Every Canadian real estate report released inevitably focuses on the two problematic cities: Vancouver & Toronto. The excess supply -especially on the condominium side – increases the risks of a significant correction there.
When we hear of forecasts of national declines of -10% to -15%, these figures are hardly representative of the reality within each city. A recent report by Laurentian Bank asserts that each city has different characteristics that are worth taking into account.
So what’s their forecast for the Calgary and Edmonton? In short, both Edmonton and Calgary should see their housing market activity return to pre-recession levels this year. The momentum is very different in contrast to the rest of the country, and all real estate drivers point towards an increase in both prices and activity.
The 2008-2009 recession has placed a significant strain on Alberta’s energy dependant economy, and left its mark on the real estate market, bringing prices down by more than 10% in both the new and resale markets.
Generally, market activity greatly declined, and only started gaining some positive momentum in 2010, but stagnated in 2011. New housing stock in the condominium segment, which is much more prominent in Calgary, as well as the number of current listings on the resale market, were both higher in 2011 as a consequence of the 2009-2010 market slowdown. This year, both Edmonton and Calgary should see their housing market activity return to pre-recession levels.This is also indicated by the upward trend in building permits.
On a separate note, population growth is the highest in the country, while housing starts have not significantly outpaced household formation in the last few years.
Thus the boom in new construction that is ongoing since the beginning of the year is fully justified, and is also the result of higher perspective of population growth. This situation also favors the rental market that tightened in 2011.
Speaking of vacancy rates, they have fallen for a second year in a row in Calgary, and have now reached their lowest point since October 2007, going from 3.6% to 1.9%. As for vacancy rates in the rental condos segment, they remain above the 5% level due to lower demand.
Because of a considerable gap between rents on the housing and condominium rental markets, the former has attracted much more demand.
Also, the gloomy economic conditions during the 2009-2010 period, as well as the more pronounced slowdown in real estate activity in the province, has favoured renting at the expense of purchasing in the large cities. Furthermore, in comparison to 2010, vacancy rates remained unchanged, reaching 5.7% in 2011.
In Edmonton, vacancy rates of apartments decreased in 2011, but much like in Calgary, the market is not as tight as in 2006, when strong returns from the oil and gas industries pushed Alberta’s economic growth to close to 6%.
Hence, the momentum is very different in contrast to the rest of the country, and all real estate drivers point towards an increase both in prices and activity. Annual growth in prices is now in positive territory after a slightly negative year in 2011, and is expected to accelerate due to higher demand, which in turn will be fueled by higher needs in terms of labor within the province, mostly from resource extracting industries.
Nonetheless, it is currently 40% more expensive to be an owner rather than a tenant in Calgary, a considerable difference which should boost expansion of the rental market and condominiums, in order to reduce the impact on affordability. This is already becoming apparent as a greater share of starts is dedicated towards the condominium market in 2011 and beginning 2012.
In brief, prospects are rising for the real estate markets in Calgary and Edmonton, but they are reasonable given the cyclical aspect of Alberta’s economy and the recent dip of crude prices to $80 per barrel.
To read the entire report along with commentary on the Toronto, Montreal, and Vancouver markets, click here (Calgary graphs on page 18)