What does a correction in Canadian real estate mean for Alberta’s builders?
Real-estate appears to be poised for a correction
by Alix Kemp
It’s hard to open a newspaper these days without reading about someone who’s predicting a correction, or even a crash, in Canada’s housing market. And whether they blame the new mortgage regulations implemented by Finance Minister Jim Flaherty earlier this year, the slowing global economy or the impending rise in interest rates, even the most optimistic of realtors are coming to terms with this reality. Scotiabank’s recent report on Canada’s housing market found that “pent-up demand has been effectively exhausted after a decade-long housing boom,” and predicts not only a price correction in the real estate market, but sluggish growth for the next decade.
The Myth of the Local Market
You’d never know it by looking at Alberta’s housing market, though. While prices are down by 1.4 per cent on a year-over-year basis in Vancouver as of September and sales volumes are down by 27 per cent in Toronto, the upward march for both Calgary and Edmonton has continued unbroken. Yes, the bidding wars may have slowed to mere skirmishes, but it certainly doesn’t feel like a correction – or, worse yet, a crash – is anything close to imminent. That resilience is attracting big-name developers like Brad Lamb, FRAM Building Group and Embassy Bosa to the two cities. They have traditionally stayed focused on the Toronto and Vancouver markets, but in September Embassy Bosa broke ground on the first tower of its $300-million development in Calgary’s East Village, and FRAM has dedicated another $300 million to its own condo project in the neighbourhood.
The prevailing theory among both economists outside the residential real estate industry and those who work in it is that the province’s resource-driven economy and the resulting in-migration from other provinces and other parts of the world have put a floor under prices in Alberta. Tsur Somerville, the director of the University of British Columbia’s Centre for Urban Economics and Real Estate, says Alberta’s energy sector puts it in better shape to survive what looks like a rapidly approaching storm than any other province in the country. “If there aren’t any noticeable changes in the oil market, I think Alberta is really in the best position for avoiding any type of correction in the Canadian markets right now,” he says.
It’s not just companies from the east and west that are cashing in on this strength, either. Calgary-based Matco Investments, for example, is also making a foray into the city’s residential market. Last year, the investment company launched M2i, a residential developer focused on Calgary’s inner city. Iain McCorkindale, M2i’s president, says migration into Calgary was a huge factor. “We’re expecting maybe 23,000 new migrants coming to Calgary in 2012, so the net migration is up. A lot of the people who are coming are from other metropolitan areas, and there’s the expectation for product to match [what’s available in other cities].” That opportunity is part of what’s brought other developers to the city, he says. “They were doing zero business in Calgary, and they’ve come up and they’re hanging the shingle … because eventually, when it comes to growth, this is going to be a very good market. It has a resource-based economy that could go on for 20 to 30 years depending on many other factors, and they need to be here.”
But as noted skeptic (and erstwhile investment advisor and author) Garth Turner never tires of pointing out, just about every real estate market in the world is “unique,” and there are plenty of people who argued that international immigration would insulate Vancouver and Toronto from any kind of correction. Turner also rejects the notion that real estate is a local phenomenon. Instead, he says, it’s primarily influenced by national trends like the cost of borrowing and the new mortgage restrictions introduced by the federal government. And like other Canadians, Albertans have taken advantage of low interest rates to get mortgages and buy property, and are just as vulnerable to any increase in rates. “There’s a strong case for saying Albertans are just as indebted as everyone else, and they’ve been even more delusional than other Canadians in bidding up the price of residential real estate.” Combined with the new mortgage rules, the end of 30-year mortgage amortizations, cash-back mortgages and the CMHC’s decision to not insure properties selling for more than $1 million, Turner feels Alberta will be just as affected by a cooling of the residential real estate market as any other part of the country.
Builders remain optimistic, but Derek Squirell, the executive vice-president of Jayman Homes, says they’re not married to that perspective. “If for some reason, investment in the oil patch does stop, or is greatly reduced, then we do see that there are fewer jobs, and there’s usually a slowdown in the new housing market,” he says. “If that’s the case, then we obviously have to adjust our operation for the market.” For Jayman, that means building smaller homes and more townhouses in order to bring prices in line with what consumers are able to pay, something the company has already started to do in response to the new mortgage restrictions from Ottawa.
Randy Ettinger, president of Edmonton-based custom home builder Celebration Homes, is also optimistic about the near-term prospects of the residential real estate market. Still, he says his company is also taking a few precautions, especially when it comes to land acquisitions. “That’s usually the area where you have the most risk as a builder,” he says, “so over the last 18 months we’ve divested ourselves of any surplus land just to reduce our own risk.” If things did go downhill, Ettinger says his company would just do less building, since they do most of their building to order, rather than doing a lot of spec building of homes they hope to sell later on.
Most in the industry don’t think the situation here will get ugly thanks to the province’s bustling energy sector. But, ironically, if it does, they’ll almost certainly have that link between real estate and global commodity prices to blame for it. After all, the province’s real estate market is effectively leveraged to the price of oil (and, to a lesser extent, gas), and so while strong prices do generally lead to economic growth and positive net in-migration, the reverse – that low commodity prices would kill economic growth and drive people out of the province – is also true. “To the extent that a lot of your housing demand is relatively transient [because newcomers are] there working in the oil industry but don’t want to make their home there, you become extremely sensitive to those swings,” Somerville says. Turner puts it even more bluntly. “Basing a real estate market on one of the most volatile commodities on the face of the earth isn’t exactly smart economics,” he says. “I don’t think anyone should be feeling too comfortable with that situation.”