CANADA's Housing Markets in FULL BLOOM.

Rising new-home and resale prices, burgeoning employment, real per capita income gains and steady consumer confidence are likely to sustain record housing sales and starts in Canada through 2000.

A POWERFUL HEAD OF STEAM IN Canada's economic engine is poised to drive growth at a pace expected to edge out even the U.S. growth rate this year. The robustness in the Canadian economy is reflected in some economists' forecasts for the country's housing starts. [sim] They are much more optimistic than they were more than a year ago, when the Asian financial crisis was roiling world markets, Russia and Latin America were in trouble and apocalyptic visions blossomed. [sim] "As we get into the next decade, [Canada] will outperform the U.S. economy. The U.S. was the pace car in terms of economic growth through most of the 1990s, and now it appears we've slip-streamed them," Tim O'Neill, the Bank of Montreal's chief economist, said toward the end of last year.

At about the same time, Aron Gampel, Toronto-based Scotiabank's deputy chief economist, predicted new-home starts in Canada would outstrip, proportionally, that of the United States in 2000. At the end of February, Ottawa-based Statistics Canada reported that the country's gross domestic product (GDP) expanded by 4.2 percent in 1999, in real terms, nosing out a 4.1 percent growth in the U.S. economy.

What does all this portend for Canadian new-home starts and resales? Where are all the predictions of a robust economy--and the longest uninterrupted streak of growth in the national economy since the 1960s--leading? In February, Ottawa-based Canada Mortgage and Housing Corporation (CMHC) released a national survey of 18,070 consumers conducted in six major Canadian cities last summer and early fall. It revealed that an average of 11.7 percent of those households intended to buy a home within a year. More than half of them were ready to buy at the time they were surveyed.

Buyers will not lack for product. In early March, CMHC reported the annual rate for housing units starts in Canada at its highest level since June 1994--to 168,000 units, compared with a revised 150,200 units for January. CMHC previously forecast 155,700 new housing unit starts this year, up from 149,968 units last year and 137,439 in 1998. (Housing start figures are all expressed in seasonally adjusted annual rate terms.) (See Figures 1 and 2.)

Statistics Canada buoyed an already cheerful mood over the past few months with reports that:

* The economy created 427,000 full-time jobs last year, which pushed the unemployment rate down to a 24-year low of 6.8 percent, or what economists regard as nearly full employment (see Figure 3).

* A 14 percent increase to $C3.5 billion in residential building permits were issued across Canada during October 1999--the most for that month in nearly 10 years.

* Canada's standard of living, which had slumped during the 1990s, should return within two years to the more affluent prerecessionary times of the late 1980s, according to Derek Burleton, a Toronto-Dominion Bank Financial Group senior economist.

* Ernie Eves, Ontario's finance minister, forecast a 5 percent growth in the province's GDP for the fiscal year ending March 31, 2000--the best of any Canadian province or any of the Group of Seven industrialized countries. He might as well have come right out with it and said "the world."

But along with the optimism was some hesitation about actually popping the corks just yet. Canada's economic performance depends on exports, 85 to 90 percent of which go to the United States. "As always, we are vulnerable to a U.S. slowdown, and we think the U.S. will slow down in 2000," says John McCallum, the Toronto-based Royal Bank of Canada's chief economist.

Toronto's growth, for example, up by 5.6 percent last year, is expected to slip to 3.5 percent this year in the wash of a slowing U.S. economy and reduced motor vehicle imports from Canada. A number of automobile plants are located in the Toronto area.

There is also a risk that the population, and therefore the demand for housing, might slip further. Canada's birth rate is down, leaving immigration as the country's main source of population growth. There were 174,000 immigrants in 1998, not the 200,000 that were expected.

Looking across the country, CMHC foresees that:

* Ontario--the most populous and wealthiest of the provinces--will continue to dominate Canada's economic growth, volume of new jobs and housing starts (71,500 starts this year, up from 67,235 last year). The annual rate for housing starts in urban Ontario was revised upward to 80,000 units in February, up from 64,000 in January. (See Figures 4 and 5.)

* Quebec's economy is increasingly bolstered by high-technology and multimedia sectors, with steady demand for housing (25,990 starts this year, up marginally from 25,742 in 1999 and way up from dismally low volumes just four years ago).

