The Future of Real Estate in Calgary: Questions Answered

Mike Star
Published on May 23, 2016

The Future of Real Estate in Calgary: Questions Answered

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Real Estate in Calgary is a hot topic these days……..

Calgary Real Estate Market Statistics as of April 30th 2016

Real Estate in Calgary Market Statistics as of April 30th 2016

With turbulent market conditions,economy, oil prices, and political instability it’s no wonder Real Estate in Calgary has become such an interesting conversation around the dinner table.

Recently, I was with a client.  A potential buyer, that was concerned about the future of Real Estate in Calgary.  Her main concerns being a first time buyer were two fold.  Firstly, was the market going to recover in the short to mid term? or was it going continue on the current path of highs and lows leaving her uncertain of whether or not a purchase in Real Estate was a wise decision for her nest egg (down payment) she had scraped and saved for.  Second, she was curious of my opinion of when the bottom of our market would be so that she could try to plan accordingly.

My short answer was simple.  Nobody has a crystal ball that can tell us what the future may, or may not bring.  Anyone that can lay claim to this, and state they are able to predict the future of our market with any certainty – is making an educated guess at best.

With that said, my client wanted my best guess.  This led us into a deep conversation about the market and Real Estate in Calgary, with pointed questions and answers that I was asked to elaborate on and research further (both for my interest and hers)  Throughout this process I have decided to go over each of her questions and answer each of them with my best guess even though I don’t have a crystal ball to refer to.

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Question:  Why has Real Estate in Calgary suffered over the last year and a half?  Will it recover in the short to mid term? Is this a good time for me to consider buying a home or any other Real Estate in Calgary?

Answer:

There are 2 parts to this answer.  First is a general look at why Real Estate in Calgary has softened and the second is a look at the factors that cause them to.

Home prices are generally affected by inventory levels.  Simply put, supply vs. demand.  The more homes there are for sale and the less buyers there are to buy those homes result in an over supplied market (high inventory levels).  In these situations, there are more homes for buyers to choose and many sellers will not sell their homes.  This creates an environment where sellers have no choice but to price their homes aggressively in order to attract a buyer.

As more sellers adjust their price, other sellers follow.  These sales (and the sale price) are recorded on MLS data (Realtor.ca) for other Realtors and their clients (potential buyers) to see.  As a Realtor it is very important for me to follow these trends for my clients.  Sometimes by looking at the data, you can see trends that lead to a softening market or one that is primed for recovery.

As an important first step to determining the future outlook of Real Estate in Calgary it is important to look at the inventory levels vs. the number of sales.  A recovering market will show signs of reducing or stabilizing inventory levels and increased sales

Source: The Calgary Real Estate Board (CREB) www.creb.com

Real Estate in Calgary, Listing Inventory vs. Number of Solds Source: The Calgary Real Estate Board (CREB) www.creb.com

I used the above chart (along with several others I’d be happy to share with you) to explain my thoughts on where the bottom of Real Estate in Calgary was.  I believe with the current rise in oil prices, the strong Canadian economy (not so much Alberta, yet) and the increasing confidence from buyers considering taking the plunge with Real Estate in Calgary – The bottom of the market was February.

January saw the largest decline in residential sales over all of 2015 and 2016 with consumer confidence at an all time low due to the economic outlook.  Hesitation in the market started to subside in February leading to the amount of sales climbing by 365 units.  Even though we had a large increase of sales in February, it kept prices down as sellers took time to catch onto and react to the changing market.  Since February the average residential price of Real Estate in Calgary has been steadily increasing.

Our Real Estate in Calgary (and Alberta) is very strongly tied to 4 key economic factors:

  • The price of oil
  • Employment opportunities/Economic outlook
  • Political environment in Alberta
  • Related markets (Toronto, Vancouver)

The price of oil:

Is Real Estate in Calgary really that dependent on the price of oil?

Is Real Estate in Calgary really that dependent on the price of oil?

Oil prices have been recovering as of late, from a more than a decade (13 Year) low in record fashion.  Three months ago you couldn’t talk to anyone without the topic of oil coming up and our suffering economy to boot.  At the time, Oil was at a $26/barrel low in January 2016 (and again in February 2016). Fast forward a few months and it’s nothing less than an amazing. Oil has soared over 80% higher to today’s price which is hovering around $47/barrel (US)

Price per barrel of oil in 2016 (US dollars)

Real Estate in Calgary seems to follow the price of oil very closely. Price per barrel of oil in 2016 (US dollars) Source: https://research.stlouisfed.org/fred2/graph/?g=NPX

Oil prices seem to be one of the key factors that most people in Alberta relate to when predicting what they may think the economic outlook will be.  The fact is, that over the last few months oil prices are slowly getting better and stabilizing.  The Alberta Real Estate market and more specifically Real Estate in Calgary is responding positively.

