SOLD

I am pleased to announce the recent sale of 1707 Oughton Dr. Port Coquitlam.

For further information please visit: www.danmccarthy.ca

Market Review

Buyers aren't intending to flip units, broker says.
Greater Vancouver no longer in a 'build it and they will come market'.

Derrick Penner
Vancouver Sun

There is less speculative froth in Greater Vancouver's housing markets, according to one market researcher, evidenced by slower sales and higher levels of mortgage financing at pre-sale sites.Projects are pre-selling about 75-per-cent of their units at launch instead of selling out, Jennifer Podmore, managing partner of research firm MPC Intelligence said.

At the same time, mortgage brokers on site are busy writing up more mortgages than they would in the sell-out years of 2005 and 2006, she added, which is a sign today's buyers aren't in it simply to flip their units.
"The best way to describe it is that we've really been in a 'build it and they will come' market for the last couple of years," Podmore, said.

In the last six months, however, after a period of rapid price escalation, "we have reached a saturation point [and] a lot of investors just don't have the ability to to be taking on units the way they were."
Prices, she added, have risen to over $800-per-square-foot in downtown Vancouver, $550 - $575-per-square-foot in Burnaby and over $500 - per-square-foot in Richmond.

That means it takes "a lot more for the end user to get in [to the units]" and speculators recognize it is less likely that they'll be able to put down a $22,000 deposit for a condo and get a $40,000 boost in the unit's equity over 12 - 24 months.

MPC Intelligence, in its mid-year report, counted 4,508 pre-sale units in projects that were available for sale as of June 30, with another 15,583 units in development to be pre-sold.

With buyers in Greater Vancouver taking up about 1,400 units per month, Podmore said that's between 15 to 19
months supply. A year ago, MPC Intelligence counted 3,654 units in projects that were available for sale with another 10,570 in the development pipeline.

Podmore added that although sales have slowed down, and the number of units under development is rising, developers "are not building to exceed the amount of [expected] demand, they're building to match it."
Robyn Adamache, senior analyst with Canada Mortgage and Housing Corp. in Vancouver, said inventories of completed and unsold condominiums in Greater Vancouver remain very low - 160 in all of Greater Vancouver and only three in Abbotsford - as of July 1. "We don't see any evidence of oversupply so far," Adamache said.


However, there were also some 14,779 condominium units under construction in Greater Vancouver, a near record.

Another 665 are under construction in Abbotsford. Adamache added that a clearer picture of how well housing supply is balanced with housing demand will emerge once more of those units are complete and owners either take possession of them or attempt to sell.
As for speculative buying, while it has risen in recent years, Adamache said it has not reached alarming proportions.

CMHC uses statistics tracked by the research firm Lancor Data Corp., which counts the number of condominiums bought in the City of Vancouver's resale market that are sold again within 12 months.
Adamache said that as of April of this year, the average was 24 per cent of those condos resold within 12 months. In the early 1980s, the number of speculative buyers in the Vancouver market approached 50 per cent.

"I would say that [level of speculation] is fairly tame given the price increases we've seen over the past couple of years," Adamache said.

BLOWING OFF THE FROTH
Real estate market researcher MPC Intelligence Inc. estimates that there is less speculation in Greater Vancouver's condo markets, with slightly slower sales and more evidence of buyers arranging financing for their pre-sale units.

Units available and Units in development
Greater Vancouver: (Total July 2007) 4,508 / 15,583
Greater Vancouver: (Total July 2006) 3,654 / 10,570

By community, July 2007

North Shore: 259 / 484
Vancouver, Downtown: 247 / 1,224
Vancouver, west and eastside: 517 / 1,860
Burnaby: 600 / 988
Richmond: 370 / 1,715
Surrey, Delta, Ladner, Tsawwassen: 769 / 4,633
New Westminster: 147 / 1,268
Coquitlam, Port Moody, Port Coquitlam: 769 / 1,752
Pitt Meadows, Maple Ridge: 246 / 709
Langley, Abbotsford: 584 / 950

Source: MPC Intelligence Inc.