* Increased starts are also forecast for three of the four Atlantic provinces, boosted by the economic spinoff of Newfoundland's offshore Hibernia oil field and other natural resource megaprojects, a revival of the fisheries industry and Nova Scotia's recently completed Terra Nova offshore pipeline and related developments. Starts on Prince Edward Island are expected to decline to 575 units this year, scarcely a ripple on an otherwise upbeat national scenario.

* Although new housing starts will slow modestly in Alberta this year (25,125, down from 25,447 in 1999) because of declining net migration from recent record levels and lingering concerns over job security, construction will remain relatively high here, as well as in Manitoba and Saskatchewan, the other two Prairie provinces.

* British Columbia should recover from the chill of lower consumer confidence and Asian buyer disinterest because of a revival in the forest sector, improved employment prospects, tighter resale markets and stronger in-migration. However, starts (18,000 units, up from 16,309 last year) will remain substantially below the provincial average for the past decade.

For another take on the national scene, Clayton Research Associates Limited, Toronto, notes in its October 1999 issue of the Clayton Housing Report, that "impressive gains in job growth over the past two years will continue to have a positive impact on housing demand."

On the other hand, the firm cautions that although real per capita incomes are growing, they are small. "Weak income performance in Canada relative to the U.S. has been a key factor behind our relatively lackluster market upturn. Much of the increase in Canada-wide housing starts in 1999 was due to a very strong pickup in Ontario in both freehold and condo sectors," according to the October 1999 issue of the Clayton Housing Forecast.

Except for some occasional, minor retreats, mortgage rates have been rising since December 1998. (At the end of February, the five-year closed-mortgage rate was 8.35 percent--up from 6.9 percent a year earlier--and is expected to rise another 0.50 to 0.75 percentage points this year.) "We expect mortgage interest rates to post further increases through early 2000 before settling back a bit later in the year," according to the October 1999 Clayton Housing Forecast.

The October 1999 Clayton Housing Report further noted that:

* The Vancouver housing market is reviving, but slowly, and substantial improvement in its resale market last year is expected to start to push new single-family and town home starts up in 2000--but marginally. Condominium starts have plummeted in Vancouver, and condo resales are down somewhat.

* Calgary's housing market will remain relatively buoyant through 2000, but will continue to moderate from its high point in 1998 because of slower employment growth. Edmonton, the provincial capital, is expected to continue to register further gains, as employment rises. Starts in Regina and Winnipeg are expected to stay near 1999 levels, with employment growth static.

* "There will be continued buoyancy in the [Greater Toronto Area (GTA)] housing market. Single family starts will improve somewhat, but that will be offset by a decline in condominium apartment starts." Condo starts nearly doubled in 1999; thousands of these units have been sold but aren't yet built. The market will therefore be somewhat overbuilt this year and sales will likely come down. The good news is that the surplus of new condos will help relieve the tightness in the rental market (see sidebar, "Tight Rental Market").

* Ottawa will match its 1999 level of starts. Montreal's starts will do likewise, and its "condo market is showing some vitality. Starts and sales of existing homes are up over last year, the average prices of existing units [are] increasing and inventories declined over past year." Halifax will continue to benefit from its economic improvement for both starts and housing demand.

* "House prices, both existing and new, will increase at a modest rate. It's a seller's market in Calgary, Edmonton, Regina, and in Toronto and Ottawa, where price gains are the strongest. In the third quarter of 1999, condo starts in Toronto, Calgary and Edmonton have helped boost apartments to their strongest pace in five years."

The GTA--Canada's housing capital

Ontario will certainly lead Canada in new-home production, and the Greater Toronto Area is the capital of Ontario in more ways than one. According to the Clayton Housing Report, the GTA accounted for about one in every four housing starts in Canada in 1999.

Robert Genier, a CMHC senior marketing analyst, foresees 55,000 new jobs in the Toronto census metropolitan area (CMA) and a 6.2 percent jobless rate in 2000. During most of 1999, he says, job growth was up by 9 percent in the manufacturing sector and 5 percent in the construction sector.

Genier also forecasts a rise in real income (in 1998 Canadian dollars) per capita for the GTA, to $C20,000 in 2000, and an additional 15,000 move-up buyers for that market in the 35-to-44 age group over the five years ending in 2001.

