Global Economic Research

June 9, 2011

Global Real Estate Trends

Adrienne Warren (416) 866-4315 adrienne_warren@scotiacapital.com

Global Real Estate Activity Cools In Early 2011

After some encouraging signs of revival last year, residential real estate markets in much of the developed world are losing momentum or in some cases, even reversing course. Increasing nervousness over global economic prospects alongside rising food and fuel prices and persistently high unemployment are keeping potential buyers on the sidelines despite highly accommodative monetary policy. A lingering oversupply of housing and/or still tight credit conditions are reinforcing the downward pressure on sales and prices in a number of markets globally. A marked improvement in housing affordability, particularly in those regions suffering large valuation declines in recent years, will eventually put a firmer floor under prices and underpin a gradual turnaround for the sector. For the time being, however, the process of repairing bloated public and household balance sheets points to a protracted period of subpar economic growth among debt-heavy developed nations that will restrain household borrowing and spending. A generally more cautious lending environment also will hold back the pace of recovery. Australias seemingly impermeable housing boom has languished in recent months. While benefitting from strong economic growth and low unemployment, record high home prices alongside a series of interest rate increases by the Reserve Bank of Australia (RBA) are eroding the nations already highly strained affordability. Average home prices in Q1 were unchanged from a year earlier, and down 3% adjusted for inflation. While the RBA has put further rate hikes on hold for now, the eventual resumption of monetary tightening will reinforce the more muted housing outlook. U.K. real estate markets also took a step back in early 2011 following a shortlived recovery last year. Average inflation-adjusted home prices were down 4% y/y in Q1. Notwithstanding ultra-low borrowing costs, recent tax breaks for home buyers and an easing in lending conditions, aggressive fiscal austerity measures and persistently high unemployment will continue to depress activity in the near-term. Spains three-year and counting housing slump shows no sign of letting up. Following steep price declines from 2008-2010, average inflation-adjusted home prices were down more than 8% y/y in Q1 (and a cumulative 20% from their peak). Prices are likely to fall further in the coming year given a massive
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This Report is prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital. While the information is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which The Bank of Nova Scotia or Scotia Capital Inc. or any of their employees incur any responsibility.
PROPERTY LEADERS REAL HOUSE PRICES (2011Q1, Y/Y % CHANGE) Ireland* France Canada Switzerland Germany** -10 -5 0 5 10 15 *2010Q4; **2010 avg.

PROPERTY LAGGARDS REAL HOUSE PRICES (2011Q1, Y/Y % CHANGE) Sweden Italy* Japan** Australia U.K. U.S. Spain -10 -5 0 5 10 15 *2010Q4; **2010Q3

Global Real Estate Report is available on: www.scotiabank.com, Bloomberg at SCOE and Reuters at SM1C

