Healthy Salaries Propel
Canada Property Boom

May 12, 2004 -- In March, Prudential Sadie Moranis Realty sold a four-bedroom home in Toronto for 720,000 Canadian dollars ($535,000), 11% above the listed price.

The sale lasted just six days and generated a fierce bidding war.  Another property -- an eight-bedroom resort home and private island in dramatic in Georgian Bay, a three-hour drive from Toronto -- received four offers and sold for C$3 million, 20% above the listed price. 

"Interest rates are lower than they have been in 40 years, and it's a great time to buy," says Terry Moranis, president and broker/owner of Prudential Sadie Moranis based in Toronto.  "It's also a great time to sell, as there is a shortage of prime properties in all neighborhoods and multiple offers are happening in all price ranges."

Nor is the Toronto area unique.  Across Canada, residential properties are appreciating rapidly and selling quickly.  Prices surged country wide in the first quarter of 2004, continuing a trend that began in 19978 and has accelerated in the past two years.  Home prices have increased about 10% a year since 2002, and increased 5% a year in the five years before that.

Surging Sales

According to the Canadian Real Estate Association in Ottawa, the number of home sales in major urban markets via the Multiple Listing Service (a cooperative marketing system used by Canada's real estate boards to ensure maximum exposure for listed properties) surged 13.5% in march this year from March 2003.  In several markets, including Vancouver, Calgary and Toronto, sales in March set new monthly records.  The average resale price in major urban markets rose 11.2% year-on-year to C$239,000, the highest level ever, and average prices set all-time highs in several cities, including Vancouver, Calgary and Montreal.

Home prices in the Atlantic and prairie provinces are the lowest in the country, but are rising the fastest.  In St. John, New Brunswick, average resale prices jumped 17% year-on-year to C$114,000 in March, while in Manitoba, prices rose 15.6% in February from the same month last year, to C$111,000.  The most expensive city is Vancouver, where average resale prices appreciated 14.9% in March to C$363,000.  Average prices rose 14.2% in Montreal, which is still a relative bargain at C$184,000.  Price appreciation was less dramatic in Toronto, with prices up 5.8% to an average C$307,000.

"The hottest markets right now are the two coasts: Vancouver and Atlantic Canada," says Phil Soper, president and CEO of Toronto-based Royal LePage Real Estate Services, Ltd. 

Low interest rates, high incomes and a sluggish equities market -- the main investment alternative -- have generated strong demand for homes.  Incomes in Canada have risen for the past four years, and the combination of high incomes and low mortgages has made property very affordable.  "People across the country are negotiating mortgages in the 4% to 5% range, so buyers in all markets are encouraged by what they can afford," says Peter Norman, vice president of Toronto-based Clayton Research, a private consulting company that has studied the Canadian housing market for more than 30 years.

Buyer demand is not limited to any single demographic group, says Pamela Alexander, Toronto-based CEO of RE/MAX Ontario-Atlantic Canada, the regional office of Canada's largest real-estate organization.  "First-time buyers are huge in (the Canadian) market, because the carrying costs of owning are often the same as, or even lower, than renting," she says.  "But it's no one group.  Many immigrants purchase homes, and we've had huge demand from move-up buyers.  Also, aging baby boomers and early retirees are not selling homes and scaling down -- they are buying more luxurious homes in better parts of the city." 

In most Canadian markets, a shortage of housing helps generate price appreciation.  "We're all in the same boat -- there's not enough product," says Deb Goodfellow, president of the Winnipeg-based Manitoba Real Estate Association.

Prices are rising fastest where supply is most limited: homes in settled city neighborhoods, upscale vacation homes and condominiums in key downtown locations.  "Anywhere that has an ambiance of maturity -- big trees, beautiful homes -- maybe not the largest homes but a mature neighborhood with a cozy feel to it and a lot of amenities, that seems to draw people into bidding wars and there is a real lack of inventory," says Ms. Alexander.

How long will the property boom last?  Consensus opinion predicts the 10% increases of the past two years will probably slow to 6% to 8% a year beginning next year.  Supply is increasing -- particularly in downtown condominium markets -- and much of the initial demand has already been satisfied.

Strong Resale Activity

However, with interest rates expected to remain low, and the economy improving, even a modest slowdown is far from certain.  "At the end of 2003, and also at the end of 2002, it was forecast that sales would begin to slow, and so far those predictions have proven incorrect," says Gregory Klump, senior economist with the Canadian Real Estate Association in Ottawa.  "Resilient consumer confidence, continued full-time job growth in the first quarter and very low mortgage rates have combined to keep resale activity very strong."

Affordability rates -- the percentage of family income required to pay for a home -- seem to indicate further appreciation.  Current affordability is about 20% of income; the benchmark at which property is still considered affordable is 30%, while during previous property peaks in Canada it reached 45%.  "The fact that affordability is so strong right now is certainly not an indicator that the market is overpriced, let's put it that way," says Mr. Norman of Clayton Research.  "It's more of an indicator that the market is under priced."

In addition, housing prices in Canada are still relatively low.  "In Canada, housing is still a deal," says Mr. Soper of Royal LePage Real Estate Services.  "Even today, the rate of price appreciation in cities like New York, Boston and on the U.S. west coast has been twice what we've seen in Toronto and Vancouver, Canada is now one of the least expensive places in the industrialized world."

Among major urban areas, prices are lowest in Montreal.  In March, according to the Canadian Real Estate Association, Montreal was half as expensive as Vancouver.  "Montreal is interesting," says Ms. Alexander.  "Prices are currently climbing 10% to 15% (a year) because they were so far behind, so that might be an excellent place to look for investment."

A major drop in prices is not likely in Canada, analysts say, for several reasons.  First, the demand drivers are still in place: low interest rates, high incomes and affordability.  Supply has increased, as measured by housing starts (the number of residential building projects begun during a specific period, typically a month), vacancy rates, listings and inventory levels, but in most cases the increases have been moderate.

Government regulations that limit property speculation have also reduced the downside risk.  Down payments of 10% to 25% are required, and condo projects are not built until they are 70% sold.  In many markets, buyers are required to move into their newly purchased condos, and high taxes are imposed on profits from property sales, which reduces the incentive to sell.

All signs point to further appreciation, says Mr. Norman  "House prices continue to rise: that seems to me the most likely scenario," he says.  "It continues to be a very good time for real estate, and there's nothing on the horizon to suggest there's going to be an interruption in the marketplace."

-- Mr. Hannon is a free-lance journalist.

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