SOLD

I am pleased to announce the sale of 22950 Purdey Avenue, Maple Ridge.

For further information please visit: www.danmccarthy.ca

Home Sales Surpass Expectations in 2nd Quarter

Vancouver, BC – July 17, 2007.

British Columbia Real Estate Association (BCREA) reports that residential sales volume on the Multiple Listing Service® (MLS®) in BC rose 20.4 per cent to $4.98 billion in June, compared to the same month last year. Residential unit sales increased 8 per cent to 11,175 units during the same period.

The average MLS® residential price hit $445,747, up 11.5 per cent from June 2006.

“Our expectation was for a continued moderation of home sales in the second quarter,” said Cameron Muir, BCREA Chief Economist. Home sales rose 7 per cent April through June reaching 32,535 units, which is near the record 32,981 units sold during the second quarter of 2005. “Homebuyers have been scrambling to take advantage of pre-approved mortgages that were negotiated before the recent hike in posted rates,” added Muir.

The five-year conventional mortgage rate climbed 75 basis points to 7.24 per cent over the second quarter of 2007.
However, Muir cautioned that higher mortgage interest rates are not the only reason for the strong second quarter results. “Consumer confidence is crucial to housing demand in the province,” added Muir. “With an abundance of employment opportunities and rising wages and salaries, households are reaping the benefits of a robust BC economy, and demonstrating their confidence by purchasing the most expensive asset they will likely ever own.”

Year to date, MLS® residential sales volume climbed 12.5 per cent to $23.6 billion, compared to the first half of 2006. MLS® home sales edged up 0.5 per cent to 54,734 units, while the average MLS® residential price climbed 12 per cent to $431,873.

For Sale

I am pleased to announce the listing for sale of 22950 Purdey Avenue, Maple Ridge at $469,900.

This large and eye-catching 3 bedroom home in Maple Ridge is centrally located within walking distance to shopping, schools and transit. The foyer’s winding staircase leads to the upper level, with its open floor plan, designer paint colours and newer carpet. The spacious living room features a gas fireplace, spectacular mountain views and adjoining formal dining room. The kitchen opens onto a great family room with a large outdoor covered deck inviting relaxation and entertaining. There are 3 bedrooms upstairs: the roomy master bedroom features a 4 piece ensuite. Downstairs there is an above ground, well-appointed 2 bedroom suite which features a large living room with a gas fireplace. The kitchen opens onto a private patio. The downstairs suite has its own hot water tank and electrical panel. The private back yard has a 10’ x 12’ storage shed for your gardening tools and extra storage. There is a large double garage and additional parking in the driveway of this home. All measurements are approximate and are to be verified by the purchaser. 24 hours notice to view this home is required.

For further information please visit: http://www.danmccarthy.ca/properties.php?catfilter=0&nolist

Real Estate Contracts and Clauses

Couple's dream home turns out to be bat cave.
After buying the $509,000 condo without a professional home inspection, they discovered they're sharing it with flying rodents.

Linda Nguyen
Vancouver Sun
Saturday, July 14, 2007

VANCOUVER - Miles Nurse and his girlfriend Jennifer Plomt thought they had purchased a dream downtown penthouse, only to discover they've moved into a bat cave.
And they have learned what might be an expensive lesson about how to buy a home.
The 33-year-old Nurse estimates he is currently sharing his newly bought $509,000 West End condo with a dozen to 80 bats.

The flying rodents, which have nested in the walls of the third-floor penthouse and hang upside down in his bathroom door frame, began making noise the first day the young professional couple moved in June 29.
"We started hearing strange noises in the kitchen like high-pitched squealing. It sounded almost like mice and we thought it was coming from the roof," said Nurse, who works for a downtown media company.
Upon further inspection, he discovered five bats sleeping between a gap at the top of his kitchen cabinet and the ceiling. He suspects they've been coming into the condo via a hole from the rooftop deck.
This is the first home Nurse and his 29-year-old girlfriend have bought together after unsuccessfully bidding on a handful of properties since Christmas.

