What’s the future of Alberta’s real estate market?
There have been numerous predictions about when and if Canada’s real estate market will crash
by Max Fawcett
For years, it seems, there’s been talk of an imminent correction – or an outright crash – in the Canadian real estate market. And yet, for all the talk and all of the moves made by the federal government to make home ownership more expensive, home prices in almost every major Canadian market continue to march upwards (much to everyone’s relief except, perhaps, former MP and noted housing bear Garth Turner). That’s been particularly true in Alberta, where home prices appreciated nearly nine per cent on a year-over-year basis in Calgary and 3.8 per cent in Edmonton in the month of August.
But are the negative predictions wrong, or just early? The Economist pointed out (again) in a recent piece that Canada’s housing market is the most overpriced in the world outside of Hong Kong. And it’s not like the macroeconomic picture going forward is particularly favourable to housing, with the bond market already telegraphing that a strengthening global economy will mean higher debt financing costs – and higher mortgage payments – in the near future. Meanwhile, Finance Minister Jim Flaherty has already scrapped zero-down mortgages, reduced the maximum amortization period on a mortgage and limited government-insured mortgages (through CMHC) to homes priced at $1 million or less. It stands to reason that if these changes don’t produce the outcome he wants – a cooling of the housing market – he will do even more in order to achieve it.
And so, we ask: Is Alberta on the verge of a real estate correction?
Alberta has a robust economy, strong job growth and positive in-migration, the macroeconomic holy trinity for those in the real estate industry. Unfortunately, none of that will matter once mortgage rates rise from the historically low levels they’ve been at for the last few years. Indeed, that reversal has already begun, with the posted five-year fixed rates at most major financial institutions rising by more than 30 per cent over the summer alone. If it continues, it could cause some real carnage in Alberta’s real estate market. For example, let’s imagine that you were one of the lucky folks who snagged a five-year fixed mortgage at 2.9 per cent earlier this year before Jim Flaherty ruined the party. Good for you – for now, anyways. But what happens if you have to refinance five years from now at, say, 6.9 per cent? You’re looking at a 50 per cent increase in your monthly payments to the bank. And if inflation takes off a bit, bond yields rise and the best you can do is 9.9 per cent? Your monthly payment doubles. Worse still, it’s not like the average Albertan family has much room on their balance sheet to accommodate those kinds of increases. According to a report that came out in August, Albertans were adding to their pile of non-mortgage debt (which already averaged $36,150) at the fastest rate in the country. Gulp.
Rates, schmates. Yes, it’s entirely possible – probable, even – that mortgage rates are on the rise. But so what? Unlike other parts of the country (ahem, Vancouver) where the ratio of median income to the average home price has blown past mere unaffordability to become downright comical, Albertans can easily afford to pay for the homes they live in. To wit: Edmonton and Calgary have the lowest readings on RBC’s Housing Affordability Measure, with the housing costs of an average bungalow eating up just 30.4 per cent and 38.7 per cent of a typical household’s pre-tax income, respectively. That’s partially a function of the province’s strong economy, but it’s also a reflection of the fact that while home prices have continued to race well past their pre-recession highs in other parts of the country, they’ve remained below those levels here in Alberta. Oh, and about that economy? It’s projected to grow by 3.6 per cent in 2014, and the longer-term future looks just as promising. That’s wealth that will flow into the pockets of Albertan homeowners, and attract people from other parts of the country to move here in search of their share. That’s good news for Albertan homeowners – and for the value of their homes.
The Results Are In
Last month in this space we asked you whether or not growing municipal debt in Alberta is a concern. | Here’s what you said: