IN THIS ISSUE: Provincial outlook update: Shifting to a ... · IN THIS ISSUE: Provincial outlook...

IN THIS ISSUE: Provincial outlook update: Shifting to a lower gear amid persistent global uncertainties. The housing market in Canada: Still a very topical subject.

Testing the limits of indebtedness.

A third tightening in three years to cool the market.

Majors markets in Canada: Dissimilar momentum having to deal with different realities.

Toronto: many ongoing projects and a very tight rental market.

Vancouver: Slowing down by itself.

Montréal: A glut of condominiums under construction.

Calgary and Edmonton: Real estate market dynamics in a resource-based economy.

What about prices then? A step-by-step normalization.

LBS Economic Research

Carlos Leitao Chief Economist 514 350-3000 [email protected]

Sébastien Lavoie Assistant Chief Economist 514 350-2931 [email protected]

Marie-Claude Guillotte Economist 514 350-2925 [email protected]

Alexandru Popescu 514 350-2978 [email protected]

Subscription: Martine Bérubé 514 350-3006 [email protected]

July 2012

2

The Provincial Monitor July 2012

Provincial outlook update: Shifting to a lower gear amid persistent global uncertainties As a result of several economic indicators recently published showing off a weaker global economy (PMIs, inflation, employment, Euro-zone deepening recession, monetary policy easing in England, China and Euro-zone), LBS Economic Research has modified its North-American forecasts downwards and estimates that growth in Canada should be 2% in 2012 and 2013. Within Canada and the provinces, forecasts have been readjusted for 2012, and minor changes have been made for 2013. The base case scenario remains the same: economic growth among the resource provinces, Alberta and Saskatchewan, will outpace other provinces in every aspect. As a result, the strength of their economic activity will be the driving force behind the national average. In contrast, Central and Eastern provinces will report a weaker performance than the national average.

Increased global uncertainties fuelled by the Euro-zone crisis and the soft landing of the Chinese economy, has led investors to avoid raw materials. Prices of commodities such as those related to energy (except for electricity) and metals display a weaker level in mid-2012 than 12 months ago; meanwhile, the WTI crude price of oil sits slightly above $80 a barrel, which is not low enough to affect sector profits in Alberta and decrease investment significantly. It is important however not to neglect the situation, as it is certainly less positive than expected.

On the other hand, Quebec and particularly Ontario, should feel the ripple effects from the strengthening in consumer demand in the U.S. Nonetheless, this will not be sufficient to push growth above 2% in these provinces. On the same note, it is important not to forget the budgetary cuts in the public sector in Ontario and the federal government, as well as those that may be triggered automatically in January 2013 south of the border (fiscal cliff)1.

Hence, in the light of this situation, a modest growth rate of 2% seems to be the new norm nowadays in Canada. Moreover the recovery has been mostly driven by increases in consumption spending and residential investment during its strongest points between the end of 2009 to the beginning of 2011. These components of economic activity were themselves fueled by the persistence of low interest rate levels and contributed to deteriorate the household indebtedness ratios to the critical point they have presently reached. Indebtedness has its limits, as well as the Canadian homeownership level, which is currently at about 70%, a limit that was tested by the American housing market at the end of 2004 before entering a long period of decline.

1 For more details about the fiscal cliff, please read the Weekly Monitor published on

May 22, 2012 under the following link: http://www.vmbl.ca/Economics/15/WeeklyMonitor_22052012_e.pdf

As a result of the strong demand in the Canadian housing market over the last few years several large cities have been pushed towards a turning point. It is mainly this key subject that will be treated in the following pages of this provincial economic forecast update.

The housing market in Canada: Still a very topical subject

The booming Canadian housing market has created much discussion during the past two years. Many experts have articulated their opinion on the matter, and tried to confirm or deny the existence of a bubble in certain specific markets. In light of the housing debacle south of the border, which now shows increasing evidence of stabilization after a five year long decline, some wonder if such an outcome might happen to Canada. This concern has been typically dismissed by most experts, including ourselves, principally because of the differences in lending practices being more stricter here than south of the border.

Although the Canadian market will not undergo the same crisis that occurred in the U.S., this does not answer the question regarding the presence of a housing bubble. There are divergent conclusions, some supporting the thesis of a housing bubble, others that of a simple boom. So is the Canadian housing market under the grasp of a bubble? It is impossible to answer this question until only after it bursts. On this matter, the purpose of this analysis is not necessarily to determine the level and volatility of current prices, but rather to evaluate the situation and present forecasts in the more active housing markets (see tables at the end of the report) and justify those by examining the evolution of different supply and demand indicators on the new and resale markets. But first, we start with an important determinant of global household demand, for which we unfortunately only have data at a national level: household debt and the maintenance of financial stability.

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Mortgage rates

5-yr. conventional mortgage Variable rate

Source: Banque du Canada

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Testing the limits of indebtedness

In fact, prices have grown at a surprising pace. At the national level, house prices are equivalent to roughly 4 to 5 times the average household income. Although it is true that the increase in prices has outpaced that of revenues, it does not automatically follow that dwellings are less affordable. The household purchasing power, especially in the light of low interest rates, has not necessarily deteriorated. In fact, the source of the issue lies particularly within this ease of access to homeownership, which has driven prices upwards due to strong demand.

The Governor of the Bank of Canada has also asserted at the beginning of the year that ‘‘experience suggests that prolonged periods of unusually low rates can cloud assessments of financial risks, induce a search for yield, and delay balance-sheet adjustments by banks, firms and households’’2. In fact, the percentage of household income spent to service their mortgage is currently hovering at a historical low (see graph).

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Mortgage interest paid as % of PDI

Source: Statistics Canada, LBS Economic Research

Average = 4.7%

As a result, households are under the impression that the purchase of a more expensive house will not necessarily have a heavy impact on their actual budget. On the other hand, their mortgage credit is growing to increasingly critical levels and thus, unsustainable over the long term (see graph).

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Household mortgages as % of PDI


2 Remarks by Mark Carney, Governor of the Bank of Canada, presented to U.S.

Monetary Policy Forum in New York on February 24, 2012.

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Household debt to GDP

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Source: Statistics Canada, Bank of Canada, Bureau of Economic analysis, Federal Reserve Bank of New York, LBS Economic Research

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The accumulation of credit has its limits and increases the vulnerability of Canadian homeowners, in case of a decline in the market price of their property, which is a possibility to be considered, given the current state of the market. Furthermore, although Canadian household debt has stabilized around 90% of nominal GDP since mid-2009, it sits at a very high level, especially when compared with the United States and notice that it hasn’t decreased since the beginning of the recovery. This is not too surprising taking into account the rhythm at which residential investment grew during the first quarter of 2012 (12% y/y on an annualized basis) while most experts expected it to ease. As a result, residential investment as a share of nominal GDP has reached historical highs of 7.2% (see graph), and a retreat is expected to occur over the following quarters not only on investment in new housing and transfer costs, but in renovations as well, which constitute 40% of total residential investment. In fact, the new measures which will be covered in the next section, will limit mortgage refinancing to 80% of the property value, when not too long ago, at the beginning of 2010, the limit was still at 95%!

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Residential investment to nominal GDP(SAAR)


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A third tightening in three years to cool the market

Recently, (Thursday, June 21st), Jim Flaherty, the Minister of Finance, and the Office of the Superintendent of Financial Institutions (OFSI) have agreed on a new set of rules, meant to slow residential market activity, and restrain the risks associated with high levels of household debt. The market was already showing signs of slowdown in certain cities, but we anticipate that these new rules should decrease the number of first-time buyers, as well as investors, and force them to reconsider their need or simply postpone their purchase for a later time in order to accumulate more capital. In fact, Governor Carney started to worry about rising household debt levels at the beginning of the recovery after the 2008-2009 crisis. He advised financial institutions to exert greater diligence when giving out loans, and recommended ‘‘not take false comfort derived from mortgage insurance and to past performance of household credit’’.

