Overall economic conditions 'quite favourable': CMHC economist

Does the Bank of Canada need to raise its key interest rate?

The BoC is really trying to balance the risks in the economy. And the bank certainly wants to get back to a more neutral level for interest rates because right now monetary conditions in Canada are simulative. If economic growth gets too strong with this level of interest rates, it will create inflation and the bank doesn't want that. So as the bank becomes more confident and the economy can sustain interest rate increases, I think they will start to move higher.

How will global economic uncertainty aff ect the Canadian economy and real estate market?

One of the things that's really helped the Canadian economy is that we've had a fairly healthy banking system. When things got really tough during the crisis, Canadian banks were still willing to lend. And we also had consumers with fairly healthy balance sheets, who were able to take advantage of the low interest rates, particularly when employment started to rebound.

That consumer activity then created more economic growth, which made the downturn much less pronounced here. During the recession we did lose about 420,000 jobs, but we have completely regained those jobs and then some. And we're one of the only developed countries that has seen its employment go back to exceeding prerecession levels.

Overall economic conditions seem to be quite favourable here. In other countries, like the U.S. where the employment recovery has been much weaker since the recession, they now have less of cushion to weather further economic shocks, whereas Canada has more potential to weather some of those problems that might come up.

How is the lack of purpose-built rentals going to affect the housing market and investors in particular?

In the last decade or so, it would seem as though condo construction has almost taken over. So most of the apartments now are condos, not purpose-built rentals. Investors' share of the condo-rental market has also been increasing in recent years. Now, about 20% of condos are typically held by investors who, in turn, rent them out. Affordability, in general, shouldn't be a problem in the rental market.

Rent growth in recent years has been pretty much in line with inflation, but it's still hard to talk in averages. It's important to realize that underneath the averages is distribution and there are some people at the low end of that distribution, who face affordability challenges. Certainly the average rent for condos tends to be higher than the rent for purpose-built rentals. But many times higher-income renters move into the condo market and that frees up units in the purpose-built rental market. So there is some churning that helps people with affordability challenges.

What is your forecast for national housing starts?

Last year was certainly a big rebound from 2009 when there was just under 150,000 starts in Canada. Housing starts were strong for a good part of 2010, but they've moderated since then. The annual rate of housing starts varied from about 190,000 to 205,000 for most of last year.

But since December 2010 that rate has been in the 170,000-to- 190,000 range. We do expect overall housing starts in 2011 to remain a little lower than what we had last year, which was just under 190,000. Our current forecast for 2011 is that housing starts will decrease to 177,600 starts. So that's a level that's pretty much in line with household formation, which is about 175,000 to 185,000.

Will all areas see declines? Most of the provinces are expected to see declines in housing starts. The exceptions really are B.C. and Alberta. In B.C., we expect housing starts to increase a bit. In Alberta, we expect housing starts to remain flat. A lot of the reason for that is inter-provincial migration, which will favour B.C. and Alberta this year.

In 2010, housing starts as a whole in Canada increased by 27% and we had big increases in just about every province across the country. This year, B.C. is expected to increase by 1.6%. That's compared to a 65% increase last year. Alberta is going to remain flat, compared to a 33% increase last year. So there's still a real slowing in the growth in the activity in B.C. and Alberta, but in other provinces that slowing goes from positive to negative growth.

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