The Canadian Real Estate Association (CREA) revises it's forecast to reflect a slowdown in sales by the end of the year, the Canada Mortgage and Housing Corporation (CMHC) is calling for a slight gain in sales this year, Interest rates and tighter rules crimp demand according to the Calgary Real Estate Board (CREB), yet average and median sale prices increased last month. And that information is from just two days in the Calgary Herald! (June 2nd & 3rd, 2010)
Although there have been some strange twists and turns in the market over the past five years, hindsight being 20/20, it is interesting to look at why different changes have happened in our market. This information should give us insight into what can and may happen over the next few weeks, months and years.
In late 2005 and most of 2006 we saw a significant change in property value in Calgary, where many homeowners saw the value of their homes increase dramatically, often doubling or more in value over only a few months. Prior to this time, we had been in a "balanced" market for many years, meaning the demand for property was relative to the amount of homes on the market. If we have between two to four active listings per month to every sale, we consider that a healthy, normal market. Buyers and Sellers are in a balanced position when negotiating a fair market value for the property.
In April and May 2005, Calgary saw an increase in demand for housing that started to surpass our inventory. Looking back, we can see a change in the composition and rate of increase in the population of Calgary. We had an increase of new Canadians coming to a rich, healthy economy with a lack of workforce. This demand of employees also increased our pay structures, even the most basic employment positions were difficult to fill, bringing wages up. This was also appealing to Canadians from other parts of the country where the economies were not so rosy. This influx of new Calgarians spurted higher demand for housing in the city. Early in 2006, with these forces, in combination with the normal seasonal increases in demand for housing, pushed demand to an all time high. Homes were being bought up the moment they came on the market as the vent up demand had many potential Buyers lining up outside new listings and making rash decisions with a feeding frenzy mentality. Many properties sold for well above list price, driving prices up even further.
This high demand lasted through the summer and early autumn. In the winter of 2006/2007 the market slowed to normalcy as seasonal demand does mellow in the cold months. Prices stabilized from September to January, giving us a reprieve from the frenzied activity. Early in 2007 we saw further increases in value as demand was, again, higher than our inventory. Perhaps many Buyers were afraid the same frenzy would happen as happened the summer before. In July/August of that year our average and median prices peaked.
And then everything changed... with our new found wealth in the "equity" of our homes, a new shift in our outlook on real estate and investment took place. Many Calgarians that were originally from other parts of the country decided to cash in on their new found wealth, and move back to their home provinces where they could purchase a home for much less, and bank the difference. This promised them a better quality of life in areas that perhaps did not have appeal for them as far as employment in past.
The second thing that happened was more demanding on our market. Many home owners dipped into their new found equity through a Home Line of Credit (HELOC). Many "new investors" decided to build a second home in anticipation of taking possession of the property and "flipping" it for a quick financial gain. There were many stories of Sellers making piles of money in profit when the buying frenzy was in its early stages. That was most certainly true, however, those circumstances were an exception to normal market conditions.
From September 2007 for 18 months we shifted into a Buyers market. Affordability eliminated many first time homebuyers from the market as financial institutions would not provide mortgages without exceptional household incomes. Qualified Buyers were at a premium and now had a strong control of the market, driving prices down. First time homebuyers are the backbone of our industry as they enter the market, Sellers of those homes are turned into Buyers that are looking for higher priced homes.
This time period saw a huge shift in paradigm in the way banks and financial institutions did business with stricter regulations and qualifications. As demand for housing decreased, pricing rapidly dropped. From July 2007 to January 2009 average prices dropped about 20%. We are just now seeing some of the repercussions of these times and changes with BMO's court action against many they feel were fraudulent in real estate transactions, this may very well be the tip of the iceberg in banks and financial institutions demanding restitution.
In May 2008 we broke another record... we had just under 15,000 homes for sale in the Calgary area. With supply so high, many potential Sellers started pulling their homes and investment properties off of the market and looked to alternative measures to look after this new issue. Many homeowners and new investors that were hoping to make profits now found they were losing money on their new investments. Some owners inadvertently became landlords out of necessity deciding to wait out this blip in the market and sell later when things ironed themselves out. What they didn't expect is the difficulties of being a landlord. Often rents are lower than the holding cost of a property, sometimes rents become overdue and often renters do not respect the property as one would hope. Don't get me wrong, I am a huge advocate of holding properties for long term gains, but this investment strategy needs to be carefully thought out and planned. Many owners did not, and do not, want to be landlords. This role, along with increased financial pressures, is taking a toll on many investors that fall into this category.
Adding fuel to the flame was the collapse of the mortgage industry in the US in October 2008. Although the policies and procedures of our industry is far stronger than that of our neighbours south of the border, what this did do was create a wait and see attitude in many potential Buyers in Calgary. In December 2008 and January 2009 sales were at their lowest in over a decade. Miraculously enough, prices remained stable for six months after the crisis, only dropping about 3%.
In 2009 we saw an increased demand in purchasing properties as prices stabilized, and interest rates were at an all time low. Normal seasonal sales, in combination with Buyers who had been on the fence since the mortgage crisis in the States added up to brisk sales throughout the year.
What is happening in 2010? Now that the vent-up demand from 2008/2009 has diminished, we are seeing sales figures returning to a sustainable level. There are a few factors that will certainly effect the market this year. The first is the International economic outlook. I am no economist, but it is easy to point out that we are in for some interesting times with the financial crisis throughout Europe. Demand for oil and gas is a major indicator for our local economy, and this crisis is certainly taking its toll on the industry. On the other hand, perhaps the silver lining to the oil spill in the Gulf of Mexico will be higher demand for oil production in Alberta.
Many of the properties that were pulled off the market in 2007/2009 are coming back on the market, adding to our increasing inventory. We had just short of 13,000 properties for sale in the Calgary area in May, the last time inventory has been that high was in July 2008. Interest rates have gone up this month by a quarter percent, ahead of the promise by the Bank of Canada to hold rates until the second half of the year. Average sale prices are back to where they were in May 2008, which is great news. Many higher priced homes are selling, driving that average and median price upward.
As interest rates move up and regulations become more stringent, we are going to see a decrease in the amount of sales of entry level homes over the rest of this year. As the amount of new homebuyers decreases, the overall sales figures will continue to decline, seeping into all price categories.
With this increase in inventory, in combination with slowing sales, Sellers will have to be very accurate in their pricing to realize their best profitability this year. Trying to catch a downward market is a difficult task, as we learned in 2007/2008. It may be some time until we see significant increases in value as much of the inventory gets pulled off the market toward the end of the year, only to re-enter on the market early next year.
When making a decision on what to do with your real estate investment, it is a good idea to look at a long term plan of at least five years with a professional industry member. With the many changes in the market and the economy, it is certainly a roller coaster ride in the short term and on a year-by year basis. If you are in need of liquidating a real estate holding in the next few months, sooner than later may be the best advice... I would be happy to chat with you further about your real estate needs.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment