Real estate market

[metallicat]

Has the real estate market cooled off in Calgary at all in the recent months? It has here in Edmonton, but still at very high levels. In your opinion, what do you think is going to happen in the next couple of years in Calgary? I am trying to buy my first piece of property, probably a condo at this time, but I don't want to get into something in this cooling market, only for things to drop even more leaving me stuck with something impossible to sell.

I realize nobody has a crystal ball, but what are your best guesses as far as the real estate market goes?

[BlackArcher101]

I'm waiting to see what happens in the spring. Prices usually drop over winter months... but I question if it's purely the annual winter price drop effect or the market slowing down from the quick rise. I'm leery of the later reason so I'm waiting until prices usually start to stabilize and go from there.

[Dan02]

I doubt we'll see any more explosive growth like years past, but i doubt we'll see a significant decline either, for a long time both the markets in Calgarys and Edmonton were severely undervalued when compared with other Canadian cities, now it's more even.

[OracleOfCalgary]

What I can tell you is that, so far, for new home builders in Calgary this fall has been the worst ever for sales. What is especially weird is that this is occurring at the same time as we are seeing oil pushing the $100/bbl mark. Can you imagine what would happen if oil fell back to the $75/bbl mark... yikes.

[Claeren]

^ Only problem with that is that i am not sure how much the day to day oil price had to do with speculative house pricing on the way up (despite the hype), so not sure how much effect day-to-day oil pricing has on the way down assuming it doesn't drop out completely.

- The entire homebuilding industry, driven by speculation, has increased its capacity to build significantly. 'Capacity to build' is a major influence on speculative home prices.
-Calgary has no fundamental shortage of land to build on.
- 'Material costs' were always cited by home builders as justification for higher and higher home pricing. This is somewhat true but was exhaggerated by home builders to their own benefit. And many of those infaltionary pressures are now gone thanks to the collapse in the American bubble. The Canadian dollar allows cheap construction imports of materials and equipment, lumber pricing has eased, etc.
- Current pricing has eliminated a huge pool of first time buyers.
- Seemingly half the cities CURRENT residents bought second homes with a 1-3 year delay before they came/come to market. Each of those thousands of new homes/condos represents surplus in the market today.
- Many many baby boomers are counting on price growth to support their retirement. Without this price growth many will be looking to downsize, potentially increasing the supply of surplus homes on the market over the next 30+ years.
- Interest rates are much higher than they were and many many peopel will be looking at renewing in the next 1-5 years at TWICE their current rate (often on twice the house, as they move into their just completed larger homes).

On the otherhand prices rarely drop in a healthy job market. They can stay stagnant (more or less matching or just trailing inflation) for 10 or 20 years though.


The high price of land has added a underlying cost to a lot of new developments that is hard for developers to get around in the near term, but beyond that i think most things would indicate that the market can now provide more homes than are needed in any given year for the foreseeable future. The sad thing about currently inflated land costs is that Calgary has no fundamental shortage of land or major physical barriers to traffic/living patterns that justify those costs like a Vancouver, Manhatten, San Fran, etc. We are a prairie city with a full 360o of growth options...

I think you will see prices fluctuate within a fairly tight band for the next 10 years. Some years will be slightly better than others of course though... I think we will see a small upwards movement in pricing again (denial-phase), and then a flat market for a good period after that (reality-phase).

The market can relatively easily now provide ~25,000 new homes a year on top of the current 5,000-10,000 empty and 10,000(?) near completed homes/condos on the market - and could further up that towardss 30,000+/year if speculation started to run rampant again). That is up from virtually 0 surplus homes and a capacity to build ~12,000 just a few short years ago. Ask many American cities how those numbers match the market....


That is my take on it.

Claeren.

[Bobblehead]

Nice analysis.

[Sylvanfan]

Originally Posted by Claeren

- 'Material costs' were always cited by home builders as justification for higher and higher home pricing. This is somewhat true but was exhaggerated by home builders to their own benefit. And many of those infaltionary pressures are now gone thanks to the collapse in the American bubble. The Canadian dollar allows cheap construction imports of materials and equipment, lumber pricing has eased, etc.

