“What’s Next For Calgary’s Housing Market?”
Seems like a simple question, and one that everyone seems to be ‘forecasting.’ (in this case with a key missing variable, they are actually more ‘guessing than forecasting). So let’s combine a look at some proven research, some previous Real Estate Cycle results and the latest January 2015 statistics to take a quick look at where it sits.
Tipping Point or Balanced?
Here we sit, now strongly past the magic “6-Month” mark of the start of oil’s decline. The traditional time that the market begins to reflect a combination of trepidation and F.O.M.O. We can see it reflected in the January statistics released by the Calgary Real Estate Board.
When comparing January 2014 to January 2015 market numbers we see that sales are down 39% at the same time as new listings have skyrocketed by 37%. Not the best situation if you HAVE to sell your property. Yes, I know that seems quite obvious, but history proves that many sellers don’t “get it” this early in the market shift. In fact, from the stats, and historical analysis, we can see typical market psychology in play today with selling prices (Median or average) not moving in January stats.
Source of Big Listing Jump
New listings are up substantially. At this early stage, now into month 7 of oil price drop, the typical increase in listings if comes from a few sources:
a. Homeowners who were stretched to the limit when they first bought. Many of these are fearful of being laid-off as the industry cleans-house, or they already have lost their jobs.
b. Market speculators. Those who buy property with the only profit goal coming from value increase. They have zero back-up plan to hold and carry the property through inevitable downturns. They don’t understand the real market dynamics and are under the mistaken mind-set that values always increase. These are the types of property owners that Warren Buffet speaks about in his quote “You can always tell who’s been swimming naked when the tide goes out”
c. Homeowners who don’t really have to sell their house but have become afraid of ‘losing money.’ They are attempting to ‘time-the-market’
What you’ll find is, in the majority, the above three groups have no initial propensity to lower their selling price by much to adapt to the rapidly changing market dynamics.
Buyers To The Rescue….. Don’t Count On It
This large increase in listings inevitably occurs when buyers pull back from the market. They, too, have some fear that ‘this time it is different’ which is the same mentality of many of the fearful sellers. Isn’t it interesting how psychology plays such a large role in the market at this early stage of market shift.
You have somewhat fearful sellers, not willing to drop their price by a significant amount, coupled with somewhat fearful buyers who probably wouldn’t buy even if they did. Both are looking for clear signals and signs of what to do. Thus pushing Active Listings up as previous month’s non-sales add on to the current month’s unsold new listings.
“But When Does The Bottom Fall Out On Price? (asks everyone)
Common assumptions are that average and median sale prices drop right along with the market shift. Yet that’s not what the Calgary stats are showing from January. In fact they are showing no real movement in prices.
In fact, the Calgary Real Estate Board Statistics are showing a typical pattern that occurs in the Calgary real estate cycle. So what’s next? Average and median sale prices traditionally begin to move downwards 2-3 months after this ‘perfect storm’ hits. (Please note: these two prices are just overall market measurements and should never be used to decide how your particular property is performing. In fact, if you are like most people, you have overestimated the value of your property anyway ) .
Why does it take a few extra months? First off, properties may have ‘sold’ (by being put under contract) but the closing date is a month or two following January. But a much larger factor is human psychology again.
The Tipping Point Hits Between Month 9 to 12
If there are no clear signs of economic improvement or even a hint of potential improvement around the corner, the tipping point arises. In this current cycle, if oil prices stay where they are today (or lower), the following two phases will begin will begin to occur in March/April
(Phase 1): After a few extra months of trying to sell their property, and attempting to capture top market dollar, sellers become faced with the reality of having to lower their price to sell. Those who need to, or are emotionally desperate to, sell start making moves first. Herd mentality then kicks in as competition
(Phase 2): Strategic buyers begin to slowly enter the market looking for bargains in roughly the same period of time, sometimes delayed an extra month or two given the signals the economy is giving. This combination of desperate sellers and bargain hunters will move the benchmark prices lower.
At this same period of the cycle, we witness home builders easing their foot off the gas pedal, slowing production. Especially on spec homes. This is where the strategic home builder will sit strategically sit back to see just how long this will play out, which increases the number of layoffs in the region and the ensuing headlines scare the consumers (sellers) even further. And if oil hasn’t shown some strength by the 12month mark (we are currently just passed the 6 month mark) then we will see another jump in listings, an larger increase in “Days on Market” days on market.
Bargain hunters enter the market, but are not desperate to buy. Vacancy rates will remain very tight, as those who have sold will still require place to live and thus supporting current rents.
So are we at the Tipping Point yet in the Calgary Real Estate Market? Not yet, but we can see it on the horizon. It is playing out exactly as expected. A turn around in the long term price of oil leading to consumer confidence increasing could put a halt on this part of the cycle, but that currently doesn’t seem to be in the cards.
Feel free to share this article with whomever you think may be concerned about the current state of the Alberta or Calgary real estate market. And watch this space for future updates and analysis.
I will be discussing our latest research in detail in Calgary (including oil’s long-term impact on the Alberta and Canadian housing market) on March 7th and 8th at our Annual ACRE Real Estate Conference. This event usually sells out in advance. If you are interested in tickets (or more details) visit link : ACRE 2015 Conference Details or call 1-888-824-7346
UPDATES Feb 6, 2015:
Here is a video “Quick Hit” titled “What’s Next For The Calgary Housing Market” I did with the Globe and Mail team.
For those of you who ‘understand’ the misinterpretation of “Average Sale Price”…. This dramatic demand swing AWAY from Calgary’s luxury real estate will definitely skew “Average Sale Price” numbers in coming months.. so even if market stayed somewhat healthy the sale prices might show more of a drop than actual overall market price movement. Let the the headlines begin! http://fw.to/adIRBOG