Real Estate Trends (july 9 2009)

Global Economic Research

July 9, 2009

Real Estate Trends Adrienne Warren (416) 866-4315 [email protected]

Canada’s Housing Market Shrugs Off Slowdown Blues The strength of Canada’s housing market so far this year stands in marked contrast to the continued softness in the United States and Europe. The majority of major centres continue to report solid sales gains, and stable to even modestly higher prices. First-time buyers in particular are taking advantage of the improvement in affordability stemming from last year’s price declines and ultra-low mortgage rates. 15

MLS HOME SALES (M/M % CHANGE)

10 5 0 -5

Nonetheless, we expect sales volumes to slow heading into the fall, with mortgage rates on the rise, and unemployment still drifting higher. Some of the pickup in spring sales likely reflects pent-up demand from last fall and winter when the onset of the financial crisis and global recession pushed potential buyers to the sidelines. At the same time, better balanced market conditions — the ratio of new listings to sales has fallen to its lowest level in a year and a half — should help prevent any major retrenchment in prices.

-10

Meanwhile, housing construction appears to have reached a bottom. After moving down sharply over the past year, housing starts and residential -20 permit demand have steadied around 130,000 annualized units. While no Jan- Apr- Jul- Oct- Jan- Aprlonger acting as a drag on growth, we do not anticipate any significant 08 08 08 08 09 09 pickup in new construction. New home prices are still falling, and builders still have a high level of completed, but unsold inventory. Although starts are running well below long-term replacement requirements of about 175,000 units annually, it will take further time to work through the existing overhang. -15

Activity continues to be much more subdued in the United States, though even here there are growing signs that home sales and construction are finally stabilizing, albeit at historically low levels. At the same time, a much larger inventory overhang, reinforced by record defaults and foreclosures, is keeping considerable downward pressure on pricing. U.S. house prices will not likely bottom until the rate of distressed sales begins to slow.

New Canadians Driving Housing Demand Canadian immigrants are narrowing the homeownership gap with their Canadian-born counterparts. In 2006, almost 72% of immigrants lived in a dwelling owned by a household member, up from 68% in 2001. The comparable share for the Canadian-born population rose a more modest two percentage points over this period, from 73% to 75%. (The census data consider shelter status from an individual level, as opposed to household level, due to the challenge of defining an ‘immigrant household’. As a result, these homeownership rates differ somewhat from the more typically cited national statistics.)

Scotia Economics Scotia Plaza 40 King Street West, 63rd Floor Toronto, Ontario Canada M5H 1H1 Tel: (416) 866-6253 Fax: (416) 866-2829 Email: [email protected]

This Report is prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital. While the information is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which The Bank of Nova Scotia or Scotia Capital Inc. or any of their employees incur any responsibility.

Real Estate Trends is available on: www.scotiabank.com, Bloomberg at SCOE and Reuters at SM1C

Global Economic Research

July 9, 2009

Real Estate Trends HOME OWNERSHIP RATE BY PERIOD OF IMMIGRATION (%) 2006 80 2001

100

60 40 20 0 <6 6-10 11- 21- 31- >40 yrs yrs 20 30 40 yrs yrs yrs yrs

Homeownership tends to increase the longer one has lived in Canada, with the majority of new arrivals first settling in rental accommodation. Over time, immigrant families eventually make the move to homeownership, at rates similar to the Canadian-born population. However, between 2001 and 2006, the homeownership rate rose for all immigrant groups, regardless of how long they had resided in Canada. The biggest increase was among those living in Canada for less than 10 years.

The faster transition to homeownerhip has been supported in part by strong labour markets. The employment rate for core working-age recent immigrants jumped 3½ percentage points between 2001 and 2006 (to 67.0%). This was faster than the 1½ percentage point gain among their Canadian-born counterparts (to 82.4%). The employment rate for all immigrants also increased over this period, but by a more modest 1 percentage point (to 77.5%). 85

EMPLOYMENT RATE (%, 25-54 YEAR OLDS) CANADIANBORN

80 75

RECENT IMMIGRANTS

70 65 60 55 1981

1991

2001

The better labour market performance of recent immigrants may reflect a favourable skills mix, with many employed in high-growth industries such as engineering, construction and skilled trades. It may also reflect a greater geographic mobility to meet shifting regional labour requirements. At the same time, mortgage product innovation and targeted marketing initiatives likely encouraged more new Canadians to make the jump into homeownership faster than previous generations.