Global Economic Research

June 9, 2011

Global Real Estate Trends

glut of unsold homes, soaring double-digit unemployment, the elimination of mortgage funding for low income families at the beginning of 2011 and a dearth of foreign vacation property buyers. Average home prices were also still declining in Italy as of the end of 2010. U.S. real estate markets have softened again after some encouraging signs of bottoming last year. Average inflation-adjusted home prices were down 5% y/y in Q1. High unemployment and tight credit availability are restraining demand, while a large volume of distressed properties is adding to the downward pressure on prices. The modest pickup in sales over the past six months has been primarily of investor-driven foreclosed properties, with little evidence of broader homebuyer activity since the expiry of purchase incentives in early 2010. Despite gradually improving job markets and near-record housing affordability, the expected addition of at least another 1 million foreclosed properties to the market this year suggests more downside price risk in 2011 after already falling almost 35% (in real terms) from the peak. Not all residential property markets are in negative territory, as the housing recovery continues in some of Europes better performing economies. In France, average real prices were up 7% y/y in Q1, though weakening global growth expectations may limit further price gains in the near-term. In Germany, for which only annual price data are available, real home prices increased in 2010 for first time in over a decade. Demand and pricing have firmed alongside a strong economy, rising exports and the lowest unemployment rate in three decades. Nonetheless, Germanys declining population will limit the extent of sustainable price appreciation in coming years. Switzerland reported steady real price increases averaging 4% y/y through Q1, while prices in Sweden were unchanged from a year earlier. Irish property prices rebounded sharply and unexpectedly in the latter half of 2010, albeit following double-digit declines in both 2008 and 2009. With the Irish economy still marred in recession, and facing an oversupply of housing, the recent upturn will likely prove temporary despite the best housing affordability in a decade. Canada also reported positive real price appreciation in the first quarter of 2011, with average inflationadjusted home prices up 5% y/y in Q1. The national average, however, is skewed by strong sales, including by foreign buyers, of high-priced properties in the Greater Vancouver Area. Excluding Vancouver, average real prices were up less than 1% y/y in Q1, consistent with a more balanced national market. Housing sales in Canada, while below the record-setting pace seen in at the height of the boom in 2005-2007, are being supported by steady job creation and still attractive borrowing costs. Relatively tight supply is adding to price pressures in several cities. Nonetheless, high home prices, the further tightening in mortgage insurance rules effective mid-March, and the upward drift in fixed mortgage rates this year appear to have slowed demand somewhat, most notably among first-time buyers. We anticipate relatively flat sales volumes and average prices through the latter half of the year.
Focus Canadian Commercial Market Activity Heats Up

One of the more positive developments in domestic property markets this year has been the continuing resurgence in office market activity. Rising leasing demand helped push the national central office vacancy rate to just 6.9% in 2011Q1, down from 7.3% in the prior quarter and a cycle peak of 7.5% in mid-2010. The turnaround is broadly based regionally: vacancy rates in most major centres across the country are moving lower while rental rates are either stabilizing or once again moving higher. Rising leasing demand mirrors the resilience in hiring in traditional office-based occupations, including finance & insurance and professional, scientific & technical services. The latter, which includes lawyers, accountants, engineers, consultants and software developers, has enjoyed particularly strong employment growth in recent years. These industries escaped the 2008-2009 recession with few job losses, and have been one of the leading creators of new jobs since.

Global Economic Research

June 9, 2011

Global Real Estate Trends

The turnaround is even more remarkable in light of the substantial new supply of available space. A boom in office construction added roughly 10 million square feet of new central inventory in 2009 and 2010, the largest share concentrated in Toronto and Calgary. Yet this new space has essentially already been absorbed, and there are few major developments under construction beyond 2011. As a result, the likelihood of new projects being announced in the coming year has increased considerably. Office availability is still well above the lows of 2008, when the national central vacancy rate dipped to around 4%. However, the industry skirted the sharp correction that had been feared at the onset of the financial crisis and global recession, and has recovered much faster than expected. Even at its cycle peak last year, the national vacancy rate was less than half the 16-17% level reached during the recession of the early 1990s. Commercial real estate activity typically lags economic recoveries, making the recent improvement particularly notable. Canadas central office market is unusually tight at such an early stage of an economic expansion. Canadian firms are confident adding to their payrolls and real estate obligations, given strong corporate balance sheets and historically low borrowing costs. If sustained, this will go a long way to supporting a successful transition from consumer- and housing-driven growth toward a greater reliance on corporate Canada. Activity in Canadian retail property markets is also buoyant, with the industrys consistently strong performance in recent years attracting considerable foreign expansion interest. A number of major U.S. retailers in particular have taken note of Canadas relatively steady sales growth, higher average sales per square foot and lower density of shopping space per capita. Given low vacancies and limited new supply in 2010, significant retail expansion is anticipated in 2011-2012. However, these new entrants are coming at a time when the outlook for consumer spending and housing activity is softening, and will intensify competitive pressures in the industry. Discretionary retail spending has weakened sharply this year as high gas prices and rising food costs reduced household purchasing power. Meanwhile, debt-heavy Canadian households appear to be adopting a more cautious approach toward borrowing, a tendency that will be heightened when the Bank of Canada eventually moves to tighten monetary policy, and/or longer-term mortgage rates trend even higher.
OFFICE VACANCY RATE 12 % National Average, Central Inventory, All Classes