When the newly renovated condo came onto the market down the street from the apartment they were renting, they knew they had to competing offers.
"We saw the condo for 20 minutes and based on our past experience, we knew that if we really wanted this place, we'd have to bid beyond the asking price and give a subject-free offer," Nurse said.
Prospective homeowners can attach subjects or clauses to their bids. For example, homeowners can specify a sale will go through only if the house passes a home inspection, or make it subject to mortgage financing or the availability of property insurance.

But home buyers in a seller's market are increasingly waiving these safeguards to improve their chances of landing a property.
"We saw the property disclosure statement they showed us and there was nothing wrong with the place," Nurse said. "We knew we wanted it. We knew it was a risk but that's the state of the market now."
He did not expect the risk to include spending a day cleaning buckets full of bat feces from the condo walls or finding a baby bat sleeping in his bed.
"We thought maybe the boiler could go, or the roof might need repairs and we might spend a little bit of money but we would move on," he said.

Now he worries about the potential health risks of exposure to bats and bat feces. The couple are being vaccinated for rabies, since bats are the most common carriers of the disease in B.C.
"Seriously, we don't sleep," Nurse said. "Any little scratchy sound outside that I hear, wakes me up. I have this black-dot phobia too where I think everything looks like bat droppings."
He's concerned other potential homebuyers would make the same mistake, relying solely on a property disclosure statement from a previous owner.

Bill Sutherland, president of the Canadian Association of Home and Property Inspectors in B.C. said people mistakenly think the disclosure statement is all they need. "There's a reasonable amount of these types of sales going on in the Lower Mainland," he said. "It's not a safe practice. People spend 20 minutes looking at a house and don't look at what condition the roof is in or understand that there may be cracks in the foundation."
He said buyers get so caught up in the competition for a house painted in "pretty colours in a nice location" that they don't realize the furnace may be defective.

A home inspection takes two to eight hours and costs $300 to $600.

Nurse and Plomt say they want to sell the bat-infested condo and are considering legal action. "We will never do a subject-free offer again and we will be outbid on a lot of places, but we know now that there's nothing to protect buyers," he said.

Industrial Update

Industrial land scarcity 'driving industry away'
Chilliwack and Alberta getting the business, meeting told.

Bruce Constantineau
Vancouver Sun
Thursday, July 05, 2007

A chronic shortage of industrial land in Greater Vancouver has driven prices sky high - scaring away potential investors and restraining regional economic growth.
That was the dire picture painted by Colliers International vice-president Randy Heed on Wednesday at a Greater Vancouver Regional District-sponsored meeting in Surrey on the future of the region.

He noted Tolko Industries tried without success last year to find a 20-acre industrial site with rail access in the Lower Mainland.
"So they expanded their search to Alberta and recently [bought] a 20-acre site in Edmonton," Heed told the meeting. "That translates into lost jobs and lost opportunity for the province as a whole."
He said industrial land prices have soared above $1 million an acre in many parts of the region, by far the most expensive in Canada. Those high costs recently drove away a Toronto company that wanted a five-acre site to expand its B.C. operations.

"Much to their dismay, the overall cost was so prohibitive that they had to scrap their plans," Heed said.
He said that in 1999, his real estate firm found 30 possible locations for a company that wanted a 15-acre industrial site.
"If they came to us today, we wouldn't be able to meet their requirements," Heed said.
He said Chilliwack has experienced an economic "boom" because of the lack of available industrial sites in Greater Vancouver, noting Kal Tire recently built a new 245,000-square-foot facility in Chilliwack and relocated its employees from Annacis Island.

Credit Union Central of B.C. economist Helmut Pastrick said the long-term economic health of Greater Vancouver depends partly on its ability to attract, accommodate and retain industry.
"High industrial land prices are a restraining factor to economic growth in the region and I believe that will remain the case for a long, long time to come," he said.

Pastrick estimated the economic impact of activity on GVRD industrial lands at between $30 billion to $40 billion annually - about 30 to 40 per cent of total GDP in the region.
He said a combination of high land costs and poor productivity growth in Greater Vancouver is a recipe for a declining standard of living over time.
"Without an adequate supply of readily serviceable industrial sites, job growth will be slower, existing firms will have trouble expanding and new firms may well go elsewhere where land is less expensive," he said.
Pastrick said the region could benefit from a land reserve that would ensure industrial sites be used only for industrial purposes, not residential or commercial.

