Thompson Nicola Valley in the south central interior of British Columbia, Kamloops is a transportation hub with a diverse economy.
Five major arterial highways converge on Kamloops, as well as two train companies and an airport. It’s also home to Thompson Rivers University, serves as a regional medical centre, and has promoted itself as the tournament capital of Canada for its hosting of various sports events.
Additionally, there’s a pulp mill, clean water, a resurgent mining industry, strong tourism, and lots of sunshine. There is a lot going on in the Kamloops economy, and that’s helped minimize risk for investors.
Market trends
Housing prices have slipped between 10%-25% since peaking in 2008, but sales have started to pick up again, says Trudy Montgomery, associate broker with Re/Max Real Estate in Kamloops.
The drop was influenced by the global economy, she said, but Kamloops has avoided anything like a real estate bubble.
“We’re hoping it’s showing that this market will never do what the Lower Mainland market has done where it will bubble up,” Montgomery says. “This isn’t that kind of market.”
Elton Ash, regional executive vice president for Re/Max of Western Canada, says Kamloops is more balanced than the nearby Okanagan region in terms of price.
There’s less of an oversupply in condominiums as seen in Kelowna, and Kamloops has a lower ceiling on its luxury home market. The median residential price for a house in Kamloops in February was $333,800, according to the Kamloops and District Real Estate Association. The largest share of sales, 36 total, occurred in a $280,000 to $319,999 range.
There were 25 sales under $200,000 and just seven over $480,000. Investors have benefited from a strong rental market, backed by especially by the student population. “There’s a huge rental demand because it’s a university town and also because there are lots of jobs here,” says Montgomery.
The favourite for investors are duplexes and triplexes, but they are in short supply and there’s little room left to build in the city. Another option is a house with a basement, says Montgomery, often selling for $320,000 to $400,000. Monthly rents can be $1,200 or $1,300 for the upstairs, and $900 or $1,000 for basements, she says.
“Even if (basement units) are unauthorized, it’s a very common thing because there’s very little accommodation,” says Montgomery.
Economics
Mining has returned as a major industry to Kamloops recently, highlighted by Highland Valley Copper, operating the largest copper mine in Canada. The nearby mines had been closed for years, says Montgomery.
“Just in a year, the mining industry got very solid,” she says. “That’s provided jobs and spurred on the economy.” Additionally, the Domtar pulp mill has provided steady employment, and environmental measures have kept the air pollution to a minimum.
Infrastructure improvements
One of the largest and most unique draws of Kamloops’ economy is its push to be a sports centre. Montgomery says the city recently built “Softball City” with 10 fields, as well as three rugby pitches.
Some $50 million has been invested in new and renovated sports facilities to host tournaments and training camps. It’s boosted the tourism industry, especially in hotels, and introduced Kamloops to an increasing audience.
Hiking trails and biking trails also attract residents looking for an active lifestyle. Since opening in 2005, the city’s new water treatment plant has also been attracting visitors from afar, as it’s the largest operating facility in North America to use membrane treatment.
The resulting clean water has also been a draw to new residents, fixing a previous problem with water issues.
Vancouver, BC – November 15, 2011. The British Columbia Real Estate Association (BCREA) reports that Multiple Listing Service® (MLS®) residential unit sales in the province rose 6.5 per cent to 5,865 units in October compared to the same month last year. The average MLS® residential price was up 2.6 per cent to $535,695 last month compared to October 2010.
“BC home sales rose three per cent in October compared to September on a seasonally adjusted basis,” said Cameron Muir, BCREA Chief Economist. “While consumer demand in Vancouver edged lower last month on a year-overyear basis, strong increases were recorded in the Fraser Valley, Kamloops, Kootenay, the North and on Vancouver Island.”
“Total active residential listings in the province declined by 3,360 units in October from September. However, active listings were up 6.9 per cent from October 2011,” added Muir. “Market conditions remained slightly in favour of home buyers last month.”
Year-to-date, BC residential sales dollar volume increased 16.8 per cent to $38 billion, compared to the same period last year. Residential unit sales increased 3.5 per cent to 66,922 units, while the average MLS® residential price rose 12.9 per cent to $566,925 over the same period.
Canadian Real Estate Magazine takes a look at the investment opportunities in Kamloops.