What are Your 5 Calgary Real Estate Projections?"Will Calgary Real Estate values CRASH in 2008"?You need to be aware of these 5 Calgary real estate projections and why I think they are going to seriously impact Calgary's Economy. UPDATE May 2009 As I read through these predictions I made in early 2008- I see they predicted the current state of the real estate market well. It is not as though I was psychic- it was looking at the data, understanding what was driving the market (a lot of speculation) and realizing that what was going on south of the boarder would impact Calgary (eventually). I have been reluctant to post any new predictions- although I do have a view of the current market and where I believe prices to be in 1-year. The real question is- are you a short term buyer or long term. If you are long term then a slight fall in prices will not have too much of an impact on you. Why? Interest rates are so low, that even if prices dip 5-10% your effectively paying less fro a property than waiting for the market to turn the corner and locking in at rates 2-3% higher in the future. Anyways- check out the market analysis I did awhile ago, and look how it has held true to date and may for the next 12 months. I am going to focus my attention on 2 factors that affect Real Estate values- Supply and Demand. #1 Low Gas Prices are forcing many small and junior oil & gascompanies to lay off employees. (Demand factor) In past 45 days, I've already seen 3 small gas companies lay off between 25-40 employees each (right before Christmas). FACTS Drilling activity in Alberta, according to the September 2007 Alberta Energy and Utilities Board (EUB) : Capable Wells (in September 2007) Total Oil- 65,184(Crude, light, medium, heavy, bitumen) Total Gas- 130,266(Gas, Coalbed Methane) Service Wells- 10,690(Water Disposal, Water Injection, Gas Injection) Total Gas wells out number oil wells almost 2:1. Oil is at an all time high, but Gas prices have come off significantly and this is a driving factor for layoffs. One other statistic that should be noted, in January 2007 there where 1,115 successful gas wells, and in September 2007 only 737 (a 33.9% drop). These stats are not here to scare you, but keep you informed as to what the demand in 2008 will be in Calgary. My thoughts: Unless the US has a very cold winter or unusually hot summer, I would not expect gas prices to rebound for at least a year. So there may be more lay offs and thus less demand for Calgary Real Estate #2 Calgary real estate investors or Speculators have flooded the market with houses they can't afford. (Supply) If you've read the papers or listened to the news lately- seems like everyone is taking about the median or average house price falling by 5%, 8% or even 12%. What are the facts? FACTS: According to the Calgary Real Estate Board October 2007 MLS Statistics: Month End Inventory- 11,188 New Listings Added- 4,913 Sales (houses sold)- 2,042 Average Sale Price- $430,828 Median Price- $380,500 In July of 2007 (the Peak of Calgary's Market) Month End Inventory- 8,972 Sales- 2,677 Average Sale Price- $447,271 Median Price- $392,000 From the data it is evident that more supply on the market is driving prices down (the median is off -2.99% and the average is off -3.70%). My Thoughts: Every year at this time, there is an increase in listings as a result in a decrease demand to buy in the winter months. Yet, it should be noted, that with a supply of over 11,000 listings there is in excess of 5 months supply on the market. This means, with current buying activity, and no new houses added to the inventory, Calgary has more than 5 months stock (a healthy market is 2-3.5 month supply). Calgary has not been in as unbalanced a market since before 2002.
I believe 25-35%* of this over supply is due to speculators who jumped into the Calgary market to late. Many built new homes or condos, with no intention to live in them- just to flip, for a quick $40,000. *I came up with the 25-35% based on the number of vacant houses on the market as of October statistics in 2007.
