Metro Calgary Home Price Forecast - July 2020
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 annual 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 typically prices begin to rise in the Spring market, this year prices have dropped.
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.
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 provided 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%.
A second wave containment effort?
Two key assumptions underpin the more optimistic home price forecasts:
COVID-19 control measures in Canada will be gradually relaxed — but not eliminated entirely — over the remainder of 2020. There will not be a second or third “lockdown” in response to new waves of infection.
Unemployment will not exceed 15%.
At Mortgage Sandbox, we are placing greater emphasis on the forecasts that include a ‘second wave’ of infection.
Dr. Anthony Fauci, director of the U.S. National Institute of Allergy and Infectious Diseases, believes the second wave of coronavirus infections is ‘inevitable.’
A study headed by Dr. Kristine A. Moore, medical director at the University of Minnesota Center for Infectious Disease Research and Policy, warns that the pandemic will not be over soon and that people need to prepare for possible periodic resurgences of disease. Optimistically, a vaccine will not be widely available until mid-2021 and 70% of the population would need to be infected to provide herd immunity. Unfortunately, more than 30% of the population have conditions that make them vulnerable.
Forecast adjustment for COVID-19
In a presentation to the Federal Standing Committee on Finance on May 19th, CMHC’s CEO revealed that the agency now expects average Canadian home prices to fall between 9% and 18%.
In a March 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, a prolonged 2.5% rise in Alberta unemployment to 8.5% would result in a 10% price drop and a 5% rise in Alberta unemployment to 11% would lead to a 20% fall in values.
The ‘official’ unemployment figures unemployed people who are not looking for work (e.g., people who work in industries that have not fully reopened like tourism or hospitality). “True unemployment is likely much higher.
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 forces drive the price forecast?
Mortgage Sandbox 5 Forces 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 core demand, non-core demand, 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.
Below we will summarize how the five factors result in the current Calgary forecast.
Core Demand
Core demand is a function of:
Population Growth: The pace at which people are moving to an area. An average of roughly 2.5 people live in one household.
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).
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
With rents dropping, 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 need to save for a few more months, or years.
In the recent past, home prices have dropped, and that has reduced homeowner equity. This loss of home equity makes it more difficult for people in ‘starter homes’ to move up the housing ladder.
Financing
Median incomes have not changed materially, but employment levels are dropping. To mitigate the impact, the Bank of Canada has reduced rates dramatically, but mortgage qualifying interest rates have not fallen nearly as much.
Before the Coronavirus, the Bank of Canada believed one of the most critical risks to Canada’s financial system was a severe nationwide recession. We now know that a recession is upon us.
Incomes in Alberta are higher than in other provinces, and that should help home price inflation. Unfortunately, unemployment in Alberta has doubled with the Coronavirus Recession, and job losses will have knocked a lot of people out of the housing market. An MNP survey released June 22nd says, half of Albertans’ report that their work situation has been affected by the pandemic.
Even though home buyers stayed on the sidelines March through May, in June they jumped back into the market with both feet. In the coming months, we will learn if the jump in June purchases is the beginning of a new trend or represents 3-months of backed-up demand piled into one month. Or even panicked buyers trying to complete a purchase before new mortgage rules come into effect.
Even after people get re-hired, they will need to be on the job for three months before they will qualify for a mortgage pre-approval. As well, small businesses and commission salesforce have to show 2 years of consistent income to qualify for a mortgage. Unless banks change their lending policies, 2020 will drag down their mortgage qualifying income until mid-2023 (when they file their 2022 taxes).
Overall Core Demand
Despite lower interest rates, due to the impacts of the Coronavirus, short-term core demand for homes will be much lower than it was in 2019.
Non-Core Demand
This represents short-term investment, long-term investment, and recreational demand (i.e., homes 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.
Since non-core demand is ‘optional’ (i.e., not used for to shelter your own family), it is more volatile than core demand.
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.
As well, recent reports of rents falling across Canada will discourage new rental investment until rental rates stabilize.
Short-term Rentals
In September 2019, Calgary city staff estimated there are 6,000 short-term rentals within the city limits. Calgary’s short-term rentals pale in comparison to the 19,000 AirBnBs in Montreal’s and the 24,000 in Toronto.
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 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 Non-Core Demand
The net effect of all the recent changes will reduce inflows of capital toward residential real estate for non-core uses, and this will put downward pressure on Calgary home prices.
Government Policy
Governments are now trying to protect against a housing crash.
Mortgage and Housing Agency Tightens Mortgage Rules
Effective July 1st, CMHC has made changes to their mortgage rules that disqualify roughly 10 percent of potential homebuyers with Fair-Poor credit. The remaining buyers who qualify for a mortgage will qualify for 10 to 8 percent less money.
The purpose of the change, is to protect taxpayers from having to cover the costs of bad loans.
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.
IMPORTANT: Statistics in May, show that 26 percent of Alberta mortgage holders applied for mortgage deferrals. Mortgage deferrals expire after 6 months and that means by October many of these deferrals will have expired. Unless these borrowers have found new work they will fall into default.
Eviction Bans and Suspensions
The Alberta government has restricted evictions tenants who are unable to pay rent until August 14, 2020, landlords are required to negotiate a payment plan with their tenant to cover any unpaid rent.
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. Spring is traditionally the busy season for real estate activity; however, this year was one of the slowest Springs in over a decade.
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.
So far in 2020 housing starts indicate that pre-sales have remained strong, however as the recession progresses, we expect pre-sales will trend downward. When social distancing measures are lifted developers will likely try to entice buyers with price discounts, move-in allowances, and cool amenities.
Popular Sentiment
The economy is reopening, and it’s time to break out the champagne! We need to celebrate the small victories because there is a long road ahead. 96 percent of Canadian oil is exported to U.S. markets, and the United States has not been managing the pandemic well.
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.
If cases in Alberta begin to rise again, then we can expect sentiment to worsen. In the short-term, we expect buyers will hold back while many sellers will move forward.
The Nanos Canadian Confidence Index has shown a noticeable drop in confidence. “Consumer confidence among Canadians remains net negative but continues to be on the rise.’ It is still well below the low that was reached during the 2008 Financial Crisis.
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 annual 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 annual 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:
Half (55%) of Albertans’ Work Situation Affected by Pandemic (MNP, Jun 22)
Home price declines will likely depend on unemployment rate: Former CMHC chair (Bloomberg, Jun 8)
Five-year fixed mortgage rate in Canada falls to 1.99% for first time (Financial Post, Jun 8)
CMHC draws fire for tightening mortgage rules (Bloomberg, Jun 4)
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