Bob Truman, First Place Realty

I think prices and sales will increase in spring 2007.  The fall period is usually the slowest time of the year for house sales, combined with the over-supply of inventory has caused prices to fall.  The economy is still strong and there are still people coming to Calgary.  As long as oil stays above $50 per BBL, Calgary will be fine.

I admit I'm a bit surprised that prices have fallen to date in November, so far below prices at the end of October.  But we'll fall into a trap if we look at real estate prices on a month over month basis.  Every year for the past 800 years, the number of new listings and the number of sales has fallen from about June to the end of December.  Then, in January, all heck breaks loose with new listings and a flurry of new sales.  I don't see why we should be surprised that 2006 is ending just like every other year.  Jan. 2 of '07, (a Tuesday), will be the beginning a new rush of activity which in turn will spur more price gains that won't stop until May or June of '07.  Calgary is far, far from seeing the top in real estate prices.  Far from it.

Bob Truman wrote:

"Although the average price has declined by $8,000 since Oct 31, the median price has actually risen by $1,000. This means that more homes are selling in the lower price ranges."

I'm not quite getting this.  A median increase would indicate that more expensive homes are selling.  If more cheaper homes were selling, we'd see the median drop.

Anyhow, it's the median prices that we should be looking at here.  The median has been rising, even as the average price drops.  All this means is that there have been few sales of exhorbitantly priced homes, as people are trying to get in before the cold snap, and the people waiting for the bubble to pop are finally taking the plunge.  If we sold a few more million dollar properties, we'd see the average price rise, and the median stay the same.  

LostDog: While on the topic, our real estate board president says the median is a better indicator than the average, yet the media always focuses on the average? Why is that?

Bob

Bob Truman Wrote:

"While on the topic, our real estate board president says the median is a better indicator than the average, yet the media always focuses on the average? Why is that?"

I've noticed that.  I would guess that the average price fluctuates more than the median, and thus makes better headlines.

I predict at the beginning of next month we're going to see "Dramatic Price Drop" in the news with almost no mention of the median.  This may cause inventory levels to stabilize as people again try to "wait it out" and people who normally would wait for Spring will try to sell when the "gettin's good".

I can see that LostDog is doing his part to keep this blog going, and I want to keep it going too.  So here goes:

First of all Bob Truman, I really do appreciate this blog.  I haven't seen many good blogs about Calgary real estate.  I've seen good ones about Edmonton and Vancouver.  Maybe I've just been looking in the wrong places.  Anyway, I like this one better already.

I do a lot of research, and put statistics onto Excel spreadsheets and then turn the data into charts.  Some of the patterns are just stunning.  But I admit, I've always focused on "residential combined average".  I probably have been doing that simply because that's what the media focuses on (as LostDog points out).

I've read what LostDog has said about the median and what it shows us.  As far as I can tell, he nailed it.  Many people consider blogs as an excellent vehicle to promote healthy discussion and debate, but so far, I just can't find fault with anything LostDog has said.  He's dead right.  And as a result of his comments, I'll definitely be looking more carefully at the median price from now on.

Back to the main topic.  I strongly feel that the media will be promoting doom and gloom from here until Christmas, and then in January, they will be printing headlines that would make you think Calgary is the centre of the universe.  My opinion is that we'll see very strong price increases for the first half of '07, starting with a bang in January.  Just like the start of a 100 metre sprint. BANG!  "And they're off".

I have heard lots of people are confident that the Calgary's housing market will still go up in 07. I hope it does, but frankly I believe the market will not go up any more in 07. I think lots of people are confident because they have seen the price has been going up for the last 10 years. Every year we thought that was the peak, but it turned out we had another peak.

But, Calgary is no longer a cheap place to live or run business any more. It's the 2nd most expensive place to live following Vancouver in Canada. The affordability ratio has dropped a lot. We're living in an oil industry city. Back in May/June the housing market was at the peak, and the oil price was close to $80 USD. Now it's around $60 USD. Calgary's inflation rate is the highest in Canada.

