Downsizing and Building

I was recently contacted by clients that are considering downsizing their home to take advantage of a lower mortgage debt load. After spending a great deal of time putting together information to assist them in making a decision on how to move forward, I felt this information would be useful and is pertinent to anyone considering a similar scenario or considering building a new home. Enjoy!


Their current home is a beautiful, modernized two storey in a lake community that was developed in the early 1970's. It was originally listed in August 2007 after the extensive renovations were completed for $819,900. I assisted them in purchasing this lovely home for $645k in September of the following year. That huge drop of 21% in anticipated value must have been a tough pill to swallow for the previous owners. I suppose that would be an interesting lesson in timing and perhaps a topic for a future Blog…

This family is looking at reducing their mortgage by about $200k and staying within the same community. With that large debt reduction, they will also be looking at downsizing their home, both literally and figuratively speaking. With this significant value change, some of their choices for a new home will certainly be fixer-uppers or "dated" homes that will need some significant renovations to bring the property to today's standards. There will also be some recently upgraded homes, they will just be of a different style, size and perhaps in a less desirable location within the community when compared to their current home. What they really need to decide is whether they are interested in purchasing a home that may need an extensive makeover, or whether they would be happy in a much smaller home than they are currently accustomed to.

In the case they decide to renovate an older home, another major decision is whether they are willing to live in the house while the work is being done, or will the renovations be completed prior to moving in. I would suggest that living in a home that is getting major renovations is certainly a challenge, especially if you have children. If you are deciding to take on a similar project, I would encourage you to consider renting a property to live in for the interim, or finding someone that will take you in (such as a relative) while the work is being done. Another option that many consider is to stay in their existing home while the work is being done, then to sell the first home once the work is completed. The big issue here is predicting what will happen to the market value while this process is taking place, and this is a similar process as to when building a new home.

To move to the next stage in making this change, we need to be sure to have a good plan in place, especially if considering holding two properties for a time as you renovate or build your new home. We are certainly in a volatile market, and have been for a long time (since 2005?)… Imagine being in the same position as the previous owner above in August 2008 and considering a similar scenario - purchasing a fixer upper in anticipation of renovating and enjoying the lower mortgage and new development in a few months. If they made this decision with the preconceived notion that they were expecting close to $800k for their home, you can see the dilemma… that value certainly slipped away from them in a big hurry. I am in no way saying that the same thing will happen over the next while, as a matter of fact, the complete opposite could also happen as did happen to anyone that would have considered this scenario in late 2005, prices literally doubled in many areas of the city in a matter of a few months. If you are buying and selling at the same time, whether the market is high or low is relative as you are buying and selling in the same market. However, when you are buying and selling at different times, anticipating the gap between the two values becomes a bit of a gamble. The same can be said for building a new home. You buy a "new build" at today's price, however, you take possession of that home at a future date (perhaps six to nine months or more) where the value can possibly change dramatically depending on what has happened in the market. What I would like to do now is give you my take on the current market and the probability of where it could possibly go - to assist you with the decision on moving forward with this new direction and how to approach the change.

I am taking the position of optimistic caution for where the market is heading over the next few weeks, months and years. There was an interesting article in the Herald yesterday with the headline "MLS sales and prices both ascend in September" (Calgary Herald, Business Section, Page C3, October 2nd, 2012). Upon initial review, it certainly seems to paint a rosy picture of our current state of affairs in the local real estate market. Let me delve a bit deeper into what I personally see going on to get a better gage of how things are looking, and where they could be heading.

The first point to ponder is that all of the "growth" increases and leaps in value and movement that we are seeing in the media are in comparison to last year at the same time. In a city of our size, we should see sales figures of somewhere between 1,000 and 1,400 single family homes sold per month. Our peak season (March to June) should be at the higher end of that number, and perhaps even peak over that amount. Alternatively, our low season (October to January) will typically dip below this range, especially December and January which historically see very slow sales. I would caution you that we are heading into our slowest period of the year. That fact is always a big question mark for values of homes and certainly for the time on the market it requires to find the right buyer for a home. Our average monthly sales figure from 2008-2011 has been just over 1,100 sales per month. Last year saw moderate growth at best as our general sales figures were flat. Our peak month in 2011 was in June when we reached 1,385 sales. That is within the range I mentioned above, however, a very mediocre "peak" number. We then saw a steady month-by-month decline in sales from July 2011 until January of this year. Without a doubt, much of the growth we saw at the beginning of this year can be contributed to that lackluster seven month period.

When we look at a shorter term we can see that we have actually seen a decrease in sales and the average price of a home in metro Calgary in recent months… as a matter of fact, prices have declined month by month since our year peak in May to the tune of -7%! (Average price in May was $502,065 and average price in September was $468,360 for a single family home in Metro Calgary - CREB Monthly Housing Statistics, September 2012).

There are certainly areas within the city that do better than others and there does seem to be a lack of inventory of certain types of homes in specific areas, especially those closer to the city core. So when we look at the city as a whole, we do see that our inventory is down as well as our new listings. However, when we look specifically at many of our suburbs, we see a different story. In the subject property's community of Lake Bonavista, there are currently 15 active listings and last month there were only four sales. Other areas in Calgary are seeing a major slowing in activity. For example, there are 32 homes for sale in Kincora, last month there were only two sales. Sherwood had one sale last month (16 active listings) and Hanson Ranch had one sale (8 active listings). Evanston fared a bit better with 13 sales, however, there are 64 active listings over there. We can go throughout the city to see similar trends in the suburban areas in the outskirts of the city limits. (Active listings taken from MLS on October 1st, 2012)

There are also many external contributing factors to real estate sales, and I am sure there are few areas that are more affected by extraneous factors than we see in Calgary… where are oil and gas prices? Do we have a net "in" migration to the city? And what about global factors such as the economic conditions in the rest of the world? What is going on with the European union? What is happening politically in other oil producing nations, especially those in the middle east? We often maintain optimism in Alberta that contributes to our micro economic conditions… however, it is very difficult to maintain steady growth that trends against what is happening in the rest of the world, especially for prolonged periods of time.

Also consider the fact that in Canada we are seeing a slowing national real estate market outside of our province, and in a world of uncertainly in the global economy, consumer confidence in Alberta and the prairie provinces has certainly improved this year… my question is how long can we maintain our optimism? We seem to always do better than most other areas in economic crunches, however, we ARE eventually affected.

To summarize, I do believe that what is happening in the global economy will affect us over the next few months. I would suggest we will see a bit of a cooling period and the chances of the same dramatic jump in the market we saw early this year happening again next year are slim. I would hope we see a bit of growth in values, however, if we stay steady over the next year I think we will be doing well.

In making the decision to purchase or build a new home today, whether downsizing or upsizing, I would suggest that the gamble in anticipating the value of your current home in a few months may be a dangerous venture. As in the real case scenario of the home above, if your budget depends on a certain sales price of your existing home, perhaps it would be prudent to sell the home in the current market (whenever that is) as the current price you can sell your home for is the only guaranteed price you can "bank on" and will eliminate the stress of an unknown profit margin in the process of building or redeveloping your new home.

Well, stress-free for what you know you have for a budget for the financial aspect of your new project. Dealing with building and renovations and that stress is a topic for another day…