Correlation between supply, demand, and price in the Calgary real estate market

The basic economic model of Supply & Demand shows that price is a reflection of the amount of supply versus the amount of demand in a given market.

The law of demand states that, if all other factors remain equal, the higher the price of a product (house & condos), the less people will demand it.  In Calgary’s case, this decreased demand can be due to unobtainable financing, or perhaps because in many cases it has become cheaper to rent a similar home instead of buying it.

In the past several years when housing demand was high, builders and investors/speculators began supplying the market with a high quantity of product.   Obviously in a strong market, builders supply more at a higher price because selling a higher quantity at a higher price increases revenue.  Demand was higher than the available supply so prices escalated.  Likewise, the lower the demand, the lower the prices.

Condos in Metro-Calgary

Metro-Calgary Single Family Homes

Metro-Calgary Single Family Homes

Prices continue to lower until demand and supply are equal.  The point at which supply and demand reach equilibrium is when the housing market is at its most efficient.   At that given price, the amount of homes being supplied is exactly the same as the amount of homes being demanded.   For Calgary,  a healthy real estate market is having between 2 – 3.5 months supply of homes.

Supply & Demand for Calgary Condos

Supply & Demand for Calgary Condos

Supply & Demand for Single Family Homes

Supply & Demand for Calgary Single Family Homes

Supply has the disadvantage of having to factor in time.   Timing is important to supply because suppliers (builders, investors with condo conversions, etc) have to react quickly to demand or price.   They have to determine whether a price change caused by demand is permanent or temporary.

Builders were pumping out spec homes.   Condo conversions were everywhere.   Some people were purchasing second homes just to flip a month down the road.    Unfortunately for those sellers this demand, and as a result price change, was not permanent.

Prices started trending back down after summer 2007, and looking at the Absorption rate chart above, this is because we entered a buyer’s market.     If you compare the Absorption rate chart, with the graph below – you’ll see how the large month-to-month increases coincide mostly with the months where the Absorption rate was in a seller’s market.

click to enlarge

I realize this is a grossly simplified look at the real estate market since I’m not factoring in other important variables such as unemployment rates, migration levels, interest rates, credit availability, and the economy in general.    Consumer sentiment also  has a large effect on the real estate market, at times contrary to what economic fundamentals say prices should be doing. 

In the past few weeks I’ve been hearing quotes such as Warren Buffet’s, “Be fearful when others are greedy and to be greedy only when others are fearful,” in relation to the Calgary’s real estate market.   I’d like to point out that he also wrote, “A public-opinion poll is no substitute for thought.”  Your circumstances are different from everyone else’s, so do you research, read as much as you can, sample from differing viewpoints.   Buy or sell when it is the right decision for you.   When you’ve reached that point, I’d be happy to hear from you.

Mike Fotiou, First Place Realty is a licensed Realtor, Certified Condominium Specialist, Accredited Buyer’s Representative and Commissioner for Oaths in the Province of Alberta.

Note:  Again, I want to point out that I am not a financial planner, nor an economist – I’m just trying to provide you with other market possibilities we may experience in the Calgary market based on statistical trends, and basic economic models.

2 responses to “Correlation between supply, demand, and price in the Calgary real estate market

  1. A dreadful report. Just dreadful. (For anybody except renters, of course).

    The increases in the absorption rate this summer were primarily caused by excess supply: speculators trying to unload their extra homes, no doubt. Now, with demand collapsing, it’s going to be a cold, hard winter for anyone with too much house.

    The only chance is for severely distressed sales to balance the market quickly, and establish a reasonable market clearing price. Since mortgage rates are low, that might take a while.

    This is absolutely not the time to buy anything.

  2. Pingback: 2009: Spring Bounce or Spring Trounce? «

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