March 2007

Fred Ketchen:  Welcome to the Scotiabank "Find the Money" podcasts. I'm Fred Ketchen, Director of Stock Trading for ScotiaMcLeod. These monthly podcasts call on some of Scotiabank's most knowledgeable experts to help you make the most of your money. Here we'll discuss strategies designed to put you in the financial driver's seat.

For many people buying a home will be the single largest purchase they will ever make, so it's not surprising that many home owners and potential home owners give a lot of thought to the housing market. To provide insight into the outlook for the Canadian real estate market in 2007, we're joined by Phil Soper, President and CEO Royal LePage Real Estate Services, and Aron Gampel, Vice President and Deputy Chief Economist at Scotiabank.

Phil, let me start out with you, what are your projections for Canada's Housing Market for 2007?

Phil Soper: Well, the outlook for 2007 really has to start with the way 2006 closed, which was stronger than anticipated and that strength is carrying forward into the early weeks of this year. Our forecast for the year is that nationally prices should rise in the order of about 6.5%. But unit volumes, the number of homes trading hands will fall slightly by 3%. Those predictions may be slightly conservative given the strength that's being carried into the spring market.

The only other thing that I'd add, Fred, is that there's not only two economies at work in the country but two very different housing markets. The resource-based western economy and the housing market in the rest of the country. In Alberta, in particular, we're going to continue to see supply shortages and prices rising well above the rate of inflation whereas in the rest of the country things should be balanced.

Fred: Aron, let me ask you a question then, what are the key pluses and minuses for the Canadian Housing outlook you see for this year 2007?

Aron Gampel: Well, Fred, on the plus side, I think we can sort of say jobs, jobs, jobs, west, west, west and low, low, low… and I'm going to go through them very quickly. The job market is very strong in Canada. We continue to see a lot of service created jobs right across the country and I think that will continue to give Canadians confidence to be in the market. West, because that's where most of the jobs and economic activity has gravitated to. As Phil has mentioned, the resource rich regions of the country are really where it's at. And, of course, low means, low borrowing costs… they're still at levels that make Canadians, I think, like investing in the housing market.

On the negative side, and there are a few, affordability is being stretched. Prices are at very high levels and even though the pace is slowing, they're still at levels that may restrict a lot of new entrants into the market place. There's a lot of turbulence in global financial markets in recent weeks, that suggests to me that all may not be that well with the way the global economy is panning out. And, of course, the big risk from a Canadian perspective is potential for a much weaker U.S. performance led by a housing market which is already in recession south of the border.

Fred: You mentioned about the west and I guess you're talking, particularly, about Alberta as being the strongest housing market performance in 2007, just let me ask you two questions; are there any other areas other than, say the west that are showing some half decent gains in housing market performance, and then let's look it here in Ontario why is the housing activity still relatively strong in Ontario, where we keep hearing that the province's economy is relatively weak?

Aron: Well, Fred, when we look at the west, we always think of Alberta, but it's British Columbia, it's Saskatchewan and it is Manitoba as well. It's right across that region.

Fred: So this great divide the Ontario/Manitoba border is where the interest lies beyond there.

Aron: I think so but, of course, we also have resource rich regions in the east and the north as well. And those areas are also benefiting from this oil and energy related boom and economic activity. But don't sell Ontario/Quebec short even in those provinces that have areas of concern in terms of commodity growth, areas where manufacturing is still doing reasonably well, the housing markets are pretty viable.

Fred: Phil, let me come back to you. As Canada's largest cohort, the baby boomers, they're approaching retirement, what impact do you expect that this will have on our housing market?

Phil: The baby boomers have been the driving force behind the Canadian real estate market for some time. It is their great number in subsequent great wealth that created the vibrant suburbs that we have around our major cities. and they continue to hold the vast majority of the real estate value in this country.

One area in which futurists of ten, or twenty years ago were dead wrong though was in predicting that at this stage, baby boomers would be selling these expensive homes and downsizing the real estate holdings, moving into condominiums and such.

In fact, that may be happening in some cases, but there are many more things that are occurring out there and there is no one size fits all prediction for how this large cohort is going to impact the market. We do know that they are a healthier, more health-conscious cohort and they are kicking and screaming their way into retirement, and they are holding onto their real estate holdings. They're comfortable with the amount of their personal wealth that's in real property. And even if they are downsizing the actual square footage say of their primary residence, they are often re-investing money in a secondary property say a recreational property either here in Canada or elsewhere.

One of the ways that the market is responding to that is through things such as the recently introduced SRES designation, Senior Real Estate Specialist Designation that we introduced early this year, that would have realtors helping introduce baby boomer and older clients to financial planners, to estates and trust people and increasingly linked to developments, recreational developments. So if they do care to put part of their holdings into other real estate here or abroad, they have an avenue to do so.

Fred: Aron, not everybody has a pile of cash that they could just go ahead and all of the sudden plunk it down on some new real estate assets, some of us have to borrow from time to time. So it's important to understand what is your forecast for borrowing costs?

Aron: Well, Fried, I think the best chance is that they're going to stay around current levels in the months ahead and probably at least through the summer and maybe into the fall. But if we are a little bit lucky they could be coming down, that would be our major risk factor, that a slow down that is emerging in the U.S. could pull interest rates down. Right now, though, steady as she goes but with a risk of lower rates.

Fred: Phil, I keep reading comment in relationships with the real estate market in particularly from the U.S., you hear about the U.S. housing market and the slow down that's there, how do the two markets, the U.S. market and the Canadian market then compare.

Phil: Well they are very different markets. Our market continues to expand and the U.S. housing market overall is clearly in contraction. To understand the differences we have to step back and first of all look at what the central banks have done over the past couple of years. The United States which has been subject to much harsher inflationary pressure has had to take a harder line on interest rates. And as a result, they raise their rates at a quicker rate and over a longer period of time than we had to do in Canada. Their rate is not only higher but the shock from an extended and more aggressive rate rising period really hit the real estate industry hard.

And that is a real estate industry that had been stoked by a number of very aggressive financial instruments, mortgage products and such and, as a result, we have an American public that has a debt-load that is much higher than the Canadian equivalent. You layer that on top of the debt load carried by the various levels of governments, in particular the federal government of the United States, and you get a house that is just not in the kind of shape that the Canadian financial balance sheet is in. That higher debt.

I guess the final point on this is that the higher debt load they carry has translated into much more expensive housing. So affordability in the United States is at its worst level in over two decades where as here in Canada affordability, despite the rising prices in recent years, is still much better than it was relatively in 1989.

Fred: So what you're saying is we should be happy "we are where we are" in particularly if we're in the real estate market, the opportunities in Canada sure out-weigh the opportunities in the United States.

Phil: In the short-term and the medium-term, Canada is the place you want to be trading in real estate. One of the long-term things that will favor the United States is that they do have a healthier year birth rate projection than in Canada and if we push our time horizon out ten to twenty years things should look pretty good in the United States.

Fred: Interesting Phil, thank you. Thank you Aron. Thank you both for sharing your views on the outlook for the Canadian Housing Market in 2007. And thank you too for listening.

I'm Fred Ketchen join us for a new podcast next month and for more information, please visit your local Scotiabank branch. We'd love to have the opportunity to talk with you.