The rise in immigrant homeownership has been a major factor behind the increase in condominium demand in Canada. Immigrant homeowners are more than twice as likely to live in a condominium (14%) than their Canadian-born counterparts (6%). Nationwide, condominium ownership jumped to a record 11% of owner households in 2006, up from 9% in 2001 and less than 4% in 1981. Condominiums account for more than one-quarter of the increase in the number of Canadian homeowners between 2001 and 2006. Condominiums typically represent a more affordable entry-point to homeownership, which may account for their popularity among new Canadians. The younger average age of immigrants relative to the

general population and their much higher likelihood of living in major urban centres also favours condominium living. Virtually all of Canada’s condo units (9 in 10) are located in its CMAs (census metropolitan areas). As recent immigrants to Canada make the transition from renter to owner, they will 20 increasingly drive housing CANADA demand. Between 2001 and 2006, Canada’s foreign-born population 15 increased 14%, four times the growth rate of the Canadian-born 10 population. Almost one in 1931 1951 1971 1991 2006 five Canadians were foreign-born in 2006, the highest proportion in 75 years and second only to Australia among Western nations. 25

FOREIGN-BORN (% OF TOTAL POPULATION)

Of the more than 1 million immigrants that came to Canada during this five-year period, 69% settled in the three largest metropolitan areas — Toronto, Montreal and Vancouver. Central municipalities are still preferred, but an increasing share of newcomers chose surrounding municipalities, including Mississauga, Brampton and Vaughan (Toronto CMA), Laval, Longueuil and Brossard (Montreal CMA), and Richmond, Burnaby and Surrey (Vancouver CMA). Meanwhile, a growing proportion (28%) of immigrants settled in smaller CMAs, most notably Calgary, Ottawa-Gatineau, Edmonton, Winnipeg, Hamilton and Kitchener. Less than 3% chose to live in a rural area. Given Canada’s aging population and relatively low fertility rates, longer-term household formation and housing needs will be largely determined by immigration. Using standard assumptions regarding immigration, fertility and mortality rates, the share of Canada’s population growth coming from immigration could rise to three-quarters a decade from now, up from 60-65% today, and almost all by 2030. Most of this growth will be in Canada’s urban areas.

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Global Economic Research

July 9, 2009

Real Estate Trends Canadian Residential Markets New Home Markets 300 275

units, thousands (annualized), 3-month moving average

Housing Starts

y/y % change, 3-month moving average

250

30

160

25

units, thousands, annualized

140

20 Housing Starts

225

New Housing Price Index

200

10

175

5

150

0

125

-5

100

100 80 60

-10

86 88 90 92 94 96 98 Source: CMHC, Statistics Canada

00

02

04

06

Single-Unit

120

15

Multiple-Unit

40

08

86

88

90

92

Inventories of Unsold New Homes 25

94

96

98

00

02

04

06

08

Source: CMHC

Mortgage Rates 16

units, thousands

20

Single & Semi

14

Row & Apartment

12

% 5-Year Conventional

10

15

8 10

6 1-Year Conventional

4

5

2 0

0 86 88 90 Source: CMHC

92

94

96

98

00

02

04

06

86 88 90 92 94 Source: Bank of Canada

08

96

98

00

02

04

06

08

Housing Starts Canada

B.C.

Alberta

Sask.