Yeah, that was bogus at the best of times. There was a pretty significant jump in material prices about 4 years ago...but after that the prices didn't rise that much that it could be used as a reason for housing prices to be moving up 20% let alone the 50% rates that did occur.

Today home builders are supposedly throwing in 30 grand worth of upgrades for free. Reality is it's work they used to charge you 30 grand for that really wasn't worth that much. I redid like 60% of the flooring in my house last year and used upgraded materials from what builders would. Between that and the tools I maybe spent 6 g's on materials. So really the stuff I took out was probably worth 2 itself so I'm looking at a price difference of 3. And theres no way a home builder would have paid someone more than 5 grand for the labour to have installed all that stuff into brand new home construction. So at most it would be a 8 grand upgrade...but I'm sure a builder would have claimed it's 12-15 if you wanted that work done on new house at this time last year.

[Dan02]

Originally Posted by OracleOfCalgary

What I can tell you is that, so far, for new home builders in Calgary this fall has been the worst ever for sales. What is especially weird is that this is occurring at the same time as we are seeing oil pushing the $100/bbl mark. Can you imagine what would happen if oil fell back to the $75/bbl mark... yikes.

I cannot quote exact numbers but you are entirely wrong, off last years pace definately, worst ever??? not even close.

[Claeren]

Originally Posted by Dan02

I cannot quote exact numbers but you are entirely wrong, off last years pace definately, worst ever??? not even close.

Do you REALLY think home builders would want to let anyone know they are not selling anything?? How many homes do you think they would sell after that got out?

I only know (key) people in the higher-end home building market (versus the mid-market and entry-market levels - or most of my close contacts that are in commercial real estate), but i have it on good authority that they are not selling anything. They have a significant backlog of contracts (8-12 months) that they are working to clear but have had little-to-no interest in new homes in months. They are most worried that people with highend homes already contracted will simply walk away from their deposits when they realize (1) the new lessor value of their new home, (2) that they cannot get nearly as much for their current home as they thought and cannot afford this new home and/or (3) that they cannot flip the new home. So far though they have had good luck... but how much less luck do they have when it gets out no one else wants these $600K+ (sometimes a lot '+'!) monster homes on tiny lots on the edges of the city??


I am sure entry level homes (and even the slightly more modest step-up homes) are still selling though, at reduced prices and/or with incentives of course. As are downtown homes/condos (highend especially), that have better longterm value prospects IMHO.


I believe builders can slowly 'release inventory' of finished homes into the market though. So while new homes are not being ordered, there are existing homes sitting empty that are released as the older inventory is slowly bought up - but look like 'new homes' when counted in the questionable stats available to the consumer. The builders are not stupid either...

The average home price data is also a HORRIBLE place to look to gauge the health of the market yet it is used as almost the primary and/or singular source by the media...



Claeren.

[Winsor_Pilates]

We're seeing some odd sales figures in our Calgary projects. One of our high end DT projects keeps selling despite what the rest of the condo market is doing, and our other is at risk of folding completely.

I think what is happening in Calgary is a diversification of product. I don't think you'll see widespread massive gains in the market as the previous few years, but certain areas will continue to prosper while others will get left behind.

People will have to start shopping for good product and locations, instead of just buying anything and making money on it. I think there's good investments to be had for those who put the effort in to know the market, but your average joe who made money on his house without knowing anything won't get so lucky again.

[Flames in 07]

Central locations probably have leveled off, may pick up a bit in the spring, but I'm not sure we'll see much change in values up or down.

The suburbs however I think are in for a decent decline. It may level off early in the year for a few months, but then slide again through the 2nd half of 08.

I disagree that there is ample land to build on ... or at least desireable land to build on. Calgary is spraled out much more that it should be. The new focus by the city will be TOD's and beltline development.

