Calgary Housing Affordability Update
As noted in previous posts, Calgary’s affordability has been on an improving trend. RBC economics shows that the current affordability in Calgary is nearing cyclical lows. If one looks at the period, all of the time between 1998 – 2005 I would consider fairly good times to buy. Since 2007, a combination of rising household income, falling house prices and lower interest rates have all improved the affordability of housing.
It’s important that individual market participants come up with a budget before buying that includes maintenance costs, condo fees, taxes, water, gas, electricity, insurance and mortgage costs. One should also budget for a higher interest rate environment when renewing in 5 years and consider things like retirement planning as well, risks of losing a job, and the amount of disposal income one will have available after tax.
I think the affordability metric is one indicator of the relative value of housing (particularly in Canada) as Canada has not had the same volumes of subprime lending. Studies have shown that regions within the US with higher amounts of subprime lending have fallen faster and harder than regions that don’t have the same amount of subprime lending (even if prices are relatively elevated in both cases). In regions with high amounts of subprime lending, I believe it is more important to pay attention to price to income instead of affordability.
I think that affordability is a leading indicator for future mortgage arrears. When affordability becomes stretched, it’s likely that mortgage arrears will increase countercyclically over the following years. The Calgary real estate correction in 1982 was predicated on extremely poor levels of affordability as noted in a previous post.
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To see the most recent RBC Report click here: RBC Housing Affordability Report
Calgary CMHC Forecast Bias – From Optimist to Pessimist?
Studies have shown that there is a tendency among analysts to be consensus seeking. More often that not, analysts are benchmarked against their peers so an analyst may be rewarded even if his prediction is off the mark as long as it is not too far off from consensus. According to some studies, analysts are more likely to be optimistic when revising downwards, and pessimistic when revising upwards.
Although limited data is available, I believe CMHC is prone to some bias tendencies. CMHC always forecast price increases for the following year since they have been putting out forecasts in Calgary since Q1 2008. This illustrates they may have an upward bias to forecasting prices. In addition, during the correction period in 2007 and 2008, there were four consecutive downward revisions. The probability of four consecutive downward revisions is 1 in 16. While the economy and oil prices did deteriorate considerably over this same period, I believe that the consecutiveness of the revisions may reveal a bias in CMHC forecasting towards being overly optimistic when revising downwards, with the potential of being pessimistic when revising upwards.
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For these reasons, I believe that the BEST information available from CMHC may not be only the price that they are forecasting for the next year, but also information in which revisions are being made counter to previous trends. CMHC has broken with the previously held consensus revision trends as of Q3 2009 and that may be newsworthy in itself.
To find the current CMHC housing market forecast click here and go to the “Order Desk”, then “Housing Market Information”, and click on “Housing Market Outlook.”
Mid-November 2009 Market Update
I think it’s fair to say that any comparison to last years sales levels shouldn’t be given much weight since the global financial system was then teetering on the brink of collapse with consumers hunkering down. So how does this November stack against previous years so far? SFH inventory is barely staying above 2900 – it’s lowest [...]
October 2009 Calgary Real Estate Statistics
Metro-Calgary Single Family Homes (SFH) October recorded an average price of $462,465 and a median of $410k – an increase month-over-month (September 2009: $459,085/$399,900) as well as year-over-year (October 2008: $449,100/$390,000) This is the highest average price since June 2008, and the highest median price since May 2008. Month-end inventory was 3003, its lowest level since April/May 2007. Metro-Calgary [...]
Calgary Housing Recovery Already Underway?
It’s been awhile since my last post, so I thought I would share some interesting information.
The first graph illustrates the historical supply and new listings on a seasonally adjusted basis. Sales and new listings have been adjusted on a seasonally adjusted basis so that it gives a leading edge indicator of of how the resale market is performing. For example, December is typically the worst month of the year for sales and May is the best and there is a fairly consistent seasonal pattern to resale volumes. This adjustment also allows one to determine whether price movements are caused to to changes in supply or changes in demand. In the past few years, sales volumes I believe soared well above demographic demand, and in early 2009 were well below demographic demand. I believe future sales volumes will fall moderately from here due to what has been described as demand driven overbuilding (premature buying) that occurred in 2006.
Looking at new listings, one can see that supply is not the problem that many blogs had predicted would happen due to high foreclosures. Supply is much lower than it was in 2007 and 2008 and this is I believe because a much lower percentage of loans was granted to debtors of poor credit quality as compared to the US. I think there is also a rational component to the ebb and flow of activity in the resale market.