In collaboration with OFSI, the Minister of Finance and CMHC, the Bank of Canada is closely monitoring the evolution of the risks on the exemplary financial stability of the country, taking the necessary measures when the need arises. After having noted that mortgage credit did not slow down during the financial crisis, in spite of a slight slowdown of the housing market, Minister Flaherty announced, in February 2010, a first round of restrictions that came into effect two months later. The same scenario reproduced itself in January 2011. This second tightening however, proved to be insufficient to temper the market in a sustainable manner, as housing starts at the national level surpassed the 200,000 (SAAR) level again in the third quarter of 2011. Since then, activity has reached even higher levels, leading to a third round of tightening, which should have a stronger impact than the first two, which almost went unnoticed. This time, the measures have been incremented systematically (or almost!), without offering the benefit of a 2-month window to act such as in spring 2010 and 2011. As mentioned above, first-time buyers will be the most affected by the change.

As for homeowners willing to borrow on the equity of their residence in order to renovate, their financial institution will be able to give them 5% less than last year. Briefly, without getting lost in the details, these measures, on top of slowing the market, should also foster a process of mild deleveraging and encourage households to use the value of their home as a mechanism of savings rather than a mechanism of consumption, an important aspect that Minister Flaherty wanted to convey during his announcement. So, when the time comes for Governor Carney to restart the process of normalization of interest rates, which should occur as soon as external conditions will allow it (by mid-2013 according to our most recent forecasts), households (as well as the housing market) should be better equipped to absorb this small shock.

In brief, this summarizes the subject of indebtedness of Canadian homeowners; measures were taken to limit the downside risks, but for the situation to improve, there needs to be a real reduction in borrowing volumes. Also, recent data on household credit show a considerable growth slowdown: mortgage credit is growing at its slowest pace since the beginning of 2002 (6% y/y), whereas consumer credit has not had such a slow growth rate (2% y/y) in the last two decades. Somewhat encouraging, this situation signals a step in the right direction in the process of household deleveraging, process which stretched over four years for our southern neighbors.

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Household credit(y/y % change)

Residential mortgage credit

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Source: Bank of Canada

Majors markets in Canada: Dissimilar momentum having to deal with different realities

In the following section, we will concentrate on large Canadian cities, since national figures are hardly representative of the reality within each city. Due to their geography, as well as other factors such as proximity or presence of more or less cyclical industries, each city has different characteristics that are worth taking into account. Therefore, simply observing the national evolution is not very useful, since conclusions are not really applicable to any region in particular. In fact, major markets evolve given different conditions and are not all at the same phase of their real estate cycle. The charts presented at the end of the report clearly show that dynamics are very different from one city to another. The following pages will describe the conclusions we came to after having analyzed a plethora of indicators, in order to predict more accurately the evolution of the new and resale housing markets within the metropolitan areas studied.

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Toronto: many ongoing projects and a very tight rental market

Risk of overconstruction in the GTA remains important which could transform into excess supply and limit the increase in price of new condominiums.

On the resale market, price growth will remain strong until the end of the year, between 5 and 10%, but should slow in 2013 without entering negative territory, due to a more balanced resale market.

Nevertheless, the condominium rental market should remain very tight. The city’s strong demographic growth will favor absorption while limiting the negative impact on prices.

One of the most important particularities of the Greater Toronto Area, which obviously has a strong influence on housing demand, is that by itself it welcomes 4 out of 10 new immigrants who come to Canada. Overall, the region receives more than 90,000 net immigrants per year, however this number is not as great as it was at the beginning of 2000. The second most popular destination is Montréal, which has seen its immigration number grow every year since 2005. This gradual deceleration of migration towards the Toronto CMA could result in changes in market dynamics. Nonetheless, household formation will remain at similar levels, as the 25-34 age cohort will be growing at the fastest pace in the last 20 years within the region, which will exert strong demand pressure on the rental and owned condominium markets, 50% of which are tenants. There is a visible preference towards condominiums, as the proportion of housing starts dedicated towards rental dwellings is very small, while that of condominiums is constantly increasing and now makes up 60% of starts. Notably, the supply of condominiums dedicated for renting keeps increasing at a fast pace; last year one third of the 18,400 condominiums completed and sold ended up on the rental market, which contributed to increase the overall share of rented condominiums to 22%. With the vacancy rate of rental condominiums at 1.1%, which is less than that of conventional apartments (1.4%), it is not surprising that new rental dwellings represent only 1% of the existing stock and that once completed, an increasing share of condominiums display a ‘‘to rent’’ sign, rather than ‘‘for sale’’. The demand for condominiums is so strong that the rental stock of condominiums has grown by one third to 32,000 units.

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Source: CMHC

As CMHC also mentioned in their fall review, capital returns have been lured by investors who bought new condominiums and decided to rent them once the construction was complete, could earn superior returns than on other investment products. Furthermore, condominiums rents are generally 40% more expensive than apartments of same dimensions in the Toronto CMA, the most important spread in the whole country.

This tendency for condos is clearly not a new phenomenon, but its intensification might create a certain imbalance between demand and supply once the projects are terminated. First, constraints in urban development have restricted the supply of individual houses and fuelled a strong level of condominium construction. The short term supply has increased to a worrisome level, standing for the first time above 20,000 units, which justifies overconstruction concerns (see graph).

Toronto: Short term new housing supply*(000s units)

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*Estimated using 50% of units under construction, as well as those newly completed and unoccupied. Source: CM HC, LBS Economic Research

Given the rhythm at which units were completed in the first months of 2012, it would require 3 years to absorb the stock presently in construction in the Toronto region (see table on the next page). This level is problematic. A smaller amount of units have been absorbed during the first months of 2012, which means that a larger number of completed condos remain unsold. This raises the issue of oversupply.

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Under construction Completions Years ofMay-12 10-year average inventory

Montréal 13,573 7,503 1.8Toronto 42,070 13,849 3.0Calgary 5,942 3,647 1.6Edmonton 3,818 3,054 1.3Vancouver 14,082 9,606 1.5Source : CM HC, LBS Economic research

Dwellings of condos

The recent condo construction boom will have the effect to increase the number of completed units in the years to come, but the rental market should remain very tight. The city’s strong demographic growth will favor absorption so that the negative impact on prices should be limited. Changes in mortgage financing rules should also drive more demand towards the rental market. Finally, starts of houses and condos display the most salient trend in 7 years in the Toronto region. At more than 48,000 units (SAAR), it is more than sufficient to satisfy demand, given that household formation is close to 35,000 households per year (see table). Furthermore, the recent weaker trend in building permits will result in a future decrease of construction of new dwellings, and a smaller number of new projects.

As for the resale market, we notice a recent stabilization, as volumes remain close to 17 per 1000 persons in the last 6 months, slightly higher than its average form 1997 to present. Thus, as a result of strong demand, the resale market is now tighter, which justifies prices increasing by close to 10% y/y, and that only approximately 3.5 months are required to absorb the current stock. The resale market remains favorable towards sellers, but could turn around when supply will increase, namely when the newly completed condos hit the resale market in the medium term.

