A TEXTBOOK MARKET?

What happened to the expected Alberta real estate boom?
Market influencers tempering demand
By Mario Toneguzzi
Calgary Herald April 11, 2013

CALGARY — Several ‘market influencers’ have kept the reins on the expected Alberta real estate boom, says a new report on the housing market.

The report, by Don Campbell, senior analyst and founding partner of the Real Estate Investment Network, said debate is raging about why the market isn’t booming like it did in 2006 and 2007 when the job market and population in the province were growing at the same rates as they are today.

“The real difference this time is hidden in the strong forces of today’s market influencers. It is very true that the market drivers are all in place to support a large growth in housing purchase demand and price increases, in fact it is a textbook market for a boom,” said Campbell.

“In Alberta, the GDP and job growth have driven very strong population growth which has led to low vacancy rates not experienced in this province for many years. Street rents are jumping due to the rental supply/demand inequality. So, on the surface that means Alberta should be experiencing another one of those unsustainable booms. Well why isn’t it? And is there one still in the works?”

He said certain wild cards can throw a market off its prescribed cycle for periods of time.

“So, despite all of the market drivers being in place to push the Alberta real estate market into its next boom cycle the market continues to underperform its economics. Why? Simply, there are market influencers in play and that is why we are not yet seeing the expected rush into the market demand,” he said.

They include the once-bitten, twice-shy attitude equating into a local lack of confidence in the market. Many Albertans made their first home purchases during the previous boom. They were hit hard when the financial crash came. This has tempered enthusiasm for the market now.

Tighter mortgage qualification rules have also tempered market demand.

Overall consumer confidence in real estate is taking a hit with many recent reports and headlines on the state of the Canadian market saying it may be over-priced or overvalued.

A large portion of Alberta population growth is from two key demographics who are less likely to buy a house immediately — immigrants and ‘Echo-boomers’.

According to the Calgary Real Estate Board, total MLS sales year-to-date in the city until April 10 were 5,798 transactions, up 3.72 per cent compared with the same period last year.

The average sale price this year has risen by 8.08 per cent to $451,246 while the median price is up by 5.92 per cent to $397,000.

Ann-Marie Lurie, CREB’s chief economist, said the organization never felt the economy was about to boom, based on several factors.

“The first consideration is the economy,” she said. “In the 2005-2007 period, we had significant growth in both the oil and natural gas sector, economic growth as of late has only been driven by the oil sector. While this has helped support growth, there have been some challenges regarding bottlenecks and price discounts which has impacted employment growth prospects in the province. We also shouldn’t forget that the natural gas market continues to struggle. Our economic growth is progressing but at a slower pace, and forecasters also estimated that employment growth and net migration would ease this year, two factors pointing towards slower demand growth in housing.

“The next consideration is fundamentals in the housing market. Inventory levels were generally more elevated in the resale market, and it has taken some time to absorb some of the excess in the market. While this has occurred primarily in the single-family market, it has only started to spillover into the surrounding areas, the condominium market, and the new home market. When considering all the options available to consumers, there was sufficient choice to prevent any significant shortage in the entire housing market, which was the case in 2006-2007, causing a unsustainable jump in home prices.”

She said she is not surprised that the market didn’t boom, given the economic backdrop and current supply in the market.

Lai Sing Louie, regional economist for the Prairies and Territories for Canada Mortgage and Housing Corp., said market conditions in Alberta’s housing markets today are different from the boom.

“Some of the differences include higher household debt as well as more prudent lending conditions today. Also, some of the transactions in that period were investor driven and we have not experienced that to the same extent today,” he said.

The underlying economics and Market Drivers state that the market should be on fire, just like it was back in 2006 and 2007 – that is unless you begin to factor in these influencers, said Campbell.

“Let us make sure we are analyzing today’s markets with today’s conditions and not compare them to previous boom-bust cycles. Each cycle has its own influencers that either heat up or cool down a market and this current cycle from 2006 until today is the perfect proof of that,” he said.

“As long as the drivers are strong, the market is structurally strong, no matter what the influencers are doing. The concern should arise when the drivers are weak and the influencers are pushing the market upwards with no support. That is not what is happening in Alberta right now; in fact, the drivers remain strong despite the headlines.”

Ben Brunnen, chief economist with the Calgary Chamber of Commerce, said the province is definitely seeing all of the signs of strong economic and potentially housing growth.

“Net inter-provincial migration, population growth is up. Unemployment is low and GDP growth is relatively high,” said Brunnen. “I think we’re seeing probably a bit more of a cautious consumer out there. I do think we’ll see some strong real estate activity happening in Calgary but not like in the boom.

“I think there continues to be some caution in the market for a number of reasons. While Alberta’s economy is good, the global economy continues to be shaky, especially Europe and the United States. So people don’t have that strong confidence per se that this economic activity is going to be sufficiently robust that they should buy a house.”