First-time buyers drove Canada's decade-long housing boom and they will lead the market out of the current downturn, says Phil Soper, president and CEO of Brookfield Real Estate Services. Brookfield owns the Royal LePage and La Capitale brands in Canada, and it recently acquired GMAC Real Estate, which has almost 17,000 sales reps in Canada and the United States.
Speaking at a recent Scotiabank forum, Soper said first-time buyers represented almost 70 per cent of the market when it peaked in 2007. Now they account for about 40 per cent of all transactions.
"Like stalled credit, the cycle of buyers and sellers grinds to a halt when first-time buyers disengage," said Soper. "It's like sand in the gears of the real estate market." He said young new buyers allow entry-level homeowners to move up to larger homes as children arrive, and in turn that helps mid-price owners aspire to more luxurious homes. "But without mover-uppers, they are stuck," said Soper.
He said it's going to take lower home prices and "transactional risk mitigation" to make first-timers start buying again. That is already being helped by dropping prices and historically low mortgage interest rates. Government incentives such as those announced in the recent federal budget will also help, he said.
The risk mitigation is helped by the return of conditional offers. During the boom, potential buyers often found themselves in bidding wars for desirable properties, and had to submit "clean" offers without any strings attached. With the softer market, now offers are being accepted with conditions on such things as successfully obtaining financing and home inspections.
Soper says the real estate industry is also seeing a shift away from the traditional "listing side" of the transaction and more to a focus on buyers. Buyer agency is growing, and brokerages are holding events such as first-time buyer seminars to help educate those entering the market. He says seller-driven contractual offers are also increasing to try and seal a deal.
Noting that housing markets have traditionally rebounded well after a recession, Soper predicted the current downturn would last about seven quarters, the same as the market correction in 1989/90. That would mean the market would flatten in the third quarter of this year and start its recovery in the fourth quarter.
Soper's forecast is more optimistic than that of his Scotiabank hosts.
Addressing the overall economy, chief economist Warren Jestin said, "The worst of the bad news will be in the first six months of this year, and next year the good news will outweigh the bad news." But he said it will be a long recovery that "may linger beyond 2010."
Senior economist Adrienne Warren said, "Another 15 to 20 per cent decline in the volume of resales is likely this year, with a further 10 per cent drop in average prices. Centres with the largest supply-demand imbalance, including Vancouver, Sudbury (Ont.) and Calgary, have relatively greater downside risk."
But she repeated what most observers have been saying about the Canadian housing market all along – that as bad as it gets in Canada, the situation is better here than in the U.S. There were far fewer subprime mortgages issued in Canada than the U.S., and the number of mortgage defaults in Canada still lingers near a record low, at about one-third of one per cent. Canadians also have more equity in their homes than their U.S. counterparts – almost 70 per cent, compared to about 45 per cent in the U.S. – reducing the risk of foreclosure.
Despite the introduction of a tax credit in the federal budget to promote renovation activity, Warren says the outlook for the renovation industry is "somewhat mixed." Spending on home improvements and alterations in Canada was close to $40 billion last year, about the same as was spent on new construction.
"The main factors behind the boom in renovations in recent years – record existing home sales, rising home prices and equity, high new home prices, record homeownership rates, an aged housing stock, and strong job and income growth – are no longer supportive," says Warren. "Renovation expenditures are typically highly cyclical, as are other areas of big-ticket discretionary spending. Job worries and a tendency for households to boost savings in today's uncertain economic and financial climate will likely trump the desire to undertake a significant new home renovation."