Metro Calgary Home Price Forecast
HIGHLIGHTS
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This article covers:
Where are Metro Calgary prices headed?
What factors drive the price forecast?
Should investors sell?
Is this a good time to buy?
1. Where are Metro Calgary prices headed?
Home Price Overview
Homebuyers are happy that prices have dropped over the past few years. Over time, more buyers have been ‘priced into the market’.
Home sellers may take heart that recently home prices have been dropping slowly. Given the expected fallout of the Coronavirus Recession, sellers may want to push ahead and sell during the pandemic. There is no guarantee that home prices will regain the current levels any time soon, because a Coronavirus induced recession may inflict long-term economic damage.
Coronavirus is now the primary source of uncertainty for home values.
Metro Calgary Detached House Prices
Benchmark house prices in Calgary had been following the traditional seasonal real estate cycle while trending downward year-over-year. We had hoped that soon home values would begin to grow 1 to 3% annually – in line with income growth. However, the Coronavirus pandemic has dashed those hopes.
Whereas normally prices begin to rise in April due to the Spring market, this year prices dropped in April.
As always, real estate markets are local and in some Metro Calgary submarkets, house prices have held steady while in other submarkets values have dropped.
Metro Calgary Condo Apartment Prices
Metro Calgary apartment prices have been sliding downward for years.
Entering the Coronavirus Recession, there is already plenty of condo supply. If supply continues to come to market, the more expensive, higher quality, and larger (i.e., 2 and 3 bedrooms) apartments will drop in price, and this will depress the values downward for more modest condos.
At Mortgage Sandbox, we would like to see developers building more 4 and 5 bedroom condos. Not everyone can afford to put their family in a house, and for many parents work-related travel makes it difficult to stay on top of basic upkeep (i.e., mowing lawns, clearing eaves, shovelling sidewalks).
Very affordable for first-time homebuyers
Since Calgary home prices have moderated, they have become very affordable. A homebuyer household earning $99,000 (the median Metro Calgary household before-tax income) can get a $425,000 mortgage. That’s more than enough to buy a benchmark $250,000 condo and purchasing a $475,000 house is still achievable. Calgary does not need any help with housing affordability, but it could use some help boosting the economy to stabilize the home values.
What about the rest of the West?
Read the Vancouver Real Estate Forecast and Edmonton Real Estate Forecast.
2021 Metro Calgary House Price Forecast
At the beginning of 2019, Royal LePage predicted house prices in Metro Calgary would drop 2.4% in 2019 while the Calgary Real Estate Board forecast a 3.7% drop. In the end, these forecasters were too pessimistic about the house market and too optimistic about the condo apartment market, a benchmark Metro Calgary house value barely budged in 2019.
The metro area performance also hides some variation. As mentioned earlier, prices in Calgary South rose by 2.7% while prices in West Calgary dropped 3.4%. These divergent price trends are what complicate the metro area forecasts. In the end, real estate is local.
For 2020, the average of the forecasts used in our analysis predicted a modest rise of 1 to 2% in each of the next two years. CMHC provides a range and their best-case scenario would have resulted in a price rise of 2% in 2020, but their pessimistic scenario anticipated prices might drop 1%.
Our forecast adjustment for COVID-19
None of our primary forecast sources have issued revised forecasts that incorporate the impact of a Coronavirus Recession, so we have adjusted the range of projections based on a rule of thumb provided by Moody’s Analytics. Moody’s Analytics specializes in products to help banks analyze loan and mortgage risks.
In a recent interview, Brendan LaCerda, a Senior Economist with Moody’s Analytics, estimates that each 1% rise in unemployment results in a 4% drop in home prices. Using this ratio, if Canadian unemployment reaches a sustained 11% (a 5% increase), then home prices could drop by 20%.
We have taken a conservative approach and adjusted the 2020 forecasts down by 10% (a prolonged 2.5% rise in unemployment) for the optimistic scenario and down 20% for the pessimistic scenario (an extended 5% rise in unemployment).
How realistic are these unemployment forecasts? On April 9th, the Canadian Parliamentary Budget Officer (PBO) projects Canadian unemployment will reach 15% by June 2020, and that stay as high as 13% by the end of the year.
The PBO may be underestimating the levels of unemployment.
The U.S. Fed projects unemployment in the United States is likely to reach a peak of 30%.
A recent research paper by Alex Bick, “Real Time Labor Market Estimates During the 2020 Coronavirus Outbreak” estimates that U.S. unemployment has already reached 20% and 21% of those who still have their jobs report a decline in earnings.
Joseph Brusuelas, the Chief Economist at audit firm RSM believes the U.S. is almost certainly facing a 20% unemployment rate now.
For a more thorough comparison of the Coronavirus Recession to the Great Recession and the Great Depression and their impacts on property prices, check out our recent article: “Should I sell my home today?”