Vancouver Port Authority president Gordon Houston assured the meeting the port has no plans to convert Burrard Inlet port lands into waterfront condo developments, as was recently claimed by one critic.
"I can assure you this is neither our intention nor is it within our mandate," he said.
Richmond Coun. Harold Steves warned that no one should consider putting farmland to industrial uses in the future.
"The answer is not in raiding farmland," Steves said in response to a suggestion that industrial space and affordable housing are restricted because 55 per cent of regional land is either in a green zone or in the Agricultural Land Reserve.

"In fact, I think we will see some non-farm activities turned back to agriculture in the future - like golf courses, nurseries, horse farms and even marginal industrial land," Steves added.

INDUSTRIAL UNEASE:
Greater Vancouver has a limited supply of industrial land and faces increasing pressure for more space for people to live. The Southeast False Creek area, shown here in this file photo, is an example of industrial land now giving way to residential development. Forecasts show the region's industrial floor space will increase by more than 35% up to 2021. However, only 26% of land set aside for industrial use remains vacant. The question is: What will that floor space be built on?

10,500 hectares: Total industrial land in Greater Vancouver Regional District.
2,775 hectares (26%):
Portion of that total still vacant.
14.5 million square metres:
Total industrial floor space in GVRD.
372,000 square metres a year: How much industrial floor space is forecast to increase until 2021.
5.2 million square metres:
Forecast for how much additional industrial floor space there will be in the region by 2021.
19.7 million square metres:
Forecast total industrial floor space in the region by 2021 (up more than 35%).

Source: Greater Vancouver Regional District, Vancouver Sun

Market Review

Home sales increase makes for second-best June yet.
Buyers feel financially secure as rates inch up, analyst says.

Derrick Penner
Vancouver Sun
Thursday, July 05, 2007

An increase in Greater Vancouver home sales in June indicates both strong employment and buyer concerns about rising mortgage rates, according to at least two analysts.

Greater Vancouver recorded 3,951 sales on the Multiple Listing Service in June, a 7.4-per-cent increase from sales in June 2006 - and the second-best June on record, according to statistics from the Real Estate Board of Greater Vancouver.

Forecasts have predicted sales would slow in 2007, however, Cameron Muir said buyers are feeling more financially secure and able to afford to buy a home.
Buyers have also watched mortgage rates inch up over recent weeks. Posted rates for a five-year closed mortgage stand at 7.24 per cent, according to the Bank of Canada, compared with 6.64 per cent at the beginning of June.
Muir added that the increase can act as an incentive for house hunters who had received pre-approved mortgages at lower discounted rates to buy.

"If you look at affordability, it has eroded somewhat because of those higher rates," Muir said.
"Typically what can happen with the perception of higher mortgage rates on the horizon, many potential buyers who have been sitting on the fence not quite ready to jump right in [do buy] in anticipation of higher borrowing costs."
Robyn Adamache, senior market analyst for Canada Mortgage and Housing Corp., added that the recent bump up in interest rates was not something that she had forecast, and it makes sense that some buyers would jump in to take advantage of pre-approvals.

In general, however, she expects mortgage rates to average out at a somewhat lower rate.
"We'll probably see another [mortgage-rate] increase going forward, and then more of a downturn," Adamache added.
Banks offer discounts from their posted rates to their better customers, and Adamache said that as long as buyers can get discounted rates below six per cent, she does not believe that mortgage rates will put a significant dent in the market.

The surprise in sales statistics, Adamache added, is the strong price growth. In Greater Vancouver, prices have increased about 10 per cent over the first half of 2007, which is more than she expected.
However, she added that provincial job growth and economic performance is stronger than anticipated in her forecast, which increases demand.

Greater Vancouver, saw a continuation in the shift toward multi-family housing in its June statistics with all of its growth appearing in townhouse and apartment condominium sales.
Some 1,846 condominiums changed hands in Greater Vancouver in June, a 16-per-cent increase from June a year ago. Townhouse sales were up 3.2 per cent to 775 units.

