Housing report worth examining

An excellent report on the United States Housing market, the State of the Nation’s Housing: 2005, was recently released by the Joint Center for Housing Studies at Harvard University. 

A notable difference when comparing this report with a similar one by Canada Mortgage and Housing Corporation is the involvement of a cross-section of stakeholders across the U.S. such as the National Association of REALTORS, the National Association of Home Builders, as well as banking and mortgage groups.

In contrast, Canada’s 2004 housing report by CMHC has no recognized or stated involvement from leading housing organizations like the Canadian Real Estate Association or the Canadian Home Builders’ Association.

The American report better captures some of the underlying trends behind the bull housing market of the past few years. The executive summary in the first paragraph succinctly assesses 2004 and predicts a key issue ahead for 2005: “House prices, residential investment, and home sales all set records again in 2004. But higher short-term interest rates and the strongest price appreciation since 1979 made it more difficult for first-time buyers to break into the market. With low-wage jobs increasing and wages for those jobs stagnating, affordability problems will persist even as strong fundamentals lift the trajectory of residential investment.”

The American report highlights the fact that homeownership posted an all-time high in 2004 of 69 per cent and indicates that 2004 ushered in well over one million new owners. Canada’s was 66 per cent in 2001 and could well be as high as the U.S. given our similar trends of new buyers entering homeownership due to such favourable mortgage rates and financing options. But, unlike the U.S. report, which uses up-to-date figures, CMHC based its recent report on 2001 Census figures.

Some other interesting points mentioned in the executive summary are:

• Borrowers cashed out $139 billion  which accounted for a third of the growth in personal consumption last year. The debt rolled over to lower interest rates resulted in savings to homeowners of $1.7 billion in annual mortgage payments. 

• There was double-digit price appreciation in 53 out of 163 of the nation’s largest metropolitan areas (e.g. Las Vegas house prices were up in the 20 to 30 per cent range). Aggregate home equity shot up 10 per cent to $9.6 trillion in 2004. The report surmises that natural and regulatory constraints on development have most likely contributed to the house price gains in areas that have risen the most. 

“Development constraints drive up land and construction costs as well as prevent new housing from keeping pace with rising demand. With inventories of homes for sale especially lean in these areas, buyers competing for the limited number of homes are bidding up prices.” 

It goes on to suggest a prescription to deal with this pricey issue. “To help keep prices from spiraling higher, jurisdictions in these metros could relax regulations in order to free up more land for residential development, increase residential densities, reduce stiff impact fees on new construction, and speed up the entitlement and permitting processes.”

• The current housing boom has lasted 13 consecutive years. The next longest expansion since 1970 lasted just five years. Nearly 18 million homes were built in the last decade. New home starts are averaging 1.9 million units a year since 2000, but inventory remains low despite all of this construction.

• Since 1999, house prices have risen faster than incomes, but 77 of the nation’s 110 largest metros still offer relatively affordable housing prices.

• The median condominium price has gone up nearly three times as much as single-family homes.

• Between 1998 and 2003, the share of home purchase loans made to other than owner-occupants went up from seven to 11 per cent. It also reflects strong growth in vacation home demand.

• National rental vacancy rates climbed for five consecutive years to above 10 per cent in the first quarter of 2004. Despite these high vacancy rates, apartment owners are taking advantage of low interest rates and strong valuations of their investments by increasing their expenditures on repairs and improvements by six percent in 2002 and eight  per cent in 2003, while 2004 was more subdued. 

• Immigrants are expected to account for one-third of net household growth and the numbers could pass the record of 10 million set in the 1990s. It also states children of immigrants that arrived in the 1980s and 1990s will become a real force of their own in the housing market in the next two decades.

• Baby boomers reaching their 50s and 60s will still be the dominant force in housing markets because of their sheer numbers and accumulation of home equity wealth. They will support demand for trade-up homes, second homes and high-end renovation projects.

• Single person households are growing. The last year it was tracked in 2000, there were 26.5 million single- person households.

• Decentralization pressures persist with longer commute times occurring. The number of metros with more than a fifth of households living over 20 miles away from the central business district rose from 17 to 44 from 1970 to 2000.

Of course, as is the case even in Winnipeg, more mature neighbourhoods are not exactly welcoming higher density construction, so the bulk of new development will continue to take place in cheaper outlying areas where commuting is a given.

• Housing affordability remains a challenge with one-in-three American households spending more than 30 per cent of income on housing, and more than one-in-eight spending roughly 50 per cent. There are an estimated 2.5 million households that live in substandard housing units. One million middle-income households from 2000 to 2003 can be characterized as having severe housing cost burdens. 

Nicolas Retsinas, the director of the Joint Center for Housing Studies, said the spate of new mortgage products, including interest-only mortgages, invariably open home buyers to more risk. If economic conditions worsen and jobs disappear, some of these buyers may lose their home. 

The other issue Retsinas singles out is that of the growing gap between the housing haves and the housing have-nots. He said they are facing real difficulties in trying to manage increasing costs of commuting and higher housing costs in areas further away from employment and from neighbourhoods they wish to live in.

How do all of these American housing market developments relate to Winnipeg? One item is the center’s strong caution to policy makers to be very careful in restricting development through regulations or other means. If you curtail supply when demand is brisk, prices will inevitably rise and create real affordability issues for prospective home buyers and jeopardize a city’s economic competitiveness because of a lack of decent, affordable housing for its work force. 

The Winnipeg Real Estate Board is well familiar with the affordability issue. In 1996, it sent a delegation to visit the Columbus Housing Partnership in Columbus, Ohio, which provides affordable housing. A hallmark of its success was promoting homeownership and giving people a hand up through programs such as down payment assistance. 

This special trip led to the establishment of the local Housing Opportunity Partnership. HOP has played a central role in reinvigorating an area of the West End by rehabilitating close to 60 homes.  HOP owes part of its success to what it gleaned from the American experience in Columbus, Ohio. 

Since HOP’s creation, the provincial and federal governments have signed an affordable housing agreement and have offered programs such as down payment assistance for low- to moderate-income buyers.

The value of housing reports is shown when public policy makers and  the private housing sector reviews them to build a common base of current knowledge, leading to better dialogue and decisions. In turn, they will ultimately serve the housing consumer and the economy better.