New-home sales of 37,304 freehold and condominium units in the GTA last year were up by a third over sales in 1998--and the best year since 1986, according to sales figures compiled by Realnet-Brethour Inc., Toronto.

PMA Brethour Ltd., Toronto, and CMHC jointly forecast sales of 11,500 condos in the GTA this year, up from 10,000 at the end of last year, and expect single-family housing starts to increase by 6.6 percent in 2000--to 16,000, up from 15,000 last year. In early March, CMHC reported the annual rate of starts in the Toronto CMA in February was 44,600--up by 45.8 percent over the revised rate in January. This was the second-highest starts activity over the past decade.

Last May, the Greater Toronto Home Builders' Association released a report prepared by N. Barry Lyon Consultants, Toronto, which noted that 65 of 107 new projects on the Toronto CMA market included suites priced at $C120,000 or less. Moreover, the study revealed that the gross carrying costs on a new entry-level condo ranged from $C730 a month (for a unit priced up to $C80,000) to $C1,083 (for one priced up to $C 120,000). Required annual incomes would be from $C24,788 to $C36,958, respectively.

While these projections seem eminently credible, they are only projections and can be easily overturned by unpredictable events. Last year, for example, CMHC had to revise its forecasts for Canada a few times, as did New York-based F.W. Dodge Division/The McGraw-Hill Companies, and the National Association of Home Builders did the same for the United States.

As one wag put it at a recent Toronto real estate conference, "Economists and analysts are good at predicting the past"--although, he admitted, he didn't have an alternative.

Building materials and labor shortage 

There is nothing more real than the foundation poured for a new home, and nothing more immediate and troublesome for a home builder and an eager buyer waiting to move in than a lack of building materials and a shortage of labor.

Those shortages and the higher materials prices that go with increased demand added 5 percent to house prices in the GTA last year, according to the Greater Toronto Home Builders' Association. That figure could go up by 6 percent or 7 percent--or more--this year if supplies continue to fall short of demand, the association predicts.

Canada Brick Ltd., Toronto, the country's oldest and largest manufacturer of burnt clay bricks, fires its kilns seven days a week in an effort to keep up with orders that are booked well into the spring. The company is building a $C51 million plant so it can add 150 million bricks a year to the 330 million bricks it churns out now, once it becomes operational in the fall.

The shortages are likely to create giant headaches among home builders and stress among buyers who can't move into their new homes on time. Nevertheless, the builder income and buyer demand for new homes is not expected to slow down for the rest of this year.

CANADA'S NEW-HOME FUNDAMENTALS

Albert Warson is a Toronto-based writer and editor specializing in real estate-related subjects.

Michel Laurence, Canada Mortgage and Housing Corporation's (CMHC's) manager, economic and housing analysis, Ottawa, views the national housing outlook through the prism of demographic trends, economic perspective and housing market conditions. Some of his observations are as follows:

* National household formation is expected to increase to an average of about 162,000 households a year over a five-year period ending in 2001, then slip but stay within the 160,000 households range over 2001-2006, based on CMHC and Statistics Canada projections (see Figure 6).

* Those in the 45-to-64 age group--predominantly owners of large homes, less likely to have a mortgage and less likely to buy a resale house--will expand the most in numbers until 2006, then will decline between 2006 and 2011.

* Those in the 25-to-44 age group will most likely buy a home for the first time, have high incomes and higher home-size expectations, are more likely to be owners than renters (about three-quarters of those who own rather than rent are from this group) and prefer new modern homes to avoid repairs.

* For the growing 65-plus age group, health begins to play a bigger role in living arrangements, with an increased need for a wide range of accommodation and support services.

"Because of these changes in age structure," says Laurence, "we can expect fewer new-owner households and therefore comparatively less demand for single-family, detached homes.

"There should be more demand for rental apartment-type dwellings, but this does not mean there will be an explosion in rental starts over the next several years," says Laurence. "Demand will also be met through other means. Condominiums, for example, may be rented out, and there may be more conversion activity geared to rental."

Laurence expects full-time job expansion to continue to support strong housing demand, although it takes at least six quarters before it really has an impact on housing demand.