10

2 00 02 04 06 08 10 Cushman & Wakefield, Scotia Economics

EMPLOYMENT 115 index Jan 2008=100 110 Professional, Scientific & Technical Services

105

100 Total Employment 95 2008 2009 2010 2011 Statistics Canada, Scotia Economics

Global Economic Research

June 9, 2011

Global Real Estate Trends

Canadian Residential Markets
New Home Construction & Prices
300 units, thousands (annualized), 3-mth moving avg Housing Starts New Housing Price Index y/y % change, 3-mth moving avg 20 15 10 5 0 150 -5 100 90 92 94 96 98 00 Source: CMHC, Statistics Canada 02 04 06 08 10 -10

Housing Starts
160 140 120 100 80 60 40 90 92 94 96 98 00 02 04 06 08 10 Source: CMHC Multiple-Unit Single-Unit units, thousands, annualized

250

200

25 20 15 10 5 0

Inventory of Unsold New Homes

units, thousands Single & Semi Row & Apartment 16 14 12 10 8 6 4 2 0 96 98 00 02 04 06 08 10 %

Mortgage Rates

5-Year Conventional

1-Year Conventional

90 92 94 Source: CMHC

90 92 94 96 98 Source: Bank of Canada

00

02

04

06

08

10

Housing Starts
Canada (000s units, sa) 2006 2007 2008 2009 2010 2011ytd 2011f 2012f (units, nsa) 2006 2007 2008 2009 2010 2011ytd 227 228 211 149 190 179 175 175 Vancouver 18,705 20,736 19,591 8,339 15,217 17,107 B.C. 36.4 39.2 34.3 16.1 26.5 25.9 25 26 Calgary 17,046 13,505 11,438 6,318 9,262 6,746 Alberta 49.0 48.3 29.2 20.3 27.1 21.6 22 28 Edm onton 14,970 14,888 6,615 6,317 9,959 7,997 Sask. 3.7 6.0 6.8 3.9 5.9 6.3 6 5 Toronto 37,080 33,293 42,212 25,949 29,195 35,129 Manitoba 5.0 5.7 5.5 4.2 5.9 4.8 5 5 Ottaw a 8,808 9,294 10,302 8,930 9,133 5,894 Ontario 73.4 68.1 75.1 50.4 60.4 62.4 60 56 Montreal 22,813 23,233 21,927 19,251 22,001 20,304 Quebec 47.9 48.6 47.9 43.4 51.4 47.6 46 44 Halifax 2,511 2,489 2,096 1,733 2,390 2,386 Atlantic 12.0 12.4 12.2 10.9 12.8 10.7 11 11 St. Johns 1,275 1,480 1,863 1,703 1,816 1,284

Source: Canadian Mortgage and Housing Corporation (CMHC), Scotia Economics calculations and forecasts. Year-to-date data are expressed at annual rates.

Global Economic Research

June 9, 2011

Global Real Estate Trends

Canadian Residential Markets
Existing Home Sales & Prices
400 $, thousands units, thousands, a.r. MLS Unit Sales 300 400
2

Housing Costs
600
10 8 y/y % change Owned Accommodation

500

6 4

200

MLS Average Price 300

0 -2 Rented Accommodation 90 92 94 96 98 00 02 Source: CMHC, Statistics Canada 04 06 08 10