Economics 101: Demand vs Supply. I think the migration will drop significantly. Yes you can find a job in Calgary without any problem. But, can the new immigrants afford the high living cost now?  I bet one of your friends who didn't have an investment property before he now must have one because the equity increased $10k a month. Who cares if the rental income can cover the mortgage or not. A crappy rental property would cost at least $400k now. So for a $300k mortgage, the rental income can't even cover the interest and property tax. When the price is not going up a lot every month, lots of people would start selling their rentals causing more supply.

Lots of pro investors have been investing somewhere else ( eg. Edmonton, Grand Praire, Saskatoon, ... ). Calgary is no longer their target.

Having said that, I don't think Calgary will crash like the U.S. housing bubble burst because there's no obvious reason for a big sell-off. I think Calgary's housing market will be correct a little bit (10%) in 07. It will be interesting to see if the market will go up or down in Feb 07 :)

Denny Wong said: "I think lots of people are confident because they have seen the price has been going up for the last 10 years."

I don't think that is the reason for the confidence Denny.  Of course real estate can not increase in value forever, for the simple reason that 'it has done so in the past'.  No, the confidence is because of your very own reasoning: "Economics 101".

True the affordability index has rizen a lot.  Calgary's affordability is now at about 35%.  Vancouver's is at about 60%.  I remember when the average home in Vancouver hit $300,000, and I thought that was insane.  With an affordability index of 60%, how in heck are people affording homes in Vancouver these days?  But they are!

Back to economics 101.  When you consider the number of people who are losing jobs in the Ontario (more tied to the USA) market, I can't see how Denny is anticipating inmigration to Calgary to slow down.  I expect inmigration to Calgary to increase.  Whether the the inmigrants (and even immigrants) can afford it or not, they will come.  Having a job is better than not having a job.  I guess they will just do what has been done in the Vancouver market.  Two guys who work for MacDonalds, could afford a very nice place in Calgary.  The migration will continue.

The fact that central Canada is slowing down (and not a lot... it's no disaster yet) will just provide more impetus for people to move to Alberta, as forcast.

You're right on many counts Denny.  If prices were to begin to snowball to the downside, it could become a pretty big snowball.  I've been waiting for the snowball to occur in Vancouver for 10 years now.  Calgary's time has not come.  I anticipate price increases in Calgary in '07 to be at least 15% in '07.  And you're right again about the pro investors investing elsewhere, like Edmonton, Grande Prairie and Saskatoon.  All three are hot markets.  Personally, I've been investing in Edmonton, not because I think Calgary is about to crash, but only because I see better potential in Edmonton.

I don't see anything wrong with your logic Denny Wong.  I just think your timing is too early.  It will indeed be interesting to see if prices rise or fall in Feb. '07.  I'll bet you the finest Starbucks coffee, that they rise  :-)

I would like like to disclose that I am not a realtor, nor a professional investor.  I'm just an older guy who got real lucky and invested just in the nick of time.  I'm well educated, was broke two years ago, and am kind of a "trends and statistics" nut.

A very interesting blog so far.  Lots of well thought out ideas.

"Economics 101" of supply versus demand is certainly true, but let's emphysize what makes Calgary today's Calgary? It is the oil price. As long as the oil price stays above 40 dollars, Calgary will continue to boom.

So, the mid-term or long-term trend of Calgary's housing market depends on whether or not the oil price will fall below $40, or the cost to retrieve oil from oil sand. If anyone can get an answer for the oil price trend, the Calgary 's housing market trend is well predcited.

Another interesting stat, that could help explain the "drop":

The sum of the highest-priced home sales so far this month is $25,269,300.

The sum of the highest-priced home sales from Oct 1 to Oct 23 is $33,174,200.

People simply aren't going after the high-priced homes at the moment.  But as we can see, the median price is rising.  Excess inventory is being absorbed, and we should see some price increases - that is, if the media doesn't succeed in talking the market down based on average price.

