Canadian Funding Corp. Reviews Housing Updates

Looking out at the Prairies Canadian Funding Corp provides the following update. The economic uncertainty and surplus of unoccupied new units will postpone Alberta’s recovery in single-detached construction for another year. Following a nearly 50 per cent reduction in 2008, single-detached starts will slip further in 2009. Edmonton will be a notable exception due to the velocity of the downturn that occurred last year. Provincial starts should rebound in 2010, provided the adjustment in starts sufficiently draws down inventories. Complete and unabsorbed units are in the process of peaking and generous incentives offered by builder should help reduce them further.

Canadian Funding Corp regards the adjustment in Alberta’s multi-family market to weaker economic conditions as having lagged that of the single-detached market. As a result, multi-family starts will face a stronger downward adjustment in 2009, likely in the neighbourhood of 50 per cent. Calgary will record the strongest reduction in starts this year, where the construction of several apartment condominium projects has already been halted. Provided the necessary adjustment is made this year, a modest gain in starts will occur in 2010.

Despite price reductions for existing homes, low financing costs, and buyers’ market conditions, Alberta’s economic environment has prompted more cautious purchasing behaviour by households, especially for big-ticket items such as real estate. As a result, existing home sales in Alberta will moderate for the third consecutive year in 2009. Once buyers gain confidence that prices have stabilized and economic conditions are improving, modestly higher sales should occur next year.

Alberta’s average resale price, notes Canadian Funding Corporation, will be slow to rebound from the first decline in 13 years. Despite a decrease in the number of active listings, slower sales will ensure the market remains fixed in buyers conditions. As a result, the annual average price in 2009 will decline for the second consecutive year.

In Saskatchewan, a 49 per cent increase in building activity in 2007, followed by a 13 per cent increase in 2008 has led to a rapid rise in the supply of single-detached housing. With complete and unabsorbed inventories up in most markets, a significant reduction in the pace of construction will be required this year to reduce these inventories to manageable levels. Builders will have an opportunity for modestly higher production in 2010, provided inventories reach their peak some time later this year.

With elevated construction levels in the last few years, the supply of condominium units in Saskatchewan has also reached record highs. Given the expectation of rising inventories, builders will adjust the pace of multi-family construction moving forward. After a 25-year high in 2008, a strong decline in production is expected this year. Assuming inven- tories are managed appropriately, Saskatchewan’s multi-family develop- ers will see modestly higher starts in 2010.

Canadian Funding Corp allows that Saskatchewan’s recent price escalation hindered resale demand in the second half of 2008, contributing to the growth in inventories and lower month-over-month prices. In the face of economic uncertainty, residential sales in Saskatchewan will face further moderation in 2009 with activity down 16 per cent. Toward year-end, modest price declines and a multitude of listings will provide opportunities for buyers, slowing the drop in sales. Under these conditions, sales will stage a modest rebound through 2010.

After leading provincial growth in 2007 and 2008, the average resale price in Saskatchewan will see little change over the next two years. An excess supply of listings and strongly motivated sellers has resulted in recent month-over-month price declines. In this environment, the average price will be lower by a few per cent this year. Once resale listings moderate and sales improve into 2010, price growth will slowly return.

After an impressive performance in 2008, single-detached starts in Manitoba will post an 11 per cent decline this year. Starts will remain elevated in the first part of 2009, thanks to a backlog of orders from the previous year. However, activity will slow over the duration of 2009 due to the economic uncertainty facing buyers and concerns over rising inventories. The weaker construction in 2009 will ensure that price growth is restrained and inventories are minimized, creating an opportunity for higher starts next year.

Canadian Funding Corp considers that Manitoba’s multi-family starts will continue to moderate from their 2007 peak, reaching 1,400 units this year before increasing slightly in 2010. Winnipeg’s share of provincial multi-family construction will be lower than historical standards. This will be due to rising inventories in Winnipeg and heightened demand for multi-family units in other markets, particularly for rental tenure.

The number of existing home sales in Manitoba will decline by more than 10 per cent in 2009 before posting a modest rebound in 2010. Demand will be weak in the first half of this year due to the current economic environment and cautious buyer sentiment. However, strong labour markets, a growing popula- tion, and relatively low prices should contribute to a recovery in the latter part of the year and into 2010.

Manitoba’s six consecutive years of double-digit resale price growth will come to an end in 2009. Resale market conditions are shifting in favour of the buyer, owing to a increase in listings and moderating sales. Given such conditions, a modest decline to Manitoba’s average resale price is expected in 2009. Look for a gradual shift to a more balanced market in 2010, resulting in modest price gains of nearly four per cent.

Canadian Funding Corporation. CMHC housing update information gratefully acknowledged.

Renovation and repositioning.
Similar to a construction loan, a renovation loan may involve financing for the specific purpose of upgrading an existing property. Canadian Funding Corporation lending professionals are able to help borrowers plan and close these transactions in a timely fashion.

Almost all lenders are concerned that their money lent is repaid, so underwriting of construction loans usually focuses on how that might occur.