In brief, condo sales in the Toronto region have reached record levels last year (newly completed absorptions and MLS sales), which in turn fuelled the development of many other projects. Although the underlying supply is not problematic, the short-term one is. Risks of overconstruction are important and the slowdown of the absorption rate will force housing starts to decline. In fact, in the last 5 years, a lot more dwellings were built than was necessary to cover household formations. And despite the fact that population growth has been relatively strong, it does not justify the pace of construction. So this situation could have repercussions on prices and affordability. The ratio measuring the cost of owing to the cost of renting, as measured by the CPI, has been constantly growing since the 2008-2009 recession, although it is still far from dangerous levels reached during the beginning of the 1990s. The interest rate increase expected in 2013 will cause this to rise even further. Nonetheless, lower replacement costs could mitigate this effect because we estimate that inflation of new dwellings, currently at 6% and by far the highest in Canada (see chart), will decrease because of overconstruction that could transform into excess supply (newly

completed and unoccupied). On the resale market, price growth will remain strong until the end of the year, between 5 and 10%, but should slow in 2013 without entering negative territory, as a result of a more balanced resale market.

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New housing price index: comparison between different markets in 2012Q1

*measures the changes in the selling prices (excluding taxes) of new houses where detailed specifications pertaining to each house remain the same between two consecutive periods. Source: Statistics Canada, LBS Economic Research

Population growth (2011

Census)

Approximation of the annual

household formation rate*

Annual average of

housing starts

Average spread on an annual basis

Housing starts (SAAR)

Year-to-date

Montréal 5.2% 16,132 21,991 5,859 19,000Toronto 9.2% 33,201 34,579 1,378 48,050Calgary 12.6% 10,313 11,144 831 15,355Edmonton 12.1% 9,859 10,347 488 11,433Vancouver 9.3% 17,682 16,743 -939 19,720

* Calculations based on the 2006 Census data.Source : CM HC, Statistics Canada, LBS Economic research

Between 2006 and 2011

Vancouver: Slowing down by itself

The Vancouver market is in a situation of excess supply, when it comes to the new condominium market: prices of new units are decreasing year-over-year.

The resale market has been in a state of equilibrium over the past two years, with prices growing at a much slower pace, and might even begin contracting as it gets closer to a buyer’s market.

The relative tightness of the condo rental market and sustained demographic growth might be enough to absorb the actual condominium supply and will help avoid any important decline of activity in the real estate market.

Data from the last census indicates that population growth in Vancouver accelerated when compared to the 2001-2006 period: between 2006 and 2011, population increased by 9.3%, greatly due largely to international immigration. In recent years, the region welcomed 40,000 international immigrants per year, which is equivalent to nearly 17,000 new households increasing pressure on housing demand. The construction of new dwellings has covered the new demographic needs, and since the beginning of the year has been slightly overdone.

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Nonetheless, the condo market remains active, and much like in Toronto, strongly supported by lower vacancy rates on the rental market (0.9% in 2011) as well as a $420 in lower rent for the condo segment. This could explain why the proportion of condominiums dedicated towards the rental market went from 22% in 2006 to 26% in 2011. Even so that the stock of rental dwellings has increased mostly due to a greater number of condominiums being offered for rent, rather than the construction of rental units (conventional or apartments), a situation similar to Toronto.

The rental or purchase of condominiums is a common practice chiefly for affordability reasons. It is commonly recognized that the Vancouver market, stuck between the sea and the mountains, is the least affordable in the country, British-Columbians have struggled with a negative savings rate since the mid-90s, notably due to a considerable share of income allocated towards dwelling costs. As a result, an amplification of the imbalance between the real estate market and household debt could lead to increased risks of a potential correction. More importantly, we noticed that the Vancouver market is in a situation of excess supply, mostly on the condominium market, judging by the increasing number of units that remain unsold (see graph).

Vancouver: Newly completed and unoccupied

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The trend for building permits is decreasing since the end of 2011, which will result in a reduction of housing starts for the rest of 2012 and in 2013. Furthermore, if we judge by the short-term housing supply, which lies only slightly higher than the average between 2004 and present, overconstruction does not seem to be a significant issue in Vancouver. Absorption of new dwellings has been slower since 2008; it is therefore not surprising that prices of new units are decreasing year-over-year. On the resale market, the situation is similar, since it takes about 8 months to absorb the current inventory. The market has therefore been in a state of equilibrium over the past two years, with prices on the resale market growing at a much slower pace, and even might even begin contracting as the sales to new listings ratio gets closer to numbers characterizing a buyer’s market. Because of less construction of single properties, the resale market is very tight, but might eventually loosen up, since CMHC no longer insures loans over $1 million.

Finally, the Vancouver real estate market has already started to correct itself, which greatly reduces risks of a more pronounced dip. The tightness of the condominium rental market, might be enough to absorb a good share of the actual condominium supply. As well, persistent demographic growth, and net migrations remaining above the 40,000 person level per year will help avoid any important decline of activity in the real estate market.

Montréal: A glut of condominiums under construction

Housing starts have been much higher than household formations leading to overconstruction.

Demand could be insufficient to overcome the heavy supply that will be flooding the market during the next two years.

On the Island of Montréal, especially the downtown area, prices should remain in positive territory while the northern and southern shores could experience a decline in prices.

Due to demographic growth mostly composed of immigrants, demand will keep rising on the rental market.

Markets within the province of Quebec, and more specifically in the city of Montréal are characterized by a more prominent rental sector than within the rest of the country, with a homeownership level slightly above 60% whereas in the rest of Canada it is close to 70%. The construction of condominiums is a more recent phenomenon. In fact, between 1990 and today, the share of condominium starts has gone from 10% to 60% of all starts, or roughly the same current level as in Toronto. Construction of rental units (apartments or multiplex) has become scarce in Montréal as well. The decline of the rental market in Canadian cities is pushing vacancy rates down.

Furthermore, demand for this type of dwelling should accelerate due to a tightening of mortgage lending rules, along with an increase in net migration from abroad. In fact, total net migration in the Montréal CMA has been constantly growing since 2005.

Montréal: Total net migration(annual, in 000s)

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Also, the condo rental market is less prominent: 9.3% of the condominium inventory in the CMA is offered for rent, although the proportion is much more important in the downtown area, at more than 20%. The lower popularity of this type of dwelling is mostly explained by weaker demand for it. Average household revenues in the Montréal CMA are smaller than those in Toronto or Vancouver, which also stands true for immigrant households. In fact, those who establish themselves in Vancouver have 20% higher revenues (30% in Toronto). On a different note, lower rent prices in Montréal do not incite households to become homeowners. In Montréal, the percentage of tenants among immigrants is higher (90%) than in Toronto (70%) and Vancouver (60%). Therefore, due to demographic growth mostly composed of immigrants, demand should keep rising.

The revenue effect is also visible on the condominium rental market, as vacancy rates on the conventional rental market are actually lower than those on the condominium market; a phenomenon not seen in Toronto and Vancouver. This decreases the condominium market appeal for investors, but increases the appeal for the plex market, which is very tight in Montréal. Furthermore, unlike the conventional rental market, rents for 2 bedroom condominiums have not increased for the past 5 years. In spite of it all, it seems that demand for condominium rental market is increasing, mostly due to low construction of conventional rentals, as we can deduct from condominium vacancy rates that went from 4.2% in 2010 to 2.8% in 2011 in spite of increases in supply. All in all, if a number of unabsorbed new condominiums hit the rental market (putting condos up for rent could be the last resort for promoters), this supply would be most likely absorbed given low vacancy rates on a historical basis in Montreal, though it would take longer than in Toronto or Vancouver.

Montréal: Short term new housing supply*(000s units)

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As for oversupply, in contrast to Vancouver, the current level is not problematic, though it might become. The short and medium term supply levels are very worrisome. There are a number of ongoing projects that raise the prospect of overconstruction. Given the rhythm at which these projects are being completed, there is approximately 2 years worth of inventory being built, which is very long.