Combined, the sales outweighed a 10-per-cent decline in June sales of single-family homes across Greater Vancouver. June saw 1,632 single-family homes sold compared with 1,805 in June a year ago.
The so-called benchmark price for a typical single-family home hit $715,715 in June, up 10.3 per cent from a year ago. The benchmark townhouse price also rose 10 per cent to reach $443,060. Benchmark condominium prices were up almost 11 per cent to $360,469.

Greater Vancouver's inventory of unsold homes also rose to 11,811 units, a 17 per cent increase over June of 2006.
In the Fraser Valley, realtors reported 2,126 MLS-recorded sales in June, a decrease of three per cent compared with the same month a year ago.
However, Adamache added that the single-family category experienced the biggest decline with 1,037 sales representing an almost 10-per-cent decrease from the same month a year ago. Condominium sales, in the meantime, were only down 7.4 per cent, and townhouse sales increased almost 10 per cent to 427 units.
The average price of a Fraser Valley single-family home hit $529,678 in June, up 11.5 per cent over June 2006. Apartment sales averaged $219,935, up 16.2 per cent and townhouse sales averaged $321,613, up 11 per cent.

The benchmark price* of a detached home in Squamish rose 24.6% from June 2006 to June of this year, the biggest percentage gain of any area in the Real Estate Board of Greater Vancouver's region and well above the board average of 10.3%.

Benchmark price*, detached homes
June 2006- June 2007
(% change)

Burnaby
$698,093 (+6.7)
Coquitlam
$621,540 (+9.4)
South Delta
$631,781 (+8.3)
Maple Ridge
$435,021 (+7.7)
New Westminster
$564,621 (+9.4)
North Vancouver
$853,247 (+12.5)
Pitt Meadows
$492,508 (+16.4)
Port Coquitlam
$521,937 (+12.2)
Port Moody
$722,100 (+8.4)
Richmond
$709,500 (+11.6)
Squamish
$522,590 (+24.6)
Sunshine Coast
$412,509 (+6.3)
Vancouver East
$645,729 (+7.5)
Vancouver West
$1,329,884 (+18.0)
West Vancouver
$1,415,852 (+6.8)
Greater Vancouver
$715,715 (+10.3)

* Price of a house typical for the area
Source: Real Estate Board of Greater Vancouver

Market Update

June Residential Sales Second Highest on Record

Vancouver, B.C. July 3, 2007
The Real Estate Board of Greater Vancouver (REBGV) reports that total residen­tial sales reached 4,244 units in June 2007, an increase of 7.4 per cent compared to 3,951 sales in June 2006.This figure represents the second highest number of sales during the month of June in the Board’s history. The highest number of sales for that month was recorded in June 2005, when 4,333 sales were reported.

The total number of new listings reached 5,533 units, an increase of 1.3 per cent when compared to the 5,460 new units listed in June 2006. Total active inventory increased by 17.7 per cent to 11,811 units when compared to the 10,033 units active in June 2006.

“Housing sales in Greater Vancouver continue to be higher than historical norms. Combine strong demand with a healthy number of listings active throughout our Board’s area, and you have a good market for both buyers and sellers,” says REBGV president Brian Naphtali.
“Clearly, real estate continues to be seen as an excellent investment,” Naphtali says. “REALTORS® continue to report strong sales activity across our entire Board area. To get a better understanding of the real estate market, we encourage consumers to talk with your local REALTOR®.”

According to Multiple Listings Service® (MLS®) data, sales of apartment properties increased by 16.0 per cent to 1,846 sales in June 2007 compared to 1,591 sales in June 2006. The benchmark price of an apartment property in Greater Vancouver, calculated by the MLSLink® Housing Price Index, is $360,469, up 10.9 per cent from one year ago. Sales of attached properties increased by 3.2 per cent in June 2007 to 775 sales, compared to 751 sales in June 2006. The benchmark price of an attached unit is $443,060, up 10.1 per cent from a year ago.

