The reason sales in Calgary have plummeted has often been attributed to pulled forward demand – buyers wanted to get in before the new regulations took effect in April or because rising interest rates were on the horizon. If one were to believe in pulled-forward demand, it would mean that a gaping void of sales was to be expected.
CREB forecasted that SFH sales were going to increase 17.7% in 2010 over the previous year. Yet for the first half of the year, SFH sales were down 4.32% and will fall further in the coming months. The fact that interest rates were set to rise in June 2010 had long been forewarned by the Bank of Canada (since April 2009) so that was most likely taken into account in the forecast. However, major changes to mortgage rules were communicated on February 16th after CREB had already released their annual forecast.
Between the time the mortgage rule changes were announced to the time they were to be implemented was slightly over two months. Was there an increase in activity during that period as buyers rushed in before changes took effect?
No. Other than year-over-year comparisons to early 2009 when the global financial markets were still reeling, there was no jump in activity and levels remained well below averages.
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That leaves us to explore that maybe the low interest rates and the fear of interest rates spiking in June 2010 was a catalyst for increased sales throughout the previous year, dragging demand forward.
It’s true that last summer Calgary experienced brisk sales:
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But that was attributed to the “pent-up demand” that was a result of buyers watching on the sidelines during the winter of 08/09. Indeed, the market was horrific during those winter months as sales dropped to record lows and no one knew what the following year would bring. (See months: Oct ’08, Nov ’08, Dec ’08, Jan ’09, Feb ’09)
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Since May 2010, sales have slowed considerably leaving us to wonder what the causes of this were. I would eliminate pulled-forward demand as a leading cause since the data doesn’t support it from my point of view. Interest rates are still low, so that hasn’t become a factor – yet. Alberta buyers didn’t have to race to beat the introduction of the HST like Ontario and BC residents. Have the changes to the mortgage rules had that profound of an effect? If we were to assume so, then a whole host of unqualified buyers have entered the market the last few years and that thought isn’t any more consoling going forward.
What does that leave us besides:
- Current price levels
- Other external economic factors such as employment, income, net migration, and the economy in general.
Would appreciate your thoughts and opinions as always!
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Interesting to look at mortgage application information for Calgary from CanEquity
Including:
-Average income
-Average loan amount
-Average age
As well as monthly application volume
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I do believe demand was artificially brought forth last year during the bottoming of rates. While your charts may not show that story, consider how they would have looked with rates that were closer to the historic norm. I would suggest that most buyers remotely interested in a house actually have bought leaving a smaller pool of buyers for the 2010 year
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Mike Fotiou says: If 2009 was the beneficiary of pulled forward demand, then sales were extremely anemic at a time affordability was at its greatest point in recent years (low interest rates, prices had dropped)
Hi Mike F,
It is really nice to see a Realtor, who does go beyond the numbers. I would definitely seek and recommend your advice to others when it come to real estate. Keep up the good work.
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Mike Fotiou says: Thanks, Nerus! Next time, please feel free to share your opinion on the topic as well
I agree with shenyyc that demand was in fact brought forward in 2010. Your data set would have to go back much further however for this to be more clear. Home ownership has risen in Canada as a percent of population from the low 60′s to the low 70′s. This is a massive amount of “brought forward” demand in the form of buyers purchasing much sooner in their life cycle including purchases of second homes. When you see intern students purchasing homes as “investments” with the help and encouragment of their parents you know the peak is in in terms of demand.
What we saw in 2010 was the last throws of raising the percentage of homeowners in what would have otherwise been a very bad year for sales after many years of above average sales.
The lower number of sales we will see over the next five years can only be put into perspective when viewed in light of 5-10 years of above average sales through the 2000′s, not just 2009.
ALE
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Mike Fotiou says: Thanks, ALE, I really appreciate your input. Unfortunately, my blogpost was limited in scope to the last couple years as I was just trying to determine whether recent and upcoming changes to mortgage rules/interest rates was the immediate reason for lagging sales… It would certainly be interesting to do a much more indepth analysis to see the shift in buyer demographics over the past decade or two.
Interesting blog post Mike, great job.
I do remember the fear in the air in 2008 when it seemed like the world had reached armageddon, at least financially.
Looking back, that emotional fear does seem to have been at the root of the lackluster sales.
In 2010, it seems like the watercooler/dinner party talk isn’t really focused as much on unemployment as it was in 2009. You still hear grumblings from those who had to settle for a job that wasn’t quite as great as they had before, but for the most part, those who lost jobs have found something.
While there has been bubble talk on blogs like this one for years, it seems like in 2010 it really seeped into the mainstream media and your average Joe was aware of such talk.
Combine that with the talk of rising interest rates becoming a reality, and well, maybe there has been a bit of a sentiment shift.
It’s interesting to watch how human psychology and emotion seem to play such a large part in the housing market, maybe even more so than the equity markets.
I’ve referenced this article quite a few times, but I still like to read through it now and again and think about how it relates to current market conditions…
http://www.irvinehousingblog.com/blog/comments/houses-should-not-be-a-commodity/
“Another major psychological change occurs in this stage after people accept the rally is dead: People reassess and change their relationship to debt.
