Recently, I’ve noticed on blogs moderated by realtors, that talk and hype has been focused (sustained) purely on the SFH market.
But what they fail to acknowledge (perhaps denial?) is that the Calgary condo market is on the cusp of self destruction. The condo market is symbolized as the most affordable entry point into the real estate market. There should be market activity. But where is it? If you examine the market closely, it is stalling, weak and ready to crumble. Once the condo market falls, the effects will ultimately cascade into the SFH market (or will simultaneous combustion occur?).
Initially, we can examine inventory levels. We currently have 2313 active listings for condos in Calgary. That is only 16 listings away from the all time high of listings on October 2007 (2329). We should easily be surpassing that mark earlier this week.
Secondly, condo sales are down 38% compared to last year. Currently, 2008 sales are stalling and flat lining:
Feb 2008: 562
Jan 2008: 454
—
Feb 2007: 895
Jan 2007: 736
Thirdly, current condo prices are also stalling and flat lining as well. We no longer see the massive month to month price increases we saw in 2007:
Feb 2008 Median Price: $295,000 Average Price: $311,812
Jan 2008 Median Price: $290,000 Average Price: $311,232
—
Feb 2007 Median Price: $280,800 Average Price: $301,812
Jan 2007 Median Price: $267,500 Average Price: $287,299
In addition, the sales list ratio is plunging into the abyss as compared with 2007 statistics.
Feb 2008: 45%
Jan 2008: 32%
—
Feb 2007: 101%
Jan 2007: 73%
Lastly, the February 2008 DOM statistic has barely moved from January 2008 DOM. DOM is not generally a good indicator to use when deciphering market conditions and direction, but for fun I thought I’d throw in the comparison as realtors use DOM as smoke and mirrors. Notice the difference from 2007 to now, when DOM a year ago was under a month.
Feb 2008: 45
Jan 2008: 48
—
Feb 2007: 28
Jan 2007: 39
We are witnessing a contraction in demand and super dilation of inventory for condominium units in Calgary. This contraction in demand may also be affecting the SFH market, resulting in a tapered variance in the sales mix. This would explain why the SFH market is seeing higher prices when inventory is high and sales are low.
New condo developments such as Arriva, Xenex on 12th, Nuera, Centro 733, Stonecroft, London London, Colors and so many others have been on the market for over a year and have not sold out.
With so much inventory right now, the sky will be the limit this year. It’s going to be a challenge for flippers to maintain their list prices at the current levels. If they maintain their denial, they’ll be priced out of the market forever – literally in terms of being able to sell their condo.
The days of a $300,000K+ 700 sq foot 1 bedroom condo are soon to be over.
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.
Presently it has been on the market for well over one calendar year and the condo conversion is only 75% sold. The units on sale are now for immediate possession with no GST.
Location is a vital element to consider when purchasing a property. The VUE is actually pretty well located on 14th Street N.W., close to the heart of trendy Kensington and a quick walk (and even quicker drive) into downtown. So why aren’t the units selling?
I was browsing online today and found an article in the LA Times which I thought was an interesting read and something that is parallel to the “symptoms” we are starting to see in the Calgary market these days.
“The choice was simple for Amanda Brown and Anders Nielsen: Pay some of the highest rents in the nation, or sink that money into a mortgage instead. The couple chose the latter, buying a one-bedroom northwest condo for $230,000 and marking their first foray into Calgary’s housing market. Now they regret it.“
The following article was on the front page news of the Calgary Herald yesterday. First and foremost, I don’t personally know the couple and the basis of my post is not one to judge them. When I read the profile of the young couple, I couldn’t help but think that these were some the prototypical buyers in the market 1-2 years ago. Buyers who were not overly prepared (or researched enough) to buy a property but yet ended up doing so after being influenced by MSM and DDS propaganda. Buyers who thought only short term and not long term. It was sexy to own a property in the last year and watch prices go up. Many of the buyers were rushed into the market fearing that they would “be priced out of the market forever.” Fast forward one year and now this couple is faced with a $32,000 bill (half to be paid by the end of May 2008, the other half to be paid by May 2009) on top of their $230,000 mortgage for a 1 bedroom Edgemont condo. One is a student and the other is working full time in the oil patch. I wonder what their next steps will be? It’s really an unfortunate situation and I definitely feel for them. Not to be pessimistic, but what if prices decline further this year or mortgage rates increase (or even a combination of both)? Eventually, they will be upside down on their mortgage and still required to pay for the repair bill on the leaking roof. I sure hope everything works out in the end for the couple, but I’m sure finances will be extremely tight during the next couple of years.
Which draws me to my next point. One of the dangers in buying a condominium is that you own what is inside the walls of your unit, nothing more and nothing less. Now not all condominium projects are built to fall apart, but as a condo owner there is an inherent risk of having no control over repair fees. Generally, if the building requires repair, the tenants are the ones who are required to pay the bill – whether they want to or not.
Maybe sometimes, renting isn’t that bad after all?
In the past several months, we’ve seen buyers disappearing at a significant rate. As already mentioned, sales are down 30%-50% year-over-year for the same monthly periods.