At Mortgage Sandbox, we provide a price range rather than attempting a single prediction because there are many risks in real estate that can impact prices. Risks are events that may or may not happen. As a result, we review a variety of forecasts from leading lenders and real estate firms, and we then present the most optimistic estimates, the most pessimistic prediction, and the average forecast. Want to learn more about real estate risk? We've written a comprehensive report that explains the level of uncertainty in the Canadian real estate market.
Our forecast inputs:
2. What factors drive the price forecast?
Mortgage Sandbox 5 Factor Framework
At the highest level, supply and demand set house prices and all other factors simply drive supply or demand. At Mortgage Sandbox, we have created a five-factor framework for gathering information and performing our market analysis. The five key factors are affordability, capital flows, government policy, supply, and popular sentiment.
In the long-run, the market is fundamentally driven by economic forces, but in the short-run, sentiment can drive prices beyond economically sustainable levels.
At the moment, real estate prices in Alberta are dropping and the market is weak. Here is why the market is vulnerable and likely to stay that way.
Affordability
Affordability is a function of:
Home Price Changes: Changes in the market value of the desired home.
Savings-Equity: How much disposable after-tax income you’ve been able to squirrel away plus any equity you have in your existing home.
Financing: Your maximum mortgage is calculated using income (i.e., how much money you can put toward mortgage payments) and interest rates (how big are the mortgage payments).
Increased affordability raises buyer purchasing capacity and puts upward pressure on prices while dropping affordability has the opposite effect.
How has affordability changed lately?
Home Price Changes
From the peak in 2015, prices have dropped 9 to 21% depending on where you’re looking and what type of home you want. Lower Calgary prices improve affordability and improved affordability should add upward pressure on prices.
Savings-Equity
Rents have risen in line with incomes (1.7%), and vacancy rates are running at a healthy 3.9%, so first-time buyers were able to save for a down payment.
On the downside, anyone who invested their future down payment in the stock market may now find out they’ll need to save for a few more years.
In the short-run, home prices will drop, and this will reduce homeowner equity. This loss of equity makes it more difficult for people in ‘starter homes’ to move up the housing ladder.
Financing
Median Calgary incomes have not changed materially, but employment levels are dropping.
A U.S. Federal Reserve economist predicts unemployment in the United States could reach over 30%. Canadian unemployment was roughly 6% at the beginning of 2020, and according to an April 21st article in Maclean’s Magazine, Canada’s unemployment rate rose to 22 percent. Apart from layoffs, many salaried employees who have not been laid-off have been asked to take pay cuts.
To mitigate the impact of job losses, the Bank of Canada has reduced rates dramatically, but mortgage qualifying interest rates have not fallen nearly as much.
Job losses from Coronavirus containment efforts are a more powerful force than low mortgage rates because without income you can not qualify for a mortgage.
Overall Affordability
The Coronavirus Recession will reduce housing affordability because many people will lose their jobs, temporarily close their businesses, or accept pay cuts.
Capital Flows
These represent short-term investment, long-term investment, and recreational demand (i.e., not occupied full-time by the owner). Here is where foreign capital, real estate flippers, and dark money come into play. It also includes short-term rentals, long-term rentals, and recreational property purchases.
Capital inflows raise demand and put upward pressure on prices while capital outflows have the opposite effect. If capital sits invested in real estate and nothing is bought or sold then it has no effect on prices.
Foreign Capital
Before the Coronavirus, the Canadian Association of Petroleum Producers predicted that capital spending would drop again for a fifth consecutive year in 2020. They felt activity would not improve without better market access via pipelines and construction of the Trans Mountain Pipeline is likely a long way from completion.
Foreign capital inflows have been a significant influence in Vancouver and Toronto and the travel bans are expected to have a high impact on those markets. This is less of a concern in Calgary because, in recent years, real estate has been less dependent on foreign capital.
Long-term Rentals
As it relates to our analysis, we expect domestic interest in long-term rental income properties will dry up so long as Coronavirus eviction bans are in place. The government has not developed an exit strategy for landlords with rent arrears when social isolation policies are lifted. How will tenants repay three to six months of rent arrears?
Rental investors will simply try to time any future property purchases for the end of Coronavirus containment period, and they will avoid properties with tenants who have outstanding rent arrears.
Short-term Rentals
In September 2019, Calgary city staff estimated there are 6,000 short-term rentals within the city limits.
The travel bans will effectively shut down short-term rentals for the next few months (Canada’s tourist high season). We expect diminished interest in buying houses and apartments to be used as short-term rentals.
House Flipping
With the uncertainty brought on by the Coronavirus, house flippers will pull out of the market until they believe that prices are near the bottom. At that time, they’ll go bargain hunting but that could be several months away.