In the most basic situation, that of an individual building a home for themselves, a business building a property for business use, or an investor building a property to rent out, the fundamental guideline is for the lender to imagine once the loan has been fully extended and converted into a normal mortgage and the building is occupied, whether the individual, business, or investor can afford to pay back the loan on a monthly basis. In the case of the individual, where the lender attempts to predict whether the individual can pay each month the loan payment that would occur once the person moves into the house, the lender would be primarily looking at the amount of income the individual receives. In the case of the business, a similar analysis would occur. In the case of an investor building rental property, a special appraisal would be ordered which would attempt to predict what the rents will be and whether they will be enough to pay back the loan, plus all expenses and still give the renter a certain minimum amount of income. The key point here is that no matter how valuable the building might be once completed, almost no lender would extend a loan for more than what the occupier could afford, because even though they will not have to make any payments during construction they would have to make monthly payments once completed and there can be no assurance that the owner would pay down the loan enough to make the monthly payments affordable once the project is completed.

Beyond this guideline, the next most common rule is a minimum cash injection requirement. Even if, for example, a business might be able to afford a monthly payment of a loan high enough to pay for the entire construction project, many lenders would require them to instead use a certain minimum portion of their own cash to complete the project. The reason for this is both to psychologically and economically tie in the owner with the project (hopefully making it less likely that they would walk away from the project if something goes wrong), and to give the lender a cushion whereby if something goes wrong they are more likely to be able to sell the real estate at a value that would better cover the loan amount. This guideline is often termed a “loan to cost” requirement, ie. the lender will only loan up to 85% of the project costs.

The final major guideline is the maximum loan amount the lender will allow relative to the completed value of the project. This rule is designed to help ensure that, after the project is completed, if the borrower stops paying the payment, the lender can sell the property and hopefully recoup all the funds loaned.

Construction loans are often extended for developers who are seeking to build something but sell it immediately after building it. In this case, a special appraisal is ordered to attempt to predict the future sales value of the project. The first guideline above, affordability, is usually not used because the owner would immediately attempt to sell the property. However, it is used sometimes for example when a developer is building condominiums, the lender might evaluate whether if the project was changed from condominiums to apartments if the rents received would more than repay the loan each month. Cash injection requirements are often higher due to the added risk (the immediate need to sell). The loan to value requirements however are often the most impactful. This is because the value is often calculated differently then how people might assume. For example, if a developer is building a 20 unit condominium project, a lender might not just loan a certain percentage of the predicted future total value of the condominiums, but only a certain percentage of the value of the condominium project if, because of an emergency or unforeseen circumstance, the entire building had to be sold at once to one buyer (known as a bulk sale). Since the realizable sales price in this case might be much lower, the maximum loan many lenders would extend would be much lower.

Reviewed by Moishe Alexander, CFC CEO

Public and private spending on major projects in Atlantic Canada will increase nine per cent to $8.8 billion this year despite a global recession that has left much of North America in much worse shape, an independent think-tank concludes in an report released Monday.
The Atlantic Provinces Economic Council’s annual Major Projects Inventory found that the economic downturn has prompted the delay or cancellation of some projects, but many ongoing projects in the region have benefited from lower labour and material costs.
“Things are not nearly as gloomy here in Atlantic Canada as they are in other parts of North America,” Elizabeth Beale, the council’s president and CEO, told about 100 businesspeople at the Pier 21 complex in Halifax.
The study found that even though private sector spending will dip four per cent in 2009, big increases in public spending will drive up the overall rate in the region.
The council concluded the federal and provincial governments have come forward in a big way to stimulate the region’s economy, boosting spending by a whopping $900 million in 2009 alone.
Nova Scotia’s share of the public funds will jump by 53 per cent, with most of the money earmarked for education, transportation and water upgrades. Newfoundland and P.E.I. will see public spending increase 40 per cent, and New Brunswick 15 per cent.
As for private sector spending, most of the new money – 40 per cent – will be spent by energy companies producing oil, natural gas and electricity.
According to the study, Nova Scotia will lead the way in 2009 with a 23 per cent increase in private and public spending on major projects as work continues on the Encana Corp.’s (TSX:ECA) $700-million Deep Panuke natural gas project.
The project is expected to start producing next year.
But there are no other offshore projects on Nova Scotia’s horizon, with the most recent exploration well drilled in 2004.
Newfoundland and Labrador will see project spending increase 20 per cent as work continues on Vale Inco’s $2.2-billion Voisey’s Bay nickel processing facility at Long Harbour and Husky Energy’s (TSX:HSE) $3.5-billion expansion of its White Rose offshore oilfield.
Spending will be up slightly in Prince Edward Island as work wraps up on 55 wind turbines erected for $220 million by West Cape Wind Energy.
In New Brunswick, major project spending will drop 13 per cent as most of the work on the Emera Inc. (TSX:EMA) Brunswick Pipeline was completed last year.
Still, New Brunswick has its share of megaprojects underway.
The council’s senior economist, David Chaundy, said major project spending in the province this year includes plans by the Potash Corp. of Saskatchewan (TSX:POT) to spend $1.7 billion to expand a potash mine near Sussex.
Two shafts are being drilled there this year, but the entire project won’t be completed until 2012.
As well, work is continuing on the $1-billion refurbishment of the Point Lepreau nuclear generating station in southern New Brunswick and the $1-billion Canaport liquefied natural gas terminal in Saint John.
On the downside, tight credit markets have led to delays in the construction of two condominium projects in Charlottetown, a new RCMP headquarters in Dartmouth, N.S., a number of wind energy projects in Nova Scotia and New Brunswick and expansion of the Come By Chance oil refinery in Newfoundland.
Lower commodity prices also forced the delay of an $800-million expansion of the Iron Ore Co. of Canada in Labrador.

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