Historically, when economic drivers such as employment, growth in the working population and average weekly earnings stabilize or improve, the housing market will experience growth.
According to Canada Mortgage and Housing Corp. (CMHC) senior market analyst Chris Janes, that’s precisely what’s happening in the St. John’s Census Metropolitan Area in 2018, and much of is due to a rebound in the province’s oil and gas sector.
“We've had some positive messages so far this year related to the oil sector, of course the price of oil being the big one offsetting the provincial government's fiscal situation,” Janes said following a presentation at the Canadian Home Builders Association Newfoundland and Labrador (CHBA-NL) chapter luncheon on Tuesday, during which he noted that the province’s royalties increase by $25 million for every $1 increase in the price of a barrel of oil.
“As we move forward we expect to see the rebound in consumer confidence and business confidence continue and that should bode well for the housing market overall.”
CHBA-NL president Randy Oram says the organization is looking forward to consumers regaining some gumption in the years ahead.
“We're definitely looking forward to that,” Oram said. “The trend line has been down and it's showing a small little trough there, so we are super excited to start seeing that line go back up, because it has been a tough few years for our home builders.”
While employment through other capital projects at Long Harbour, Muskrat Falls, and Voisey’s Bay are also factors, it’s the oil sector’s past, present and future developments that are fuelling the rebuilding confidence.
“The future potential is huge and the housing cycle that we just came through in terms of a down cycle was maybe warranted based on the cycle we came through prior to that in terms of very robust activity,” Janes stated, pointing to the 2008 through 2012 period.
“I think now we're repositioning for another growth cycle as we move into 2019 and beyond, and obviously the oil sector will be a huge driver of that growth.”
That said, there are still challenges facing the housing market related to employment losses, stagnant GDP growth over four years and a provincial fiscal model that sees the province with the highest revenues and highest expenditures per capita in Canada.
These types of turnarounds, Janes said, usually take between 18 and 24 months, but the numbers from 2017 compared to the first half of 2018 indicate it’s comfortably underway.
While total housing starts in 2017 were down more than 60 per cent from the peak in 2012 — 763 starts compared to 2,153 — the decline has slowed to four per cent year-to-date in 2018, even factoring in a slower-than-expected August.
Not surprisingly, the makeup of those housing starts has shifted dramatically from single-detached homes to more multiples, which include row houses, semi-detached and duplexes. It’s not an indication the market is suffering, Janes said, but because housing starts are largely driven by demand, not speculation, and right now there are more first-time buyers looking for lower-priced properties and more current home-owners with economic trepidation choosing to stay put rather than move into a bigger, more expensive property.
In fact, total housing starts over the last two years have been at or near the pre-2000 level.
“I think that's just representative of where we are relative to where we've been in the past,” said Janes, noting anything below 1,000 per year is considered a depressed market. “I don't think that's going to be a sustainable growth rate and we'll start to climb back towards anywhere around 900 to 1,300 housing starts a year. That would be a reasonable number to see and once we go beyond that we'll be back into a growth phase.”
As for the MLS residential market, Janes said it’s “hanging in there” following a corrective phase.
Average prices are relatively stable and should close out the year just above the $300,000 mark, and it will remain a buyers’ market and will continue with an ample supply for listings.
A significant factor in new home starts and sales of existing homes, but one the CMHC and the CHBA-NL won’t be able to gauge until later this year or early next year, are new mortgage lending qualifications rules introduced by the Office of the Superintendent of Financial Institutions (OSFI) and the federal department of finance.
As of Jan. 1 all federally regulated financial institutions are required to stress-test borrowers’ applications using a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate or their contractual rate, plus two percentage points.
Both Janes and Oram say it’s particularly hurting homebuilders.
“They've had contracts in place that have gone south when the rule changes came into play or they've had people come looking for a pre-sale and they haven't been able to get the pre-sale done because they haven't qualified for the financing associated with that,” Janes said.
Oram says the new rules are also lowering the price point home shoppers are considering.
“If the household income could afford a $350,000 household, now they're probably down to $300,000,” he says, noting that the housing stock is changing to more row houses and semi-detached properties as a result.