During the rally, debt became a means to take a position in the housing commodity market. Nobody cared how much they were borrowing because they never intended to pay off the loan through payments from their wage income.
Everyone believed they would pay off whatever they borrowed in the future when they sold the house for more than they paid.
Once prices stop going up, people realize they are simply renting from the bank, and the only way to get ahead and build equity is to pay off a mortgage.
The desire to borrow 10 times income diminishes rapidly as people realize they could never pay off such a large sum.
What started in the denial stage as an involuntary contraction of credit, in the fear stage becomes a voluntary contraction of credit as people simply do not want to borrow such large sums.”
So maybe what we’re seeing here in 2010 really is just the start of Canadians becoming self aware of just how much debt they were piling on.
Or maybe it’s just a temporary blip like 2008, who knows.
I was wondering Mike, are you able to make a chart/graph showing trends in the number of price reductions? Perhaps as a percentage of the inventory?
I guess ultimately that would just be reflected in the sold prices, but it will be interesting to see what becomes of the inventory that is currently on the market.
Are sellers holding firm with their asking prices, or are they lowering prices and that’s still not bringing out the buyers?
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Mike Fotiou says: I’ll see what I can do
Hi Mike,
It would be interesting to see the percentage of the population that are homeowners over this period. I think one plausible explanation is that demand was shifted forward for owners/occupiers but the demand from speculators was shifting the opposite direction. With the old rules I know a lot of people that owned more than one house because they either built a new house and didn’t sell the old one or they coupled up with someone else that owned a place and they rented the other one. The new rules make this very difficult, so I’m guessing that the percentage of the population that owns one place is higher than the historical mean, but the number of people owning multiple properties was decreasing at a proportionate rate.
Just a possible explanation with no evidence to back it up. If this is the case, it’s troubling for sales going forward.
Mabus
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Mike Fotiou says: I think this ties in with what ALE was saying. It looks like I’ll be browsing StatsCan for a while
I think CMHC might also publish the data. They were the source for a parliamentary document a few years back that discussed this topic:
http://dsp-psd.pwgsc.gc.ca/Collection-R/LoPBdP/EB-e/prb0403-e.pdf
From my own anecdotal experience, I think a TON of unbderqualified people bought too much house in the last 3-5 years.
I personally watched 3 months ago as my girlfriend was approved for a $450,000 mortgage with no money down (the bank guy was telling her how to fraudently use a line of credit as a downpayment). Her income is about $75,000. Fortunately, she was smart enought to back out.
I also watched as friends of mine took out a $700,000-1.9% variable rate mortgage. When I questioned them, the reply was: “We were smart, we made them run the numbers if interest rates go up. We will be okay even if rates go all the way up to 2.9%.”
Not good. Not good at all.
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Mike Fotiou says: Especially when you look at the history of the overnight rate. Hopefully they’ll be able to pay down a chunk before rates emerge from emergency lows. Bank of Canada Overnight Rate Chart (Source:Canadian Mortgage Trends)
Wow, are you the only real estate agent who says “low interest rates postponed the full effect of the correction”? Or at least you’ve questioned it.
Anyway, this is a real eye-opener.
Prof ANON: are you serious your friends said that they’d be ok if rates go up to 2.9%??? Isn’t the average rate at 7-8%. Oh, boy.
CM, it looks like I can only look back 14 days for Price Reductions on Active listings, and it’s not something I am/was keeping track of.
Here are the stats for the past 14 days:
260 Condos reduced prices.
Average price reduction: $12,354
746 SFHs reduced prices.
Average price reduction: $15,062
-Largest price reduction was for an Eau Claire condo, down $481k. (It’s still almost $5M, was originally listed at $6.25M)
-Smallest price reduction was $1. I’m not sure what that is about.
I am able see how many properties reduced their price before they ended up selling, but this will not capture those that were relisted at a lower price and subsequently sold. (It technically is possible by looking for matching addresses within a set time frame, but that would be a lot of work)
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Off on a tangent, but there are currently 15 properties listed over $4M in Calgary – 13 SFH & 2 Condos. If either of those condos sell near their asking price, they’ll be the most expensive condos sold on MLS in Calgary.
So far in 2010, 2 homes have sold for over $4M, both in Elbow Park ($5.3M and $4.2M)
The Bank of Canada increased the overnight rate by 0.25%. The only mention of housing in the media release was:
A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in 2 days. Hopefully, a little more insight on the housing market then.
Thanks for checking Mike!
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Mike Fotiou says: Any update on the rental market you’ve been following? Inventory is slowly dwindling as listings expire and aren’t being relisted. They must be going somewhere…
Hi Mike,
The SFH market price still sits quite solid. When do you think the price starts to move (up/down)? Or should we go back to the human psychology to map out the trend? Thanks.
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Mike Fotiou says: The average price will still bounce around because of the low sales volume. Pending sales show the median will be heading towards $400k in the next couple weeks.
Hi Mike,
Here’s a graph put together by EHB that shows the ramping of sales over the last decade. Like you said it would be interesting to see a more in depth analysis as some of the increase is due to migration.
http://edmontonhousingbust.com/2010/07/historical-monthly-sales-levels/
ALE