At Mortgage Sandbox, we break down our market analysis to five key factors: affordability, capital flows, government policy, supply and popular sentiment. In the long-run, the market is fundamentally driven by economic forces, but in the short-run sentiment can drive prices beyond economically sustainable levels.
At the moment, real estate prices in Metro Alberta are dropping and the market is weak. Here is why the market is weak and likely to stay that way.
Alberta’s recovery may be pulled down if Canada heads into a recession: A recession would reduce employment and lead to forces home sales and that puts downward pressure on home prices. This recent Reuters article observed that recently “Oil prices slipped as concerns that the global economy could be slowing”. On the bright side, Alberta unemployment peaked in 2016 at 9% and has since dropped below 7%. Still nowhere near the 2008 employment levels when a mere 3.5% of people were searching for work.
Reduced borrowing capacity has pushed out family homebuyers: Mortgage stress tests and rising interest rates have effectively reduced the maximum amount people can borrow by 20%. This has a lesser impact on Calgary and Edmonton than than Vancouver and Toronto since Alberta incomes are higher but is still reduces the prices that people are able to afford.
In the days hot markets, home prices outpaced their natural long term levels: In most areas of Calgary a benchmark house costs more than $430,000 but 50% of Calgarian housholds can not afford a $430,000 home even with a 20% down payment. This is after several years of price declines. Is it possible that the constrained supply during the oil boom pushed people to buy houses at prices above their economic worth?
Capital spending in the oil sands is set to decline: According to the Canadian Association of Petroleum Producers, Capital spending will drop for a fifth consecutive year to approximately one-third of the investment seen in 2014 and activity is not likely to improve without better market access via pipelines. Construction of the Trans Mountain Pipeline is likely a long way from completion.
A Synchronized Global Real Estate Market Correction has dampened Foreign Buyer activity: Home sales have slowed in Manhattan, Sydney, Stockholm, London, and the list goes on. Perhaps global real estate investors have lost their appetite? Has the Chinese government been successful in their campaign to prevent citizens from taking money out of the country? If there were a global real estate downturn, how would this impact Calgary?
If Calgary is simply caught up in a global real estate correction, then at least there is no one to blame for the turn in the market. If this is the case, then it means that Canadian policies and government intervention will be powerless to change the global flow of capital and investment, and that’s a scary thought.
The federal government is working with B.C. and Ontario to bring about a “soft landing”.
Changes to Mortgage Rules to prevent Canadians from taking on too much debt also reduce their purchasing power.
5-year fixed mortgage rates are 0.5% higher than in 2016 so they aren’t really a factor.
The Alberta market is already soft, so the federal intervention on behalf of a few large irrational markets prevents the feds from helping out Alberta housing. Some industry advocates blame the January 2018 stress test for causing a slowdown in the market but in Alberta the slowdown is inextricably linked to the price of oil.
While fewer people are buying homes, the Metro Calgary population continues to grow: According to the federal housing agency, there is consistent evidence of overbuilding in Calgary and Edmonton. Builders are generally slowing down the number of new projects but new home sales continue to decrease at a faster rate.
In February 2019, Metro Calgary had 11,000 new homes under construction.
A change in buyer sentiment has led to a Wait-and-See Strategy: Another theory is that homebuyers can buy at today’s prices but are playing-it-cool until they see a turn in the market. Slower sales mean the prices of most recent homes are a less reliable indicator of where the market is headed. This is because prices set under heavy sales activity are more representative of the consensus of many buyers. Low activity implies that many buyers believe properties are mispriced and are sitting on the sidelines. Declining activity in a market with rising prices is usually a leading indicator that a price drop will follow.