Everyone wishes they had a crystal ball, with a clear picture of the future. But homeowners and investors looking at the housing market numbers for clarity are looking in the wrong place.

That’s because the numbers (average price, housing starts, sales-to-listing ratios, etc.) are only a reflection of what has occurred in the past.

Smart homeowners, first-time buyers and investors ignore those stats and focus on the underlying economic fundamentals, and by doing so can quite accurately predict what will happen in their target region’s real estate market.

The “Canadian real estate market” does not exist

Canada is actually a series of regional markets, all of which perform relatively exclusive of each other.

In 2011, the market really will be a Goldilocks story: some markets will be too hot (compared to underlying economics), others will be too cold, and some will perform just right. As our regions continue to detach from each other economically, this trend will continue for many years to come and will compel investors and homeowners to ignore national real estate numbers and trends.

2011 predictions

Long-term increasing prices of real estate stem from economic (GDP) growth.

GDP growth = job growth = (12 months later) population growth = increased rental demand = decreased vacancies = increased rents = (18 months later) property purchase demand = increase in property prices

Sustainable real estate price increases occur approximately 18 months after a region’s economy begins to grow. This cycle works in reverse, too: prices drop approximately 18 months after the economy in a region begins to shrink.

(There can be upward and downward blips not attributed to economic growth, such as when governments enact new measures, but these are just short-term.)

Because Canada’s 2011 market is going to be even more regionally fractured than in 2010, it is imperative that investors and homeowners understand this formula and make their investment decisions based on it, rather than on fluctuating housing market numbers.

A regional view

BC

This year BC will witness extreme variations in regional results, more so than in most other provinces. With forestry having a bit of a renaissance (compared to the last few years) and mining having a strong comeback, economic growth will occur in specific regions.

Regions that will perform contrary to underlying economics and expectations: Maple Ridge, Surrey, Ft. St. John, Dawson Creek, Penticton and Princeton will over-perform; Vancouver’s mid-price market, Abbotsford, Kelowna, Nanaimo, Port Alberni will under-perform.

The province as a whole will enjoy a flat and balanced market. There will be lots of talk of housing market health when housing starts come in lower than expected. Resale homes will outperform new homes across the province as the HST continues to have an effect.

ALBERTA

Alberta’s economic recovery won’t be felt until after “spring breakup” (an annual time of short-term layoffs). After that, the province is poised to enjoy nation-leading economic growth in many regions.

Oil sands and oil-drilling jobs are beginning to come back on stream, with billions being invested across the province. However, this time companies are being more careful with project scheduling, trying to keep a cap on the inevitable cost increases (labour and materials) that hurt the province during the last boom. This will help keep a cap on inflation as well as prolong the recovery, managing it at a sustainable pace.

This economic and population growth will lead to in-migration and a reinvigorated real estate market later in the year.

Although there will be more hiring activity in the northwest of the province, a natural economic cap is in place with low natural gas prices. This situation will combine with the high supply/low demand condition of the residential real estate market to keep Grande Prairie and its surrounding region from performing at the same level of the hot spots of the province.

Calgary, Edmonton, Red Deer and Lethbridge will lead the way in property and rental demand growth, with Ft. McMurray following very close behind.

PRAIRIE PROVINCES

Saskatchewan has been an economic star for Canada over the last few years as it aggressively develops its untapped resources. As the world’s economies begin to awaken, there will be an increased demand for everything the province produces – food, fuel and fertilizer. This will help soften the inevitable hangover of the overheated real estate market that many cities and towns in the province experienced. The markets will come back to a sense of reality to be more balanced or even dip slightly into a buyer’s market.

Manitoba’s economy and real estate markets seemed to almost ignore the economic downturn that the rest of the country experienced. Historically they miss boom/bust cycles, providing investors who do their homework and who choose their neighbourhoods with care a consistent, not spectacular, return on their investment. This trend will continue in 2011.

