What a neat and frustrating market we have in Calgary (and surrounding towns) at the moment. Price of oil hovers around $40/barrel, layoffs in the hundreds per week, yet, here we are with some homes selling fast and at list price. Every down turn is different. In the 1980’s we had mortgage rates nearing 20% (20 freaking percent!). Oil supply and Mr. Trudeau’s (the older guy, not the newer guy) National Energy Program (NEP) in the 80’s lead to a collapse in our oil industry but homeowners also had double digit mortgage rates….with this information, I’ll let you play economist to figure out why house prices dropped in all price categories.
Fast forward to the most recent memory, the 2008/2009 housing drop. Thanks to greedy American investment bankers we had one of the worst economic financial meltdowns in history. That led to Canadian banks to literally HALT lending to most people for a period of time. Combine no mortgage access with a lower demand on our oil and exports, our provincial economy took a hit as people left our province. With nobody buying houses and others unable to get a mortgage because banks stopped lending, demand dropped and supply increased at a dramatic rate (Fall of 2008). Prices fell quickly, across all price categories.
Now, let’s look at why, after a full year of declining oil prices, we still have a market where some homes are selling like hotcakes? All of the past downturns have shown swift movements in the housing sector, why not this one?
1) 2013 Flood. While the flood devastated so many homes and people, it actually created significant wealth for most other homeowners. Builders were behind production in 2013, resale home market was already balanced at the time, and migration into the province was at record numbers with nearly the size of Airdrie moving to Calgary that year. We had a zero supply in the rental market, forcing many to buy. The flood displaced hundreds and took out any little supply that our market had at the time. So, by the time oil dropped in 2014, our supply was so low and demand was still high. There was a lot of room to add supply to our market, easing a lot of the initial pain to real estate prices.
2) Affordability & Financing. Yes, people are losing their jobs. However, in the $300-$500K segment of the market, by technical standards, Calgary and Edmonton still boost the most affordable real estate values in most of Canada based on average incomes. This is why, as of December 1, 2015, we still have a seller's market in this category with just a 2 month supply. Conversely, the unaffordable market of over $600K, has over a 6 month supply or a buyer's market. Also, mortgages are still attainable, whereas in 2009 they were not, in a broad sense. In the summer of 2007, house prices in Calgary across all segments of the market teetered on the unaffordable side (relative to incomes and average house price) and then when the prices dropped enough for people to buy, the banks said no to the mortgage! Ouch, what a time in our real estate market by the time 2009 came. In the current market, people who want to buy a house can still afford to buy a house and can still get a mortgage to buy the house.
3) Migration. Up until the third quarter of 2015, we still had a large number of people moving to our province. Crazy considering the number of job losses in 2015, but they kept moving here! In 2008, people stopped moving here almost immediately. This time the trend has taken a lot longer. Expect this to change for 2016, expect fewer people moving here. NOTE, when or if you see the migration number as a negative then you can officially call every segment of the housing market a ‘buyer's market’!
Are you sitting on an $800,000 house or a condo apartment and cursing me at the moment? The so called ‘hot market’ only pertains to the single family (detached) homes under $500,000. Homes in the higher-end are faced with a buyer's market, as do all condo apartments. In fact, condo apartments could become much worse as 2016 progresses as new buildings near completion. If oil doesn’t rebound during the first few quarters of 2016, expect migration to falter and housing supply increase. This will cause even the ‘hot market’ of homes under $500,000 to become a buyer's market as well. Once this happens, you will then see a real drop in overall house prices. We just aren’t there yet. For the next few months we will continue to operate in this strange seller's market and buyer's market, relative to the type and price category. So if you hear a co-worker or friend brag about their house selling fast at no discount to last year's price, ask if it was a condo or detached house, then ask if it was under $500K or over $500K.
The best case scenario for Calgary or Edmonton in 2016 would be stable oil prices and a housing market with zero appreciation (give or take a few percent depending if you are in the above or below $500,000 segment). This is the BEST case scenario. Worst case isn’t worth talking about is it?
Terrible time to downsize because your larger home will take a bigger overall hit than your newer home. But, it is what it is as they say. At least you built a lot of free equity over the past decade. Plus, this trend could take years so if you want to downsize, then waiting might not help you either as taxes and maintenance will cost you a lot more by hanging onto your larger house.
Great time to enter the housing market if you can afford it and have a stable job. More selection, better pricing and record low mortgage interest rates make your timing nearly perfect (but not perfect). The one thing to consider in buying a house in 2016: it won’t be a great short-term investment as it likely won’t appreciate over the next 5 years enough to pay closing costs, commissions, taxes etc. So, if you plan to by real estate next year, consider it a long-term investment and hope you don’t need to sell it within a few years.
These are interesting times in Alberta. Please let me know if you have any questions regarding your house or mortgage, ask now before it’s too late.