Moishe Alexander’s Review

Niagara Falls, Ontario - Credit Flickr Creative Commons

The apartment vacancy rate in the St. Catharines-Niagara Census Metropolitan Area (CMA) edged up to 4.3 per cent in 2008 from four percent in 2007. The vacancy rate reversed back to its 2006 level. Although the movement of renters into home ownership slowed, fewer youths entered the rental market leading to increase in vacancies. The vacancy rate will shift back to four per cent in 2009, as movement to home ownership slows.

Vacancy Rate Trends Up

The vacancy rate for private rental apartment buildings with three or more units in the St. Catharines- Niagara CMA (hereinafter Niagara) was above the national and provincial averages. According to the Fall 2008 Rental Market Survey conducted biannually by the Canada Mortgage and Housing Corporation (CMHC), the vacancy rate moved higher to 4.3 per cent in 2008 from four per cent last year and above the ten-year average level. Softer demand for rental apartments across almost all bedroom types contributed to the increase in the vacancy rate. Demographic and economic factors are the main drivers of rental demand. Niagara’s population has been declining since 2004 with the number of deaths exceeding and growing faster than the number of births. Moreover, the latest statistics show that there are nearly as many people leaving the region (mostly to other provinces) as there are moving into it (mostly international immigrants). This is in contrast to the positive contribution from migration to population growth the region had been experiencing in the decade prior to 2004.  Typically, international imigrants, who are the main driver of migration into the region in recent years, tend to rent a home when they first arrive. Later on, with better employment opportunities they decide to move into ownership. With fewer immigrants choosing Niagara as their new home, the demand for rental subsided. Overall, the negative population growth eased demand for rental accommodation in the region. A strong labour market supported the movement of renters into home ownership, however at a slower pace than in the past. According to the 2006 Census, the ownership rate in Niagara is 74.6 per cent, well above the national average rate of 68.4 per cent. Over the last 15 years, (i.e., the latest three census periods) the home ownership rate in the region gained more than three percentage points. Job growth during the January-September period of 2008 was 3.4 per cent from the same period last year. Job creation in service-producing sectors accounted for the major part of the employment growth. It is worth noting that employment grew strongly among young people aged 15-24, an age group which typically prefers renting. However, the employment growth has not translated into demand for rentals, as jobs were created only in part-time positions in the service sectors. On average, employment in the service industry doesn’t command as high a wage as a job in the goods-producing sector. Therefore, this didn’t lead to a push in demand for rental apartments. In general, there is a tendency for young people to stay longer in their parents’ home, since with a more competitive labour market they need to spend more time on education. There are other factors which affected the vacancy rate. While the number of purpose-built rental unit completions remained unchanged (67 units in the four quarters ending with the second quarter of both 2008 and 2007), the conversion of some units from rental to condominium caused the stock of rental accommodation to shrink by 0.7 per cent to 15,574. This reflects the fact that some property managers facing softer conditions in the rental market decided to convert their properties into ownership units. This helped limit the increase in the vacancy rate.

Vacancy Rates Increased for Apartments in Almost All Size Categories

Vacancy rates have gone up for all apartment types but 3-bedroom apartments. The vacancy rates for one- and two-bedroom apartments determined the direction of the overall vacancy rate since they account for almost 90 per cent of the total rental apartment universe. The vacancy rate for one-bedroom apartments (37 per cent of the universe) widened to 4.6 per cent from 3.9 per cent last year. Similarly, the vacancy rate for two-bedroom apartments (52 per cent of the universe) edged up to 4.1 per cent from 3.9 per cent.

Rents Increase Less Than Inflation

Despite weak demand for rental housing, average rents in Niagara continued to rise. The average rent for a two-bedroom apartment in the fixed sample, which focuses on the comparable units and excludes the impact of changes in the rental stock due to construction, demolition and conversions, increased 1.8 per cent between October 2007 and October 2008. This is slightly lower than the increase of 1.9 per cent a year earlier. Still, this increase was above the Residential Tenancies Act Guideline for 2008 of 1.4 per cent. The increase in rents was less than the year-overyear inflation rate of 2.6 per cent.

Weaker Demand for Some Services Drives Up Vacancies in Niagara Falls

Although the overall vacancy rate moved higher, the vacancy rates varied across the seven zones in which Niagara is divided for rental market survey purposes. The vacancy rates increased in three zones and decreased in the other four. The largest increase, from 2.5 per cent in 2007 to 5.9 per cent in 2008, occurred in the vacancy rate for the core of the City of Niagara Falls (Zone 3). This vacancy rate was the highest among the seven zones and was the same as the Zone 3 vacancy rate in 2006. This market is dependent on tourism and ancillary services and the decrease in the number of customers at gambling facilities led to a reduction of the workforce in the information, culture and recreation services industry. This in turn reduced rental demand and pulled the rate back to the high levels which are usual in this zone. An increase in the vacancy rate in Zone 2 (non-core area of the City of St.Catharines) from 2.7 per cent in 2007 to 4.7 per cent this year has also contributed to the overall increase in Niagara’s vacancy rate, as almost a third of the total rental stock is located here.