Dark Money
Dark money is proceeds of crime or money that is transferred to Canada illegally. This includes money earned legitimately that is illegally transferred from countries with capital controls (e.g., China) and legitimate earnings moved from countries who are the subject of international sanctions (e.g., Iran, Russia, and North Korea).
In order to hide the illegal nature of the funds, it is laundered in the real estate market. Sometimes the true owner of the property is hidden by using property is bought by a Straw Buyer and other times the property is owned by a shell company.
Sometimes a real estate agent or lawyer will accept the illegal cash to help the nefarious individuals hide its true origins. In 2015, a B.C. realtor was caught with hundreds of thousands of dollars in her closet, at home.
We see no evidence of a diminished role for dark money in local real estate. A recent report says Alberta is to blame for the majority of Canada’s money laundering.
Overall Capital Flow
With the risks to short-term rentals and other investors pausing their acquisitions we believe there will be a drop in capital inflows toward residential real estate.
Government Policy
Governments are now trying to protect against a housing crash.
COVID-19 Support Measures
Mortgage Payment Deferral
A typical mortgage deferral is an agreement between the borrower and the lender to pause or suspend mortgage payments for one or two months. For the Coronavirus, they have extended this for up to 6 months.
After the agreement ends, your mortgage payments return to normal. The mortgage payment deferral does not cancel, erase, or eliminate the amount owed on your mortgage. The borrower still accrues interest that will have to be paid.
A Canadian with a $250,000 mortgage who defers their mortgage by six months adds approximately $4,000 in accrued interest to their mortgage balance.
Eviction Bans and Suspensions
The Alberta government has suspended the enforcement of evictions indefinitely and Residential Tenancy Dispute Resolution Service (RTDRS) will not issue any new eviction orders until further notice. Sheriff's offices have been asked to postpone any scheduled enforcement of eviction orders.
Short-term Rentals to Require a Business Licence
The new City of Calgary rules, effective February 1, 2020, requires short-term rental operators (Airbnb and VRBO) to have a business licence to operate legally in the city. This is simply an administrative hurdle and it doesn’t appear that these rules will impact the short-term rental industry.
Supply
Supply comes from two sources.
Existing sales: Existing home sales are sales of ‘used homes’. They are homes owned by individuals who sell them to upgrade, to move for work, or some other reason. The Calgary Real Estate Board only reports existing home sales and listings.
Pre-Sales and Construction Completions: Most new homes are sold via pre-sales before the construction has started. These are predominantly apartments and townhomes. Data on pre-sales is private and difficult to find, but construction starts (reported by the government) are a very accurate lagging indicator of pre-sale activity.
Rising supply releases the upward pressure on prices caused by demand.
Months of Supply of Existing Homes
At the beginning of 2020, sales were higher than in previous years. On March 23rd, the Alberta Real Estate Association has cancelled all open houses to comply with the pandemic containment guidelines and, as a result, the number of sales and listings are dropping.
Spring is traditionally the busy season for real estate activity; however, this year, it will be more challenging to sell homes.
Only motivated sellers will sell during a pandemic, while the majority of willing buyers will be sidelined by employment and savings concerns.
Coronavirus mortality rates (short-term impact)
We know that older Canadians are more vulnerable, and the fatality rates follow a pretty clear trend:
People aged 80 and up have an expected 14.8 percent mortality rate
8 percent of those 70 to 79 succumb to it
3.5 percent of 60 to 69 year-olds are likely to pass away
In 2020, 45% of baby boomers will be over 65 years old, and in Calgary, roughly 11% of the population is over 65 years old, but in Fort McLeod and Pincher Creek, more than 20% of residents are in their golden years.
Obesity is also a COVID-19 risk factor and 29% of Alberta residents are obese.
The Coronavirus could cause an unusually large number of homes to come to market in areas favoured by retirees. Real estate prices in these areas may be particularly vulnerable.
Coronavirus short-term rentals sold or converted (short-term impact)
Travel bans will effectively shut down short-term rentals for the next few months (Canada’s tourist high season). The drop in bookings may force many owners of apartments primarily used as short-term rentals to sell their condo or repurpose it for long-term rentals adding up to 6,000 homes to the market in the next six months.
We surveyed over 50 Canadian real estate agents, and 50% had observed short-term rentals being listed as long-term furnished apartment rentals while 25% of agents expected most short-term rentals would be sold.
Mortgage Delinquencies and Foreclosures
The most recent data indicates that more Canadians are missing their monthly payments, and job growth has been healthy. Some economists have been warning of a recession, and even without a recession, it appears more Canadians are over-extending themselves. Surprisingly, the increases in delinquencies are led by Ontario and British Columbia, and not Alberta.
According to Equifax, the credit bureau company:
“Mortgage delinquencies have also been on the rise. The 90-day-plus delinquency rate for mortgages rose to 0.18 percent, an increase of 6.7 percent from last year. Ontario (17.6%) led the increases in mortgage delinquency followed by British Columbia (15.6%) and Alberta (14.8%). The most recent rise in mortgage delinquency extends the streak to four straight quarters.”