Many who are employed by the Debt Dealer Syndicate (DDS) will attest the reason that demand has contracted is that “buyers are taking their time to make a decision on buying.” Somehow, that’s a counter-intuitive approach to this market meltdown. The DDS will always tell an individual that the best time to buy is always now. It’s part of their job, an unwritten code of honor within their collective. But if you take some time to analyze that particular reason, then it becomes contradicting in the same breath. With low mortgage rates and prices in a “balanced market” and “stabilizing” one would think the entry point into the real estate market would be best served immediately. No bidding wars to speak of anymore. No lining up at 5am in the morning to be first in line (before all the speculators) to buy the condo that you have always wanted. One would suggest this is the easiest time to enter into the market. Remember, the Alberta economy is the “hottest in the world.” We also have the oil-sands. Demand SHOULD BE healthy. Sales numbers SHOULD BE healthier. Prices are “stabilizing” and the market atmosphere is much more relaxed than ever. Buying should be easier than ever.
So why isn’t anyone buying?
Consumer psychology and confidence. As a consumer, we all have an innate fail-safe instinct to find the best deal in the marketplace. This value driven consumerism has been absent over the last two years. Neglected because people fell prey to the cunning marketing machine of the DDS. But reality has finally set in again. Buyers are fed up! They are realizing the prices of Calgary properties today are hyper-valuated to unrealistic proportions. These high priced properties are no longer a good deal, not worthy of spending their hard earned money on. Meanwhile, personal savings rates have plunged from 10% in 1990, when households saved about $7,500 of their annual incomes, to just $1,000 or 1%. Of more importance, there is the negative economic reality the world is in right now. In Alberta, more pessimist cracks are showing each day in the optimistic outlook cast on this province over the last two years. Nearly half of Albertans polled today would hold off buying a new home. With the US likely in a recession already and the potential of a slowdown in the Candian economy, consumer confidence is declining. The abatement of consumer confidence is then further propagated by Main-Stream-Media (MSM). For example, in Vancouver (where the bubble has prolonged many years as a result of foreign investment), the declining sales due to low consumer confidence is stalling their golden real estate market. Here is a short Global News story about the recent stalling of the Vancouver real estate market. A revelation in the video comes when a realtor with over 36 years of experience admits on camera that some of the properties are worth around $200,000-$300,000 less than their listing price. I wonder which realtor in Calgary would dare admit that current properties are overvalued by (X)% or $(X). It would make for an interesting Mario Toneguzzi article.
Coupling low consumer confidence and value consumerism, making the largest purchase of one’s life would simply not be the smartest or best thing to do right now in the face of uncertainty. A large percentage of buyers are becoming more rational and remaining on the sidelines to see how the market will play out. It should be an interesting springtime.
To reach market rationalization and equilibrium, the ball is now in the sellers’ court.
It’s not only the Year of the Rat in 2008, but it will be the year of the Inventory for Calgary’s real estate market. After an unprecedented boom in the last two years, Calgary’s juggernaut real estate market has shown accelerated signs of losing momentum. As the “well” of buyers is drying up (a great volume of buyers were sucked up and fell prey to the hype surrounding buying during the boom), sales have been down substantially year over year.
As inventory increases, there will certainly be a downward pressure placed on prices. This is simplistic market supply and demand forces functioning in the real estate marketplace. Price changes in the real estate market are “sticky” and do not occur over night but take months to reflect the direction and psychology of the market.
If we examine the current inventory levels, Calgary is poised to have all time highs in both condo and SFH inventories this year:
SFH Feb 2008 (MTD): 4638
SFH Feb 2007: 2032
SFH Jan 2008: 3997 (+111% increase)
SFH Jan 2007: 1894
In 2007, the highest inventory levels for SFH was reached in September 2007 at 5562 active listings. As you can see, we are quickly approaching those numbers so early in the year.
Condo Feb 2008 (MTD): 2154
Condo Feb 2007: 654
Condo Jan 2008: 1926 (+117% increase)
Condo Jan 2007: 886
In 2007, the highest inventory levels for condos was reached in October 2007 at 2329 active listings. As you can see, we are also quickly approaching those numbers so early in the year. It shouldn’t be too long until we reach last year’s unprecedented record inventory. Keep in mind, that there are several thousand new condominium units itching to hit the market this year. There will be alot of sleepless nights for condo speculators this year.
In contrast, as mentioned on the Alberta Bubble Blog, where are all the buyers? Sales are plummeting this year compared to last two years of the boom. Sales are down 30%-40% at the beginning of the year. February sales are projected to be 40%-50% lower than last year at the same time.
The fact that sales are down and inventory is increasing substantially, prices can only go one direction. It will be interesting to see how (or even if) the hyped “spring uptick” will roll out this year. With so few sales happening right now, it just wouldn’t make sense for sales to increase in the next coming months when the perception is that prices will be higher.
Meanwhile, inventory will continue to increase each day. Will the overextended sellers be able to hold on to their multiple properties, taking losses every month? Will desperation set in? Will they start to price competitively to sell their properties before inventory levels reach all time record highs? Only time will tell. If one analyzes the manner in which the US housing market crashed, the symptoms are eerily similar. What catalyzed the downturn was when the US market bottom fell out and buyers disappeared.
Being bullish in this current market will prove fatal.
One thing is for certain though, this will be the Year of the Inventory.
Posts
Recent Comments