Future values in Calgary

I know you are contemplating whether to sell your home today, or rent it for a year in anticipation of values increasing. I just wanted to make a few comments to you so that you are aware of my thoughts on the market over the next few weeks, months and years. I want to point out a couple of my legal fiduciary duties to you which we discussed when I sat down with you. The first is "Undivided Loyalty" - "The Agent must act solely in YOUR best interests, always putting YOUR interests above their own interests and above the interests of other parties." And also "Reasonable Care and Skill", "the Agent MUST exercise reasonable care and skill in performing all assigned duties." In my own interpretation of these two aspects of my duties to you, I feel obligated to be sure you have all the information you need to move forward with your real estate holding, whether you want to sell your home or rent it out. I only have your best interests in mind when putting this note together for you.

First off let me be perfectly clear in my belief that holding a real estate property over a long period of time is absolutely one of the best long-term investments for anyone, and I truly believe that everyone should have some type of real estate holding in their investment portfolio. From the simple idea of owning your own home, to owning a rental property.

The advantage of owning real estate as a long-term investment is that not only are you gaining valuable equity as the value of your property increases, but you also have a renter assisting you with the payments of the mortgage on that investment. What I am hoping to do here is analyze what we think the market is going to do over the next little while, and address some of the issues you will need to deal with during, and after your rental experience with this home. I know you have rented properties in past, so I am not going to go over the process of collecting rent and addressing any issues that may transpire over the rental term that you will need to address and, of course, dealing with the accelerated "wear and tear" usually associated with renting out any property. I am hoping that you will look into using a professional property management company to keep an eye on things as you will be away from Calgary. Many owner/landlords look after their own properties, however, I would suggest this is an easier prospect when you are close in proximity to the property.

I have dealt with a number of clients in past that have been in a similar position to yourself. They were unable to get the sale price they needed in order to deal with their financial obligations or their perceived value of the property at the time they had it on the market. The original cost of a home, the cost to build the home and the amount owed on a mortgage to a home have little influence on the market value of a property. Even a bank appraisal and the City of Calgary Property Assessment do not necessarily reflect the true sales value of a home. What determines the value of a home is what a potential buyer is willing to pay for a home, period. If potential buyers are not willing to pay a certain price for a home and the potential seller is not willing to adjust their expectations accordingly, the home will not sell. In a "balanced market" where there is a limited amount of homes available for a buyer to purchase, they are willing to perhaps pay a bit more than they originally intended to, keeping the market "in balance" and the values stable.

If there are not a lot of homes on the market, buyers feel the pressure to negotiate for a home that they want as they feel a certain risk of losing the home to another buyer. They feel a need to get the purchase done before they lose the property to someone else. In a market where there are more buyers than sellers, the values of homes go up. If there are too many properties on the market in relation to the amount of buyers looking for a home, that pressure is eliminated. The more and more inventory there is on the market, the less motivation a buyer has to make a purchase in a specific time frame. They will often wait to "see what happens" with the market, which essentially means they expect prices to go down in the short term so they are looking for "bargains" or homes of exceptional value. That is why we need to keep an eye on the market to see what the trend is, and try and predict where the market is going. In the long term, prices tend to move upward, however, short term prices can fluctuate dramatically depending on whether there is "buying" or "selling" pressure.
The bottom line really is that real estate is a true "supply and demand" market. If fewer and fewer people are purchasing homes, builders start to decline building new homes as the profit margins also drop. In longer periods of a buyer dominated market, we see more and more builders go out of business as they are unable to make a profit on their homes. As more buyers come on the market and we see less homes available to purchase we see the opposite happen where builders come out of the woodwork and existing builders put pressure on to build even more homes. The problem with this model is that new builds are slow to react to what the market is doing. If we see a steep incline in demand as we did in 2006, it takes months for new home builds to be completed, often over eight months. By the time the new building matches the original demand we often see an inventory that we cannot move quickly enough forcing the pricing trend down, as we saw in 2008 and are still dealing with today.

Further complicating the matter is the fact that a "buyers market", or an over abundance of inventory, tends to last a lot longer that a "sellers market" which tends to happen very quickly and last a short burst of time. Interestingly enough, the buyer frenzy that we experienced in 2006 was a direct result of the population in Calgary increasing at an amazing rate, increasing around 25%. That huge immigration to the city directly fueled the huge demand for housing in a very short period of time. At that time Calgary was a very affordable city to live in with a good demand in the job market. What happened though, is that this increased demand for housing also pushed the market to almost double its value in a short period of time actually making the city much less affordable to live in. That, in combination with a waning global economy, has slowed down our growth to a halt. As a matter of fact, last year was the first time we literally saw zero population growth since 1984!

What is also disturbing is the fact we are seeing massive new development in all sectors of our city. Drive to the outskirts of Calgary in any direction and you can see new neighbourhoods sprouting up at an astonishing rate. It is beyond my scope to address our future economy, however, I certainly wonder how we can sustain all of this development with little growth in our population. What we have been seeing over the past year or so is essentially "lateral" movement. People within the city "upsizing", "downsizing" or "rightsizing", we are moving from one home to another and selling our homes to someone else doing something similar. What is confusing then is how we going to fill up all of these new homes that are being built if we have fewer and fewer "new" citizens to our fine city?

Having said all of that I would suggest that we are in for some interesting times in the real estate market over the next few years. I would suggest we will see further decreases in value for the rest of this year. Historically the first half of the year sees the most activity in sales figures. As Canadians and Calgarians we wake from our winter blues invigorated and many look at purchasing a new home as the weather gets better. As summer approaches that excitement declines as we look forward to enjoying our short summer. As summer comes to a close we then get caught up in the new school year and getting back to work. As soon as our weather turns inclement again, we tend to cocoon back indoors avoiding the cold and snow.

With our busy time behind us and an increasing inventory, the next few months certainly points toward flat or decreasing values. At this time next year I would expect average and median values in Calgary to be lower than they are today. If you decide to hold your property in anticipation of selling your home at a higher price than you can get today, I would encourage you to look at a longer term plan than renting for a year then seeing what happens. If you are looking for increased value I would suggest you put together at least a three to five year plan to weather the coming storm.

Whether you would like to hold your beautiful home as a rental property, or sell it shortly is not what is important to me. What IS important to me is that you have all the information you need to make the decision on how to proceed with your real estate investment. If you have any questions or concerns regarding any of this information, or would like further clarification regarding any of these comments, please do not hesitate to call or drop me a line.