Boom, Bust and Housing

Maclean’s, April 27, 1998

by John Schofield

Calgary realtor Rudy Spiess has some sage advice for prospective buyers these days: remember your chequebook. In the country’s busiest markets, hungry buyers are prowling the streets in search of real estate, and fussbudgets or lollygaggers need not apply. In extreme cases, says Spiess, the race to purchase has given way to a whole new phenomenon–drive-by buying. One client, interested in purchasing a property, cruised past a $106,000 bungalow recently, then made an unconditional offer on the spot–and bought it. Other buyers prefer the luxury of a little more time–at least a few hours. But those who wait longer often end up on the losing side of a deal. “We’re having to educate our buyers,” says Spiess. “We tell them, ‘If you see something you like, you have to act. You can’t sleep on it.’ ”
Housing is hot. Across Canada, in almost every major city, healthy local economies, spiralling consumer confidence and low mortgage rates are fuelling strong demand for new and existing homes. One of the most striking exceptions is Vancouver, where the property market is deflated (page 19).The boom is creating shortages of resale homes in some markets, pushing up prices and sparking bidding wars. While resale values remain below last year’s numbers in some cities, local realtors say prices are rising in the most sought-after neighborhoods and are expected to propel average prices upwards in the months to come. In line with seasonal trends, the supply of listings should begin to improve later this spring, but observers of the real estate scene say the overall health of the economy could keep housing prices strong for several years.
Up against a wealth of buyers and a shortage of listings in Montreal, Angela Burns and her boyfriend, Ian McGregor, spent a frustrating two months searching for their first home. This month, they finally found a $133,000, four-bedroom house in suburban Kirkland. But one they had bid on earlier was snapped up before they could get back with a second offer. “They were going like hotcakes,” says Burns, 31, a transplant co-ordinator at a Montreal hospital. “It was great for the real estate agents. They kept saying, ‘We haven’t seen multiple offers in years.’ ”
Eager buyers are also giving new home construction a boost. Housing starts across Canada last month rose 3.1 per cent over February to reach an annual rate of 162,100 units, the highest in four years. In Ontario, the pace of building is so hectic that some areas have run short of bricks. Amid the bustle, trends are emerging that promise to set the course for the housing market in the years to come. “It’s very much a good news story,” says Peter Norman, an economist with the Bank of Montreal. “There’s just a tremendous demand for housing out there.”
The economy is the key. With unemployment at an eight-year low of 8.5 per cent and inflation at a meagre one per cent, Canadians are in the mood to buy. Most of the job gains in recent months have been full-time positions, helping to boost consumer confidence to its highest point in almost nine years. “It’s just a great market right now,” says Ed Szaniawski, a 30-year-old insurance claims representative from Oakville, Ont., who is shopping around for a house with a larger lot. Judging from recent sales on his street, Szaniawski says he expects to turn a profit of about $30,000 on the four-bedroom home he and his wife, Christine, bought for $289,000 only last January. “We’ll make money on this sale, that’s a given.”
Despite rising prices, buyers are encouraged by the lowest mortgage rates in 30 years. Earlier this month, Canada’s big banks cut mortgage rates by up to one-fifth of a percentage point. The monthly carrying cost of a 25-year, $100,000 mortgage at the five-year rate has dropped by more than $250 since the beginning of1995. And although the Bank of Canada may soon boost its key lending rate to prop up a sagging dollar, experts predict that mortgage rates will remain low. In another move that could keep the market percolating, Canada Mortgage and Housing Corp. is extending its 95-per-cent financing program from first-time purchasers to all home buyers next month.
Given that Canada’s economy is perpetually plagued by regional disparities, the strength of the housing market is remarkably widespread. It is even felt in Montreal, where real estate values have suffered for two decades under the constant threat of separation–and, more recently, from January’s devastating ice storm. Now, prices for existing homes in high-demand districts such as Beaconsfield and Notre-Dame-de-Grace have jumped by more than seven per cent since early 1997, according to a survey by Toronto-based Royal LePage Real Estate Services Ltd. Housing starts are expected to reach 11,000 units in Montreal this year–well above the 7,600 units of 1996. Like many anglophones, David O’Connor, a manager at a pharmaceutical-testing company, and his wife, Mary-Louise, a lab assistant, have set aside their concerns about the province’s political future and taken the plunge. Their concern over rising prices and the birth of daughter Meghan five months ago helped cement their decision to buy. They paid $137,000 recently for their first home, a split-level model in the suburb of Pierrefonds. “It was the perfect opportunity,” says O’Connor, 29.
