Calgary Home Price Forecast for 2019
Prices in Calgary and Edmonton are likely to drop
2019 will be a difficult year for sellers of homes
There will be opportunities for buyers to find some great deals, but they may hold-off hoping to get a better deal in the future
There may be excess condo supply in 2019 that could put sellers at a disadvantage
Foreign and speculative capital flows appear to have bypassed Alberta, and flowing to Seattle, Toronto and Montreal
2019 House Price Forecast
In 2019, Calgary was kicked while it was down. First, the price of oil has languished for the past few years, sitting close to half the price it reached in 2008. Then the pipeline west that would have brought Alberta bitumen to new markets and added new buyers was delayed again. Finally, the existing U.S. buyers pushed the price of Western Canadian Select oil lower than other global oil prices. Since close to 25% of Alberta’s economy driven by Oil and Gas, this this has led to a slowdown in job and population growth.
In contrast to the frenetic condition real estate markets back in the boom times, today’s market feels depressed, but it’s actually balanced. The market is very healthy right now however it appears that short-term shortages between 2005 and 2007 inflated home prices above the level sustained when demand moderates and is balanced. As a result, prices have been drifting slowly downward since 2015.
There is broad consensus among economists that 2019 will be good for home buyers and that house prices will either hold flat or continue to drop in 2019. Perhaps a 3% drop doesn’t sound significant to you, but a 3% drop on the $485,000 benchmark priced Calgary house is a $15,000 and that’s a significant amount of money to most homeowners.
Before going further, we need to make it clear that forecasts are simply intelligent guesses and history has often proven forecasters wrong. For example, in 2016 Royal LePage (a major real estate brokerage) predicted that Vancouver house prices would drop 8% in 2017, but instead the benchmark detached home price rose $100,000 from $1.5 million to $1.6 million.
If you hear of a forecast this year that sounds too good to be true and unbelievably accurate (e.g., estimating to the dollar), then likely it is.
To formulate our forecast, we first evaluated other forecasts from well respected sources and then analyzed what we believe are the 5 key factors influencing housing markets to arrive at the most likely outcomes.
Evaluation of Forecasts
2019 forecasts for Calgary range from a 1% rise to a 3% drop, and a majority expect a drop. Most of these forecasters work for companies that make money when people buy real estate, so they likely have strong convictions if they’re talking the market down.
Analysis of 5 Factors Driving Prices
Affordability is focused on Canadian home buyers in the traditional sense. These are people who are buying a home to live in it and they’re relying on their own income to pay the mortgage. This type of home buying is grounded in the world of classical economics.
Supporting higher prices, we have historically low interest rates and median household incomes in Calgary are higher than the rest of Canada. However, Alberta unemployment is high and it seems unlikely that oil will make a big comeback in 2019.
Some economists argue that higher interest rates and government rules that reduce the size of mortgages people can get are depressing the market, but in Calgary, this argument doesn’t hold water. Calgary real estate is very affordable and even someone earning $50,000 can find a modest condo to live in. Contrast this to Vancouver where the benchmark condo costs $670,000…$100,000 more expensive than a house in Calgary. Affordability is not a problem in Calgary.
There is a global slowdown in real estate investment, but Calgary is unlikely to be strongly impacted by this slow down because it was never a recipient of the foreign direct investment that has distorted the Vancouver, Toronto, and Montreal markets.
Condo investors will have observed prices dropping over the past few years and are likely sitting on the sidelines hoping to buy at the next market trough. Since they aren’t buying a home to live in, they can park their money in a savings account earning 1.5% while they wait for prices to stabilize.
Dark money has also had an influence in Vancouver and Toronto but appears to be absent from Calgary since it is more easily hidden when the market is volatile.
In summary, capital flows have eased but have not imploded like Vancouver which has seen sales of houses drop more than 50% since 2017.
The government has been tightening mortgage rules for years. Ten years ago, Canadians had access to government insured mortgages that could be repaid over 40 years. Today, government backed mortgages must be repaid within 25 years and they’re only available for homes occupied by owners. Below is a list of the government’s ongoing tinkering with mortgage financing:
2008: Reduced the maximum lifespan of a mortgage from 40 years to 35 years.
2010: Applied a stress test against the 5-year contract rate for mortgages with a down payment of less than 20%.
2011: Reduced the maximum lifespan of a mortgage from 35 years to 30 years.
2012: Reduced the maximum lifespan of a mortgage from 30 years to 25 years on mortgages with a down payment of less than 20%.
2016: Applied a stress test against the 5-year posted rate for mortgages with a down payment of less than 20%.
2016: Banned default insurance on refinances, mortgages greater than 25 years, and single-unit rentals.
2018: Applied a 2% stress test to mortgages with a down payment of greater than 20% to ensure borrowers can handle an interest rate increase.