Especially since housing starts have been much higher than the number of household formations (see table on page 6) and that this trend persists throughout the current year! Furthermore, the trend for building permits has recently reversed upwards. The problem is that unlike in Toronto, overconstruction in the market for new dwellings in not justified by a tight resale market.

Montréal: sales to new listings ratioand resale prices

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*available for 11 Canadian cities and uses repeat sales methodology, more robust in gauging average house prices. Source: QFREB, LBS Economic research, Teranet-NBC

In fact, in Montréal, the resale market is balanced since 2010, with one sale for every two new listings, and price growth now hovers around 4% when it used to be close to 10% in mid-2010. Furthermore, property costs remain 15% higher than rental costs, which is a high from a historical perspective, and is having a considerable impact on the accessibility to homeownership and driving demand towards the rental market. Although the rental of condominiums is not common practice in the CMA, it seems that there is an ongoing catching up to the national average, the rate of homeownership being lower within the province of Quebec. The question is whether the Montréal market is undergoing changes in order to catch up to its peers, or it is simply the victim of overconstruction. In either case, it is unstable and will be more affected should a shock in demand occur. The fundamental factors are not very favorable either. Immigration will fuel demand, but economic growth in the CMA will be insufficient to absorb the growth in excess supply which will be weighting on the market over the next few years. Finally, population growth of 5.2% is nowhere near that of Vancouver or Toronto. Nonetheless, it does not necessarily mean that the market is due for a strong correction, the Montréal CMA being less of a cyclical market than the others.

Hence, in the light of the information we have, Montréal seems to be the most at risk to undergo a more pronounced slowdown, since demand will be insufficient to overcome the heavy supply that will be flooding the market during the next two years. Nonetheless, the risks of such an outcome in the Island of Montréal are less serious than in the northern and southern shores. On the Island of Montréal, especially the downtown area, prices should remain in positive territory while the northern and southern shores could experience a decline in prices.

9


Calgary and Edmonton: Real estate market dynamics in a resource-based economy

This year, both Edmonton and Calgary should see their housing market activity return to pre-recession levels.

The momentum is very different in contrast to the rest of the country, and all real estate drivers point towards an increase in both prices and activity.

The 2008-2009 recession has placed a significant strain on Alberta’s energy dependant economy, and left its mark on the real estate market, bringing prices down by more than 10% in both the new and resale markets. Generally, market activity greatly declined, and only started gaining some positive momentum in 2010, but stagnated in 2011. New housing stock in the condominium segment, which is much more prominent in Calgary, as well as the number of current listings on the resale market, were both higher in 2011 as a consequence of the 2009-2010 market slowdown. This year, both Edmonton and Calgary should see their housing market activity return to pre-recession levels.

This is also indicated by the upward trend in building permits. On a separate note, population growth is the highest in the country, while housing starts have not significantly outpaced household formation in the last few years (see table on previous pages). Thus the boom in new construction that is ongoing since the beginning of the year is fully justified, and is also the result of higher perspective of population growth. This situation also favors the rental market that tightened in 2011.

Speaking of vacancy rates, they have fallen for a second year in a row in Calgary, and have now reached their lowest point since October 2007, going from 3.6% to 1.9%. As for vacancy rates in the rental condos segment, they remain above the 5% level due to lower demand. Because of a considerable gap between rents on the housing and condominium rental markets, the former has attracted much more demand. Also, the gloomy economic conditions during the 2009-2010 period, as well as the more pronounced slowdown in real estate activity in the province, has favoured renting at the expense of purchasing in the large cities. Furthermore, in comparison to 2010, vacancy rates remained unchanged, reaching 5.7% in 2011. In Edmonton, vacancy rates of apartments decreased in 2011, but much like in Calgary, the market is not as tight as in 2006, when strong returns from the oil and gas industries pushed Alberta’s economic growth to close to 6%.

Calgary: sales to new listings ratioand resale prices

0.2

0.4

0.6

0.8

1

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-20

0

20

40

60Ratio Teranet house price index*

Seller`s market

Buy er`s market

Balanced market

y /y % chng.

*available for 11 Canadian cities and uses repeat sales methodology, more robust in gauging average house prices. Source: CREA, LBS Economic Research, Teranet-NBC

Hence, the momentum is very different in contrast to the rest of the country, and all real estate drivers point towards an increase both in prices and activity. Annual growth in prices is now in positive territory after a slightly negative year in 2011, and is expected to accelerate due to higher demand, which in turn will be fueled by higher needs in terms of labor within the province, mostly from resource extracting industries. Nonetheless, it is currently 40% more expensive to be an owner rather than a tenant in Calgary, a considerable difference which should boost expansion of the rental market and condominiums, in order to reduce the impact on affordability. This is already becoming apparent as a greater share of starts is dedicated towards the condominium market in 2011 and beginning 2012. In brief, prospects are rising for the real estate markets in Calgary and Edmonton, but they are reasonable given the cyclical aspect of Alberta’s economy and the recent dip of crude prices to $80 per barrel.

What about prices then? A step-by-step normalization

Finally, although there is common recognition that the prolonged low-interest-rate environment that has been ongoing since the financial crisis has put increasing pressure on real estate prices, there has been much disagreement regarding the magnitude of overvaluation. In our opinion, overall prices are indeed exceptionally elevated. However, evaluating and quantifying the extent of overvaluation is like trying to predict the number of medals Canada will win at the London 2012 Olympic Games! It depends on a broad range of factors specific to each CMA as well as the fact that different markets are operating at different phases of the real estate cycle. Therefore, dynamics are different from one CMA to another, which makes it clear that there is little reason for price movements in different CMAs to go in the same direction at the same time.

10


Thus, it is important to not jump to conclusions too fast based solely on statistics showing the national average. The slowdown in prices will develop step-by-step, primarily as the result of decreased demand leading to lower sales, and not as the result of oversupply caused by an increase in arrears (see graph). Certain markets such as Toronto and Montreal could experiment some oversupply issues as mentioned before. Hwoever, even if it appears evident that borrowers will have to deal with squeezed budgets following interest rate hikes, the Bank of Canada will proceed in a gradual manner to implement the process of normalization of its overnight target rate.

% of arrears in the mortgage market*

0

0.2

0.4

0.6

0.8

1

1.2

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Québec Ontario Alberta BC

*Mortgage arrears is three or more months

Source: CBA

At first, in the short run, the new measures on insured mortgages will reduce the number of those that were ready to buy. They will most likely put off their decisions until they gather more savings. In the meanwhile, the actual economic environment will not favor an increase in household borrowing capacity. Despite impressive gains in full time employment during the first half of 2012, specifically in high-paying key sectors (manufacturing resource extraction), this improvement could be short-lived given uncertainties concerning the global economy. Furthermore, private sector employment cannot automatically absorb the growth in unemployment caused by the payroll cuts in public administration. Moreover, well-paid jobs in the construction sector are also to be gradually cut. At 7.2%, the part of construction jobs in total employment is relatively elevated, and for it to reach its historical average at 6%, 200 000 jobs would disappear. Overall, employment net gains will remain modest in contrast to the strong rebound recorded in 2010-2011, which will slow down housing demand.

The next step will be higher interest rates, which is expected to happen by mid-2013. Again, the normalization process will be gradual since we anticipate the overnight target rate to be at only 2% at the end of 2014.

This should have limited impact on the housing market while it will allow households to readjust. One thing is for sure, activity will slow as soon as interest rates start to increase. This is inevitable after being at such a low level for almost 3 years, from September 1st 2010 to mid-2013.

