When it comes to the real estate market, the conjecture is flowing, the questions being posed, the concern mounting. In the majority of the country, this concern is all focused on markets perceived to be ‘over-priced’ or ‘over-heated.’ However, with a quick trip west to Alberta you find the concern is on the opposite end of the scale with the experts asking the question: “Why isn’t the market booming like it was in 2007?”
This is real life proof that the Canadian market has become incredibly regional in its performance and focus. The debate in Toronto is all about the over/under supply of condos hitting the market: in Vancouver it is all about whether the city is becoming a haven for empty condos owned by foreigners, in Saskatchewan the discussion is currently focusing on how to provide affordable housing for the growing population of workers.
While these discussions continue, in Alberta the discussion has turned just a little strange. The questions are not about whether the market is over-valued, or whether there are too many foreign buyers, or even a discussion on affordable housing. The debate that is raging is all around why the market isn’t booming like it did in 2006 and 2007 (the hottest time in Alberta’s real estate market) when the job market and population were growing at the same rates as they are today.
The Difference This Time is the Competing Forces of the Market Drivers and the Market Influencers
The big difference this time is hidden in the market influencers (rather than the market drivers). It is very true that the market drivers are all in place to support a large growth in housing purchase demand (as demonstrated in the graphic below). The GDP and job growth has driven very strong population growth which has led to low vacancy rates not experienced in this province for many years. So, on the surface that means Alberta should be experiencing another one of those unsustainable booms. Well why isn’t it? And is there one still in the works?
The answers to these questions becomes clearer when you look at the the difference between Market Drivers and Market Influencers. In the international study we completed when completing the research for our book “The Secrets of The Canadian Real Estate Cycle” we uncovered that market drivers are the underpinnings of a market based mostly in demographics and economics. These drivers move a market through its various cycles.
We also uncovered that wild cards can throw a market off of its prescribed cycle for periods of time, – these wild cards are called “Market Influencers.” Eventually, the market drivers grab back control of the real estate market and put it back on its long term cycle; however, these influencers can make the market either over-perform (as they did in 2006 and 2007) or underperform as they are right now.
It is true that all of the market drivers are in place to push the Alberta real estate market into its next boom cycle. However the cycle is being held back by a few market influencers that are in play and that is why we are not YET seeing the expected rush into the market demand. For instance, some of the influencers in play include:
1. Once bitten, twice shy = local market lack of confidence. Albertans love their real estate; however, many made their first home purchases during the previous boom and began to normalise that the market continually went up in value by double digit percentages year after year. Then, when the world financial crisis hit and pushed the markets around the world off of their cycles, Alberta was hit especially hard. This quick up, followed by quick down, has helped to temper the enthusiasm for the market for now.
2. Mortgage Qualification Rules: In 2006 and 2007 the influencer was very positive (easy to get mortgage financing). This helped to push the market beyond where the cycle analysis says it should be performing. This time around, in 2013, the mortgage qualification rules are much tighter (whether CMHC insured or not). These tighter rules are helping to temper the market demand, the opposite of what was happening during the last boom cycle.
3. Overall Consumer Confidence in Real Estate: Although most people understand that the Canadian real estate market is not national – it is regional – consumers have a difficult time cutting through the national headlines and reports that state the “Canadian Market” may be over-priced or over-valued, while others state that it is fine and no major correction is in the works. The prevalence of pundits has thrown so many mixed signals at the consumer this time they are more confused than ever. No one wants to be buying something OVER market value, nor do people want to appear as ‘the last fool’ when they buy something, so it is safe just to stay where they are and wait. This waiting has tempered the expected demand, but won’t last forever.
4. New Jobs Mean it is Difficult For Two Key Cohorts To Get a Mortgage: This time around, a large portion of the Alberta population growth includes two key cohorts who are less likely to buy a house immediately. First, Alberta is attracting more people from outside of Canada (immigrants) than it has historically. In most cases, the majority of this cohort will rent their homes initially (on average for four years) before they purchase a home. This is often due to economic necessity (and the inability to immediately qualify for a mortgage) and emotionally (seeing if they plan on staying in this new region they have chosen). The second cohort that Alberta is attracting is the Echo-boomers. Alberta’s average age has stabilized (and in some cities become younger), while in many other provinces the average age continue to get older. This is an important distinction for the housing market because of the historic performance of this age group:
a. In this age group, the propensity to own a property is not as strong. Like the growing immigration population, this can be because of economic reasons (down payment, not being able to afford to own where they want) or emotional reasons (wondering if they are staying long term, no desire for permanency).
b. Shared rental accommodations are increasing due to shift work and rental economics. This increased density has helped absorb a larger population without direct impact on housing purchase demand.
c. Ability to qualify for a mortgage – as many of this age group have moved to Alberta to begin a career, oftentimes banks will hesitate when considering whether to grant a mortgage to the younger buyer with a new job.
This is just a quick overview of the influencers that are keeping a foot on the brake of the real estate market in Alberta. The underlying economics and Market Drivers state that the market should be on fire, just like it was back in 2006 and 2007 – that is unless you begin to factor in these influencers.
Let us make sure we are analyzing today’s markets with today’s conditions and not compare them to previous boom-bust cycles. Each cycle has its own influencers that either heat up or cool down a market and this current cycle from 2006 until today is the perfect proof of that.
As long as the drivers are strong, the market is structurally strong, no matter what the influencers are doing. The concern should arise when the drivers are weak and the influencers are pushing the market upwards with no support. That is NOT what is happening in Alberta right now; in fact, the drivers remain strong despite the headlines.
Don Campbell began his investing career in 1985 with a house purchased in Mission, BC. He is the Founding Partner and Senior Analyst of The Real Estate Investment Network and currently owns over 170 doors in BC and Alberta.