ONTARIO

Government intervention in Ontario (including Toronto’s new Land Transfer Tax and the implementation of the HST) has had completely unpredictable and long-term effects on the province’s real estate market and its ability to provide affordable housing in a province that needs it the most.

Economically, the province will be divided into two regions – one with job growth and one with job stagnation. The regions with job growth will dramatically outperform the rest of the province.

Ottawa: Ottawa will continue to be the consistent performer in the province’s real estate market. Investors and homeowners are poised to see their market perform at a non-spectacular but very acceptable level. Vacancy rates will begin to decrease later in the year, and a balanced market will ensue. As a high-tech labour shortage looms in Canada, we will see an increase in in-migration to the city, with the decrease in vacancy rates to follow.

Hamilton: Hamilton is poised to be one of the top real estate performers in later 2011. However, several factors could change this – once again, these are not economic fundamentals but government issues including, but not limited to, where (if at all) the Pan Am stadium will be built, and whether or not Metrolinx will build out the proposed LRT. The Economic Development team is working hard to bring jobs to (and back to) Hamilton, and the results are already starting to be felt. As per the formula, these jobs lead to inevitable real estate value increases.

Kitchener-Waterloo-Cambridge (Tech Triangle): KWC is the economic and real estate winner in the province in 2011. Job growth is already being felt across the region, and this is just the beginning. Leadership in the government and the corporate arenas is working hard at turning this area into Canada’s job-growth region, and investors and homeowners should be doing what they can to support this policy, as it will lead to money in their pockets down the road. In all cases, it is important that investors choose their neighbourhoods carefully, focusing on regions where demand is occurring and where they can create positive cash flow.

Toronto: A tale of many regions – all in one city. Some neighbourhoods are poised to outperform (e.g. Scarborough and the Beach), while others will lag. Toronto investors won’t see values skyrocket, as was witnessed over the past few years. New condos will still come on the market and will be sold on a per-square-foot or replacement-cost basis rather than a comparison basis.

Best deals will be found in the secondary and resale markets, with an increasing number of motivated vendors hitting the market later in the year, keeping a cap on price increases. Remember that “average price” means nothing in a market as large and diverse as Toronto. The overall Toronto market will underperform.

The rest of the province will experience a return to sane markets – not too hot and not too cold.

NEW BRUNSWICK

Over the past five years businesses have migrated to the province based on tax incentives and lower labour costs. The job growth and economic diversification has led to generally strong real estate markets, especially in larger centres. This is a fragile growth that will have to be considered when any government decisions are made.

The shelving of large projects like the Irving refinery left some speculators holding properties they expected to sell quickly, which led to more listings coming on the market than would normally be expected given the underlying economics. Construction jobs should be down this year, with the completion of the nuclear plant refurbishment and the lack of new housing demand. This will prove to be a year that New Brunswick markets will seem confused and disoriented.

NEWFOUNDLAND

After having very strong economic growth in 2010, new leadership comes in to take Newfoundland to the next stage of its economic development. With the loss of the province’s most fervent booster and biggest personality, the province could experience a small financial hangover but should pull out of that to show strong economic growth again this year.

The province discovered that a lot of the GDP growth didn’t translate into on-shore job growth, as much of it was in off-shore development. Therefore it didn’t translate into supporting the real estate market as much as expected. The largest impact was from speculators from out of province expecting to see the “next Alberta.”

As in the other Maritime provinces, this will be a year of mixed signals both economically and in the real estate market. However, it is projected that the provincial economy will stay relatively strong in 2011. By the end of the year we will see a balanced real estate market settling in, with average growth.

NOVA SCOTIA

Nova Scotia skirted the economic downturn better than most provinces, seeing a growth of about 1.9%, and this rate is poised to be repeated in 2011. Job growth will continue slowly. However, there are some economic headwinds that the province will have to work against. Expect a real estate market very similar to 2010, with no big surprises either up or down.

Don Campbell is the president of the Real Estate Investment Network (REIN) and author of 97 Tips for Canadian Real Estate Investors ($27.95; John Wiley & Sons, April 2011). Visit his website for more.