Thoughts On Latest Forecast

UPDATE (August 2011) CREB has revised 2011’s forecast, click here

Had Ricky Gervais hosted CREB’s 2011 Forecast Conference, he might have cracked a joke such as:  “They jumped the gun and released their 2011 forecast before CRTC’s regulatory change that would allow the broadcast of any false or misleading news that could result in financial harm.”

If a newcomer came to the city and based their buying decision on 2011’s forecast, it would seem like a no-brainer to BUY NOW.

  • Net migration to increase 340% over 2010
  • Oil & gas prices up
  • Employment up
  • New single family home starts to increase 7% to 6000 units
  • New multifamily starts to increase 11% to 4000 units
  • SFH listings to drop 1.6% while condo listings drop 12.5%
  • SFH sales to increase 19.9% while condo sales increase 15.8%
  • SFH average price to increase 4.1%
  • Condo average price to increase 1.8%

It looks like it’s going to be a perfect year!   And while I wish, wish, that were the case I’ll outline why I don’t believe it’ll be quite that rosy.  I might be way off base, but this an instance where I would be happier if I were wrong 😉

I can see an average price increase for 2011, providing overall sales are weak and the luxury segment remains steady.   It’s explained briefly in the forecast:

Confidence in the oil patch and improvements in the overall global economy may trigger sales of larger and higher priced homes, prior to an overall rebound in more average-priced property. This will put upward pressure on average prices

As we’ve looked at before, the luxury segment really doesn’t trend the same way as the rest of the resale market.

A better gauge would be the median price and to keep an eye on Teranet’s House Price Index to see what house prices really are doing.

The forecast continues:

Actual price appreciation will require a resurgence of sales in the entry level homes to fuel a sustainable recovery and create a more balanced market.

So it was a little surprising to read CREB state the 2011 forecast wouldn’t change in light of the federal government’s announcement on Monday.

BNN reports (video, 3:35 mark) that for the average Canadian buyer (keeping in mind average Canadian house prices are lower than Calgary’s) the changes translates to a 0.5% rate increase, or 7-8% reduction in affordability.  Not exactly an insignificant amount.

That these tightening conditions, as well as possible interest rate hikes later in the year, would result in a 19.9% and 15.8% increase in sales while prices rise seems counterintuitive.   While this will mostly just affect marginal first time buyers, it’s still a change that would result in a decrease of sales.   The CREB forecast also stated that there is “little pent up demand from renters.”

BMO Nesbitt Burns economist Douglas Porter said resale prices in Canada could drop as much as 7% within the next 12 months because of the change to amortization lengths, as buyers who would have opted to spread the cost out over 35 years are forced instead to take out borrow less in order to keep their payments affordable.

However, according to CREB’s forecast, it’s not lower prices that will spur sales.

So what is this forecasted increase in sales – which by the way would mean sales would be higher than 2008, 2009, and 2010 levels – dependent on?

A lot of  “if’s” and “should’s”.

If we see the job growth that we expect to happen in Calgary then the in-migration should occur and that should drive the sales.” – CREB

With more activity in the energy sector that should help support employment growth and that will strengthen demand for housing – CMHC

The forecast is based, not on conditions indicative of today, but on hoped for conditions in the near future.    With little demand left within the city, in-migration is all that’s left to propel the housing market.

Interestingly, the forecast expects the housing market in Calgary to improve in the second half of the year while the rest of Canada slows down.

Economists Benjamin Tal and Emanuella Enenajor of CIBC World Markets stated in their recent report:

The softening in the monthly pace of job creation from an average of 31,000 in 2010 to 22,000 in 2011 will single-handedly slow growth in personal spending by more than 0.4 of a percentage point…Our expectations that the housing market will stagnate in 2011 and might even see some softening in the second half, suggests that the estimated 8-per-cent rise in net worth in 2010 will not be matched in 2011.”

Scotia Capital economists Derek Holt and Gorija Djeric have this to say:

We remain of our long held belief that Canada is tapped out on housing and household finance variables that are all at cycle tops, in contrast to the U.S. that has already moved well off cycle tops and may be creating some pent-up demand.  Examples include the home ownership rate, house prices by any definition, near record debt payments as a share of after-tax incomes, near record weakness in housing affordability, and record debt-to-income and debt-to-asset ratios.”

So once again the essence of CREB’s forecast is that “it’s different here.”

Frankly, I would be a little gunshy to make such an optimistic sales forecast especially after last year’s results:

Forecast vs Actual Sales (click to enlarge)

I hope I’m wrong.   It would be nice to see the housing market stabilize after the ride we’ve been on the past 5 years.

Will employment growth, wage increases and in-migration be enough to counter the effects of tightened lending standards, reduced affordability and increased inventory?

Calgary Daily MLS Statistics

To make it easier to compare statistics, I’ve now added the “Year-over-Year Comparison” column on the daily stats. Hope you find it useful!

15 responses to “Thoughts On Latest Forecast

  1. the whole thing continues to baffle me. This is all simple math. Median incomes need to match median prices for housing to be “balanced”. Run a simple mortgage calculator with small interest rates differences and you can clearly see what small interest rate moves will do to these “payment” buyers. With ever increasing carrying costs, new tighter credit conditions, and a 100% certainty or rate hikes both short and long term, the only way to go is down.

    They can “hope” all they want for the stated variables but unless incomes go up substantially, prices and sales will be trending downward. No need to make things more complicated than they really are.

    With people blowing their brains out on huge leveraging, is it any wonder RRSP savings are at their lowest rate in over a decade.?!

  2. What I find quite amusing is that the CREB is putting themselves “behind the 8-ball” so-to-speak right out of the gates in 2011.

    Still early, and would not be surprised to see sales pick up in the latter part of January, but pro-rating the current SFH sales (360 as of Jan 18) to January month end = 620 sales.

    January 2010 had 762 sales.

    If we finish at or near 620 sales then we are ~20% down, not up YoY

  3. Like the new YOY column. Props.

  4. I am on the fence part of me wants to see prices fall , but the other side of the coin is no recovery which means no jobs. I know people are starting to feel the pinch that are looking for work. Lets hope for a stable market but I do believe that we are heading lower.

    Some good news last night , I heard that oil rig count is up from last year so maybe things will level out . Its those gas prices that are keeping things slow.

  5. y/y – brilliant!

  6. Carioca Canuck

    Hi Mike….

    Did the way listings are tabulated by CREB change ?

    Mike Fotiou says: The only thing I’ve seen change is that the stats on the CREB site are updated at 4:15am instead of 12:01am…but other than that, no.

  7. Mike, I’m sure you’ve answered this multiple times before, but did CREB not do forecasts for 2005-2007?

    I can say the Forecast Conference wasn’t an entire waste…my realtor friend got me a nice “creb” branded blanket 🙂

    Mike Fotiou says: I wasn’t able to find those sales forecasts in our archives or in CREN. If anyone has a copy, please let me know.

  8. CREB is on a camapaign that all is well. There is a separate section in todays Sun for housing in Calgary and expectations for good things this year.

  9. Mike,

    Great work and thanks for being to honest in your comments…! You brought out CREB’s irresponsible motive to propel the sale without considering common man’s financial ruin.

    As you said, I too wish that things will be as rosy as they predict, but in reality it is not. For eg., my salary was stagnant for the past 3 years (after having a downward cut). I am not buying their thoughts.

    Keep up the good work…!

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