Greg Head & Don R. Campbell, Co-Authors of
‘Secrets of the Canadian Real Estate Cycle’
Wayne Gretzky scored an incredible 1,921 points in the National Hockey League and along the way rewrote the record book with 61 records that still remain untouched. At one point, the greatest player in the history of the game was asked how he did it and his response was “I skate to where the puck is going, not where it has been”.
Wayne’s advice not only applies to hockey, it also applies directly to sophisticated property investing. I’m not the only one who uses that analogy: Warren Buffet once wrote in his annual letter to shareholders that he follows Gretzky’s advice and invests where the puck is going, not where it has been. So whether you play hockey or not, you can use this piece of advice when looking at the real estate market.
It has been proven that many investors make their decisions based on where the market (puck) is – and that is why they create average results while creating higher risk. Sophisticated investors understand it doesn’t matter where the market has been, it all has to do with where the market is going. And once you identify its destination, get there before the market does and you will do incredibly well.
When it comes to Canadian Real Estate, one does not have to look far to see where the ‘real estate puck’ has been the last few years. In fact, attend any real estate related seminar in Calgary, Toronto or Vancouver and in minutes you can get a pretty good idea of where the excitement lies. Below is the 12-month moving average of real estate values in Calgary and Toronto.
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Source: CREB, TREB
To continue the hockey analogy, clearly the ‘puck’ has been in the Toronto real estate market over the last 3 year, while Calgary has been waiting on the bench; however, is the puck about to be passed to Calgary for the next opportunity? Well, let’s look at the economic indicators to see. In fact, to provide some qualitative analysis to that statement, let’s have a look at some of the key drivers of real estate values in Calgary and Toronto.
First, let’s have a look at housing affordability from the RBC Affordability Index since 2007. The higher the affordability index, the less ‘affordable’ houses are. Historically speaking, it’s been normal to see Toronto having a higher affordability index than Calgary, but the current data shows that the gap is widening.
This makes Calgary a much more affordable city in which to purchase property. The other important factor to take away from the graph is Toronto’s Affordability Index is nearing its previous peak reached in the fourth quarter of 2007, before values began to fall in that market.
Affordability is an important key driver of real estate values, however it is only one indicator. Another important indicator for real estate values is employment and, more specifically, job growth. The graph below compares the job growth in Calgary and Toronto from January 2007.
From July 2009 to January 2011 Toronto added a significant amount of jobs which definitely helped support real estate values, however job losses became the trend throughout 2011 and continues to be the case in early 2012. Job losses makes for a great news story, but when it becomes a consistent headline like it has started to in Toronto, it has a significant impact on consumer confidence which deters potential home buyers.
Meanwhile in Calgary, the story in 2011 and early 2012 is the complete opposite. In 2011 the Province of Alberta created 100,000 full time positions, which was a record for the Province. Calgary contributed to that total to a tune of 30,000 jobs and it’s important to note that these were not your typical flipping burger type jobs, they were high paying engineering, construction, medical and manufacturing type jobs.
Source: Statistics Canada
Where there are jobs, the people will come and they will come from places where there are less jobs. That really sums up the story between Toronto and Calgary and can really been seen from the Net Migration figures released up to the 3rd Quarter of 2011. Alberta is once again on the rise, while Ontario is on a sharp decline.
Source: Government of Alberta, Government of Ontario
The previous key drivers we have evaluated all speak to the demand side of the equation for real estate. Going back to economics 101 which states that price is a function of demand and supply, it only makes sense that we consider the supply of real estate in both Toronto and Calgary. The graph below shows the total residential housing starts for both cities.
In 2011 Toronto recorded 45,006 housing starts, which represents the largest year over year increase on record dating back to 1972. This even surpassed the 38.3% increase in 1987, just before the crash in 1989 where values fell 30%. Yes, something to consider!
Once again, there is a completely different picture in Calgary where builders have remained disciplined by only recording 9,292 starts in 2011. A far cry from the 17,046 starts recorded in 2006. This is a good sign, since excess inventory left over from the boom that ended in 2007 has had time to be taken off the market before too many new projects have been started.
In summary, from evaluating some of the most important key drivers of real estate values between Calgary and Toronto it is clear to see that a shift is likely to happen sometime in 2012 or 2013 where values begin to fall or stabilize in Toronto and begin to rise in Calgary.
In Toronto we have the situation where job growth, net migration, affordability, and housing starts are all trending in the wrong direction to support further prices increases.
Meanwhile in Calgary the exact same key drivers are trending in the right direction to finally see some upward movement in values after four years of flat prices. So if you are investing in real estate and you have been asking yourself, “Where is the puck going?” it’s clear to see from evaluating the key drivers that it’s headed to Calgary and other parts of Alberta. The next question is, “Will you get there before the puck does?”
Here’s to Strategic Investing!