Consequently, price appreciation should decelerate in line with inflation and even dip into negative territory, which would allow households time to adapt. In time, the relief gained from slower price appreciation, coupled with moderate, but positive income growth, is expected to offset the rise in interest rates, thus making housing more accessible overall. This should keep the market active and re-stimulate demand throughout 2014-2015. In the long run, demographic trends will bring their own negative impact. The pool of potential buyers will start shrinking as a result of a shrinking workforce, particularly in Quebec and British-Columbia. Briefly, in financial services advising, we mention as many times as possible to clients that “past yields do not guarantee future performance”. Well, nowadays, that is also true for real estate assets, even if many are having trouble believing it given the impressive returns in prices during the last decade.

For those who still wonder if prices will decline, let us recapitulate the fundamentals driving the housing markets: incomes, employment, interest rates, demographics trends and geographic situation.

That said, for a sharp drop in prices to occur, we have to see a sharp rise in interest rates or in the unemployment rate, for instance. Such outcomes are rather improbable, as we anticipate the unemployment rate to decrease, slowly but surely, to 7% in the long term. In addition, despite moderate labor market dynamics, Canadian businesses surveyed recently by the Bank of Canada still expect to hire in the next 12 months. As for the ones who are still not convinced about the gradual increase in interest rates, they should remember the importance of exports in the Canadian economy and also, the fact that exports have not yet returned to pre-recession levels, a situation that the Bank of Canada is worried about. That said, Governor Carney cannot decide to rise the overnight target rate abruptly while Ben Bernanke, chairman of the Federal Reserve, has committed to leave the fed funds rate in a range of 0-0,25% until the end of 2014. Such a decision could exert more pressure on the loonie. In the end, this will have a negative impact on exports already heavily affected by decelerating global economic growth. Lastly, all in all, we estimate that prices will evolve between +5% and -10% until 2014.

Marie-Claude Guillotte Économist

11


Units* % chng. Units* % chng. Units* % chng. Units* % chng. Units* % chng.2006 18,705 -1.1 17,046 24.7 14,970 12.6 37,080 -10.9 22,813 -9.92007 20,736 -20.8 13,505 -20.8 14,888 -0.5 33,293 -10.2 23,233 1.82008 19,591 -15.3 11,438 -15.3 6,615 -55.6 42,212 26.8 21,927 -5.62009 8,339 -44.8 6,318 -44.8 6,317 -4.5 25,949 -38.5 19,251 -12.22010 15,217 46.6 9,262 46.6 9,959 57.7 29,195 12.5 22,001 14.32011 17,867 0.3 9,292 0.3 9,332 -6.3 39,745 36.1 22,719 3.3

2012 ytd 18,372 7.4 14,064 108.5 10,603 32.6 47,621 25.8 19,094 -6.02012 f 18,000 0.7 13,000 39.9 10,300 10.4 45,000 13.2 20,000 -12.02013 f 15,600 -13.3 13,800 6.2 11,000 6.8 35,000 -22.2 18,500 -7.5

* units, non-seasonally adjusted at annual rate. Source: CMHC, LBS Economic Research.

Vancouver Calgary Edmonton Toronto Montreal

Major Markets: Housing Starts

Price % chng. Units % chng. Price % chng. Units % chng. Price % chng. Units % chng. Price % chng. Units % chng. Price % chng. Units % chng.2006 19.1 36,479 -13.6 31.4 33,027 38.2 21.2 21,984 18.0 5.0 84,842 -1.0 n/a 39,141 n/a2007 14.5 38,978 6.9 24.0 32,176 19.4 42.3 20,427 -7.1 4.1 95,164 12.2 6.9 43,666 11.62008 7.8 25,149 -35.5 0.5 23,136 -2.1 0.2 17,369 -15.0 5.4 76,387 -19.7 4.5 40,440 -7.42009 -6.0 36,257 44.2 -7.8 24,880 -4.8 -8.4 19,139 10.2 -2.3 89,255 16.8 4.6 41,753 3.22010 11.3 31,144 -14.1 2.7 20,996 3.3 4.1 16,403 -14.3 11.6 88,214 -1.2 8.3 42,299 1.32011 7.6 32,936 5.8 -1.2 22,466 1.0 -2.0 16,963 3.4 6.4 91,760 4.0 5.5 40,365 -4.6

2012 ytd 5.7 28,798 -20.4 1.8 25,622 15.6 1.5 17,688 8.3 10.0 95,894 6.6 4.5 42,242 5.62012 f 1.8 28,500 -13.5 3.0 25,000 11.3 2.0 18,000 6.1 7.0 95,000 3.5 3.0 41,800 3.62013 f -4.0 27,800 -2.5 1.5 25,500 2.0 2.0 18,200 1.1 0.0 89,000 -6.3 -2.0 40,000 -4.3

* seasonally adjusted, units are annualized, change in prices are based on the Teranet house price index and weigheted average prices for Quebec. Source: CREA, QFREB, Teranet-NBC, LBS Economic Research.

Toronto MontrealVancouver Calgary Edmonton

Major Markets : Home Sales and Prices*

12


0

5

10

15

20

25

2004

2005

2006

2007

2008

2009

2010

2011

2012

Toronto: Short term new housing supply*(000s units)


*Estimated using 50% of units under construction, as well as those newly completed and unoccupied. Source: CMHC, LBS Economic Research

468

10121416182022

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Toronto: Residential market activity*(per 1,000 population)

Housing starts MLS® sales (right)

*SAAR dataSource: CMHC, CREA, Statistics Canada, LBS Economic research

0

20

40

60

80

100

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

*

%

Toronto: Housing starts by intended market type

Freehold Condominium Rental

*Year to date. Source: CMHC, LBS Economic Research

101520253035404550

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Toronto: New housing market trends(000s of units*, SAAR)

Housing startsBuilding permits

*6-month moving average. Source: CMHC, LBS Economic Research

0

500

1000

1500

2000

2500

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Toronto: Newly completed and unoccupied

Condominium (right)Freehold


0.3

0.8

1.3

1.8

2.3

2.8

3.3

3.8

0

10

20

30

40

50

60

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Toronto: Housing starts by dwelling type(000s units, SAAR)

Multiple dwellings

Single dwellings

Multiple/single ratio

Source: CMHC, Haver Analytics, LBS Economic Research

90100110120130140150160

0500

1000150020002500300035004000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20102012**

%Toronto: Absorption of new dwellings

(monthly average)

Freehold Condominium

Absorption rate: freehold* Absorption rate: condos*

*Rate at w hich newly completed dwellings are absorbed (excluding the rental market); **year-to-date. Source: CMHC, LBS Economic Research

-20

-10

0

10

20

30

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Toronto: new housing price index*(y/y % chng.)

NHPI

Average

*measures the changes in the selling prices (ex cluding tax es) of new houses where detailed specifications pertaining to each house remain the same between two consecutive periods. Source: Statistics Canada, LBS Economic Research

13


-10

-5

0

5

10

15

20

0.20.30.40.50.60.70.80.9

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Toronto: sales to new listings ratioand resale prices

ratioTeranet house price index*

y/y % chng.

Seller`s market

Balanced market

Buyer`s market

*av ailable f or 11 Canadian cities and uses repeat sales methodology , more robust in gauging av erage house prices. Source: CREA, LBS Economic Research, Teranet-NBC

0.90.9511.051.11.151.21.251.3

20

40

60

80

100

120

140

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

Toronto: cost of owning vs. renting(Consumer price index 2002=100)

CPI-Rented accomodationCPI-Owned accomodationOwned / Rented ratio (right)


123.

9

128.

8

89.7 10

6.5

106.

1

108.

