Red-hot housing market to cool, CMHC says

Derrick Penner
Sun

Expect British Columbia's red-hot real estate markets to temper in 2006, Canada Mortgage and Housing Corp. experts said Wednesday. But the province's strong economic conditions will at least keep the sector warm for at least a couple more years.

CMHC regional economist Carol Frketich, speaking to an audience of 560 at the federal housing agency's annual B.C. market outlook conference, said she expects B.C.'s new housing starts to dip to 31,600 in 2006, a decline of 6.3 per cent from her projection of total starts to the end of 2005.

Frketich added that she also expects 2006 housing resales to slip to 95,000, a drop of 7.7 per cent from the all-time record of 104,000 she is predicting will occur by the end of the year.

Those levels, however, are still high and Frketich doesn't see conditions changing enough to dampen activity.

She expects construction and sales to remain high enough to push prices even higher in 2006, though at a slower rate than 2004.

Frketich said so far in 2005, B.C. has recorded the highest average price increase in Canada at 14 per cent. The average B.C. house, she added, is worth $330,000 in 2005, which is also the highest in Canada.

In 2006, Frketich expects housing prices to rise in excess of six per cent.

She added that solid economic factors -- including some 3.3-per-cent growth in the output of B.C.'s overall economy, population growth through inmigration of some 44,000 along with employment and income growth -- will keep demand for housing at a steadily high number.

"From an economic perspective, the fundamentals are still there to continue to support ongoing high levels of activity in B.C.'s housing sector," Frketich said.

Bank lending interest rates will be key to maintaining that activity. The Bank of Canada has moved to raise interest rates as a means to quell inflation.

The bank, at its most recent meeting, raised its key overnight rate to three per cent, and Frketich expects it to continue doing so through 2006 to about four per cent by the end of the year. She said that will slow resale activity in the market, but have less of an impact on new home sales.

Frketich pointed to a correlation of interest rates to construction activity that shows that a one percentage-point increase in mortgage rates reduces new housing starts by 3,000 to 5,000 units.

"Given the limited scope of rate increases, I don't anticipate they will have a destabilizing effect on debt servicing costs," she said.

Cameron Muir, CMHC's housing market analyst for the Lower Mainland, said conditions in the market appear to be so good some people tend to believe something must be about to go wrong.

However, he compared current market conditions with previous periods, such as the 1981 run up that crashed in 1982, and the 1988 to 1990 bubble, and concluded that activity now is nowhere near as heated, and is supported by strong fundamentals.

CMHC is projecting that Greater Vancouver sales of single family homes to decline eight per cent to 15,500 units in 2006, townhouse sales to slip four per cent to 6,500 units and condo sales to fall five per cent to 16,000 units.

The agency is also forecasting Greater Vancouver housing starts to dip three per cent to 17,500. Muir added that some of the decline will be attributed to the builders not being able to keep up with demand.

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THE FUTURE

- Demand to remain strong

- Affordability to decrease

- 2005 resale prices up 14.1%

- 2006 resale prices up 6.1%

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