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Semis, condos, are the future

Jason Mercer
Senior Market Analyst
Canadian Mortgage and Housing Corp.
National Post - June 23, 2007

I recently released my forecast of the Toronto metropolitan area housing market, in conjunction with the Canada Mortgage and Housing Corp.'s (CMHC) quarterlly Housing Market Outlook publication. Two key trends concerning new home construction will persist for the remainder of this year and into 2008: Total housing starts will continue to edge lower, and the share of total new construction account for by multiple-family home types (semi-detached, townhouses and condominium apartments) will continue to increase. Following are the factors underlying these market trends.

Many households in the Toronto area will continue to be interested in home ownership over the next year. Job growth will be steady in a number of different sectors of the economy and the unemployment rate will remain low, which translates into average annual wages increasing faster than the rate of inflation. Add to this the fact that mortgage rates are forecast to remain low from a historic perspective, and it makes sense homeownership demand will remain strong.

Meanwhile, a growing share of homebuyers will turn to the existing home market to meet their needs. This trend began in 2003 as the number of listings in the resale market started to increase relative to sales. As home buyers have benefited from more choice, fewer new home sales have transpired. Following the new-home sales trend, construction has started on fewer homes since 2003. Construction will start on 34,600 and 32,500 homes in 2007 and 2008, respectively. While these numbers are off the 2003 peak of more than 45,000, they are still above CMHC's longer-term forecast of 29,000 starts in 2010, which is closer to forecast long-term household formation.

Declining overall home construction is only half the story. We are also seeing a shift in the type of new homes people are purchasing. In 2007, a combination of semi-detached houses, townhouses and, increasingly, condominium apartments will account for two-thirds of new home starts. In 2008, more than 70% of foundations poured will be for one of these three home types. This is in contrast to 2002, when single-detached homes accounted for 50% of new home construction.

What has driven the trend toward more multiple-family home sales and starts? The answer lies with the rising cost of construction and, by extension, rising home prices. Since the late 1990s, when home construction in the Toronto area began moving upward, the cost of land, labour and some building materials has risen steadily. In order to remain profitable, home builders have passed these increased costs on to buyers, at least in part.

During the first quarter of the year, the median price of a newly-completed, single-detached house in the Toronto metropolitan area was $441,000. This price translated into a monthly mortgage payment of $2,220, assuming a 25% down payment and the average five-year, fixed-rate mortgage at the end of the first quarter amortized over 25 years. Adhering to the rule-of-thumb, gross debt to service ratio of 32%, the annual household income required to carry this mortgage would be $83,000. This required income is above the estimated median household income for the Toronto area.

While many households would like to purchase a new, single-detached home, prices have dictated that many of these households have had to turn their attention to the less expensive multiple-family alternatives. As shown by the numerous construction cranes seen throughout the Toronto area, condominium apartments have become increasingly popular in the multiple-family home category. In 2007, condominium apartment starts and sales will be in line with the record and near-record levels experienced over the past two years.

Posted on Wednesday, July 18, 2007 at 06:01PM by Registered CommenterElaine in | Comments1 Comment | References1 Reference

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Reader Comments (1)

this can't be prevented...
September 17, 2008 | Unregistered Commenterrenovation calgary

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