The big question is will it stay? Go even higher? Or will it begin to fall again?   These are questions I can’t begin to predict considering I specialize in Real Estate, not oil.  I do however feel comfortable/confident enough to share my thoughts on why oil may have gone up over the last few months.

There are 6 reasons in my opinion:

US production of oil and their ability to store it:

Simply put, higher oil production in the US (mainly due to shale plays) has led to an abundance of oil, far greater than the consumption.  This over supply of oil has been stored as production continued to soar.  As more and more oil is stored, storage facilities become full.  As storage facilitates come closer to (or hit) capacity levels, they increase the cost of storage due to demand.  This in turn can lead to a cut in production.  Many analysts look at storage capacity quite seriously as it is a strong indicator of future oil prices.  Barrels of oil produced today must be sold for cost to extract it and cost to store it before sale.

Softening of the US dollar:

A strong US dollar and weak Canadian dollar is good for our oil producers in Canada as they pay for infrastructure, labour, and many other associated costs in Canadian currency, yet sell in US dollars.  $47 dollar oil seems a lot more like $60 dollar oil.  Recently, the US dollar has experienced some softening. Oil is traded internationally on the US dollar, as the US dollar falls – oil price rises.

Oil companies slowing production and going into bankruptcy

So far, (as of April 2016) 59 oil companies in North America have claimed bankruptcy.  In a study conducted by Haynes and Boone Law firm 36 companies filed in 2015 and an additional 17 have in 2016.  For those companies not filing bankruptcy, many have had to face cuts in infrastructure, planning, and development projects along with company wide layoffs which all resulted in decreased production and future outlook for production.

Market volatility:

Volatility in the price of oil makes investors that typically trade in oil very nervous. In a study conducted by oil-price.net they raised the case that the oil market is experiencing unprecedented volatility due to OPEC’s current state of disarray.  With many of the countries belonging to OPEC having huge economic problems due to the low price of oil that has been led by OPEC’s mandate to continue to produce at high volume, the market has reacted with extremes.  Most notably Venezuela (member of OPEC since 1960) has had to cut back to a 2 day workweek to save on electricity cost.  This is very worrisome for OPEC.  If Venezuela’s production continues to be at risk it could lead to an end of OPEC’s mandate.

OPEC led by Saudi Arabia has become very desperate and has recently tabled talks with Russia to come to an agreement to cut production.  This did not happen as of yet but the discussion of cutting production is still on the table and will be discussed again in the coming June 2016 meeting.  A cut in production will stimulate the price of oil and result in a stronger consumer confidence in Alberta and the potential buyers of Real Estate in Calgary market.

Disruptions in the supply being able to make it to the market:

Disruptions in oil production can come from many sources including large scale disruption such as terrorism, sabotage, and natural disasters (Fort McMurray Fire is a current example, many of the pipelines throughout the region have been shut down for preventative measures and this will surely result in a loss of production reported)

Many unreported (or not highly covered) disruptions occur as well.  These are more prevalent with the low price of oil and include poor maintenance of facilities, equipment failure, reduced employment leading to lower safety standards and mishaps.  These unplanned disruptions averaged 2.5 million barrels per day loss of production.

Oil Production in the U.S.A.

The US has had an oil production boom for almost 5 years (2010-2015) with advances in fracking in the shale plays across the Country.  The US went from importing over ten million barrels per day to keep up with demand, to producing 9.3 million barrels a day on their own.  This over production of oil has started to taper with the declining oil prices (shale oil is expensive to produce and not profitable for many of the shale oil companies).  The US is now down to 8.8 million barrels a day (a loss of 113,000 barrels) The other factor is the steep depletion rates in fracked shale fields. These depletion rates are commonly 45% per year compared to 10% per year on drilled wells.  This depletion should pave the way for greater oil production in places like the Alberta oil sands.

Saudi Arabia:

Saudi Arabia’s economy is nearly 100% oil dependent.  With current oil prices they cannot sustain their current way of life (citizen’s of Saudi Arabia pay no income tax).  For Saudi Arabia to continue under it’s current economic structure it requires oil to be at $86 per barrel.  With sub $50 oil, they will be broke within 4 years unless they make dramatic changes to policy and start taxing citizens.

This is an unlikely scenario as it would create a chaotic environment for a regime that has controlled the region since the 6th century with little to no say from it’s citizens.  If taxes were to be collected from the people, the people would want say in where it is spent (human nature).  I believe this would pose a large problem for Saudi Arabia and a much easier answer for them is to find a solution to cut production along with Russia, OPEC, and any other country they can commit to raise the price of oil again.

