Recently, an article published in the Calgary Herald depicted the Western Property Market as “buoyant,” portraying provincial immunity to the affects of the impending economic implosion and meltdown of the US economy.
Further critical analysis of the components of the article would point out that maybe the market may not be buoyant by underlying economic fundamentals.
“The report, authored by Adrienne Warren, senior economist at Scotiabank, said from a housing demand standpoint, “economic conditions still favour Western Canada, with its booming resource-based industries and extremely tight labour markets.”
…
“Overall, compared to American markets, the economy in Calgary is still robust, with a low unemployment rate of about three per cent, as well as continued job creation and wage growth, said Lai Sing Louie, senior market analyst in Calgary for Canada Mortgage and Housing Corp.“Overall, the fundamentals show the economy is expanding so we’re not in the position like some areas of the States where they’re in deep trouble. In terms of what that means to the housing market, it means that there’s still demand for housing for sales and coming into the spring season we’re looking at prices shoring up as this is usually when the strength of buying starts to come into the marketplace,” he said.”
Alberta’s economy is not sufficiently decoupled from the US to be immune. The US imports over 90% of Alberta’s provincial exports which includes crude petroleum and gas/gas liquids. These two products form the largest provincial export. The oil and gas sector contributes to around 24.5%of Alberta’s GDP. If there is a decrease in demand for Oil/Gas (like during times in a recession), then the Alberta economy will definitely be impacted. Ziff Energy warns of potential layoffs of up to 50,000 employees this springtime. Furthermore, Ziff Energy warns of a “Conventional Oil & Gas Recession in 2008.” In relation to Alberta’s tight job market, one must analyze what type of jobs are being created (transient, F/T, etc.) and whether all these jobs can actually support a mortgage at the present values.
“Yet, affordability is becoming a constraining factor in several centres, including Calgary where average home prices have doubled in the past four years,” said the Real Estate Trends report. “The odds of significant overbuilding, or of the price declines that are now occurring in the United States, are still relatively low. Inventories of unsold homes, including condominiums, in Canada’s major centres are well contained, particularly when compared with the housing market upswing of the late 1980s. Tighter lending guidelines for developers and a lower level of investor participation have reinforced a more cautious approach among homebuilders.”
If affordability is becoming a constraining factor, then the housing market prices are simply unsustainable where they are presently at. A quick glance at some Calgary mortgage statistics from Canequity will show that the average applicant gross salary is 60,980.63. Realistically, after tax salary in Calgary will not be enough to even afford (and have a decent quality of life) a SFH, let alone a simple one bedroom 600-700 sq. foot condominium. For that financial consideration alone, most first time home buyers will require dual incomes. The statement that inventory is contained is completely erroneous. Inventory levels (for both SFH and condos) are soon to reach last years all time record high and we are only in February. What the article fails to mention is that sales are down 30%-40% year over year. With so little demand, it will be impossible for inventory to be contained. We are poised to have all time record high levels of inventory in 2008.
“The continued strength in the Calgary MLS market can be seen in the latest data by the Calgary Real Estate Board. According to the board’s website, as of Tuesday, the average sale price of a single-family home in the metropolitan area was $466,657 for the past 30 days, while the median price was $425,000. For January, the average sale price was $455,297 and the median price was $410,000.
In December, the average sale price for a single-family home was $444,769, while the median price was $406,788.”
These numbers mean nothing without proper analysis. The minor price increase can be due to many factors. For example, the prices may be inflated due to a higher number of million dollar homes sold as compared to the previous months. Furthermore, it seems the bottom of the market may be falling out as lower end transactions and sales are down drastically. The homes sold now are those current owners moving to bigger homes. Average price per square foot has fallen since July 2007 and has seen just a minor increase of $3 from $293 (Jan 2008) to $296 (MTD Feb 2008). With inventory ballooning out of control and sales retreating back to conservative levels, the upwards pressure on prices will be soon eroded over time. Soon sellers will have no choice but to lower prices to trigger sales (simplistic supply-demand economics). Keep in mind, there was a slight run up in prices before the US market crashed.
“Warren said the underlying fundamentals suggest Canada is likely to maintain a relatively healthy real estate market, particularly in its fastest-growing regions. But “there is growing concern over the sustainability of these trends in light of the U.S. slowdown and ongoing financial market volatility.”
“The current housing boom in Canada is the strongest and longest of the postwar era, she said. Between 1998 and 2007, average inflation-adjusted home prices have soared some 65 per cent, easily besting the 32 to 56 per cent appreciation of the prior three housing cycles of the 1960s, 1970s and 1980s.”
I think the rebuttal for this section of the article is perfectly accommodated by the post from Radley77’s blog titled: Long Term Relationship Between Calgary House Prices and Alberta Economic Activity Diverge – Irrational Exuberance? The graph clearly shows the trend of Calgary house prices becoming unlinked and diverging from Alberta’s current GDP. Even though the economy is doing well, it doesn’t fundamentally justify and support the current prices. Couple that with the graph from Mike Fitiou, then the bubble is clearly evident. The unsustainable overvalued prices are clearly evident.
To conclude, these underlying fundamentals that are so easily verbally coined in the article are in reality not supporting the current prices seen Calgary real estate market today.
Just like no one believed the Titanic would ever sink, fate had its course.
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