Even St. John’s, Nfld., where the province’s formerly sluggish growth rate is expected to lead the country this year, is basking in the glow. “A lot of people are very optimistic about where Newfoundland is going,” says Tim Crosbie, president of the St. John’s Real Estate Board. March housing starts across the province tripled from the month before, and resale values in some areas of St. John’s have risen more than four per cent over the past year. Some markets in Atlantic Canada are even stronger. In Halifax, standard two-storey homes in the city’s south end are worth 8.8 per cent more than in early 1997, reports Royal LePage. New home sales, however, have been hurt by the harmonization of the provincial sales tax with the federal GST. It did not increase the price of housing; still, many consumers who feared it would rushed to buy new homes before the new tax’s introduction last year–and that, in turn, dampened demand this year, says Norman.
The country’s busiest markets are benefiting from a steady influx of new residents, many drawn by the promise of boomtown prosperity. A Bank of Montreal report predicts that Calgary’s population will swell by more than 20,000 this year, the majority of the newcomers under 35 and in their prime home-buying years, says Norman. “That’s two large subdivisions, if you think about it,” says Spiess. Beyond that, the bank sees Calgary growing by more than two per cent annually for the next six years, almost twice the national average of 1.2 per cent a year.
Calgary’s explosive growth helped drive the average price of an existing home up 6.2 per cent in 1997 from the year before, and prices are expected to climb another 10 per cent in 1998. Robust economies in Alberta, Saskatchewan and Manitoba have also pushed up resale values anywhere from two per cent to six per cent in parts of Edmonton, Regina and Winnipeg, according to Royal LePage. But Calgary remains the country’s hottest market, with sales of existing homes expected to reach about 23,000 units this year, up from an average of 12,200 a year during the 1980s. Realtor Larry Peterson, who sports the nickname “Mr. Sold,” says he worked 10- to 12-hour days, six days a week for much of last year. “I was getting pretty burned out,” he says. As for his hopes of easing the pace in 1998, “it’s just been crazy again.”
The Toronto market is almost as heated, thanks to healthy job growth, a swelling population and one of the lowest rental vacancy rates in Canada. Housing starts should reach 31,050 this year, an impressive 21-per-cent gain over last year, the Bank of Montreal predicts. And although sales of existing homes in 1998 are expected to dip slightly from last year’s all-time high of 58,000, prices will continue to rise. As prospective sellers sit on the sidelines, a shrinking supply of listings has already lifted the value of an average house 5.4 per cent since early last year to $215,372. “It’s a bit of a question mark right now what’s holding people back,” says realtor Brent Haldane, who speculates that homeowners hit hard by the great real estate bust of 1989 may be waiting for current values to climb a little higher before putting up the “For sale” sign.
Amid the shortage, bidding wars are increasingly common. Realtor Jimmy Molloy cites the case of a home in the city’s tony Avenue Road and St. Clair Avenue area that attracted an astounding 14 bids, driving the price up 30 per cent to $925,000. “If you have a property that sells at asking price or less,” says Molloy, “the joke around the office is, ‘What did you do wrong?’ ”
Canadians’ renewed passion for real estate has even hit the nation’s capital, where the housing market has been rocked in recent years by massive civil service layoffs. Norman predicts that existing home sales in Ottawa will rise 0.7 per cent this year to 9,500 units, which would make it the best year for local realtors since 1989. And according to Royal LePage, standard two-storey homes in the city’s west end have jumped an average of four per cent from early 1997.
Ultimately, even Vancouver’s sluggish market should succumb to the underlying demographic trends that presage solid demand for housing in the coming years. Lewis Nakatsui, president of the Ottawa-based Canadian Association of Home Builders, says the house construction business will remain healthy because housing starts during the recession of the early 1990s fell far below 160,000 a year–the so-called natural level to be expected based on population growth and other demographic factors.
The mass influx into the market of Canadians aged 32 to 38–members of so-called Generation X, born at the tail end of the baby boom–is another reason real estate will remain buoyant for some time, says David Foot, a University of Toronto economist and author of the best-selling book Boom, Bust and Echo. Hard times in the early 1990s forced many Gen Xers to put off buying a home, says Foot. As a result, the average age of first-time buyers rose to 35 last year from 32 in 1992. But the entry of Generation X into the market pushed the proportion of first-time buyers as high as 70 per cent early last year, and marked the beginning of real estate’s revival. With prices on the rise, owners wishing to upgrade their housing now claim half the market, and are even a driving force in some cities. Hot on the trail of the Gen Xers are members of the baby-bust brigade, says Foot. Born between 1967 and 1979, busters will become a major force in the housing market starting in 2001.
Another factor fuelling demand for housing in the years ahead may be the money passed on by deceased parents or relatives. An estimated $50 billion annually in inheritances will move into Canadians’ hands over the next 20 years, up from a current rate of about $32 billion. Estimates suggest that about 40 per cent of Canadians will benefit from bequeathed funds. Economists such as Foot argue that the increased inherited wealth will likely be socked away in mutual funds or savings bonds, having little impact on real estate. But Royal LePage says its research shows that about six per cent of those who benefit from this huge transfer of wealth plan to buy a home.