"Any increase in mortgage rates will be more moderate and delayed, relative to the U.S., as a result of continuing excess capacity in the Canadian economy, low inflation, government budget surpluses and a stronger Canadian dollar," Laurence says. "Therefore, we do not expect mortgage rates to be a major stumbling block for better housing markets." (See Figure 7.)

DEMAND ISN'T THE ONLY FACTOR

There is more to housing starts than simple demand. According to CMHC, starts are also influenced by home prices, rent levels, building costs, profit margins and vacancy rates.

According to CMCH:

Average prices for existing homes in Canada were relatively static from 1995 to 1998, then increased demand and a relatively stable supply of listings drove prices up significantly. This year the average Ontario house price, at $C 180,000, will match the average set back in 1989. Increases will be more moderate in other parts of the country, except for British Columbia, where they will be relatively stable and remain the highest in the country.

New-home prices are up in most Canadian cities across the country--the greatest gains were in Calgary but that should taper off. New-home prices in Ontario have revived, but are still below their overheated state in the late I 980s. New-house prices in Vancouver will come down, but more slowly as the local economy improves.

Builders' costs have consistently risen more than new-home prices in the last few years, which has put tremendous pressure on builders' profit margins. Higher volumes of sales would ordinarily help, but the industry is still vulnerable to higher costs and can't pass them on to buyers. Most of the increases are in materials (mainly wood-related products, but also hardware and gypsum wallboard, for example), which are up by about 6 percent a year compared with about I percent for labor costs.

TIGHT RENTAL MARKET

It is getting tougher to find rental accommodation in Canada's 26 metropolitan centers, which could put pressure on provincial governments to encourage rental apartment construction through tax and other concessions to developers. Ontario may have to revive its canceled social housing program, and other provinces that haven't abandoned it may have to build more, to accommodate lengthening lists of people who can't afford market rents and who depend on government-subsidized housing for rent-geared-to-income housing.

A recent CMHC rental market survey indicated the overall vacancy rate slipped from 3.4 percent in October 1998 to 2.6 percent in October 1999--the lowest rate in 12 years. Ottawa's vacancy rate was the lowest, at 0.7 percent, followed by Toronto, at 0.9 percent.

Roger Lewis, a senior economist at CMHC's market analysis centre, Ottawa, attributed the lower rates to "increases in employment, low rental construction levels [and] growth in the young adult population."

NEW-HOME STARTS SPURRED BY RESALES

Sustained employment gains and low interest rates keep driving the home resale market. A record 340,600 resales across the country are expected this year--up about 0.1 percent over 1999.

The Canadian Real Estate Association, Ottawa, recently reported 215,625 home resales in 16 key regional markets last year through its multiple listing service, up by 7 percent over 1998 (see Figure 8).

In November 1999, Royal LePage Real Estate Services Ltd., Toronto, which bills itself as Canada's leading full-service real estate company, reported that for the second consecutive year, the average house price in Canada is expected to rise by 2.3 percent this year--from $C157,400 in 1999 to $C161,020 in 2000.

"Real estate market activity in 1999 set decade-high levels of volume and unit sales activity," says Simon P. Dean, the company president. "For the coming year, we anticipate a fairly balanced market, with supply and demand on an even keel, tempered by a slim decline in affordability. We project ongoing activity with the move-up buyer and amongst baby boomers seeking ownership in recreational properties."

Increases in average prices in all nine markets surveyed for the forecast are expected to top out in Edmonton, Alberta, with the largest increase at 4.7 percent, followed by Ottawa at 3.0 percent and Toronto and Montreal, each at 2.9 percent.

Montreal, which has lingered longer in the shadow of the recent recession than any other Canadian city, is poised to make a strong comeback if the real estate market is any barometer.

Last year was the best year of the decade for real estate activity in Montreal, and as the Royal LePage report notes, "Quebec's healthy economy will continue to stimulate market activity as major industries, such as communications, finance and business in general strengthen. As well, the erosion of provincial debt, near record-high levels of employment and political stability will continue to fuel consumer confidence and spending."

Alex Medow, a CMHC Ontario regional economist, says that for the last five months of 1999 the resale market in Ontario was "very high, running at annualized rates in the 155,000 to 165,000 units range, with prices up by 4 percent and even higher sales expected in 2000." It's basically been a seller's market for the past three or four years; if a house is especially desirable, it would not be unusual at all for several would-be buyers to get into a bidding war over the property.