No More Unreal Estate

“I’m on a new diet,” a friend told me after Christmas. “I’m reducing my calorie intake. Instead of five scoops of ice cream, I’m only eating four.” The comment was made tongue-in-cheek and the absurdity of it was not lost on him. Rather than losing any weight, he will only be gaining weight at a somewhat slower pace.

by Todd Hirsch

From ice-cream diets to real estate. The escalating prices in Calgary’s red-hot residential real estate market raised a lot of eyebrows in 2006. But now the question that is peppering the lunchroom chat among Calgarians is, “Has the market peaked?” More ominously, some are quietly wondering if the real estate market is headed for a downturn. Is the residential real estate market about to go on a diet and shed value? Or, like eating a little less ice cream, will it simply see its value grow at a slower rate?

The statistics are a bit troubling, for sure. After soaring upward at unprecedented rates for most of 2006, average home prices dipped in the fall and early winter for the first time in years. The Calgarians who survived the big real estate collapse of the mid-1980s have seen this before, so it is not surprising some are whispering the “c” word – crash.

To get a better sense of where Calgary’s residential housing market is going this year, we need to back up and look at what happened in 2006. Last year, the total number of housing starts, the prices for new and existing homes and the speed at which new listings were sold set new records. All kinds of anecdotes sprang up about houses selling on the Internet, sight unseen, above list price, within half an hour on the market.

It was crazy.

But several economic factors worked in tandem last year to produce that result. Calgary’s job market was on fire and unemployment fell to record lows. Not only were there lots of jobs, average wages rose over 6%, more than double the national rate. A record number of interprovincial migrants made their way to Calgary, more than even the torrid pace of new building could keep pace with. The provincial government was debt-free. Energy prices were high. Major capital projects were everywhere. Econo­mic euphoria punctuated the headlines
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Given those conditions, it is no wonder the city’s real estate market was on such a roll.

But now it is 2007, and the situation is different. Not bad, just different. Energy prices have moderated. Sixty-dollar oil is the new $20 oil; it is still historically high, but it is down from its record peak. Labour shortages and high costs are causing both employers and individuals to think twice about relocating here. Even the politica­l climate is a bit different with a new premier in Edmonton and another federal election looming.

It is in this different environment of 2007 that we are likely to see Calgary’s residential real estate market calm down and, with luck, sanity will be restored. The fact is that 2006 was not only a record-smashing year in real estate, it was in some ways a very unhealthy one for the market. Speculative buyers helped drive prices skyward. These speculators saw the market prices going up, and – as in every speculative market – they cashed in. Some who did not sell at the peak may end up taking a bath. Condos and houses that sold for above list within 30 minutes are now taking weeks, maybe even a few months, to move. Buyers are enjoying a bit more clout in negotiating prices lower, too.

But it is this rebalanced negotiation that makes for a healthy market. If sellers can name their price and be sure of a quick sale, it leads to unwise and irrational decisions on the part of the buyer (so-called panic buying). At the other extreme in the cycle, when the seller is better off walking away and defaulting on the mortgage (as many did in the 1980s), something is awry, too.
Calgary’s residential real estate market will moderate in 2007, but we are still likely to see gains in both housing starts and resale prices. The record-setting pace of 2006 will be long gone. A more balanced market will emerge.

Beware of the doom-and-gloom commentators out there. A drop of 10% in new housing starts in 2007 will prompt some dour headlines, but it would still result in one of the best years ever for housing starts in the city. If prices on the Multiple Listing Service increase by only 15% this year, the pessimists will be out in full force, pointing out that this is a 25-percentage-point drop from 2006. But it is still an increase –and a healthy one at that.

Basically, Calgary’s real estate market will be just fine in 2007. It will just be four scoops of ice cream instead of five.

Between the Lines is a column on current affairs topics that touch on business in the province. Todd Hirsch is the chief economist for the Calgary-based Canada West Foundation.

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