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A Tale of Two Tales: Is Alberta headed for a real estate downturn?

Some real estate forecasters say Alberta’s housing market will face a moderate downturn in the short term. Others say it could be much worse

May 19, 2015

by Jesse Snyder

About 67 of the 120 units in M2i’s SoBow development have sold, and the company is reevaluating how quickly it wants to build the next phases
Rendering courtesy M2i

The row of new six-storey condominiums in Calgary’s Inglewood neighbourhood reflects the latest desires of young, inner-city home buyers. Floor plans are built for small families or single owners, with simply designed bathroom fixtures and open-concept layouts. Nearby is an expansive green space with winding jogging trails. Trendy restaurants and retail shops dot the neighbourhood and public transit routes easily connect residents to the city’s downtown.

And yet, consumer demand for the condos is in question. The buildings’ developer, M2i Development, completed its second phase of construction in late-2014. So far, about 67 of its 120 units have sold. But due largely to a glut of oil on the international market, and the resulting fall in activity in Alberta’s oil and gas sector, buyers are pulling back. “What we’ve been seeing is consumers are a lot more cautious about making a buying decision,” says Iain McCorkindale, the president of M2i.

The company is planning another four of the six phases of construction, each its own separate building, that would bring the total to over 600 units in as little as eight years.

But since late 2014, the company has been re-evaluating the pace of those ambitions. McCorkindale hasn’t made a final decision on his next step, saying he will wait until mid-2015 to determine the extent of a low oil price’s effect on Calgary’s housing market. Elsewhere, it is likely developers will follow suit, with some possibly pushing back development plans. “I think there will be projects that were perhaps intended to proceed in 2015 and I think those decisions will either be pushed out to very late this year or even next year,” he says. “I just can’t see developers and their lenders moving forward unless they get really, really strong presales.”

Calgary’s real estate market tends to react faster to economic downturns than Edmonton’s, but over time forecasters believe Alberta’s housing market as a whole is set for a prolonged slump in activity. Altus Group, a Toronto-based consultancy, forecasts housing starts in Alberta to fall sharply compared to the rest of Canada in its 2015 housing forecast report. Single-family housing starts for single-detached, semi-detached and row houses in Edmonton are forecast to fall from 10,700 in 2014 to 8,100 in 2016, according to the report; Calgary housing starts in the same category are expected to fall from 10,400 in 2014 to 8,900 in 2016. Unlike the economic recession of 2008-2009, this downturn will be acutely felt in Alberta: every other major Canadian market, with the exception of Winnipeg, is forecast to see housing starts rise.

Source: Altus Group Economic Consulting

Forecasters are in agreement that things aren’t exactly looking rosy in Alberta’s real estate market. But there is a wide discrepancy over just how deep Alberta’s housing correction will cut. As is the case in all industries, the moment uncertainty looms, doomsayers tend to find a more attentive audience. Some forecasts, though they are by far the minority, and crafted by the same people who have been calling a bottom on housing prices for years, believe housing prices in Alberta are unsustainable, particularly due to a dependency on sales in the $1 million-plus range. Others argue Alberta’s woes are simply a matter of reduced demand due to falling revenues, and that activity is sure to pick back up. So which has the truer vision?

Matthew Boukall, the director of residential research at Altus, expects the housing market to slow in coming years, but not to drastically low levels. “No one at this point is expecting a 1980s, 10-year weak economic cycle,” he says. In Calgary specifically, he says, a municipal policy that restricts new development in specific suburbs will tighten supply enough to put upward pressure on prices. Across the province, he sees communities facing a gradual slowdown as international oil markets languish, including Alberta’s two main cities. “In Calgary the head offices tend to react very quickly to downturns,” he says. “The impact will be felt a little bit later in Edmonton.”

In its 2015 Housing Market Outlook, the Canadian Mortgage and Housing Corporation (CMHC) predicted that Alberta would see average home prices rise two per cent in 2015 to $407,000 and $415,000 in 2016. It expects Multiple Listing Service (MLS) sales volumes to grow a modest 0.1 per cent over that same period.

But for Ross Kay, a real estate consultant based out of Toronto, that report would serve a more useful purpose if it were crumpled up and used as fire starter. Kay is one voice in a small chorus of doomsayers forecasting a major correction in Alberta’s housing market. Formerly a Realtor, Kay has since moved into the consultancy business, and has been an outspoken critic of the industry’s standards for assessing housing market trends.

For example, Kay says, average selling prices don’t include listed homes that haven’t been sold, which can artificially inflate average prices. “They’re using the average sale price as what the average value of the average Canadian home is,” he says. A more accurate measure, he argues, is to take the average listing price, which he says provides a much more bearish outlook on the state of the market.

On February 24, 69 per cent of all houses listed in Calgary were listed below the average selling price. And that number could grow as more residents begin putting their homes up for sale: new listings in Calgary for February were up nine per cent compared to a year earlier. In January, they were 42 per cent higher than the year prior.

Average selling prices are therefore being kept higher by third- and fourth-time buyers, the argument goes, particularly those purchasing homes in the $600,000 -plus range. Meanwhile, first-time buyers are delaying home purchases or outright avoiding the real estate market. For developers and buyers, that question is ultimately at the heart of the real estate market’s fortunes: are there enough young buyers to stabilize demand? According to Kay, there are not. The market signaled a reverse in July and then began a correction in December 2014, he says, and will begin to appear in average selling price data by the end of the year.

Others aren’t so sure. Boukall says the first-time buyer market is fairly robust, but is simply choosing different products from a decade ago. “The entry-level side of the market is still very healthy and strong,” he says. “It’s just that they’re buying different products than they did in the past; your first time home buyer may not be buying detached suburban homes.” From 2006 to 2014, single-family housing starts for detached suburban houses dropped, from 10,482 to 6,494. In that same period, single-family starts for semi-detached, townhouse and condos tripled.

That’s welcome news for developers like M2i, who are putting off investment decisions in the short term. Until then, all eyes will be on the price of oil, which is bound to cause a lag in the market. The question is by how much. “When you take $23 billion out of the oil sands up north in terms of investment capital,” McCorkindale says, “then it’s logical that there are not going to be as many opportunities.”


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