Calgary Real Estate Bubble

Bubble Debunked
Fundamentals for continued real estate growth remain strong

Calgary Sun Staff, May 3, 2006

Anyone living in Calgary in the mid-1980s will remember when the bottom fell out of the real estate market, hot on the heels of powerful growth in the city in the '70s, fuelled by the energy sector.

With the city once again experiencing tremendous growth, fuelled by the energy sector, some are questioning whether another real estate bubble exists.

Many people point to the National Energy Program, introduced by the Pierre Trudeau government, as the key factor in Calgary's bubble bursting last time. Although the NEP precipitated the crash, other factors were at play.

Mortgage rates soared to more than 20%, which, combined with double-digit inflation, made monthly carrying costs unmanageable, forcing thousands of people to sell their homes, some in infamous dollar deals.

Add to that a major loss of jobs and people leaving the city with housing supply exceeding demand and prices dropping 42% over the course of four years.

Richard Corriveau, regional analyst for the Canada Mortgage and Housing Corporation, says things are much different in Calgary's real estate market today.

"If we talk about a bubble, we would have to consider the prospect of prices going south and we just see indicators in resale homes, and economically, that price growth will continue, however perhaps less pronounced than the gains we've seen in the last year," says Corriveau.

Some regions of the U.S. have been identified recently as being on the edge of a bubble, which Corriveau says is due to different circumstances down south.

"Prices increases in the United States are based very much on speculation, which was rampant in many U.S. markets," he says.

"Housing markets are dictated by local conditions, notwithstanding low mortgage rates, which are national by nature. In Calgary, the supply/demand relationship is supporting our price increases."

It is possible to create a bubble with uninformed decisions, says Corriveau.

"If talk of a bubble became contagious, it could be a problem," he says. "If people generate a belief in a bubble, overall demand for housing would decline, prices would decline and a bubble becomes a self-fulfilling prophecy."

If anything, expect prices to continue rising.

"We don't anticipate price declines and the risk to waiting to buy a home is higher prices and mortgage rates.

"People waiting to buy aren't doing themselves any favours and will be kicking themselves one year from now if they wait," says Corriveau.

"Can we expect 25 percent price growth in 2007? Perhaps not, but there's nothing on the horizon to indicate it won't be a double-digit increase."

And no bursting bubble

"The key drivers of a healthy housing market are population growth, job growth and income growth, which we have in Calgary," says Corriveau.

"As long as those fundamentals are there, we won't see a bubble."

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RECORD MLS SALES

MLS sales in Calgary broke several records in April, with total residential sales at 3,389, the highest April ever, and 6% ahead of sales in April 2005, according to figures released yesterday by the Calgary Real Estate Board.

The number reflects a slight decline from March sales, which was to be expected, said Kevin Clark, CREB president.

"The April sales numbers confirm our anticipated gradual stabilization in the spring real estate market," said Clark.

Price records were also smashed -- the average combined residential price, which includes single-family, condominium and mobile homes, reached the highest ever at $341,838, a 5% increase over March's average price of $325,481 and a 37% increase over last April's average combined price of $249,195.

Clark attributes the record to an increase in sales of high-end homes.

"With 374 sales over $500,000, the average sale price has again increased to an all-time high", he said.

In April 2005, only 134 homes of all types valued at $500,000 or more were sold.

Broken out, the average prices and number of homes sold in April were: Single-family, $376,725/2,445; condominium, $256,455/922, and; mobile home $42,968/22.

By comparison, last April's figures were: Single-family $273,953/2,351; condominium $183,541/842; and mobile home $40,157/14.

Real Estate Bubble

No bubble in Canadian house prices

Jacqueline Thorpe, Financial Post
April 06, 2006

The U.S. housing market may be rolling over but virtually all Canadian cities remain undervalued and could see annual price increases of 4.2% on average through 2010, a new study from Merrill Lynch says.

The study runs contrary to current wisdom that Canada's housing market is boiling over. For example, despite the oil boom, house prices in Calgary are 16% undervalued compared with average historical valuations. Ottawa's market is 13% undervalued, Halifax 12% and Toronto 17%. Merrill found only Victoria to be overvalued.

"The two most important fundamentals from my perspective and just about any housing economist you talk to is how much can people afford -- what are people's incomes and what are the interest rates charged on the debt," said David Wolf, Canadian economist and strategist for Merrill. He based his study on a new valuation that takes into account how much potential homeowners can afford.

"Rates have gone way down and incomes have gone way up and prices, broadly speaking, have only just recently started to keep pace with that," Mr. Wolf said.

Figures from Royal LePage Real Estate Services yesterday show the Canadian market did in fact heat up in the first quarter.

The average price of a detached bungalow rose 11% to $282,059 over the first quarter of 2005, the price of a standard two-storey property rose 9.2% to $340,956, while a standard condominium rose 8.8% to $195,909.

That contrasts sharply with the United States where both existing home sales and prices have been declining in recent months.

Despite the sizzling start to the year, Mr. Wolf believes Canadian prices will continue to push ahead based on his estimate of "potential" house prices, or the price an average family could buy given standard mortgage terms and current interest rates and household incomes.

This is the reverse of the commonly used affordability index that compares what kind of income is needed to buy the median house at standard mortgage rates and terms.

Applying his measure, Mr. Wolf found most cities in Canada are posting below-potential prices as recent increases have only partially eroded the setbacks of the 1990s.

Mr. Wolf refined his measure further to take into account the fact that some cities -- for reasons of size, geography, climate, etc -- will always be pricier than others. Vancouver, for example, will always be more expensive than Thunder Bay.

And he compared current potential prices with average prices going back to 1980.

"Victoria B.C., is the only Canadian city we estimate to currently be overvalued based on this metric," Mr. Wolf said in his study. "Even with the rapid house price gains of recent quarters, both Alberta cities [Calgary and Edmonton] still come out as somewhat undervalued based on this metric."

To test his metric, Mr. Wolf did the same for several U.S. cities and found most were overvalued -- San Diego was the worst at 44% overvalued.

The analysis also revealed that Canadian markets were much more frothy than U.S. markets in 1990. For example, in 1990 Toronto was the most overvalued (54%) of all Canadian and U.S. cities.

"While cities in Ontario were most stretched in 1990, we note that every major Canadian city in our sample comes out as overvalued, to contrast with the current estimated broad undervaluation," Mr. Wolf noted.

Since 1990, actual prices in Toronto have only risen an aggregate 32% -- and are still lower in inflation-adjusted terms than they were 15 years ago -- while household incomes have risen 43% and five-year mortgages are barely half of what they were.

"Relative to both its own history, and the U.S. benchmark, then, we don't think Canada's [current] housing market looks frothy," Mr. Wolf wrote.

Given the current and historic potential valuations, Mr. Wolf calculates house prices should increase an annualized 4.2% on average through 2010.

"[But] if rates spike and incomes stagnate, we will surely not see those real 4.2% gains come to fruition," Mr. Wolf said.

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