The series of events that occurred over the last few years may be as follows…. In 2005\2006 as rental vacancy dropped to 1%, and perceived slowness to bring new product to market, buyers reduced their personal time horizon to buy. This is driven by a belief that if they do not buy now, then they risk further price appreciation occurring or waiting a long time for house prices to drop. Potential sellers also recognize that there is a lack of supply, and put off selling. Speculators also enter the market to drive up demand in the short term, but do not immediately cause an increase in supply. In mid 2007, when inventory is increasing, and new construction was high, it is apparent that supply can satiate demand at that price point. Potential sellers and speculators that were delaying selling rush to the exits to cashout. Also, buyers suddenly realize that there will be a price correction, and now instead of reducing time horizon to buy, they increase the time horizon to buy as they realize that in the near term there was going to be a price correction. This causes a very sharp and sudden shift in both the supply and demand balance. In 2009, when housing construction nearly ground to a halt (especially with MFH starts) buyers have now begun reentering the market once again as inventory depletes. Potential sellers may also now be once again delaying selling purchases due to perception that the market has turned the corner, and less risk from a wave of supply coming from foreclosures.
In summary, I believe the price correction in the resale market is over for now as indicated by the graphs below… Although, I do not see why a relapse into a bear market is not possible if sales were to drop again. Housing corrections typically occur over a period of several years, and historically taken at least 4 years to unwind so I would not be surprised to see further price drops if the supply\demand situation shifts once again. There are reports that the Calgary commercial office space is overbuilt and vacancies will rise to 20% in the coming years and will halt commercial construction in Calgary for several years. The good news is this will provide stability and growth opportunity for businesses in Calgary as they can better keep a lid on operating costs.
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Propped Up Market?
A year ago this week, the plug was pulled on controversial 40-year mortgages as the federal government tightened mortgage rules. The Canadian Association of Accredited Mortgage Professionals estimated that 37% of all new Canadian mortgages taken from the one-year period ending in the fall of 2007 were longer than the standard 25-year amortization period. And according to [...]
New Housing Price Index (August 2009)
In Calgary, contractors’ selling prices edged up ever so slightly between July & August - up 0.2%. Year over year prices were down 6.3%. Other cities that were down from August 2008 were: Victoria (-10%) Edmonton (-11.4%) Vancouver (-7.8%) Saskatoon (-7.6%) Cities included in the survey that were up year over year were: St. John’s (+7.5%) Quebec (+6.3%) Fredericton & Moncton (+2.2%) Regina [...]
September 2009 Calgary Real Estate Statistics
September 2009 Statistics Single Family Homes (Metro-Calgary) Average price was $459,085, a 3% increase from last September ($444,048) and a 1% increase from last month ($454,130) Median price was $399,900, a 1% increase from last September ($395,000) and down $100 from last month ($400,000) Condo (Metro-Calgary) Average price was $290,253 – up slightly from last September ($287,426) and a 2% [...]
Eye of the Beholder
…continued from previous post. Statistics are a wonderful thing. Hard data. The thing is, they can be easily manipulated to portray something different, sort of like forced perspective in visuals. We had a brief discussion earlier on this blog how by selecting different time periods we could make the point that [...]
Calgary Resale House Price Model
The following graphs illustrate the historical relationship between absorption rate and house price changes in Calgary. As the absorption rate decreases, demand exceeds supply, and house prices rise. When the absorption rate is high, supply exceeds demand and house prices fall. While I do not believe this metric is useful for determining long term price point, I do think it is useful for determing the near term price trends.
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Recent history indicates that an annual absorption rate of 4 would be a market that is roughly balanced. In 2008, Calgary had record amounts of resale inventory and these inventory levels have dropped in 2009. Also, sales dropped dramatically following the credit spread crisis, but have since improved on a seasonally adjusted basis. If the current inventory glut continues to decline at it’s current annual rate, and sales stay flat seasonally adjusted, it is possible that the Calgary housing market will bottom in December 2009 after falling further in autumn. I think there are upside risks and downside risks to this forecast. I believe it is prudent for all market participants to err on the side of caution both when formulating business plans and household budgeting. It’s probably also worth noting that house prices are likely to increase by only in the zero to very small single digits for a number of years after bottoming, so there is no rush even if you are trying to time the bottom.
Data: Bob Truman – First Place Realty
