Northern lights
Canada’s property market is beginning to shine brightly again, as Rosanne Barrett discovers
Analysts of Canada’s property market are optimistic, but cautiously so. Having dodged the worst of the North American property freefall, Canada is emerging from the dark depths of the global financial crisis with its industry intact. Industry experts are now declaring that there is light at the end of the tunnel, with both property prices and the number of transactions on the up.
Senior economist for investment firm BMO Nesbitt Burns, Michael Gregory says, “The worst of Canada’s recession occurred through December 2008 and January of this year. Things were looking really bleak. It caused people to be cautious. Now, thanks to low mortgage interest rates, buyers are more confident. The worst is over.”
As a result Canada’s real-estate agents are really busy. The Canadian Real Estate Association (CREA) found in mid-July that the market had bounced back significantly in the second quarter of 2009, recording the fourth strongest quarterly sales figures for non-seasonally adjusted home sales ever. It was the first year-on-year increase in quarterly activity since the end of 2007. The number of transactions has been increasing every month since the beginning of 2009 and real-estate agents say the average sale price is also rising.
CREA president Dale Ripplinger notes that home sales across the country are recovering. “Potential buyers who moved to the sidelines late last year, when economic uncertainty peaked, are returning to the housing market now that the worst of the recession may be behind us,” he says. “Sales momentum remains strong going into the second half of 2009. Chances are good that the number of transactions in the second half of 2009 will surpass levels in the first half of the year.”
Unlike its neighbour, the United States, Canada’s property market did not experience an excessive boom during the mid-2000s and it was also spared the bust. Until its mid-2007 peak, the real-estate market grew year on year from 2000, in line with Canada’s increasing wealth (which is linked to rising commodity prices). But from October 2007 to October 2008 the median house price dropped about 10 percent, from CA$312,024 (HK$2.16 million) to CA$281,133, according to the Knight Frank Global House Price Index. In its latest report, which incorporates data from the first quarter of 2009, prices have fallen by 2.4 percent compared with the last quarter of 2008.
Although Canadians were not greatly affected by the sub-prime loans disaster, the economy fell on the back of decreased trade with the U.S., its major trading partner. Government agency, the Canada Mortgage and Housing Corporation (CMHC) found the market’s decline at the end of 2008 was in line with an orderly fall in the market from peak levels, and its chief economist Bob Dugan says the global crisis contributed. Dugan is positive going forward, saying, “Housing market activity will begin to strengthen in 2010 as the Canadian economy recovers, bringing housing stats more in line with demographic fundamentals over the forecast period.”
Industry experts expect Canada’s property market to recover gradually over the next four years: by 2013 the number of transactions is expected to reach the pre-crisis figure. In July, a report from the CMHC found the number of new property constructions would also increase slowly until 2014, in line with expected increases in population.
Canada’s housing market varies across its vast nation and two of the most popular areas for Hongkongers to invest are Toronto and Vancouver. But despite promising news on the property market for Canada overall, analysts expect the market to flounder in these cities over the coming years. Throughout 2008 the average home price in Toronto was CA$348,000, up 3.5 percent on the previous year, according to the CREA. But in 2009, the CREA anticipates that the average house price will drop by 2 percent, with another fall of 1 percent in 2010, leaving the average house price at CA$329,943. It is a similar story in Vancouver where prices are tipped to drop 5 percent this year, and another 1 percent in 2010 to CA$504,000.
But an average home in Toronto or Vancouver is a far cry from the average Hong Kong shoebox apartment. Since the 1930s, the average Canadian home has increased in size from about 800 square foot to almost 2,000 square foot. Most new properties have three bedrooms and two bathrooms. One such home currently for sale within minutes of the University of Toronto and Toronto Inner Harbour, is an older property in need of work. It is listed for CA$345,000. You can also pick up a semi-detached property in central Toronto with three bedrooms, three bathrooms and a basement, for CA$355,000. No surprise then that Remax executive vice-president Michael Polzler says the current market has “some of the best real-estate deals this market has seen in years”.
Away from the big cities, property prices are expected to grow on the back of increasing demand. Take the fishing and mining city of St John’s in the extreme northern province of Newfoundland. Though the town is small, it has experienced one of the biggest property booms in Canada, recording an average increase in home values of 19.6 percent in 2008 to CA$187,571. Even in crisis-wracked 2009, St John’s property prices are expected to grow 12.6 percent, plus another 5 percent in 2010 to bring the average house price to CA$204,000.
Overall, property prices in the major cities of Canada are forecast to grow from their current levels throughout this and next year – but with only an increase of 0.2 percent next year.
While Canada is strong and stable politically and economically, potential investors should note that tax rates are relatively high. Non-residents must pay tax on their Canadian-earned income, including a 25 percent rental tax that is withheld by the property manager. Capital gains tax is calculated at an individual’s marginal tax rate on half the amount of the capital gain minus the costs incurred for the property. Local authorities also levy property taxes, these are between 0.6 percent and 2 percent of a property’s worth, depending on the province and the property. On the plus side, the interest rate for mortgages is currently very low and the base interest rate is 2.5 percent. Also, tax deductions are permissible, including maintenance costs, depreciation, travel, utilities and management and administrative fees.
Another bright point for investors is the high demand for rental accommodation in Canada’s big cities. In Toronto last year the rental vacancy rate hovered around 2 percent, while in Vancouver it was about 0.5 percent. As landlords are able to set rents freely in most provinces, the price of rentals has risen steadily. The CREA expects this trend to continue throughout this year and next, and rates Canadian properties as having a 6.48 percent rental yield.
Overall the Canadian property market remains buoyant despite the recent falls. An optimistic nation, a recent survey by the CMHC found more than 70 percent of Canadians believed now was a good time to purchase a home in their community.
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