Bright spots in Greater Vancouver in April 2007 compared to April 2006:

DETACHED:
Delta South up 30.2%...................................(82 units sold, up from 63)
Richmond up 16.5%.............................. . (198 units sold, up from 170)
Vancouver East up 5.2%.......................... (244 units sold, up from 232)
West Vancouver/Howe Sound up 15.1%..... 84 units sold, up from 73)

ATTACHED:
North Vancouver up 34.9%......................... (58 units sold, up from 43)
Vancouver West up 22.7%........................... (92 units sold, up from 75)
Whistler/Pemberton up 225%........................ (26 units sold, up from 8)

APARTMENTS:
Burnaby up 10.4%................................... (223 units sold, up from 202)
North Vancouver up 8.5%....................... (127 units sold, up from 117)
Port Moody/Belcarra up 60.6%................... (53 units sold, up from 33)
Richmond up 12.8%................................ (229 units sold, up from 203)
Squamish up 312.5%..................................... (33 units sold, up from 8)
Vancouver West up 24.3%...................... (625 units sold, up from 503)
Whistler/Pemberton up 100%....................... (16 units sold, up from 8)

Market Review

CONDOS TO REMAIN AN ATTRACTIVE OPTION FOR MANY HOME BUYERS

Canada’s condo markets have delivered a strong performance in recent years, and the economic and financial outlook suggests a continued robust performance in 2007 and 2008. Like all real estate, the sales and price experience for condos will be heavily influenced by location. Since 2004, housing markets in central and eastern Canada have generally experienced a soft-landing, with activity moderating, but remaining at high levels, and with prices continuing to rise at a solid pace. The outlook is for more of the same over the next 24 months.

In contrast, new and resale housing in the west has been on fire, but soaring prices have eroded affordability in many markets. In 2007/08, housing conditions are likely to cool in the west, but this need not lead to a boom-bust cycle if price growth slows as new supply comes on the market, demand eases and speculation becomes gradually less intense. So while the risks warrant close monitoring, the TD Economics base case projection is for a moderation in western housing activity, but with the price gains, home construction and resale activity all remaining at well above their historical averages.

The regional condo markets are likely to be caught up and parallel these broad regional real estate trends, with the result that condo prices are expected to continue to post double digit gains in the west, but slower than that experienced in 2005/06, while prices in the rest of the country advance at a mid-single digit rate. Looking beyond the near-term outlook, there is fundamental support for condos in the major Canadian markets from structural economic trends, including the aging population and the continued urbanization of the country.

In March, TD Bank Financial Group conducted a survey of Canadians aged 18 and over who were potential condo buyers. The findings confirmed that condos are viewed as an increasingly attractive option for many Canadians and the sentiments expressed suggest that demand for new and resale condos will remain strong. 39% of those surveyed said they were likely to consider buying a condominium as a principal residence and this ratio had risen by 4 percentage points from a similar survey done in June 2006.

The top two reasons for preferring condos were lower maintenance costs and greater affordability, but there was more to the decision as well. The top three amenities were good building security, attractive design and environmentally friendly/energy efficiency. The last item is of particular interest, since the outcome could be interpreted in two different ways. It might reflect increased environmental awareness, which is consistent with the fact that concerns about the environment are ranking at the top of many public opinion polls. Alternatively, it could reflect a desire to keep monthly expenses on utilities as low as possible. Proximity to public transit, retail outlets and entertainment were also deemed to be attractive to potential buyers.

Surveys can provide interesting anecdotal evidence of changing consumer preferences and tastes, but they can also be misleading at times. So, the natural question is how do the survey results stack up against the current trends and the outlook for condos in Canada?

The attractiveness of condos is evident in the recent strong activity recorded in the major markets across Canada. From 2001 to 2005, condo starts have posted an average annual increase of more than 16%. And, condos have climbed from close to one-fifth of all new home construction to almost one-third over the past ten years. Despite the strong supply coming on the market, robust demand has quickly absorbed the additional units. Indeed, with the exception of Montreal, conditions have been consistent with characteristics of a sellers’ market. This can be seen by the fact that sales-to-new listing ratios on apartments, which are dominated by condos, have been well above the 0.55 mark that is traditionally thought of as being the threshold been balanced markets and sellers’ markets.