100 90 92 94 Source: CREA 96 98 00 02 04 06 08 10

200

-4

Existing Home Inventory

3.5 3.0 2.5 2.0 Canada ratio, MLS new listings-to-sales

Existing Home Inventory

3.0 2.5 2.0 1.5 1.0 ratio, MLS new listings-to-sales 2008 2009 2010 2011ytd

1.5 1.0 90 92 94 Source: CREA 96 98 00 02 04 06 08 10

0.5 0.0 Vancouver Source: CREA Calgary Toronto Ottawa Halifax

MLS Home Sales

Canada British Columbia Alberta Man.-Sask. Ontario Quebec Atlantic Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units 2006 2007 2008 2009 2010 20011ytd 277,211 307,089 304,971 320,367 339,030 365,784 483,137 521,059 431,805 465,068 447,010 458,550 390,963 439,119 454,599 465,725 505,178 580,314 96,671 102,805 68,923 85,028 74,640 84,042 286,149 357,483 353,748 341,818 352,301 354,366 73,970 70,954 56,045 57,543 49,723 52,266 142,668 171,526 205,026 215,814 231,235 239,801 22,549 26,468 24,063 24,181 24,036 25,176 278,364 299,544 302,354 318,366 342,245 358,398 194,930 213,379 181,001 195,840 195,591 196,047 195,383 209,468 220,092 230,243 248,697 250,154 71,619 80,647 76,754 79,111 80,126 77,607 148,277 158,589 171,258 182,640 193,174 198,936 22,851 26,258 24,532 22,844 22,461 22,932

Vancouver Calgary Edmonton Ottaw a Montreal Toronto Halifax Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units 2006 2007 2008 2009 2010 2011ytd 509,876 570,795 593,767 592,441 675,853 793,241 36,479 38,978 25,149 36,257 31,144 38,418 346,675 414,066 405,267 385,882 398,764 401,721 33,027 32,176 23,136 24,880 20,996 22,278 250,915 338,636 332,852 320,378 328,803 322,561 21,984 20,427 17,369 19,139 16,403 15,966 352,388 377,029 379,943 396,154 432,264 455,242 84,842 95,164 76,387 89,255 88,214 89,490 257,481 273,058 290,483 304,801 328,439 338,291 14,003 14,739 13,908 14,923 14,586 14,127 235,623 250,213 259,050 271,724 292,964 296,388 39,141 43,666 40,441 41,754 42,347 48,639 203,178 216,339 232,106 239,158 253,610 263,234 6,462 7,261 6,472 6,062 5,944 5,862

Source: Canadian Real Estate Association (CREA), QFREB, Scotia Economics calculations. Year-to-date data are expressed at seasonally adjusted annual rates, except for Montreal which are not seasonally adjusted.

Global Economic Research

June 9, 2011

Global Real Estate Trends

Canadian Non-Residential Markets
Office Markets
14 12 10 8 6 4 2 0 99 00 01 02 03 04 05 Source: Cushman & Wakefield Ltd. 06 07 08 09 10 11 % National Office Vacancy Rate
8 7 6 5 4 3 2 1 0 99 00 01 02 03 04 05 Source: Cushman & Wakefield Ltd. 06 07 08 09 10 11 % National Industrial Vacancy Rate

Industrial Markets

Office Vacancy Rates Largest Five Markets

14 12 10 8 6 4 2 2 0 99 00 01 02 03 04 05 Source: Cushman & Wakefield Ltd. 06 07 08 09 10 11 Ottawa Calgary Vancouver 0 Toronto 6 10 % Montreal 8 %

Industrial Vacancy Rates Largest Four Markets

Montreal

Toronto 4 Calgary Vancouver

99 00 01 02 03 04 05 Source: Cushman & Wakefield Ltd.

06

07

08

09

10

11

Building Permits

Building Permits
400 index: 1999Q1 = 100 300 Institutional & Government Commercial Residential

Total

Res.

Indust. Com m .

Inst. & Govt 6.2 6.9 7.8 8.6 8.5 8.4

200

2006 2007 2008 2009 2010 2011ytd

66.3 74.4 70.4 61.0 72.4 69.6

(C$ billions) 41.1 4.5 14.4 45.5 5.0 17.0 40.9 5.1 16.7 34.7 3.9 13.8 43.5 5.1 15.4 42.3 5.4 13.5

100 Industrial 0 99 00 01 02 03 Source: Statistics Canada 04 05 06 07 08 09 10 11

Source: Statistics Canada. Year-to-date data are expressed at seasonally adjusted annual rates.