Vacancy Rates High in Older Buildings and for Low-Rent Apartments

Despite their lower rents, the vacancy rate was higher in relatively older buildings. Compared to the previous year, the vacancy rate has gone up in buildings constructed before 1974. Newer buildings, especially those built after 1990, benefited from a decline in the vacancy rate. Since around 41 per cent of the total rental stock was built between 1960 and 1974 period, the increase in the vacancy rate in buildings constructed during that period from 3.6 per cent last year to 4.8 per cent in 2008 lifted the overall average vacancy rate higher. Although the rents in larger buildings are relatively higher, renters prefer large buildings, as the availability of amenities makes them more attractive. The vacancy rate in buildings with over 100 apartments was the lowest at 2.4 per cent. About 20 per cent of apartments are in buildings with at least 100 units. The vacancy rates for higher-rent units (those between $800-899, and above $900) were relatively lower compared to less expensive units. Yet, the vacancy rate increased for expensive rental units (above $900) from 1.5 per cent in 2008 to 3.3 per cent. As this rent range competes with homes with modest prices, some renters opt for homeo wnership rather than paying a high rent.

Townhouse Vacancy Rate Higher Too

Rental townhouse (row) vacancy rates also increased, to 5.8 per cent in 2008 from 5.1 per cent a year ago. The same factors raising apartment vacancy rates were at play here. Further movement into home ownership eased the vacancy rate in townhouses. At 848 units, they account for only around 5 per cent of the rental stock.

Availability Up in Tandem with Vacancies

Rental availability rate provides a broader supply measure of what a landlord has available to market to prospective tenants than does the vacancy rate. The availability rate measures the combined incidence of vacant units, as well as units where the existing tenant has given notice to move but has not yet vacated the unit and the landlord has not yet found a replacement. Consistent with the vacancy rate, the availability rate in Niagara trended higher in 2008. According to CMHC’s Rental Market Survey, 6.8 per cent of rental apartments were considered available for renting in October 2008, up from 5.7 per cent last year.

Affordability Slightly Lower

The rental affordability indicator is a gauge of how affordable a rental market is for those households who rent within that market. A generally accepted rule of thumb for affordability is that a household should spend less than 30 per cent of its gross income on housing. The rental affordability indicator examines a three-year moving average of median income of renter households and compares it to the median rent for a two-bedroom apartment in the centre in which they live. More specifically, the level of income required for a household to rent a median priced two-bedroom apartment, using 30 per cent of its income, is calculated. The three-year moving average of median income of households in a centre is then divided by this required income. The resulting number is then multiplied by 100 to form the indicator. An indicator value of 100 indicates that 30 per cent of the median income of renter households is necessary to rent a two-bedroom apartment going at the median rental rate. A value above 100 indicates that less than 30 per cent of the median income is required to rent a two-bedroom apartment. Conversely, a value below 100 indicates that more than 30 per cent of the median income is re-quired to rent the same unit. In general, as the indicator increases, the market becomes more affordable; as the indicator declines, the market becomes less affordable. According to CMHC’s new rental affordability indicator, affordability in Niagara’s rental market weakened slightly in 2008. The cost of renting a median priced two-bedroom apartment increased by 2.2 per cent, while the median income of renter households improved by only 0.5 per cent. The rental affordability indicator in Niagara stands at 102 in 2008, down from 104 the previous year.

Rental Market Outlook

The private apartment vacancy rate in Niagara is expected to slightly tighten reto four per cent in 2009. The expected slowdown in the economy coupled with announced lay-offs will limit income growth, implying fewer people will move into home ownership. Demographic trends will continue to have an important impact on the rental market. The aging of the population suggests demand for rental will increase. Senior households are expected to continue to move back into rental as their children leave home, since this is more convenient as they will no longer be responsible for maintenance and they will obtain equity cash to supplement their old age income. Also, rental buildings are typically located closer to necessary amenities such as medical assistance and transportation. An expected rebound in the number of international migrants who will come to live in Niagara will also raise demand for rentals.

You can find the entire report in PDF format through the following link:

http://www.cmhc-schl.gc.ca/odpub/esub/64451/64451_2008_A01.pdf

Moishe Alexander’s Review

New Home Market – New Home Construction Under Pressure

St Catherines, Ontario - Credit B. Gilliard, Flickr

Moishe Alexander says new home construction will ease back by 12 per cent to around 1,000 homes in 2009 from 1,140 home starts in 2008. The contraction will be felt across all housing types, with the number of single detached home starts easing off by about 13 per cent. Given their popularity, townhouse starts will moderate by only 8.3 per cent. The lower number of starts is attributable to uncertainty about economic prospects, limited land supply, demographic changes and more selection in the resale home market. Construction of single-detached homes will continue to moderate because of land supply limitations.