[Julio]

I think thew bloom is definitely off the rose, and for the most part agree with Claeren's excellent analysis. About the only market I see the chance of a significant downturn is price is in the entry level condo market. A whole lot of people bought this type of property to flip it, and the flipping isn't happening. A lot of these condos have gone on the rental market, but many more are up for sale now. And I just refer right now to the resale market. I don't know how the several condo projects going up in the Beltline area are going to fill.

[Flames in 07]

Originally Posted by Julio

I think thew bloom is definitely off the rose, and for the most part agree with Claeren's excellent analysis. About the only market I see the chance of a significant downturn is price is in the entry level condo market. A whole lot of people bought this type of property to flip it, and the flipping isn't happening. A lot of these condos have gone on the rental market, but many more are up for sale now. And I just refer right now to the resale market. I don't know how the several condo projects going up in the Beltline area are going to fill.

I think there will be a market there, as gas gets to be 1.25 and 1.50 and eventually 2.00 per litre, the concept of walking to work will be more and more appealing.

[Claeren]

Originally Posted by Flames in 07

Central locations probably have leveled off, may pick up a bit in the spring, but I'm not sure we'll see much change in values up or down.

The suburbs however I think are in for a decent decline. It may level off early in the year for a few months, but then slide again through the 2nd half of 08.

I disagree that there is ample land to build on ... or at least desireable land to build on. Calgary is spraled out much more that it should be. The new focus by the city will be TOD's and beltline development.

I agree, suburban condo's especially are in for a decline (actually have already declined). Developers HAVE to build them to gain density for the rest of their communities but each development is basically the exact same crappy suburban-type style far from any important services and so it makes them a dime-a-dozen over the long term compared to downtown area condos. Condos near current future LRT stops (or TOD's as you mention) might be the only exception...


As for land, there is TONS of land in Calgary compared to Manhatten, Vancouver, San Fran, etc! You could fit another few million people in and around the core alone if you wanted to! With no water/ocean area taking up prime areas around the city the city needs to sprawl far FAR less (as measured as average distance from the core) than other cities to accomodate the same numbers of people. I am not saying that sprawl is IDEAL (I HATE it), i am just saying compared to those other cities (whose pricing is not that far out of reach) we have a healthy surplus of options and no physical barriers to that type of growth.

Inversely, anti-sprawl intiatives have the very real effect of inflating land prices and eroding affordability. So if you assume that Calgary is going to stop sprawling (how likely is that?!) then you can bet that housing prices are quite sustainable at current levels (and up). If you assume Calgary (and area) will continue to sprawl then prices are far from sustainable as we have hundreds of years worth of land available (as sad as that is for future generations) and thus no residual land value once you get a medium distance form the core.


Claeren.

[Flames in 07]

Again, energy costs and more gridlock will curtail sprawl, they are not physical barriers, but they are barriers none the less. True, Manhattan has the east river and the hudson that make you grow up vs out, however at some point people will decide that a 90 minute commute each way, all the while paying $2 per litre for gasoline isn't worth saving a few bucks on your property by being out in the burbs.

I like how Cgy is growing in population, but we have too many people who treat it like a small town. People will need to be comfortable with 1150 sq ft condos, and not feeling like owning 2 cars in a 2 adult home is a birthright.

I don't have kids so it's easy for me to say, but we have far too many burbs as it is. The city needs to focus on making central locations more appealing for younger families. I think the TOD's will do that.

[Claeren]

Originally Posted by Julio

I think thew bloom is definitely off the rose, and for the most part agree with Claeren's excellent analysis. About the only market I see the chance of a significant downturn is price is in the entry level condo market. A whole lot of people bought this type of property to flip it, and the flipping isn't happening. A lot of these condos have gone on the rental market, but many more are up for sale now. And I just refer right now to the resale market. I don't know how the several condo projects going up in the Beltline area are going to fill.

The thing that interests me there is that TONS of people want to live in that area. They just cannot afford (or even qualify for the mortgage! Like me! Where you need ~$70k/year just to think about looking...) $300K+ for a TINY one bedroom. Or $400K+ for a tiny 2-bd-rm. IF they were even say... $200k & $300k respectively they would be selling by the thousands. So somewhere between there and here a price floor will exist that will ensure they are bought up. Much more so than a condo in the far burbs where IMHO there is no price floor in many severe downward market circumstances....