In many cases, parents who profited enormously from this century’s prosperous years are not waiting until they die to help their struggling children into the housing market. Take Wayne and Doreen Follett, a St. John’s couple in their late 20s, currently hunting for their first home–with the help of a few thousand dollars from their parents. “Basically, the only reason we’re doing it is because we had some income come our way that wasn’t expected,” says Wayne, a loans officer at a local branch of the Royal Bank. “Plus, rates are low, and there seem to be a lot of chances out there to get a good buy.” Their idea of a dream home? For now, at least, a bungalow or modest two-storey with a separate apartment to help pay the mortgage.
Bob and Anne King are past that stage. After 13 years in their Calgary split-level, the engineer and his wife, a teacher, want more room to accommodate their 2 1/2-year-old daughter. In Calgary, the kind of large lot they are looking for next to a green area could mean spending as much as $300,000–and a long wait for the right property to become available. “We’ll find the house that fits our needs,” says King, 39. “If we have to spend a little more, we’ll do that.”
Economists such as Foot say demand for the larger three- and four-bedroom homes should remain strong over the next 10 years. Growing families, aging parents and the trend towards home offices–not to mention Canadians’ characteristic lust for space–should continue to drive the quest for large living quarters. The revival in the move-up market and the blistering pace of renovation activity are both indicators of that demand. Home renovators generated sales estimated at $22 billion last year (compared with $17.6 billion for new home builders), and the long-term outlook for the industry is bullish.
While the allure of the suburbs remains strong, many Canadians are swapping suburban sprawl for the convenience and culture of inner city life. In Toronto, realtors report that the hottest demand for homes is in neighborhoods closer to downtown, such as Cabbagetown, Riverdale and North Toronto. Shorter commute times especially appeal to two-career families. “The most precious commodity to a two-wage-earner family is time,” says David Baxter, executive director of the Urban Futures Institute, a Vancouver-based research group. “They will pay a lot more money so they don’t have to drive the freeway every day.” Two-career couples still want what Baxter calls “ground-oriented” homes–ones opening onto a yard–but are opting for smaller, easy-maintenance inner-city lots.
Over the next 15 to 20 years, that trend could trim the demand for traditional large-lot suburban housing and change the face of inner-city neighborhoods. A so-called densification of some Canadian cities and suburbs is also being driven by developers looking to cut land costs, and municipal planners aiming to improve the efficiency of public transit and lot servicing. “In Canada’s largest cities,” says David Linton, research director for the Urban Development Institute, a Vancouver-based group funded by the development industry, “we’re seeing an increasingly widespread transformation where new buildings are being built among old ones, and old ones are being adapted for new uses.”
That trend is bringing about a transformation in the building business itself. The market is fragmenting, and home construction is increasingly becoming a boutique industry that demands constant innovation, says Linton. “It’s almost a cliche to talk about niche markets, but that’s in fact very much the case,” he says. “There really isn’t one single housing market any more. There’s an incredible range of supply and demand.” Developers targeting people in their 20s are building studio condominiums. For first-time home shoppers, there are small-lot detached homes in so-called New Urbanist neighborhoods that hark back to the 1920s or ’30s. To appeal to “mature” buyers in their 50s, other builders are offering easy-to-maintain luxury bungalows made with top-quality materials and state-of-the-art amenities, such as remote-control security systems and built-in entertainment units. Still others are offering very-high-end condominium developments with units priced anywhere from $400,000 to $2 million (page 20).
That selection will only increase as the population ages and new trends emerge. Already, for instance, there appears to be a gradually growing move-down market–homeowners opting for smaller homes. Over the next two decades, says Baxter, the move-down market will be made up increasingly of so-called equity refugees. In search of additional income and a quieter lifestyle, the retirees will sell higher-priced city homes and buy cheaper–but not necessarily smaller–houses in smaller communities. The phenomenon, he predicts, will spur the growth of real estate markets in small-town Canada.
While demand for real estate is strong, no one is forecasting the sort of frenzied boom that gripped some of the country’s largest cities in the 1980s. The skyrocketing prices that characterized the period were driven by the entry of older boomers into the market and the rapid rise in two-career couples, phenomena that will never be repeated on the same scale, demographers say. Still, it is a cardinal rule of real estate that cycles come and go, and investors are wise not to get carried away. The twists and turns may be less severe in the years ahead, but that is eminently more preferable, says Alan Silverstein, a Toronto real estate lawyer and author. “When things go in wild gyrations,” he notes, “there are really no winners in the long run.” But for now, at least, potential buyers might want to keep their chequebooks handy.