Manitoba

Ontario

Quebec

Atlantic

233 225 227 228 211

32.9 34.7 36.4 39.2 34.3

36.3 40.8 49.0 48.3 29.2

3.8 3.4 3.7 6.0 6.8

4.4 4.7 5.0 5.7 5.5

85.1 78.8 73.4 68.1 75.1

58.4 50.9 47.9 48.6 47.9

12.5 12.1 12.0 12.4 12.2

2009ytd

133

12.9

13.0

2.9

3.3

48.6

41.5

10.7

2009f 2010f

135 150

14 20

13 18

3 5

3 5

50 52

41 40

11 10

(units, nsa) 2004 2005 2006 2007 2008

Vancouver 19,430 18,914 18,705 20,736 19,591

Calgary 14,008 13,667 17,046 13,505 11,438

Edm onton 11,488 13,294 14,970 14,888 6,615

Toronto 42,115 41,596 37,080 33,293 42,212

Ottaw a 10,470 7,105 8,808 9,294 10,302

Montreal 28,673 25,317 22,813 23,233 21,927

Halifax 2,627 2,451 2,511 2,489 2,096

St. John’s 1,834 1,534 1,275 1,480 1,863

2009ytd

6,650

3,713

3,509

21,941

6,247

17,309

1,162

1,142

(000s units, sa) 2004 2005 2006 2007 2008

Source: Canadian Mortgage and Housing Corporation (CMHC), Scotia Economics calculations and forecasts. Year-to-date data are expressed at annual rates.

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Global Economic Research

July 9, 2009

Real Estate Trends Canadian Residential Markets Existing Home Sales & Prices 350

$, thousands

Housing Cost Trends

units, thousands, a.r.

300 250 200

MLS Average Price

150

550

10

500

8

450

6

400

4

350

2

300

0

250

-2

200

-4

MLS Unit Sales

100 50 86 88 90 Source: CREA

92

94

96

98

00

02

04

06

y/y % change Owned Accommodation

Rented Accommodation 86 88 90 92 94 96 98 Source: CMHC, Statistics Canada

08

02

04

06

08

Existing Home Inventories

Existing Home Inventories 3.5

00

4.0

ratio, MLS new listings-to-sales

3.0

ratio, MLS new listings-to-sales 2006

3.0

2007

2008

2009ytd

Canada

2.5

2.0 2.0

1.0

1.5 1.0

0.0

86 88 90 Source: CREA

92

94

96

98

00

02

04

06

08

Vancouver Source: CREA

Calgary

Toronto

Ottawa

Halifax

MLS Home Sales Atlantic Canada British Columbia Alberta Man.-Sask. Ontario Quebec Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units 2004 2005 2006 2007 2008

225,581 248,257 276,008 305,822 303,594

462,363 486,084 485,804 523,855 434,477

289,107 96,385 194,769 332,224 106,310 218,266 390,963 96,671 285,383 439,119 102,805 356,235 454,599 68,923 352,857

57,460 65,866 74,350 71,430 56,399

115,850 129,480 142,742 171,609 205,041

20,270 21,073 22,158 25,982 23,728

245,230 262,949 278,364 299,544 302,354

197,353 197,140 194,930 213,379 181,001

167,392 180,431 190,284 202,895 210,775

70,869 72,806 74,297 83,453 79,402

130,844 142,177 148,277 158,589 171,248

19,631 22,444 22,851 26,258 24,537

2009ytd

290,943

382,373

406,149

46,342

212,702

21,523

296,974

161,479

215,992

72,502

177,378

21,314

58,742

334,854

Vancouver Calgary Edmonton Toronto Ottawa Montreal Halifax Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units 2004 2005 2006 2007 2008

373,877 425,745 509,876 570,795 593,767

37,972 42,222 36,479 38,978 25,149

222,860 250,832 346,675 414,066 405,267

26,511 31,569 33,027 32,176 23,136

179,610 193,934 250,915 338,636 332,852

17,652 18,634 21,984 20,427 17,369

315,266 336,176 352,388 377,029 379,943

84,854 85,672 84,842 95,164 76,387

238,152 248,358 257,481 273,058 290,483

13,457 13,300 14,003 14,739 13,908

189,050 203,720 215,659 229,902 na

48,564 49,506 50,106 56,151 na

175,132 189,196 203,178 216,339 232,106

5,516 6,698 6,462 7,261 6,472

2009ytd

482,773

24,115

387,707

18,917

316,438

15,828

369,444

69,281

292,638

13,872

na

na

240,987

5,220

Source: Canadian Real Estate Association (CREA), Scotia Economics calculations. Year-to-date data are expressed at seasonally adjusted annual rates.