The big thing is that SO many of those units have been bought for above where i think that price floor is in the market. Which means not so much that they will go unclaimed but more so that you will not see any significant price growth until that price floor reaches those purchase prices (after years of natural inflation pushing up the price floor).




Claeren.

[Flames in 07]

One other item, someone earlier was equating WTI to homes sales.

WTI is very, very overrated. WTI, is a good marker for synthetic and light oil prices, but more important is nat gas pricing and for the future, heavy differentials.

Heavy differentials will improve in 09 and 10 (as for why that's a long story). What we will see is large oil companies will hire thousands of folks over the years and will scoop up folks who lose work from reduced gas activity.

Also, everyone is spooked by the royalty review, however from my side it won't curtail too much oil production plans, however it may shut some gas projects down ... for awhile anyway. Once people see that the royalty thing isn't that bad, and that the credit pinch in the US really is disconnected to Cgy, prices will level off and good property will appreciate.

[Winsor_Pilates]

Originally Posted by Flames in 07

Again, energy costs and more gridlock will curtail sprawl, they are not physical barriers, but they are barriers none the less. True, Manhattan has the east river and the hudson that make you grow up vs out, however at some point people will decide that a 90 minute commute each way, all the while paying $2 per litre for gasoline isn't worth saving a few bucks on your property by being out in the burbs.

I like how Cgy is growing in population, but we have too many people who treat it like a small town. People will need to be comfortable with 1150 sq ft condos, and not feeling like owning 2 cars in a 2 adult home is a birthright.

I don't have kids so it's easy for me to say, but we have far too many burbs as it is. The city needs to focus on making central locations more appealing for younger families. I think the TOD's will do that.

Completely agree.
There are other factors then just availible land when it comes to sprawl. People will want to live closer to the core and be willing to go into smaller condos to do so. It may take time, but eventually Calgary will develope a vibrant core that people want to be in because of the lifestyle.
That's why I think condos in good locations and small houses in close to core areas are the best bet for Calgary investors. Everything else will be a dime a dozen and boring.

If comparing to Vancouver, I'd be trying to find the Coal Harbour, Yaletown, Gastown and Kits of Calgary. Small trendy areas that young professionals are willing to blow their wallets out on because of the lifestyle.

[Winsor_Pilates]

Originally Posted by Claeren

$300K+ for a TINY one bedroom.

Just paid $414,000 for a 1 bed in Calgary

[Claeren]

Originally Posted by Flames in 07

Again, energy costs and more gridlock will curtail sprawl, they are not physical barriers, but they are barriers none the less. True, Manhattan has the east river and the hudson that make you grow up vs out, however at some point people will decide that a 90 minute commute each way, all the while paying $2 per litre for gasoline isn't worth saving a few bucks on your property by being out in the burbs.

I like how Cgy is growing in population, but we have too many people who treat it like a small town. People will need to be comfortable with 1150 sq ft condos, and not feeling like owning 2 cars in a 2 adult home is a birthright.

I don't have kids so it's easy for me to say, but we have far too many burbs as it is. The city needs to focus on making central locations more appealing for younger families. I think the TOD's will do that.

That is a nice picture and a good model to fight for but i am not sure it has anything to do with the fundamental realities of the market. Sounds more like an urban studies university student world!

As gas pricing rises our world fuel economy is increasing and alternative fuels are coming to market. People in other cities already go to far greater lengths at far higher costs to live in their respective suburban homes. Calgary is FAR from that threshold. 50 years or more away from that i would think, and that is assuming no fundamental change in the way we wish to live or transport ourselves.

However that is not my point really. Even downtown and around downtown we have FAR more land than most cities with comparable pricing. There are no downtown area land scarcity problems with room for literally thousands of towers within minutes of downtown.

So even if we hit some wall where no one could live in the suburbs anymore, we would still have FAR more potential units of living space than most other major cities around the world, which would thus undermine long term real estate prices.



Claeren.