New home builders have the unenviable task of attempting to forecast demand and construct homes accordingly. Surprisingly, the recession hasn’t put a damper on the real estate market. Demand is as high as ever and developers are now scrambling to respond to a supply shortage but have to be prudent.
“There is not a lot of inventory around,” said Gary Friend, president of the Canadian Home Builders’ Association, adding his industry has been careful not to speculate. “We have to watch our Ps and Qs, as we try to meet this demand.”
The problem is that builders can’t turn on a dime as from start to completion can be up to 6 months or more. Build too much and they’ll be left with unsold product and need to use enticements such as upgrades and price reductions. Too little and they won’t be as profitable. It’s a fine balancing act to be sure.
Last month CREA said existing home prices across the country were up 13.6% in September from a year ago as a supply problem was evident in almost every city.
Speaking of Canada in general, Bog Dugan, chief economist with CMHC says, “The existing homes market is in short supply so we’ve gone from a buyer’s market to seller’s market. The way it gets linked is you get some spillover into the new homes market and that’s starting to happen.” (Source)
In Calgary, builders are starting to gear up on the SFH side as shown by October’s CMHC Housing Start report:
Source: CMHC (click to enlarge)
Year-over-year SD starts are up 38% for single detached homes in Calgary while other types of construction are down by 2%.
Source: CMHC (click to enlarge)
Year-to-date, SD homes are only 4% off pace from last year and quickly gaining. However total construction is off by a whopping 54%. (They’ve been busy little bees over in Edmonton)
“Builders continued to increase starts in response to declining inventory levels and higher new home sales,” said Richard Cho, senior market analyst in Calgary for the CMHC. “The recent up-tick in construction activity is expected to continue in the months ahead.” (Source)
This is good news for buyers as SFH resale inventory has been dwindling throughout the year.
Technically speaking, the Calgary market is in “Balanced” territory, but teetering on the edge of becoming a Seller’s market once again.
Will the recent price gains coax more home owners to sell this spring?
3 responses so far ↓
Jimmy // November 10, 2009 at 6:31 pm
This is a wild card that might throw SFH prices even further from fundamentals next year. If builders hold out, wondering about shadow inventory or another downturn, they stand a good chance of underbuilding and causing a temporary surge in prices. It’s really the opposite of 2008, when unemployment was low, salaries were rising but overbuilding pulled down prices throughout the year. It seems so long ago now…
Notice I say temporary. If we sit at inventory less than 3000 for too long, especially into next spring I have no doubt prices will get “too high” and correct eventually. It’s too bad for prospective buyers that interest rates will almost certainly be higher by then. The buying opportunities this spring were pretty good in retrospect.
Mike I’m sceptical that one can call this a balanced market based on the ab rates. I think the absorption numbers that determine a buyers vs sellers condition need to be revised for other factors. In a balanced market, prices shouldn’t be peaking in November.
And about the SFH-Condo differential, I think that’s really a measure of the lack of inner city land to build homes on and the cost of building a new home relative to a condo. This is a more recent development in Calgary compared to most cities due to our rapid growth. Another Calgary problem is the poor quality of transit options in outlying neighbourhoods, making “outer city” land less feasible.
Condo capacity can always be increased and is essentially completely elastic. SFH capacity is space-limited. Just look at what Hong Kong does when they need more apartment or office real estate.
It’s easy to see that this dynamic is only going to make the Calgary SFH-condo differential increase going forward unless we invent hover-cars and live like the Jetsons.
Realesto // November 10, 2009 at 10:30 pm
Great post Mike, I always enjoy reading your take on the market as well as the summary of the statistics provided by the boards. Keep up the great work.
NumbersGuy // November 12, 2009 at 3:32 pm
I have heard that developers were caught a little by surprise at the level of sales this summer/ fall, and have little in the way of new subdivisions with lots for sale. At the current pace, inventory may continue to decline over the winter as developers will wait for warmer weather to push in new roads and services this spring to bring newe lots online. This in turn may lead higher prices in the spring until developers can catch up.