Why do trees in Alberta lean north? If you grew up in Calgary, you no doubt heard some variation of this joke’s opening line in grade school. And that is my horrible segue to a special report released by BMO today highlights that although Calgary and Edmonton are rivals on the field and rink, the two cities will likely be partners in achieving above-average economic growth in the years ahead.
The report highlights the demographics, labour market, and energy sector in Alberta. Below is the excerpt detailing real estate:
While some other major Canadian cities have begun to see housing market activity cool, Calgary and Edmonton are gaining momentum as a strong economy spurs a pickup in housing demand.
The recession was particularly hard on Alberta’s housing market. Extremely tight supply during the boom years of 2005-2007 sent average prices surging to record levels—in Calgary, for example, they rose 78% in just two years through July 2007.
However, the associated run-up in homebuilding was met by a steep drop in demand during the recession, causing prices to stagnate for about 4 years before recently finding momentum. Indeed, demand has started to pick up, with existing home sales up more than 20% y/y in Calgary through the first seven months of the year, and a more modest 7.5% y/y in Edmonton.
Average prices, while still below peak 2007 levels, are again moving higher in both cities. Strong income growth and stagnant home prices since the recession have greatly improved affordability in Alberta’s major cities.
Average prices in Calgary and Edmonton are now less than 5x and 4x estimated median family income, respectively, well below valuations of about 7x in Toronto and 10x in Vancouver.
Barring a severe decline in oil prices, higher affordability and stronger underlying economic and population growth should allow Alberta’s major markets to outperform in the years ahead. With the supply overhang from the pre-recession boom getting worked down, residential construction activity has begun to pick up.
For example, housing starts totalled more than 10,000 units in the year through June in each city, up from little more than 8,000 in the same period a year ago, but still about 30% below peak activity seen in 2007. Construction has also begun to pick up in the industrial and commercial sectors, boosted by expanding
office and retail space in Calgary and projects like Edmonton’s recently-completed EPCOR office tower.
However, while airport upgrades are ongoing in both cities (almost $4 bln worth), overall government construction spending continues to soften after
stimulus spending peaked in 2010.
To download entire report, click here