This will translate into higher prices, especially in the relatively built-up northern part of St. Catharines- Niagara. Given the land supply limitations and Greenbelt legislation constraints in the north, more active residential construction is expected to occur in the southern areas of the region. Single-detached homes will also continue to lose their attraction due to changes in the region’s demographic composition. The declining average number of persons per household suggests that smaller households will require smaller and less expensive homes. Moreover, an aging population will need to live closer to amenities, in homes which are easier to maintain than single detached houses. In some cases, wealthy seniors will move from small single-detached houses to larger condominium apartments. This is still a movement to higher-density housing. To accommodate a growing population of older people, there will be more construction of townhouses and apartments, more retirement home building and many redevelopment projects. Some of these projects are expected to take place in former industrial sites abandoned by the manufacturing industry. Prices for new homes will continue to grow although at a slower pace than in 2008. Rising residential construction costs associated with land supply constraints and higher development charges will account for the major part of the increase. Increasing concrete and steel costs will also contribute to higher costs for high-rise construction. Consequently, in 2009, there will be a shift to more modestly priced housing which will lower the average price. The softening and well-supplied resale market will offer a broader selection of homes for buyers thereby encouraging more interest in resale homes which are more affordable relative to the new home market. The price differential between Toronto and St. Catharines- Niagara homes, on the other hand, will continue to attract many well off households from Toronto area, especially among people of preretirement age and those whose commutes are less-than-daily because of workplace flexibility. This will provide some support to the slowing market.

Resale Market – Back to Balance

Moishe Alexander says sales are forecasted to moderate again in 2009 by 4.9 per cent to 5,800 transactions. A moderation in employment, slow growth in earnings and less migration are the main factors behind the projected tapering off. Prices increasing at a more subdued pace will mitigate the decline in demand. The region is losing population to all other areas in Canada except for Toronto and Hamilton. Since people moving to St. Catharines-Niagara tend to be older than those leaving, there will not be as many first-time buyers coming to the region. At the same time, the housing demand of incoming migrants from Toronto and Hamilton will be probably more concentrated in the adult lifestyle-housing segment of new homes. The number of listings in 2009 is expected to trend slightly higher to the 12,600-level which is a moderate gain of 0.8 per cent after the 6.7 percent increase in 2008. The sales-to-new listings ratio will move down to balanced market territory at around 49 per cent in 2008. The ratio will ease down slightly in 2009. The greater selection in the resale market will underlie the deceleration in the growth of resale home prices to 1.9 per cent, a rate similar to inflation. Buyers will have definitely more options to find a home of their choice. Resale home prices have been growing slower than new home prices in 2008. This is forecast to change in 2009 as builders will start sensing demand for new homes is declining. As a result, the resale price growth will again outpace new home price growth, but both will be slower than in the past.

Economic Factors- Local Economy to Contain the Slowdown

Moishe Alexander says that in 2008, the labour market has been strong creating slightly over two percent more new jobs. In 2009, the economy is not expected to perform as strongly. Employment is forecast to moderate by 0.7 per cent and the unemployment rate will edge a little higher. The moderating employment picture is also consistent with demographic trends. The region has one of the oldest and slowest growing populations in Canada. More and more baby-boomers will be retiring in the coming years and since the migration into the region is not expected to be strong, the labour force will be shrinking. Several strong service-producing sectors, particularly health care, public administration and, to a lesser degree, educational and financial services, will have better performance somewhat offsetting job losses in other sectors. Even tourism sector which is perceived to be very vulnerable to the fluctuations in the value of the Canadian dollar has been doing relatively well. Although the number of trips by US citizens is down significantly, a steady inflow of international tourists and more domestic travellers have sustained the tourist industry. Average weekly earnings will grow in 2009 but at a slower rate than in 2008. Some service sectors are adding relatively high-wage jobs. The regional economy is becoming better positioned to weather economic downturns thanks to diversification of the production base. Also, the region is gradually shifting more to the creation of many smaller but more viable businesses which replace large plants.

Mortgage Rates

Moishe Alexander says that mortgage rates are expected to be relatively stable throughout the last quarter of this year, remaining within 25-50 basis points of their current levels. Posted mortgage rates will decrease slightly in the first half of 2009 as the cost of credit to financial institutions eases. Rising bond yields, however, will nudge mortgage rates marginally higher in the latter half 2009. For the last quarter of 2008 and in 2009, the one year posted mortgage rate will be in the 6.00-6.75 per cent range, while three and five year posted mortgage rates are forecast to be in the 6.50-7.25 percent range.

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64315/64315_2008_B02.pdf