Consequently, the demand-supply balance has supported solid or strong price gains. There has been a significant regional dimension, with the west posting double digit condo resale price increases over the past few years, whereas price growth has tended to be in the single digits elsewhere.

Looking ahead, there is every reason to expect that the level of activity will remain strong and that prices will continue to advance, but some cooling will likely be evident in regions where affordability is being eroded by price growth.

The key short-term drivers for housing demand are labour market conditions and the level of interest rates. On these two fronts, the outlook is favourable. Employment growth in Canada is expected to slip from 2.0% in 2006 to 1.8% in 2007 and 1.3% in 2008. However, this continued job creation is expected to keep the national unemployment rate at close to a 30-year low and maintain an the employment-to-population ratio at a record level. The plentiful jobs augur well for personal income, which is expected to rise at roughly 4% per annum over the next two years, but it is also positive for consumer confidence. There will be a regional dimension, with the lowest unemployment and greatest income gains in the west, but labour market conditions will remain generally solid in central and Atlantic Canada as well, and there is upside potential in these regions when exports to the U.S. firm, which is expected to occur in 2008.
The interest rate outlook suggests that mortgage borrowing costs will remain stable and low by historical standards. The prospects for variable mortgage rates are tied to developments in the prime lending rate, which is, in turn, determined by changes in the Bank of Canada overnight rate.

The Canadian economy is delivering a sub-par pace of economic growth, but it is also operating at virtually full capacity. In this environment, the Bank is expected to leave monetary policy unchanged. A stable overnight rate would imply no change in the prime lending rate.

However, there are risks on both the upside and the downside to this outlook. If inflation accelerates, the unemployment declines further or the domestic economy proves stronger than anticipated, the Bank of Canada could decide to raise rates. On the flip side, if the U.S. housing market correction leads to a U.S. recession, the negative impact on the Canadian economy might force the Bank to cut rates.

On balance, the recent economic data suggest that the odds of rate hikes are greater than rate cuts, but the main issue for housing markets is that the extent of any change in monetary policy from current levels is likely to prove limited because inflation is unlikely to get out of hand, while any unexpected headwinds from U.S. weakness will only gradually diminish the tightness in Canadian labour markets.

With respect to long-term borrowing costs, the 5-year fixed mortgage rate tracks changes in 5-year government bond yields quite closely (see chart below). Bond markets have fully priced our expectation of soft national economic growth in the near term, but improving in 2008, and the continuation of relatively subdued inflation. Accordingly, bond yields are expected to remain near current levels and rise only modestly in 2008. For example, the yield on the 5-year federal government bond is projected to rise only 50 basis point (half a percentage point) over the next 18 months, suggesting a similar increase in mortgage rates. Again, there are risks on both sides of the forecast, but the scope for either interest rate increases or decreases appears limited. As a result, the level of borrowing costs should remain favourable for real estate.

While the economic and financial fundamentals are expected to be supportive, declining affordability is expected to pose a headwind in some cities. From a national point of view, housing affordability has deteriorated over the past couple of years, reflecting the solid price gains that have outstripped personal income growth. As the accompanying charts show, housing affordability does impact home sales, but there is a lag. The implication is that buyer demand is eventually damped, and this ultimately leads to slower price growth, but the impact takes as much as a year to be fully felt.The current level of affordability is not a major problem, but the recent erosion does point to softer price growth ahead. Indeed, the current share of personal income going to home ownership costs points to a slowing in national average resales and a moderation in price growth from 10% to approximately a 5.5% pace over the next year. As one might expect, the erosion in affordability has been most pronounced in the western markets that have experienced the strongest price gains. So, we anticipate that the bulk of the cooling in prices will occur in these markets.