3

87.7

88.2

77.9 90

.8

0

20

40

60

80

100

120

140

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Toronto: Total net migration(annual, in 000s)


2

3

4

5

6

7

8

2004

2005

2006

2007

2008

2009

2010

2011

2012

Ontario: Residential market balance

Months of inventory*

Average

*The number of months of inv entory represents the number of months it w ould take to sell current inv entories at the current rate of sales activity. Source: CREA

2535455565758595105115

65

85

105

125

145

165

185

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Toronto: New listings and MLS sales(in 000s of units SAAR)

New listings

MLS® sales (right)

Source: CREA, LBS Economic Research

0.40.7

0.40.8

1.7

1.1

3.2 3.2

2

3.1

2.1

1.4

00.5

11.5

22.5

33.5

2006 2007 2008 2009 2010 2011

Toronto: Rental market activityVacancy rate (% )

Rental condominium apts. Apartments in buildings with 3 units & over

Source: CMHC

31 31

1921

19 1920 20

22

16

20

24

28

32

30

35

40

45

50

55

60

1995 1997 1999 2001 2003 2005 2007 2009 2011

Toronto: Secondary rental marketCondos used for rental

Condos used for rental (in 000s units)As a % of condominium universe

Source: CMHC

1542

1535 1615

1487 15

95

1608

1067

1061

1095

1096

1123

1148

600

800

1000

1200

1400

1600

1800

2006 2007 2008 2009 2010 2011

Toronto: Average rents2-bedroom units ($)

Rental condominium apts. Private apts.

Source: CMHC

14


0

2

4

6

8

10

12

14

2004

2005

2006

2007

2008

2009

2010

2011

2012

Vancouver: Short term new housing supply*(000s units)



468

10121416182022

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Vancouver: Residential market activity*(per 1,000 population)

Housing startsMLS® sales (right)

*SAAR dataSource: CMHC, CREA, Statistics Canada, LBS Economic Research

2

6

10

14

18

22

26

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Vancouver: New housing market trends(000s of units*, SAAR)



0

20

40

60

80

100

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

*

%

Vancouver: Housing starts by intended market



050010001500200025003000350040004500

0

250

500

750

1000

1250

1500

1750

2000

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Vancouver: Newly completed and unoccupied

Freehold

Condominium (right)


0.30.81.31.82.32.83.33.84.34.85.3

0

5

10

15

20

25

30

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Vancouver: Housing starts by dwelling type(000s units, SAAR)

Multiple dwellingsSingle dwellingsMultiple/single rat io


8090100110120130140150160

0200400600800

10001200140016001800

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20102012**

%Vancouver: Absorption of new dwellings

(monthly average)




-30-25-20-15-10

-505

101520

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Vancouver: new housing price index*(y/y % chng.)

NHPI

Average


15


-15-10-50510152025

0.20.30.40.50.60.70.80.9

1

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Vancouver: sales to new listings ratioand resale prices

Ratio

Teranet house price index*

Seller`s market

Buy er`s market

Balanced market

*av ailable f or 11 Canadian cities and uses repeat sales methodology , more robust in gauging av erage house prices. Source: QFREB, LBS Economic Research, Teranet-NBC

y/y % chng.

0.9

1

1.1

1.2

1.3

1.4

1.5

405060708090

100110120130

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

Vancouver: cost of owning vs. renting(Consumer price index 2002=100)

CPI-Rented accomodation

CPI-Owned accomodation

Owned / Rented ratio (right)


32.1

31.2

25.4 33

.9 39.0 41.9

36.1 41

.8

42.9

41.4

05

101520253035404550

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Vancouver: Total net migration(annual, in 000s)


2

4

6

8

10

12

14

16

2004

2005

2006

2007

2008

2009

2010

2011

2012

British-Columbia: Residential market balance

Months of inventory*Average


1520253035404550

354045505560657075

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Vancouver: New listings and MLS sales(in 000s of units SAAR)

New listings

MLS® sales (right)


0.40.2

0.6

1.7

2.2

0.90.7 0.7

0.5

2.11.9

1.4

0

0.5

1

1.5

2

2.5

2006 2007 2008 2009 2010 2011

Vancouver: Rental market activityVacancy rates (% )


Source: CMHC

1252 14

35

1507

1448 16

10

1663

1048

1090

1131

1175

1202

1243

600

800

1000

1200

1400

1600

1800

2006 2007 2008 2009 2010 2011

Vancouver: Average rents2-bedroom units ($)


Source: CMHC

22 22 22

2425

26

202122232425262728

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011

Vancouver: Secondary rental marketCondos used for rental

Condos used for rental (in 000s units)

As a % of condominium universeSource: CMHC

16


2

3

4

5

6

7

8

9

2004

2005

2006

2007

2008

2009

2010

2011

2012

Montréal: Short term new housing supply*(000s units)



0

5

10

15

20

2519

97

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Montréal: Residential market activity*(per 1,000 population)

Housing starts

MLS® sales (right)


0

20

40

60

80

100

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

*

%

Montréal: Housing starts by intended market



5

10

15

20

25

30

35

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Montréal: New housing market trends(000s of units*, SAAR)



0

500

1000

1500

2000

2500

3000

3500

0

500

1000

1500

2000

2500

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Montreal: Newly completed and unoccupied

FreeholdCondominium (right)


0.30.81.31.82.32.83.33.84.34.85.3

0

5

10

15

20

25

30

35

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Montréal: Housing starts by dwelling type(000s units, SAAR)

Multiple dwellings

Single dwellings



8090100

110120130140

0200400600800

10001200140016001800

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20102012**

%Montréal: Absorption of new dwellings

(monthly average)




-202468

1012141618

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Montreal: new housing price index*(y/y % chng.)

NHPI

Average


17


02468101214

0.2

0.4

0.6

0.820

04

2005

2006

2007

2008

2009

2010

2011

2012

Montréal: sales to new listings ratioand resale prices

RatioWeighted average price

Seller`s market

Buy er`s market

Balanced market

y /y % chng.

*available for 11 Canadian cities and uses repeat sales methodology, more robust in gauging average house prices. Source: QFREB, LBS Economic research, Teranet-NBC

0.70.750.80.850.90.9511.051.11.151.2

20

40

60

80

100

120

140

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

Montréal: cost of owning vs. renting(Consumer price index 2002=100)

CPI-Rented accomodationCPI-Owned accomodationOwned / Rented rat io (right)


22.8 29

.3

27.3 36

.1

32.8

29.0

28.2

28.4 32

.0 35.3

05

10152025303540

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Montréal: Total net migration(annual, in 000s)


456789

10111213

2004

2005

2006

2007

2008

2009

2010

2011

2012

Province of Québec: Residential market balance


Average

*The number of months of inv entory represents the number of months it w ould take to sell current inv entories at the current rate of sales activity, Source: CREA

40

45

50

55

60

65

75

80

85

90

95

100

105

2004

2005

2006

2007

2008

2009

2010

2011

Montréal: New listings and MLS sales(000s of units SAAR)

New listings

MLS® sales (right)

Source: QFREB, LBS Economic Research

2.8

3.83.2

2.7

4.2

2.82.7 2.92.4 2.5 2.7 2.5

00.5

11.5

22.5

33.5

44.5

2006 2007 2008 2009 2010 2011

Montréal: Rental market activityVacancy rates (% )


Source: CMHC

1020 1082

1037

1070 11

44

1075

636

647

659

669

701

719

400

600

800

1000

1200

2006 2007 2008 2009 2010 2011

Montréal: Average rents2-bedroom units ($)


Source: CMHC

8

9

910

9 9

8

8.5

9

9.5

10

0

2468

1012

2006 2007 2008 2009 2010 2011

Montréal: Secondary rental marketCondos used for rental

Condos used for rental (in 000s units)As a % of condominium universe

Source: CMHC

18


1.52

2.53

3.54

4.55

5.5

2004

2005

2006

2007

2008

2009

2010

2011

2012

Calgary: Short term new housing supply*(000s units) Freehold

CondominiumCondominium average


0

5

10

15

20

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Calgary: New housing market trends(000s of units*, SAAR)

Housing starts

Building permits


0

20

40

60

80

100

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

*

%

Calgary: Housing starts by intended market



05

101520253035404550

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Calgary: Residential market activity*(per 1,000 population)



0

100

200

300

400

500

600

700

800

0

200

400

600

800

1000

1200

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Calgary: Newly completed and unoccupied

Freehold

Condominium (right)


00.20.40.60.811.21.41.61.8

02468

1012141618

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

*

Calgary: Housing starts by dwelling type(In 000s units, SAAR)

Multiple dwellings

Single dwellings

Multiple/single rat io

*Year to date. Source: CMHC, Haver Analytics, LBS Economic Research

80

90

100

110

120

0200400600800

10001200

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20102012**

%Calgary: Absorption of new dwellings

(monthly average)




-20-10

010203040506070

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Calgary: New housing price index*(y/y % chng.)