Global Economic Research

June 9, 2011

Global Real Estate Trends

U.S. Residential Markets
Housing Starts
2.4 2.0 1.6 1.2 0.8 Multiple-Unit 0.4 0.0 90 92 94 96 98 Source: U.S. Census Bureau 00 02 04 06 08 10
0.2 0.0 90 92 94 96 98 Source: U.S. Census Bureau 00 02 04 06 08 10

Housing Starts by Region

1.2 units, millions (annualized) South

units, millions (annualized) Total

1.0 0.8

Single-Unit

0.6 0.4

West

Midwest Northeast

New Home Sales

1.6 1.4 1.2 Unit Sales 1.0 0.8 0.6 0.4 0.2 90 92 94 96 98 Source: U.S. Census Bureau 00 02 04 06 08 10 Average Price 250
5

Existing Home Sales

350 300
8 units, millions (annualized), 7 3MMA 6 Average Price $, thousands,3MMA 300 250 200 150 4 Unit Sales (Singles only) 3 2 90 92 94 96 98 00 02 04 06 Source: National Association of Realtors (NAR) 08 10 100 50

units, millions (annualized), 3MMA

$, thousands, 3MMA

200 150 100

Housing Starts
Total Singles Multiples West South Midw est North East 0.167 0.143 0.121 0.062 0.071 0.071 Total

Permits
Single Multiple

2006 2007 2008 2009 2010 2011ytd 2011f 2012f

1.801 1.355 0.906 0.554 0.587 0.580 0.57 0.80

1.465 1.046 0.622 0.445 0.471 0.413

(millions of units) 0.335 0.444 0.910 0.309 0.321 0.681 0.284 0.196 0.453 0.109 0.117 0.278 0.116 0.120 0.297 0.166 0.106 0.316

0.280 0.210 0.135 0.097 0.098 0.087

(millions of units) 1.839 1.378 0.461 1.398 0.980 0.419 0.905 0.576 0.330 0.583 0.441 0.142 0.605 0.447 0.157 0.559 0.398 0.161

Source: U.S. Census Bureau, Scotia Economics calculations and forecasts. Year-to-date data are expressed at seasonally-adjusted annual rates.

Global Economic Research

June 9, 2011

Global Real Estate Trends

U.S. Residential Markets
Mortgage Rates and Applications
9 % 8 7 6 5 4 99 00 01 02 03 04 05 06 07 08 09 Source: Mortgage Bankers Association (MBA), FHLMC 10 11 30-Year Mortgage Rate MBA Mortgage Application Index Purchases Only index 5 4 3 2 1
6 4 2 0 -2 90 92 94 96 98 00 02 Source: U.S. Bureau of Labor Statistics 04 06 08 10 Rent of Primary Residence

Housing Costs
6
8 Consumer Price Index, y/y % change

Owners' Equivalent Rent

New and Existing Home Inventories

14 12 10 8 Existing months' supply, 3MMA

Apartment Vacancy Rates

16 14 12 10 West 8 6 4 2 90 92 94 96 98 Source: U.S. Census Bureau 00 02 04 06 08 10 Northeast South % Midwest

6 4 2 90 92 94 96 98 00 02 04 06 08 10 Source: U.S. Census Bureau, National Association of Realtors (NAR) New

Existing Home Sales

Total (sa) 6.478 5.652 4.913 5.156 4.907 5.115 Avg Price Months ($000s) Supply (nsa) (nsa) 269.5 6.4 263.8 8.7 240.4 10.0 217.1 8.3 220.2 9.1 208.2 8.3 West South Midw est

New Home Sales

2006 2007 2008 2009 2010 2011ytd

1.346 1.084 1.070 1.211 1.154 1.283

Avg Price Months North Total ($000s) Supply East (million units, saar, unless otherwise noted) 2.563 1.483 1.086 1.049 303.5 6.4 2.235 1.327 1.006 0.769 308.8 8.4 1.865 1.129 0.849 0.482 288.9 10.7 1.914 1.163 0.868 0.374 268.2 9.0 1.860 1.076 0.817 0.322 271.5 8.0 1.953 1.095 0.785 0.303 264.3 7.2

Source: National Association of Realtors (NAR), U.S. Census Bureau, Scotia Economics calculations. Year-to-date data are expressed at seasonally-adjusted annual rates.