Employment Opportunities and Economic Outlook:

Calgary (and the rest of Alberta) has historically been known for the lower than average unemployment rate, higher salaries, and a lower cost of living when compared to other major cities across Canada.  As of 2015 this has changed.  Higher taxes, Higher debt, and the downfall of one of Alberta’s largest industries (Oil) has all played a key role in the downturn of Real Estate in Calgary.

Here is a quick look at what made Real Estate in Calgary so attractive prior to the current recession:

Source: http://www.livingin-canada.com/compare-canadian-cities.html

Real Estate in Calgary is based on affordability, income, and employment

Source: http://www.livingin-canada.com/compare-canadian-cities.html

Source: http://www.livingin-canada.com/compare-canadian-cities.html

Real Estate in Calgary was booming with a strong employment rate. See Chart: Employment Rate of Canadian Cities 2013

Employment Rate of Canadian Cities 2013
Source: http://www.livingin-canada.com/compare-canadian-cities.html

 

The four largest cities in Canada include Toronto (6 million) Montreal (4 million) Vancouver (2.4 million) Calgary (1.4 million)

The average price for Real Estate in Calgary was higher than Montreal but much lower than both Toronto and Vancouver with an ultra low unemployment rate nearly 2.5% lower than the other 3 major cities which made Real Estate in Calgary quite attractive from a pure affordability standpoint .

The household income for Toronto, Montreal, and Vancouver was all very similar in the $77,000 – $79,000 with Calgary showing a whopping $106,000 per household.

Lower housing costs and larger incomes lead to a much higher expendable income. This typically goes back into the local economy.

The second chart shows us the employment rate with Alberta leading the pack.  Far higher than the other 3 cities.  This was a huge contributor to Alberta’s growth over the past decade.

This affordability is what has made Real Estate in Calgary so attractive in the past several years. Currently we are experiencing a steep decline in employment and household income. Our average home price did go down slightly in 2015 but has since started to rebound in 2016.

Real Estate in Calgary Source: CREB (Calgary Real Estate Board) http://www.creb.com/

Source: CREB (Calgary Real Estate Board) http://www.creb.com/

Average home prices of Real Estate in Calgary have climbed slightly as of April 30, 2016 showing a +0.30% gain following a loss of -2.64% in 2015.

Want more statistics? I produce easy to read graphs and charts using the Calgary Real Estate Boards monthly statistics.  Fill out the form below and get in touch, I’d be happy to discuss Real Estate in Calgary with you

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Political Environment in Alberta:

Love it or hate it, Alberta is under new leadership in the form of Premier Rachel Notley and the NDP.  Alberta, has historically been under conservative leadership and is experiencing a very different form of leadership with an extreme change after 43 years (1971-2015). The Tories are on the right side of the political spectrum and the NDP are on the left.  Needless to say this dramatic of a change after 43 years will take a longer than normal adjustment period with new policies, budgets, and a distinct divide among Alberta voters . This is true for both the citizens of Alberta and the companies/industries that operate within the province.

Chart depicting the Tories 43 year run. Source: https://en.wikipedia.org/wiki/Politics_of_Alberta

Real Estate in Calgary could be tied to political stability across Alberta. Only time under new leadership will determine the relevence

Chart depicting the Tories 43 year run. Source: https://en.wikipedia.org/wiki/Politics_of_Alberta

This uncertainty in the political environment plays into the opinion of potential buyers of Real Estate in Calgary.  Uncertainty doesn’t lead to confidence, and buyer confidence is what drives the market values for Real Estate in Calgary.  Regardless of which political party is in power, Real Estate in Calgary dependent on consumer confidence in the market.  Political stability and security is a big factor in that confidence.

Related Markets

Real Estate in Calgary is tied to both global and local factors.  Most notably are the Toronto and Vancouver markets.  Over the past 18+ months the Alberta economy and Real Estate in Calgary has suffered.  This is while both Toronto and Vancouver have been booming.  The average residential home price in both the Toronto and Vancouver market has skyrocketed!  Meanwhile Real Estate in Calgary has softened. In my experience, and opinion that spread can only go so far before Toronto and Vancouver are far too expensive and Real Estate in Calgary is extremely affordable in comparison.  The rise in Toronto and Vancouver Real Estate prices, along with the strengthening price in oil could very well lead to stronger residential home prices and other types of Real Estate in Calgary.

 

Conclusion:

It is my belief that Real Estate in Calgary is heading for a strong recovery with a slow start in the second half of 2016 and steadily increasing along with the return of jobs, industry and oil prices into 2017. As stated in the opening of this post, nobody has a crystal ball and can tell us exactly what will happen to Real Estate in Calgary in the future – the above is my opinion. I hope you enjoyed my thoughts, feel free to comment, get in touch with me, and please use the buttons below to share this post (it would really mean a lot to me)

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