NHPIAverage


19


-20-1001020304050

0.2

0.4

0.6

0.8

1

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Calgary: sales to new listings ratioand resale prices

Ratio Teranet house price index*

Seller`s market

Buy er`s market

Balanced market

y /y % chng.


0.9

1

1.1

1.2

1.3

1.4

1.5

40

60

80

100

120

140

160

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

Calgary: cost of owning vs. renting(Consumer price index 2002=100)

CPI-Rented accomodationCPI-Owned accomodationOwned / Rented ratio (right)


15.0 17

.5

11.3 13.1

21.7 25

.2

21.8

22.5

20.8

12.3

0

5

10

15

20

25

30

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Calgary: Total net migration(annual, in 000s)


123456789

10

2004

2005

2006

2007

2008

2009

2010

2011

2012

Alberta: Residential market balance


Average


51015202530354045

2025303540455055606570

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Calgary: New listings and MLS sales(in 000s of units SAAR)

New listings

MLS® sales (right)


0.7 0.7

3.5

1.5

5.25.7

0.5

1.52.1

5.3

3.6

1.9

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 2011

Calgary: Rental market activityVacancy rates (% )


Source: CMHC

1212

1217 12

93

1310 13

85 1460

952 10

82 1140

1089

1064

1078

400

600

800

1000

1200

2006 2007 2008 2009 2010 2011

Calgary: Average rents2-bedroom units ($)


Source: CMHC

18

21

18

24

2826

1618202224262830

02468

1012

2006 2007 2008 2009 2010 2011

Calgary: Secondary rental marketCondos used for rental



20


1.5

2

2.5

3

3.5

4

4.5

5

2004

2005

2006

2007

2008

2009

2010

2011

2012

Edmonton: Short term new housing supply*(000s units) Freehold

CondominiumCondominium average


0

2

4

6

8

10

12

14

16

18

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Edmonton: New housing market trends(000s of units*, SAAR)



0

20

40

60

80

100

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

*

%

Edmonton: Housing starts by intended market



4

9

14

19

24

29

34

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Edmonton: Residential market activity*(per 1,000 population)



01002003004005006007008009001000

0

200

400

600

800

1000

1200

1400

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Edmonton: Newly completed and unoccupied

FreeholdCondominium (right)


00.20.40.60.811.21.41.61.8

02468

10121416

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

*

Edmonton: Housing starts by dwelling type(in 000s units, SAAR)

Multiple dwellings

Single dwellings


*Year to date. Source: CMHC, Haver Analytics, LBS Economic Research

8090100110120130140150160

0

200400

600

800

10001200

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20102012**

%Edmonton: Absorption of new dwellings

(monthly average)


Absorption rate: freehold* Absorpt ion rate: condos*


-15

-5

5

15

25

35

45

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Edmonton: new housing price index*(y/y % chng.)

NHPI

Average


Edmonton: Short term new housing supply*(000s units)

1.5

2

2.5

3

3.5

4

4.5

5

2004

2005

2006

2007

2008

2009

2010

2011

2012



21


-20-100102030405060

0.2

0.4

0.6

0.8

1

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Edmonton: sales to new listings ratioand resale prices

Ratio Teranet house price index*

Seller`s market

Buy er`s market

Balanced market

y /y % chng.


0.9

0.95

1

1.05

1.1

1.15

1.2

1.25

1.3

40

60

80

100

120

140

160

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

Edmonton: cost of owning vs. renting(Consumer price index 2002=100)

CPI-Rented accomodation

CPI-Owned accomodation

Owned / Rented rat io (right)


6.9 10

.7

5.0 6.2

12.4

19.2

15.5

14.0 16

.9

10.7

02468

101214161820

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Edmonton: Total net migration(annual, in 000s)


123456789

10

2004

2005

2006

2007

2008

2009

2010

2011

2012

Alberta: Residential market balance


Average


5

10

15

20

25

30

15

20

25

30

35

40

45

50

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Edmonton: New listings and MLS sales(in 000s of units SAAR)

New listings

MLS® sales (right)


0.6

1.5

4.3

3.1

5.2

3.7

1.2 1.5

2.4

4.5 4.2

3.3

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 2011

Edmonton: Rental market activityVacancy rates (% )


Source: CMHC

890 10

52

1099

1122

1050 11

64

810 96

4

1037

1016

1020

1034

400

600

800

1000

1200

2006 2007 2008 2009 2010 2011

Edmonton: Average rents2-bedroom units ($)


Source: CMHC

18

2523 24

29 28

1618202224262830

02468

1012

2006 2007 2008 2009 2010 2011

Edmonton: Secondary rental marketCondos used for rental



22


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012 2013

Canada 1.8 2.9 1.9 3.1 3.1 2.8 2.7 0.7 -2.8 3.2 2.4 2.0 2.0N&L 1.6 15.6 5.8 -1.7 0.2 3.3 9.1 -0.4 -9.0 6.1 2.8 1.0 3.8PEI -1.1 4.8 2.1 3.0 1.3 2.6 2.0 0.7 0.2 2.6 1.1 1.5 1.9NS 3.2 4.0 1.4 1.4 1.8 0.9 1.6 2.7 0.0 1.9 0.3 1.9 2.5NB 1.7 4.5 2.8 1.4 0.5 3.0 1.6 0.6 -0.4 3.1 0.1 1.3 1.5Quebec 1.5 2.4 1.2 2.6 2.0 1.7 2.4 1.3 -0.7 2.5 1.7 1.6 1.7Ontario 1.8 3.1 1.4 2.5 2.9 2.1 2.1 -0.6 -3.2 3.0 2.0 1.8 1.8Manitoba 0.8 1.6 1.4 2.6 2.7 3.2 3.3 3.8 -0.3 2.4 1.1 2.2 2.3Sask -1.0 -0.4 4.6 3.8 3.5 -0.4 2.8 4.6 -3.8 4.0 4.8 3.0 2.8Alberta 1.7 2.2 3.2 5.2 5.3 6.6 3.3 0.9 -4.5 3.3 5.2 3.2 2.9BC 0.6 3.6 2.3 3.7 4.5 3.3 3.1 0.7 -2.1 3.0 2.9 1.9 2.3