Since Alberta hasn’t been wrestling with wildly volatile markets, the provincial government hasn’t copied B.C. and Ontario’s measures to calm the market and bring about a “soft landing.”
The Calgary Real Estate Board (CREB) insists that “oversupply continues in Calgary’s housing market” and that condos are consistently in “market in buyers’ market territory and putting downward pressure on prices.”
The markets are surely slower than the frantic boom years, but the charts below clearly show that the house market just recently entered a balanced market and the condo market only became a buyer’s market in December. CREB appears to be lobbying for government support.
Here is the broader supply picture:
In an average month, 1,600 condos are for sale in Calgary.
In 2018, apartment sales totaled 2,700 units and this means that in 2019 Calgary may temporarily have excess supply. By no means does this imply that the City can’t support further densification. Canada is experiencing record population growth and Calgary will receive its fair share, but in 2019 the condo market is likely to see a strong buyer’s markets accompanied by falling prices.
Sentiment is the key to prices. People fall in love with a home and before making a final decision, they look at the other four factors and ask, “Is it worth it?” The final decision to buy sits in the realm of behavioural economics rather than rational classical economics. People make purchase decisions with their hearts and gut feelings and no one wants to be caught paying too much or selling too cheaply. Here are some key principles of behavioural economics to watch for in 2019.
Uncertainty aversion is the tendency to favour known risks over unknown risks. For example, when choosing between buying or renting, we are more likely to choose the option that provides more certainty. Lately there has been a lot of uncertainty in the Calgary real estate market and that may cause people to choose renting until the market stabilizes and home prices become more certain.
Endowment effect is a bias where we tend to overvalue something that we own, regardless of its objective market value. This has come into play this year with sellers anchoring to the peak prices and only reluctantly lowering their asking prices as the market softened. This has led to unsold houses piling up on the market.
Herd behavior is evident when people do what others are doing instead of using their own information or making independent decisions. This was evident when people stretched themselves to “get into the property ladder” when the market was headed upward. In a down market, baby boomers who intend to cash in their real estate to fund their retirement may stampede to sell their homes and it could accelerate a decline in prices beyond what the forecasts are expecting.
Confirmation bias occurs when people seek out or place higher value on information that fits with their existing beliefs and preconceptions. When most people believed real estate would climb “up and up” forever they only read news that confirmed this. If there is a tipping point where people come to believe that a major correction is underway, then people will reinforce their belief by ignoring news to the contrary and this will prolong any downturn making it a self-fulfilling prophecy.
Anchoring happens when people fixate on a number like the price at the market peak and use this as a reference point to judge current values. It’s a subconscious process and it’s frightening how easily we are influenced. An experiment asked people to write down the last three digits of their phone number multiplied by one thousand (e.g. 678 = 678,000). Results showed that people’s subsequent estimate of house prices were significantly influenced by the arbitrary anchor, even though they were given a 10-minute presentation on facts and figures from the housing market at the beginning of the study. In practice, anchoring effects are often less arbitrary. For example, the list price of the first house shown to us by a real estate agent may serve as an anchor and influence perceptions of houses subsequently presented to us (as relatively cheap or expensive). In 2019, anchoring will most likely be observed when sellers reject offers that are lower than the most recent peak price from 2017, or they simply take their home off the market expecting that prices will rise to the 2017 peaks in the near future.
It’s difficult to ignore sentiment and behavioural economics in a digital age when Google and Facebook will curate your news to reinforce your existing beliefs. Could social media’s content filtering negatively reinforce consumer behaviour and lead to worse recessions and more profound swings in asset prices? It’s clear that social media contributed to the stratospheric rise in the price cryptocurrencies like Bitcoin. Time will reveal if real assets are vulnerable to social media bias too.
Advice for Buyers
In Calgary buyers of homes have more negotiating power and their power has been growing every month. So long as you aren’t taking on an uncomfortable amount of debt and this is your “forever home”, 2019 will be a good time to buy but 2020 may be even better.
At the end of the day, a home is a place to live more than it is an investment. If you feel you need a home to have the lifestyle you’ve always wanted, then now is the best time since 2008 to be a buyer. Just be sure to drive a hard bargain and keep in mind that prices will likely continue to drop after you buy your home. It’s impossible for everyone to perfectly time the peaks and troughs of the market.
Advice for Sellers
Real estate holds more uncertainty for sellers. Current forecasts would indicate that the longer you wait the less you’ll get for your home. In the early 1990s, Toronto saw a dramatic real estate correction and it took almost 20 years for prices to match their previous peak. There’s no guarantee that’s the case in Calgary; however, there are some respected economists that have been warning of risk in the market for some time. If you don’t like risk and you know you need to sell in the next 5 years, it may be prudent to list earlier rather than later.
For the latest market information for Calgary and specific real estate trends in the City of Calgary, North Vancouver, Richmond, Burnaby and Surrey, bookmark our Calgary Real Estate Insights page.