There seems to be a disconnect between the current economic malaise and the Calgary real estate market. Sales volumes have increased every month this year, and it looks to continue that way for June. MLS Average and median prices have continued rising all year.
Where’s the disconnect? Calgary economist Adam Legge can shed some insight:
There has been a lot of talk lately about an economic recovery, or the infamous “green shoots.” Yet, on May 8, 2009, we received April labour force data showing that Calgary experienced one of its worst months of job losses in a decade on a seasonally adjusted basis – approximately 8,000 jobs lost – driving the unemployment rate up to 6.3 per cent. February 1997 was the last time that we were at that unemployment rate.
On the same day, analysts hailed a loss of 539,000 jobs in the U.S. as a good thing. Or at least not as bad as they expected. Correct me if I’m wrong but isn’t the fact that people are losing their jobs generally a bad thing? I think a better time to hail recovery or turnaround might be the day when, oh, I don’t know, we see an end to the losses, or, heaven forbid, actually see a gain in jobs. I know, crazy notion…
First, simply because bad news isn’t as bad as we think, doesn’t mean it stops being bad news. The global and Calgary economies are still experiencing job losses, slowing sales, increasing bankruptcies, increasing mortgage arrears and increasing demands on social agencies. Let’s breathe a sigh of relief when those reverse. When we actually see good news. And a trend of good news. One month of good news won’t convince me. A quarter or two quarters will be making more headway.
Second, because we haven’t seen the worst of it yet. Some forecasts suggest that developed economies will experience double-digit unemployment by 2010. With rising unemployment will come increasing defaults on loans, mortgages, and a variety of other impacts to the financial sector as a result of decreased employment.
Finally, we would be absolutely kidding ourselves if we actually thought we did it. To actually think that we solved this complex financial monstrosity would be a hallucination. It would be folly, and ultimately detrimental, for us to think that we have actually found all the toxic assets, dealt with them and are on a stable, healthy and viable road to recovery. Our biggest error would be in thinking we were back on our feet, and casting attention away from what got us here in the first place. If we don’t truly deal with the balance sheets of our financial institutions and ensure that we can manage these issues better in the future, we will be rebuilding our foundation on quick sand.
…Let’s not act like the sky is falling. But let’s not think we are in a recovery when we aren’t.
Source: Calgary Economic Development, Adam Legge
So what’s causing this resurgent in sales? Why are prices seemingly increasing? Homes are going C/S before clients have been able to contact me to schedule a showing. There are a variety of contributing factors:
Interest Rates
The Bank of Canada has dropped their rate to historic lows, and have stated they’re intending to keep it there for some time. This means variable rate mortgages continue to be very attractive.
Fixed-rate mortgages have also been very low. Earlier this month when 5-year bond yields rose, banks increased their fixed-rates. However, the 5-year bond yield has dropped from their 7 month closing high on June 10th, and some lenders have moved to lower (very slightly) their 5-year fixed rate again.
Even with interest rates so low, I encourage those buying to budget enough for increased interest rates for when your 1-5 year term is up and you have to renew. You can read my blog post: Budget & Plan Ahead for Higher Interest Rates.
Inventory
Although I had stated earlier this year that there might be a slight increase in prices this spring before continuing their gradual decline to normalcy, what I didn’t expect was the lack of inventory – especially compared to the highs we reached last spring. Take a look at the graphs below showing inventory over the course of a year:
Builders have scaled back new construction (Blog Post: New Construction & Inventory Levels)
In a span of a few short months, the market went from being extremely buyer friendly to an overall balanced one.
In fact, as of last week it was actually a Seller’s Market for homes priced between $300,000-$500,000, and right on the brink of one for homes under $300k. (Source)
Foreclosures
Lenders began foreclosure proceedings against 3,407 Calgary-area homeowners between April 2008 and February, up from 1,947 in the 12 months prior, according to Alberta Justice. (Source) However, these aren’t being readily listed on MLS, as the amount of listed foreclosures have continued dropping since this spring. I’m sure banks recall the early 80′s when there were so many foreclosures in communities that they were being given nicknames such as Abandondale and Foreclosureridge. Of course, nothing would be gained by listing all the foreclosures as surrounding property values would be affected.
What’s Next?
With low interest rates, declining inventory, and prices rising - emotions come into play. An email I received this week stated in part: “I have this fear of prices shooting way up again and I’ll have missed the boat.“ And really, that’s all it takes before we get carried away on another bubble before the first one has fully deflated.
The Teranet-House Price Index released their April report today. It’s nothing short of worrisome that Calgary price increases (not prices) are still so far out of line with the rest of the country.
Although the MLS average and sales price are showing an increase, the HPI is actually showing prices are still gradually declining – at least up to April. What happens if the HPI starts showing increases for the months of May/June as current MLS sales figures are showing?
Has the market already “bottomed”? I personally don’t think so. However, there seems to be ongoing events that have prolonged inflated values compared to historic norms. The introduction of 0% down 40 year mortgages introduced home ownership to a lot of buyers who could (or should) otherwise not qualify. Now, low interest rates have increased affordability, but only temporarily. Multiple offers are becoming more common again. I had a seller last week refuse to counter my buyer’s offer because it wasn’t list price.
What will happen in the near future? I’m not sure. When emotions take hold, anything goes.