4

Global Economic Research

July 9, 2009

Real Estate Trends Canadian Non-Residential Markets Office Markets

Industrial Markets 8

14 %

12

%

7

8

National Vacancy Rate

6

National Vacancy Rate

10

5 4

6

3

4

2

2

1

0

0

99 00 01 02 03 04 05 Source: Cushman and Wakefield LePage

06

07

08

09

99 00 01 02 03 04 05 Source: Cushman and Wakefield LePage

Office Vacancy Rates Largest Five Markets 14

07

08

09

Industrial Vacancy Rates Largest Four Markets 8

%

12

06

%

7

Montreal

6

10

Montreal

5

8

Toronto

4 6

Toronto

Calgary

3

4

2

2

Ottawa

Calgary

Vancouver

0

Vancouver

1 0

99 00 01 02 03 04 05 Source: Cushman and Wakefield Lepage

06

07

08

09

99 00 01 02 03 04 05 Source: Cushman and Wakefield LePage

06

07

350

Indust. Comm.

Res.

2004 2005 2006 2007 2008

55.6 60.8 66.3 74.4 70.4

(C$ billions) 36.8 3.5 10.1 38.7 4.0 12.0 41.1 4.5 14.4 45.5 5.0 17.0 40.9 5.1 16.7

5.1 6.0 6.2 6.9 7.8

2009ytd

52.8

27.3

8.4

300 Institutional & Government

150

Commercial Residential

100 50

3.1

14.0

Industrial

0 99 00 01 02 03 Source: Statistics Canada

Inst. & Gov’t

Total

index: 1999Q1 = 100

200

09

Building Permits

Building Permits

250

08

04

05

06

07

08

09

Source: Statistics Canada. Year-to-date data are expressed at seasonally adjusted annual rates.

5

Global Economic Research

July 9, 2009

Real Estate Trends U.S. Residential Markets Housing Starts 2.4

Housing Starts by Region 1.2

units, millions (annualized) Total

2.0

1.0

1.6

South

0.8

1.2

0.6

Single-Unit

0.8 0.4

units, millions (annualized)

West

0.4

Multiple-Unit

Midwest

0.2

Northeast

0.0

0.0

86 88 90 92 94 Source: U.S. Census Bureau

96

98

00

02

04

06

08

86 88 90 92 94 Source: U.S. Census Bureau

1.4

units, millions (annualized), 3MMA

98

00

02

04

06

08

Existing Home Sales

New Home Sales 1.6

96

$, thousands, 3MMA

350 300

1.2

8

units, millions (annualized), 7 3MMA

$, thousands,3MMA

300 250

6 250

Unit Sales

1.0 0.8

200

Average Price

5 200

0.6

Unit Sales (Singles only)

0.4 0.2 86 88 90 92 94 96 Source: U.S. Census Bureau

98

00

02

150 4

Average Price

04

06

150

3

100

2

08

100 50

86 88 90 92 94 96 98 00 02 Source: National Association of Realtors (NAR)

Housing Starts Total

Singles

2004 2005 2006 2007 2008

1.956 2.068 1.801 1.355 0.906

1.611 1.716 1.465 1.046 0.622

2009ytd

0.514

0.370

2009f 2010f

0.50 0.70

04

06

Permits Midw est

North East

(millions of units) 0.345 0.516 0.909 0.352 0.525 0.996 0.335 0.444 0.910 0.309 0.321 0.681 0.284 0.197 0.453

0.356 0.357 0.280 0.210 0.135

0.175 0.190 0.167 0.143 0.121

(millions of units) 2.070 1.613 0.457 2.155 1.682 0.473 1.839 1.378 0.461 1.398 0.980 0.419 0.883 0.569 0.314

0.144

0.080

0.054

0.522

Multiples

West

0.117

South

0.262

08

Total

Single

0.374

Multiple

0.148

Source: U.S. Census Bureau, Scotia Economics calculations and forecasts. Year-to-date data are expressed at seasonally-adjusted annual rates.