LOL.  Again LostDog... BINGO!  Another great point.  Your analysis is pretty darned sharp.  And the logic behind it is right on the money, in my view.

Ultimately, the media has very little to do with the trend over the longer course.  The media stories might insight a few of the fence-sitters to topple and put their homes up for sale, but in the long haul, media can't influence these extreme market forces by very much.  As in any open and free market, it's nothing than the dynamic market forces that will dictate price direction.

Little Immigrant, indeed, the price of real estate in Calgary is predicated upon fairly solid oil prices.  But as long as the price for crude is above $50 a barrel, Alberta will flourish, and real estate prices throughout the province will escalate for a long time to come.  But what if the USA crashes?  I say, so what?  China's need for oil alone, and their interest in Alberta oil, and our interest in dealing with them is ten times what we've ever sold to the USA.

I don't pay as much attention to what is happening south of the border as our friends in Ontario do.  Of course, I hope the USA holds up, but with $40 trillion in debt, I'm not holding my breath.  And I still think Alberta will be fine, even in the worst case scenario.  There will be plenty of demand for Alberta oil.  OPEC can do all the shenanigans they want, but a more reliable source could never be found than Alberta, and the Chinese like that.

And if the world came to an end tomorrow due to the crash of oil prices, I'd want to live in Alberta or B.C. anyway.

After watching the market for the last 5-6 months very closely here's my observation. 3-5 months prior, a lot of people were trying to get the big buck for their house. The market flooded. The market just can't maintain a steady 6k inventory at insane prices for very long. Many of these homes aren't selling (Unless priced right) and are starting to fall off the market. I think we'll see a steady dip in inventory levels until March/April. Prices will continue to fall slightly until inventory levels drop to around 4-5k. Supply and demand. Hopefully our oil prices will remain strong and maintain a healthy market. People are starting to get very cautious and holding off on purchasing a home. Who wants to buy a house now knowing they may loose money in a few months and have negative equity. What a crappy feeling. I'm sure a lot of people are in those boots right now that bought May/June.

I agree with you Snarg. I think the real estate market will drop 10-20% in 2007 to a more realistic price range. Part of the reasons for the insane increase was due to the extremely low inventory in the beginning of the year. Every few weeks the same property could go up by $10-20k. Everybody was holding one or more properties and wait. In addition, for those who didn't have any investment property, they also jumped on the banwagon because of the great quick profit. The poor first-time buyers were desperate to buy anything they could afford. Plus, the new home builders took the advantage of this market by marking up the new home price. All these factors drove the price out of control.

Since June, the pro investors started selling their properties for profit taking. As you can see the inventory was increased rapidly from 1500 to 6000 in just a couple months. That clearly explains the true market actually has lots of supply.

Don't just look at the average or median price. If you look more specifically, you will notice the actual house price has gone down a lot. Eg. a 50' x120' R2 could easily be sold for over $500k in Killarney, Tuxedo, etc ... Now they're selling for $430-450k. A 2000 sqft 2-storey could easily be sold for $520k in Panorama. Now they're selling for $440-460k.

Calgary is the 2nd most expensive city in Canada now. Vancouver is the number one and will always be #1 because of its unique geographic reasons. Its land is limited by ocean and mountains. People who migrate to Vancouver is mostly wealthy people from Asia and Europe, whereas people who migrate to Calgary are looking for jobs. They can find a job with 15% higher salary, but the houses are 30-40% higher than their hometowns. What is the point in moving to Calgary??

Bob, what are your thoughts and opinions as to where you think the market is heading?

Think about P/E. What is Toronto's rental cost and what is Calgary's? The rent in Calgary is somewhere 300 dollars lower than that in Toronto. To match Toronto's P/E, either house price will come down or the rent will come up. Considering the daily immigrant coming in to Calgary, the rent will have to come up. And pushes the P/E even lower.

I made a mistake, with a low P/E in Calgary, to match what in Toronto, either the house price or the rent in Calgary will have to go higher.