Global Economic Research

June 9, 2011

Global Real Estate Trends

International Residential Markets

Inflation-Adjusted Home Prices

400 1996=100, inflation-adjusted Ireland U.K.
400

Inflation-Adjusted Home Prices

1996=100, inflation-adjusted

300

300 Spain

200 Sweden 100

200

France Italy

100

0 96 98 00 02 04 06 08 10 Source: Scotia Economics

0 96 98 00 02 04 06 08 10 Source: Scotia Economics

Inflation-Adjusted Home Prices

400 1996=100, inflation-adjusted
400

Inflation-Adjusted Home Prices

1996=100, inflation-adjusted

300 Australia 200

300

200 Switzerland

Germany

100

Canada

United States

100 Japan

0 96 98 00 02 04 06 08 10 Source: Scotia Economics

0 96 98 00 02 04 06 08 10 Source: Scotia Economics

International House Prices (Inflation-adjusted, y/y % change)

2002 Australia Canada France Germ any Ireland Italy Japan Spain Sw eden Sw itzerland United Kingdom United States 15.8 7.3 6.3 -2.3 5.8 9.3 -3.7 13.4 4.2 4.0 15.3 7.5 2003 15.4 6.9 9.7 -2.9 12.3 3.4 -5.0 16.9 4.7 2.3 14.2 4.8 2004 4.2 7.4 12.9 -3.7 8.9 3.8 -6.2 15.3 9.0 1.6 10.8 6.3 2005 -1.2 7.8 13.3 -3.9 10.0 5.5 -4.8 11.2 8.6 -0.1 3.5 6.1 2006 4.2 9.2 10.2 -1.8 9.7 3.6 -3.6 6.5 10.8 1.4 3.9 -2.0 2007 9.0 8.7 4.9 -1.3 -1.1 2.9 -1.1 2.6 8.2 1.3 8.8 -5.0 2008 0.1 -3.1 -1.9 -2.8 -10.8 -0.9 -2.6 -3.9 -0.2 0.3 -4.3 -12.7 2009 1.6 4.7 -7.2 -0.2 -19.4 -1.2 -2.4 -7.3 1.9 5.5 -9.7 -9.3 2010 9.3 4.0 4.6 1.9 1.2 -1.5 -3.1 -5.4 6.6 4.0 4.3 -0.2 10Q2 13.0 6.9 4.2 .. -0.4 -1.6 .. -5.6 7.9 3.6 6.8 0.6 10Q3 7.1 -1.5 6.6 .. 11.2 .. -2.8 -5.4 5.6 4.7 4.4 -0.3 10Q4 2.3 -0.7 7.7 .. 12.0 -1.5 .. -5.7 3.3 3.9 0.7 0.2 11Q1 -3.5 5.3 6.8 .. .. -8.5 -0.2 3.8 -4.2 -4.8

So urce: OECD, A ustralian B ureau o f Statistics, Canadian Real Estate A sso ciatio n, Statistics Canada, INSEE, Irish Department o f the Enviro nment, Heritage and Lo cal Go vernment, Euro stat, B ank o f Italy, Istat, Japan Real Estate Institute, Japanese M inistry o f Internal A ffairs and Co mmunicatio ns, B anco de Espana, Instituto Natio nal de Estadistica, Statistics Sweden, Riksbank, Swiss Natio nal B ank, Statistics Switzerland, U.K. Office fo r Natio nal Statistics, U.S. Natio nal A sso ciatio n o f Realto rs, U.S. B ureau o f Labo r Statistics, Sco tia Eco no mics.