The performance of condos is likely to be influenced by the general trends in real estate. The pace of condo starts is expected to decline by close to 6% over the next 18 months and resale price growth should cool in the west, but remain quite elevated. Consequently, price growth in Calgary is expected to drop from 26.6% in 2005/06 to 15.0% in 2007/08, while Edmonton slips from 16.6% to 12.5% and Vancouver goes from 16.3% to 10.5% over the same time frame. In central and eastern Canada, the markets are already much more balanced and the level of activity and price growth is far more sustainable, suggesting little reason for major market changes. Accordingly, Toronto condo prices are projected to average 4.2% growth in 2007/08, little changed from the 4.6% in 2005/06. Ottawa price gains are expected to rise slightly from 3.6% to 4.5%, while Montreal price growth softens from 6.4% to 3.5%.

One should also stress that while the erosion in affordability in some major markets will act as a constraint, condos are significantly more affordable than alternative real estate options. To illustrate, condo prices are almost half of the average price of detached bungalows in Vancouver. They are a roughly one-third less than the average price in Calgary and Toronto. Obviously, one must factor in the financial burden of condo fees when making comparisons, but the fees often cover items that homeowners would have to pay themselves in non-condo dwellings.

So, the conclusion is still that condos tend to be much more affordable than detached dwellings in most cities. And, given the rapid price increases in detached dwellings sustained over the last few years, condos may be the only option for some potential homeowners – and many first time buyers – in selected markets. So, while affordability may temper market performance, the drag should prove less of an obstacle for condos. The TD survey clearly indicates that potential condo buyers are acutely aware of the lower price tag associated with these dwellings.

Looking beyond the near-term outlook, the prospects also look good for condos over the long haul due to a number of structural trends. Canada has an aging population, associated with the graying of the baby boom generation. The median age in Canada was 37 in 2001 and it is projected to climb to between 45 and 50 years of age by 2056. This could create headwinds for real estate, which is influenced by demographic demand for housing, but the aging population could prove positive for condos.

First, Canadians are living longer, healthier lives with the result that homeownership rates amongst older individuals is rising, as they are staying in their homes longer. Second, older Canadians might have a preference for condos, as some homeowners downsize in favour of properties with less maintenance costs.

While the changing demographic profile points to slower population growth, it is also evident that cities will continue to expand faster than rural communities. As an illustration of how dramatic this trend has been, in 1901 37% of Canadians lived in urban centres. By 1951, the ratio had climbed to 62%. In 2006, it reached 80%. However, land scarcity is becoming a more pressing issue is some urban areas. Commute times have been rising in recent years, but are reaching a breaking point in some cities, as traffic densities have surged. This is contributing to an urban renewal, which is expected to intensify in the years to come. While condos are not solely located in cities, as evidenced by their presense in some resort settings, the bulk of condos are concentrated in urban centres, making them highly likely to benefit from the urbanization trend.

Immigration will play an increasingly important role in terms of contributing to population growth, and this could also prove favourable for condos. New arrivals, which are a growing share of first time home buyers, do not spread themselves equally across the country. For example, 88% of immigrants in 2004 settled in Ontario, Quebec and British Columbia. And, 80% of the immigrants to Ontario took up residency in the Greater Toronto Area. In fact, 72% of all immigrants were destined for Toronto, Montreal and Vancouver. Since these cities are also the largest condo markets, demand for this type of dwelling is likely to remain well supported over the coming decades.

Conclusions
The bottom line is that the TD condo survey appears to correspond well with the economic trends. Condos are an attractive alternative to buying a detached dwelling and affordability is often far greater. Some cooling is expected in Canada’s major condo markets, but conditions should remain healthy and the level of activity will be high. The moderation will be concentrated in the west, but this represents a retreat from unsustainable levels. Having said all of this, some risks are present. The explosive price growth and the presence of speculation in the west have been sending off warning signals. But, if price growth moderates as new supply comes on the market and as eroding affordability dampens demand, a boom-bust cycle can be avoided. Meanwhile, there is significant additional supply in the pipeline for Toronto from projects that are already underway, but are not yet completed. This could impact price growth, but so long as employment remains solid and interest rates do not rise significantly from current levels, there should be no problem absorbing the additional units. So, the risks do not outweigh the short-term and long-term drivers for condos that all look to remain supportive.

Craig Alexander, VP & Deputy Chief Economist, TD Bank Financial Group