Has Calgary’s Housing Market Bottomed Out?

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.Bank of Canada Rate

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.

5 year Bond

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:

SFH Inventory

Condo Inventory

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.

Absorption Rate

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.

House Price Index

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.

Advertisements

8 responses to “Has Calgary’s Housing Market Bottomed Out?

  1. I continually follow your site and would like to credit you for being honest and open about the housing maket. It’s a refreshing contrast sometimes between the over hyped doomers and the pumpers you get in the paper. Keep up the good work

  2. Thank you Mike. You blog very interesting and HONEST. I hear and read all around we are pass ressession everething OK ! Buy! don’t wait.Calgary is completely immune from rest of country, we are in a good shape because oil!!!
    But I can say “worth” is in AHEAD. I am working in Alberta Oilsands and can tell: No any improovment in workforce in the near future more laid offs and I beleive it will 3-4 years at least.

  3. Thanks for the break down of all of that information. I really learn a lot from you! I am still not in a position to become a homeowner but I hope there is a lot more to choose from when I am. The lack of inventory is puzzling especially when I keep hear stories of multople offers. Seems like potential sellers aren’t falling for the false bottom.

  4. The main driver here – half the sellers took houses off the market since last year, planning on waiting out the recession… this is different from the US, where inventory didn’t drop quickly- meaning that sellers are better off here – lack of ‘subprime’ and the seller population has wealth as a result of the prior boom in oil and gas, and are planning on waiting out the recession.

    One thing to keep in mind is that the reason that the price hit a ceiling in 2006/07 and bouced off it quite forcefully was a lack of buyers able to pay half a million dollars for a family house; and the large number of sellers wanting to take profits at those levels.

    In addition, the notion that house prices can only go up has been competely discredited, meaning many fewer buyers will ever be willing to pay inflated prices. Those prices only ever lasted for a very short time window (1-2 months) in Calgary when demand was highest in spring of 2006 and 2007. When one goes back and looks at the solds history, they stand out as quite shockingly higher than the price paid for the same thing a couple months before or after. And- sales volume at those times dropped off quickly.

    It appears that what we have now is a BOUNCE off of the ‘long term support level’ – ie. the long term trend that would have erased the bubble was almost reached (within 10%); people noticed that dip and bought it out — now those left behind are afraid that those prices won’t come back, when logic says that they will! The resistance level that was in play before is still there- with low interest rates offsetting unemployment once the demand surge from the lowest interest rates is finished– it appears to be finishing up just now.

    Still – anything could still happen. Let’s keep in mind though that something significant has changed – people’s expectations. Once the bounce starts to peak out, it then becomes sellers who want to rush in to sell into the remains of the rally, fearing that they will have missed the window to SELL. Once that happens, you see inventory climb.

  5. Good honest report Mike!

    Low inventory is puzzling. We know there were a lot of sales to flippers, speculators and investors in the past 6 years. Are those people now reluctant landlords? Are they holding out hoping for the next boom? Are they underwater on the mortgage so even if they did sell they wouldn’t have enough to pay off the mortgage?

    It’s possible.

    I honestly think we are on the crest of the next bust, this is the last of the cheap money, the last of the greater fools. With the world economy is recession (including Canada) and Calgary boasting a 100% grow in unemployment why would any sane person buy now and not wait?

    Potential buyers have to remember one thing. Canada is NOT detacted from the US economy. What looked like amazing US RE prices in 2006 wasn’t as good as waiting till 2007, which wasn’t as good as waiting till 2008, etc…

    Buyers, wait just 2 more months and see. That will put us in September, the traditional market decline period.

    Mike

  6. Thank you for all your insightful comments!

    What I said about emotions being a contributing driving force can be reiterated with news articles like the one today which begins like this:

    You blinked, didn’t you? After months of patiently waiting for the market to hit bottom–and watching interest rates, house sales and prices slide–you blinked.

    And in that nanosecond, you might have missed it.

    Don’t be upset. You’re not the only one.

    June 27, 2009 Calgary Herald

    The last thing this market needs right now is unduly motivated buyers rushing in hoping that they aren’t priced out again.

  7. Correction:

    That should read:

    “Calgary, sadly, it is NOT an island immune to the sea of debt or the worldwide financial hurricane.”

  8. I just noticed that RECA (Real Estate Council of Alberta) has an opening for a member of the public to serve as a Council member. Deadline is July 3rd.

    Click here for more info

    RECA is an independent, non-government agency, responsible for regulating more than 15,000 industry professionals in the real estate, mortgage, and real estate appraisal industries under Alberta ’s Real Estate Act.

Please feel free to post your comment or question

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s