6

Global Economic Research

July 9, 2009

Real Estate Trends U.S. Residential Markets Mortgage Rates and Applications

Housing Cost Trends 5.5

9.0 8.5

%

MBA Mortgage Application Index – Purchases Only

8.0

index

5.0 4.5

7.5

8

7.0

4.0

6.5

3.5

Consumer Price Index, y/y % change

6

Rent of Primary Residence

4

6.0

3.0

5.5 5.0

2.0

4.5 99 00 01 02 03 04 05 06 07 08 Source: Mortgage Bankers Association (MBA), FHLMC

2

Owners' Equivalent Rent

2.5

30-Year Mortgage Rate

09

0 86 88 90 92 94 96 98 Source: U.S. Bureau of Labor Statistics

New and Existing Home Inventories 14

02

04

06

08

Apartment Vacancy Rates 14

months' supply, 3MMA

%

12

12 Existing

10

00

South

10 8

8 6

Midwest West

6

New 4

4

2

2

86 88 90 92 94 96 98 00 02 04 06 08 Source: U.S. Census Bureau, National Association of Realtors (NAR)

86 88 90 92 94 96 Source: U.S. Census Bureau

Northeast

Existing Home Sales Total

2004 2005 2006 2007 2008

(sa) 6.778 7.076 6.478 5.652 4.912

2009ytd

4.636

Avg Price Months’ ($000s) Supply (nsa) (nsa) 243.0 4.3 266.1 4.4 269.5 6.4 263.8 8.7 240.2 10.0 259.3

11.1

98

00

02

04

06

New Home Sales

South

Midw est

1.575 1.617 1.346 1.084 1.070

North Avg Price Months’ Total ($000s) East Supply (million units, saar, unless otherwise noted) 2.540 1.550 1.113 1.201 271.5 4.0 2.702 1.588 1.169 1.279 290.0 4.5 2.563 1.483 1.086 1.049 303.5 6.4 2.235 1.327 1.006 0.768 308.8 8.5 1.864 1.129 0.849 0.479 287.7 11.2

1.154

1.714

1.036

West

08

0.730

0.341

259.3

11.1

Source: National Association of Realtors (NAR), U.S. Census Bureau, Scotia Economics calculations. Year-to-date data are expressed at seasonally-adjusted annual rates.

7

Global Economic Research

July 9, 2009

Real Estate Trends U.S. Non-Residential Markets Office Vacancy Rates Largest Five Markets

National Vacancy Rates 20

30 % Office

16

%

20

Los Angeles

12 8

Dallas-Fort Worth

25

15

Industrial

10 4

Chicago

5

0

0

86 88 90 92 94 Source: Coldwell Banker

96

98

00

02

04

06

08

00 01 02 03 Source: Coldwell Banker

04

05

06

07

08

09

Industrial Vacancy Rates Largest Five Markets

Construction Investment 350

Manhattan

Washington, D.C.

20

index: Jan. 2002 = 100

% Dallas-Fort Worth

300

Manufacturing

15

Detroit

250

Chicago Residential

200

10

150 Institutional

5

Commercial

100

Mid New Jersey

Infrastructure 50

Los Angeles

0

02 03 04 05 Source: U.S. Census Bureau

06

07

08

09

00 01 02 03 Source: Coldwell Banker

04

05

06

07

08

09

Construction Investm ent Total

Residential

Manufacturing

2004 2005 2006 2007 2008

991.6 1102.7 1167.6 1137.2 1074.1

538.4 617.5 619.8 499.7 363.4

23.8 30.0 35.5 42.6 63.7

2009ytd

969.6

263.1

83.5

Office & Institutional Com m ercial (US$ billions) 121.8 138.3 128.8 144.4 149.0 158.0 182.2 178.3 194.1 193.3 161.1

195.8

Infrastructure

Private

Public

169.2 181.9 205.3 234.3 259.7

771.4 868.5 912.2 850.0 766.6

220.2 234.2 255.4 287.1 307.5

266.1

658.0

311.6

Source: U.S. Census Bureau, Scotia Economics calculations. Year-to-date data expressed at seasonally adjusted annual rates.

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