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Canada 7.2 7.6 7.6 7.2 6.8 6.3 6.0 6.2 8.3 8.0 7.5 7.3 7.2N&L 16.1 16.6 16.5 15.7 15.2 14.8 13.6 13.3 15.6 14.3 12.6 12.2 11.9PEI 12.0 11.9 10.9 11.2 10.9 11.1 10.3 10.7 12.0 11.3 11.4 11.1 11.2NS 9.8 9.6 9.1 8.8 8.5 7.9 8.0 7.6 9.1 9.3 8.8 8.6 7.7NB 11.1 10.2 10.3 9.8 9.7 8.7 7.6 8.5 8.8 9.3 9.6 9.5 9.5Quebec 8.8 8.6 9.1 8.6 8.3 8.0 7.2 7.3 8.5 7.9 7.7 7.9 7.8Ontario 6.3 7.1 6.9 6.8 6.6 6.3 6.4 6.6 9.0 8.7 7.8 7.8 7.8Manitoba 5.1 5.1 5.0 5.3 4.8 4.3 4.4 4.1 5.3 5.4 5.4 5.5 5.7Sask 5.8 5.7 5.6 5.3 5.1 4.7 4.2 4.1 4.8 5.2 5.0 4.6 4.5Alberta 4.7 5.3 5.1 4.6 3.9 3.4 3.5 3.6 6.6 6.5 5.5 4.9 4.8BC 7.8 8.5 8.1 7.2 5.9 4.8 4.2 4.7 7.7 7.6 7.5 6.7 6.6


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Canada 1.2 2.4 2.4 1.8 1.4 1.9 2.3 1.7 -1.6 1.4 1.5 0.9 0.8N&L 2.9 1.8 2.2 1.0 -0.1 0.7 0.7 1.0 -2.9 3.5 2.7 1.2 1.0PEI 1.4 1.8 2.0 1.3 2.0 0.5 1.2 1.2 -1.4 3.1 1.8 0.8 0.3NS 0.9 1.8 2.0 2.6 0.2 -0.3 1.3 0.9 -0.1 0.2 0.0 1.0 1.8NB -0.3 3.9 0.0 2.1 0.1 1.4 2.1 0.6 0.2 -0.9 -1.2 0.4 0.3Quebec 1.1 3.8 1.6 1.5 1.0 1.3 2.3 1.2 -0.8 1.8 1.0 0.3 0.6Ontario 1.9 1.8 3.0 1.7 1.3 1.5 1.5 1.5 -2.4 1.6 1.8 0.6 0.7Manitoba 0.3 2.3 0.6 1.1 0.6 1.2 1.6 1.7 0.0 1.9 0.7 0.7 0.6Sask -2.8 1.7 1.7 0.8 0.8 1.7 2.1 1.7 1.3 0.9 0.3 1.6 1.4Alberta 2.9 2.5 2.7 2.4 1.5 4.8 4.7 3.1 -1.3 -0.4 3.8 2.4 1.8BC -0.5 2.3 2.5 2.4 3.3 3.0 3.2 2.0 -2.1 1.7 0.8 1.7 0.9


Unemployment rate in Canada and the provinces

Employment growth in Canada and the provinces

Real GDP growth in Canada and the provinces

23


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Canada 4.4 6.3 3.6 4.6 5.6 6.4 5.9 3.7 -2.9 5.6 4.1 3.4 2.8N&L 9.3 4.0 6.1 0.4 1.1 3.2 8.6 7.4 1.6 4.6 5.1 3.0 2.8PEI 4.0 3.4 1.0 0.2 2.7 6.0 7.4 5.1 -1.3 5.3 5.6 2.8 2.5NS 3.6 6.1 1.8 2.9 2.2 5.8 4.3 4.1 0.1 4.5 3.5 3.5 3.6NB 3.0 3.9 0.5 1.8 4.7 6.2 6.2 6.5 0.8 5.0 4.8 2.8 3.0Quebec 4.2 6.1 4.5 4.2 5.1 4.9 4.5 4.9 -1.1 6.2 2.9 3.2 2.0Ontario 2.5 5.9 3.4 3.0 4.8 4.0 3.8 3.9 -2.5 5.4 3.6 3.0 2.4Manitoba 5.8 7.0 3.6 6.6 5.9 4.1 8.9 6.9 -0.4 5.7 4.3 4.2 3.2Sask 4.4 7.6 5.0 3.9 5.4 7.0 13.6 11.7 -0.5 3.4 7.5 5.0 3.8Alberta 8.9 9.0 4.4 10.3 11.9 15.4 9.9 0.2 -8.3 6.0 6.9 5.3 4.5BC 5.9 6.3 2.7 6.3 4.6 7.6 7.1 1.5 -4.4 5.4 3.1 2.8 3.3


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Canada 163.0 205.2 218.6 233.1 225.0 228.2 228.7 211.6 148.2 191.3 193.3 206.0 183.0N&L 1.6 2.4 2.5 2.9 2.5 2.3 2.6 3.2 3.0 4.1 3.5 3.5 3.4PEI 0.6 0.7 0.8 0.9 0.9 0.7 0.7 0.7 0.9 0.8 1.0 0.9 0.8NS 4.0 5.0 5.1 4.6 4.8 4.9 4.7 4.1 3.4 4.4 4.7 3.7 3.8NB 4.0 4.0 5.0 3.8 3.9 4.0 4.4 4.4 3.5 4.5 3.2 2.4 2.5Quebec 27.5 42.2 50.3 58.3 51.4 47.6 49.0 48.0 43.9 51.0 48.2 44.5 40.5Ontario 73.7 83.7 84.7 85.2 78.3 74.4 67.8 75.5 49.8 60.8 67.8 76.5 62.0Manitoba 2.9 3.7 4.2 4.4 4.7 5.1 5.7 5.5 4.0 6.1 5.9 6.8 6.4Sask 2.4 2.9 3.3 3.8 3.3 3.6 5.9 6.9 3.8 6.1 7.2 8.3 8.6Alberta 29.1 39.0 36.4 36.3 40.7 49.0 48.4 29.3 20.0 26.9 25.5 31.5 31.8BC 17.2 21.5 26.4 33.0 34.4 36.5 39.5 34.2 16.0 26.7 26.4 27.3 23.0


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Canada 2.5 2.3 2.8 1.9 2.2 2.0 2.1 2.4 0.3 1.8 3.0 1.9 2.0N&L 1.1 2.4 2.9 1.8 2.6 1.8 1.4 2.9 0.3 2.4 3.4 2.8 2.3PEI 2.6 2.7 3.5 2.2 3.2 2.2 1.8 3.4 -0.1 1.8 2.9 2.2 1.9NS 1.9 3.0 3.4 1.8 2.8 2.1 1.9 3.0 -0.1 2.2 3.8 2.3 2.2NB 1.7 3.4 3.4 1.4 2.4 1.7 1.9 1.7 0.3 2.1 3.5 2.3 1.8Quebec 2.4 2.0 2.5 1.9 2.3 1.7 1.6 2.1 0.6 1.3 3.0 2.5 2.0Ontario 3.1 2.0 2.7 1.9 2.2 1.8 1.8 2.3 0.4 2.4 3.1 2.0 1.9Manitoba 2.7 1.5 1.8 1.9 2.7 1.9 2.1 2.2 0.6 0.8 2.9 1.9 2.1Sask 3.1 2.8 2.3 2.2 2.2 2.0 2.9 3.2 1.1 1.3 2.8 2.1 2.3Alberta 2.3 3.4 4.4 1.4 2.1 3.9 4.9 3.2 -0.1 1.0 2.4 1.2 2.7BC 1.7 2.3 2.2 2.0 2.0 1.7 1.7 2.1 0.0 1.4 2.3 1.7 1.7


Inflation in Canada and the provinces (%)

Housing starts in Canada and the provinces (000s of units)

Retail sales growth in Canada and the provinces

IN THIS ISSUE: Provincial outlook update: Shifting to a ... · IN THIS ISSUE: Provincial outlook...

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