Can you time the bottom of the real estate market in Calgary?
Everyone always wants to buy real estate at the bottom of the market and sell at the top. The question everyone wants to know right now is – When are we at the bottom and how do we know?
Most people rely on gut instincts. They listen to the media or wait to hear their friends and coworkers assuring them that things have gotten better. Sadly, if you wait for that moment, you are already too late to reap the rewards of low real estate prices.
Let’s make sure we understand the fundamentals of real estate pricing in Calgary, consider the following. Then we will move on to the BIG question.
How is value determined in real estate?
Real estate markets are fueled by supply and demand. Specifically, the supply of homes and the demand for them, are what informed buyers and informed sellers agree to buy/sell a property for. Do we sometimes get uninformed sellers selling homes for far less than what informed sellers would? Yes. Do we sometimes get uninformed buyers paying far more than what an informed buyer would? Yes. That being said, it is not the one offs that determine price, the consistent actions of informed buyers and sellers do that.
In Calgary, it is believed that the price of oil affects the demand for homes. This manifests through people’s willingness to buy homes or what value informed buyers feel is fair. In the past 30 years we have seen oil prices drop significantly five times.
February 1986 – December 1986 (10 months) 49% drop in oil prices.
August 1991 – January 1992 (5 months) 29% drop in oil prices.
September 1997 – February 1999 (17 months) 27% drop in oil prices.
June 2001 – March 2002 (9 months) 27% drop in oil prices.
November 2008 – September 2009 (10 months) 50% drop in oil prices.
December 2014 – current (4 months so far) 50% drop in oil prices.
So what did this mean for the price and demand for homes.
1986 49% oil drop 8% increase in real estate prices
1991 29% oil drop 2% decrease in real estate prices
1997 27% oil drop 7% increase in real estate prices
2001 24% oil drop 7% increase in real estate prices
2008 50% oil drop 7% decrease in real estate prices
2015 50% oil drop 7% decrease in real estate prices
(Please note all increases or decreases are based on averages. Each community, style of home, type of home, etc. will have it’s own influencing factors).
As you can see, to simply say that every times oil drops, home prices or demand drops, is inaccurate. Oil certainly can affect our markets but so do exchange rates, employment levels and interest rates. A 2005 study by Mercedes A. Padilla, Master of Entrepreneurship from MIT shows that these four factors explain 98% of the ups and downs of Calgary home prices.
The supply side of real estate is also complex. When it comes to new homes, Calgary developers are wary of overdeveloping new stock, if it’s not demand driven. Developers tend to build when prices have already gone up, not in anticipation of it. This greatly minimizes the risk of Calgary seeing an oversupplied market and keeps a steady increase of stock throughout the years.
That being said, Calgary has been in a supply shortage since the end of 2012. This is partially due to the city’s need to upgrade the NW sewer lines and NE water treatment plants. This infrastructure deficit has caused the developers to ration lots and the City to be extra cautious in approving new home permits in developing suburban communities. (The NW sewer line upgrade is not anticipated to be complete until 2016-2017).
At the time of writing this, the Calgary is sitting at an inventory level of approximately 6080 homes for sale. This is the similar inventory levels Calgary had in 2005. Considering the City has increased by roughly 400,000 people since that time (even more if you account for growth in the bedroom communities around Calgary) you can clearly see that our inventory levels are not keeping up with our population increases.
In 2008, when we saw the last decrease in Calgary real estate prices, we had a multitude of different factors at play that we don’t this time. We were in the midst of a global economic downturn, credit was significantly cut off, the United States was in horrible economic shape and Calgary was already in a downward spiral from bubble type condition from the housing market of 2007.
Seeing the “correction” of the market this time was not unexpected. In fact market corrections occur all the time. Calgary had seen above average inflation since the beginning of 2013. This inflation had placed home prices about 4.5% over our trend lines. This above average inflation also explained why Calgary was one of the top three cities in Canada to watch for in real estate investment. The only thing that came unexpectedly was the massive dip in oil prices. Before that, the school of thought was that once the sewer line upgrades were complete, more new homes would hit the market and even out our supply.
Another factor to consider is the current municipal political climate. Given the direction being taken by City Council, there is still uncertainty that even with the completion of the sewer line upgrade whether new lot permits will be made available. If municipal administrators continue to restrictively release new home permits, this will continue the shortage of inventory and home prices would continue to increase at great rates of return.
So is this the bottom of the Calgary real estate market?
I think it is as close as you are going to get to the bottom of the U pattern real estate markets travel in.
Right now we are really in a “We’re not sure what’s happening so we are just going to hold off” period. We do have a supply issue. And the low oil prices have caused some short-lived uncertainty causing a temporary demand problem. But when you look at the numbers, as we do week by week, you see the following. At the beginning of 2015, Calgary’s average home price was $500,000. The lowest point came in March when we saw average prices lower to $459,000. Since then we have seen the average price slowly climb to $466,000.
Oil prices slid from $75 a barrel in November 2014 to the lowest point of $47 in March 2015. Currently oil is sitting at $55. If this continues, this will elevate the feeling of uncertainty and demand will most likely return, leaving us only with the supply shortage we had before the oil price downturn started.
To say anyone can predict the economic future of our city, province or country with 100% accuracy is irresponsible. All investments come with risk, and the best you can do is make informed decisions. The nice thing with real estate is there is never a bad time to buy, just a bad time to sell sometimes.
Don’t worry it’s not all doom and gloom. Calgary was fortunate to have a soft landing this time due to the improving economic US market, low interest rates, an improving dollar against the US green back and an employment shortage of skilled labour. Although we are sensitive to economic shocks, we are resilient and will feel confidence and demand return very shortly to the Calgary real estate market.