A recent survey by MNP reported a staggering number of Canadians are stretched to their limits:
“Over 30 per cent of Canadians say they’re concerned that rising interest rates could push them close to bankruptcy, according to a nationwide survey conducted by Ipsos on behalf of MNP, one of the largest personal insolvency practices in the country.”
Job losses from Coronavirus containment will worsen this situation. Although the CMHC can help Canadians via Canadian lenders offering options to defer payments, re-amortize mortgages, add interest arrears to your mortgage balances. It will not help overextended Canadians from their credit card debt nor will it protect Canadians who chose to finance their homes with private mortgage lenders. Many Calgarians turned to private mortgage lenders to help them through recent economic tough times and those private lenders may get cold feet and ask to be repaid as the Coronavirus crisis unfolds.
Baby Boomers Downsizing?
According to a recent survey, 44 percent of Alberta Boomers who own a home plan to downsize in the retirement and 45 percent would consider a condo apartment for their next purchase. Another survey from RBC says, “Over the coming decade, we expect baby boomers to ‘release’ half a million homes they currently own—the result of the natural shrinking of their ranks, and their shift to rental forms of housing, such as seniors’ homes, for health or lifestyle reasons.”
We prefer the term '‘right-sizing’ because most boomers selling a house are buying luxury apartments with large floor plans in buildings with shared pools, saunas, gyms, and party rooms. That hardly sounds like a step down.
As baby boomers begin right-sizing and list their million-dollar homes for sale, they will add supply in what is considered the luxury market. If not enough Gen-X and millennial buyers are to buy these expensive homes, there is a risk that this may depress prices at the top of the market, which will then compress prices for townhomes and condo apartments.
In the near-term, supply is tight, but in the medium-term, there are risks of excess housing supply.
Pre-sales and Completions
New Construction
Near-record number of condos were built in 2019 and, although housing starts have dropped, the demand from Baby Boomers should continue to provide support for apartment construction. As more buildings complete in 2020 and 2021, and people move out of their rental or sell their current home, this new supply should help maintain a balanced market.
Pre-sales
Pre-sales, are purchases of brand-new homes from developers. We have no direct data for Calgary, but housing starts are a very good lagging indicator that pre-sales are continuing just as strong as prior years.
Pre-sales will trend down as showrooms close during the pandemic. When social distancing measures are lifted developers will likely try to entice buyers with price discounts, move-in allowances, and cool amenities.
Popular Sentiment
Alberta’s economic hard times, media coverage of low oil prices, delayed pipelines, and rail blockades all weigh on local buyer sentiment. There's no way of predicting popular sentiment, but as witnessed in the past two years, sentiment can shift quickly.
Nanos Canadian Confidence Index showed a noticeable drop in confidence mid-March, before a state of emergency was announced. Future index announcements will likely be worse.
3. Should Investors Sell?
From a seller’s perspective, there are more changes in the market that influence prices downward so now may be a better time to sell than in two years and the seasonal real estate cycle usually favours sellers in the first half of the year.
With Coronavirus containment efforts, open houses may be impossible. However, you can get a Realtor to help you plan small repairs and improvements to your home so that it will be ready when the real estate market thaws.
Sellers should always consult a mortgage broker early to prioritize flexible loan conditions and reduce the risk of mortgage cancellation penalties. Find out more about the benefits of a mortgage broker.
4. Is this a good time to buy?
With lower prices, homebuyers who waited have been rewarded and Coronavirus containment efforts will push prices further downward.
It is likely that prices will drop significantly in 2020 so a wait-and-see strategy is advisable. Regardless, the seasonal real estate cycle usually favours buyers in late summer.
If you are in a hurry to buy because you’ve recently expanded your household (Congratulations!), just be sure to drive a hard bargain and pay less than the recent prices for a comparable home in the area. As well, when it comes to financing, don't bite off more than you can chew.
Buying a home is a big decision, so check out Mortgage Sandbox's Canadian Homebuyer Guide so we can walk you through the end-to-end process and get you ready to buy your new home!
Here are some recent headlines you might be interested in:
In Canada’s oil capital, a real estate glut compounds the misery (BNN Bloomberg, Apr 21)
Sales, new listings fall as COVID-19 makes selling a home more difficult (CTV)
Low oil prices, social distancing add more hurdles to home sales (CTV)
Calgary housing market among the most affordable in Canada, report says (CBC)
'We're a bit stuck': CEO of Alberta bank expects province's economic struggles to continue (CBC)
Canada’s Risky Housing Market Has Traded Places With The U.S., IMF Says (Huffpost)
Assessing whether 2020 will bring a Canadian property tumble (CBC)
Should Canada ban non-residents from buying homes? (The Star)
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