#3 How high can Calgary prices move and still be affordable? (Demand) Prices have moved up over 45% in the past 2 years. Look at only the fundamentals of real estate, and ask yourself if the average salary has moved up 45% in the past 2 years? The answer is no. To accommodate these huge jumps in the market, the government along with CMHC has allowed for 40 and 50 year amortizations, 0 down mortgages, HELOC's (home equity lines of credit) to encourage further consumer spending and speculating. My Thoughts: I'm not all doom and gloom on the way prices have moved up, but I will say that if we are not careful, Calgarians will be in a similar situation as our neighbors to the south. Careless spending and buying homes that we have to amortize over 50 years, with no down payments- it's a recipe for foreclosures and a bubble market. I expect the higher end homes ($750,000+) to be affected the most. I really do not believe that the majority of Calgarians can afford the median priced house anymore. On the January 5, 2008 the Calgary Herald had an article which showed that the number of million dollar homes (according to the City of Calgary Assessment department) increased 10X from 2005 of 815 to 8,146 in 2007. I seriously doubt that there are 10X as many millionaires living in Calgary or having moved to Calgary in the past 2 years. In case your wondering what a mortgage on a million dollar home would be: (assuming a conventional mortgage of 80% on $1,000,000, with a 5 year term at prime 6.00% on a 25 years amortization) Monthly Payments= $5,118.46Taxes (based on an approximate 2007 mill rate of 0.0078)= $7,800/year or $650/month Total payments (mortgage and Taxes) = $5,768.46/month To be qualified from a bank for these kinds of payments, you'd need to make north of $400,000/year (based on pretty conservative numbers). #4 How will the high Canadian $ affect Calgary (and Canada as a whole)? (Demand) Canadian$= USA$ Good for Canadians or bad? I won't get into a whole economic debate as to whether a high Canadian dollar is good or bad (be it short term or long term). I will only comment on what I see and what is a current concern for Calgarians. i) The US imports roughly 50% of our oil and gas. This means that with a weakened dollar, they have a much higher cost to import our resources. This could lower the demand from the US on our oil and gas. ii) Assuming that demand stays the same, with our Canadian $ so high, companies located in Alberta like a low dollar- oil and gas are priced in US dollars. When a Can$ was worth .85 of a US$, and the world pays $90.00/US a barrel, Canadians got $105.88/ CAN a barrel. My Thoughts: As long as the US economy is under water, then our dollar will remain high. This will force our economy to become more effective and efficient at manufacturing, distribution, production etc. The one positive for Albertans- with manufacturing layoffs in Ontario, we could expect to see an in migration into Alberta with Ontario folks looking for employment. Possible increase in demand- so long as there are jobs. #5 How will the Royalty Review affect the Oil and Gas Industry in Alberta? (Demand) Very controversial topic. I'll tell you what I have learned from speaking with different CEO's of some of the major oil companies in Calgary, along with different Commercial Realtor's and Investors who are tuned into the Calgary economy. There is an overwhelming sentiment that the Royalty Review will affect the amount of marginal work done here in Alberta. If a company has the choice to invest its resources in Saskatchewan or British Columbia or worldwide vs. Alberta- they may pass on Alberta investments that where once marginal at best. When you consider the low gas prices, and the increased Royalties, the combination is looking grim for Alberta in the short term. What all this Information means… Short Term- If you are looking to Buy, then you should be prepared to i) hold the property for a long period of time or ii) make sure you find a motivated seller to get the best possible price. I am predicting that the spring will have a large spike in proprieties again. In the past 2 months (November and December '07) we've seen a significant decrease in listings (a decrease of almost 4,000). I believe this to be due to many expired listings taken off the market, not because houses have actually sold. In talking with numerous sellers who have taken their house off the market, they believe that the spring will a good time to relist. If too many people all have the same idea, you can bet a spike in listings, coupled with a decrease in demand for homes will put downward pressure on prices (good for buyers). Long Term- If you are buying with the intention of staying here a long time, then I suggest finding a house you really like and want to live in. Your primary residence should not be viewed as an investment (although it is for many people). You need a place to live and so I recommend looking for a home in a great community that you will happy living in for years to come. If You are thinking of Selling- here are my 2-bits: i) Why are you selling? Is to release equity to buy anther place in Calgary ii) What are your options? Can you rent it out and break even right now (maybe hold on to it for a few years and wait for the market to appreciate 5-8%). iii) How will you sell it? Are you confident that you can sell it yourself, or are you going to enlist the help of a Realtor. If you would like any more information or would like to comment on my site- please email me at shane@strategic-home-buying.com . The facts I used can be interpreted numerous ways, depending on what side of the fence you are on. My inferences on what will happen in Calgary are only that- educated guesses. If anyone knew for sure what would happen, I'd love to talk to them (if there is anyone, I'd suspect they also made millions in real estate in the past 2 years). Shane Melanson
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