Metro Calgary Home Price Forecast - Oct 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?
Home Price Overview
Homebuyers are happy that prices haven’t changed much in the past year. Over the past three years, more buyers have been ‘priced into the market.’
Home sellers may take heart that recently, despite the pandemic, homes have been holding their value.
Given the current recession and a wave 2 of infections, sellers may want to push ahead and sell during the pandemic because there is no guarantee that home prices will maintain current values over the next two years.
Coronavirus is now the primary source of uncertainty for home values.
Metro Calgary Detached House Prices
The Calgary benchmark house price jumped ten thousand dollars in July and has held its gain. Government intervention in the market has successfully shielded the real estate market from the pandemic induced recession.
We believe politicians are hoping to guide the market toward a typical annual real estate cycle with price growth in the range of 1 to 3% annually – in line with income growth.
Typically, as we head into Fall, home price growth softens.
Our examination of the five factors driving Alberta home prices leads us to conclude it is unlikely that current house prices will be sustained through the next 12 months.
Overall, according to the CMHC, there is a low risk of a price correction in Calgary.
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 values have been trending downward over the long -run, but recently they’ve had a boost. They haven’t increased in value as much as houses because it appears that condos are falling out of favour as people seek larger living spaces where they can work-from-home.
We expect that Calgary developers will shift toward larger (i.e., 2 and 3 bedrooms) apartments to meet buyer preferences. As the supply of more generous floorplans comes to the market, it may depress the values for small floorplan condos.
At Mortgage Sandbox, we would like to see developers building more 4 and 5 bedroom condos because:
Not everyone can afford to buy a house for their family.
Many parents who work-from-home and have taken on child-minding find it challenging to stay on top of necessary house upkeep (i.e., mowing lawns, clearing eaves, shovelling sidewalks).
Many people prefer to live in higher-density neighbourhoods with all the essential amenities within walking distance.
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 $240,000 condo, and purchasing a $485,000 house is still achievable. Calgary does not need any help with housing affordability, but it could help boost the economy to stabilize the home values.
What about the rest of the West?
Read the Edmonton Home Price Forecast, Vancouver Home Price Forecast Forecast, and Okanagan Valley Home Price Forecast.
2021 Metro Calgary House Price Forecast
Peering into the future, some forecasters expect prices to continue rising while others expect prices to drop.
The highest forecast in a September Reuters poll of 16 economists was price growth of 10% in 2021, while the lowest prediction called for a 10% drop.
Moody’s Analytics, who develop mortgage risk software for Canadian banks, predicts a 10% drop in Calgary and Edmonton.
CMHC, the government housing agency, predicts a ‘peak-to-trough’ drop of between 6% and 19%.
There is no consensus among economists. Market sentiment and government stimulus have led to price acceleration and record home purchases even though most economic fundamentals have faltered.
Our advice to homebuyers embarking on the most expensive purchase of their lifetime, and sellers who want to get as much equity as possible out of their homes, is to place a little more weight on CMHC and Moody’s Analytics. They may be projecting lower values in the future, but:
CMHC sells insurance to banks that limits their losses if a mortgage goes bad.
Moody’s Analytics sells software to banks that helps them assess the risk of their mortgage portfolios.
Both organizations are unique to see market conditions across the regions and all the banks.
In the next section, we examine the five factors that drive these forecasts. They will help explain why some several forecasters are anticipating price drops.
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 many real estate risks can impact prices. Risks are events that may or may not happen. As a result, we review several 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 sentiment can drive prices beyond economically sustainable levels in the short-run.
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).
How have these changed lately?
Population Growth
Alberta’s population is almost always growing, but the rate of growth is essential for our analysis.
If population growth is the same or lower than in the past, then there is less upward pressure on prices.
At the moment, population growth is stable in Alberta. As a result of ongoing COVID-19 related travel restrictions, we may observe lower growth through to the end of 2020 and into 2021.
READ: Fewer People = Less Demand : Easing Population Growth to Weigh on Housing, TD Bank
Home Price Changes
Depending on your neighbourhood, prices have dropped 9 to 21% since 2015. Lower Calgary prices improve affordability, and improved affordability should add upward pressure on prices.
Savings-Equity
Equity
Existing homeowners have benefited from stable values while they pay down their mortgages so that today they have more home equity to use when buying a bigger home.
Savings
Over the past few years, rents rose faster than incomes, so first-time buyers struggled to come up with down payments.
The stock market has dropped because of the pandemic, so anyone who managed to save a down payment and invested it in ‘blue-chip stocks’ may now find out they’ll need to save for a few more months or years.
Financing
Mortgage Interest Rates
The Bank of Canada has reduced rates dramatically, but mortgage qualifying interest rates have not fallen nearly as much. Also, lenders have tightened their rules so that the lower rates result in interest savings, but rates haven't resulted in a massive lift in homebuying budgets.
Employment and Incomes
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’ Alberta 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). The true ‘effective’ level of unemployment is higher than the ‘official’ number.
Even after people get re-hired, they will need to be on the job for three months before they qualify for a mortgage pre-approval.
Small businesses and commission salesforce have to show two years of consistent income to be eligible 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).
Homeownership Costs
The City of Calgary raised taxes almost 9% in 2020 and is likely to raise property taxes to make up for the pandemic budget shortfall.
Property taxes are factored into your mortgage affordability calculations, so an increase in taxes lowers homebuying budgets.
Overall Core Demand
Despite lower interest rates, due to the Coronavirus' impacts, short-term core demand for homes will likely be much lower as we head into 2021.
Non-Core Demand
Non-core demand 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 to shelter your own family), it is more volatile than core demand.
Foreign Capital
Before the Coronavirus, the Canadian Association of Petroleum Producers (CAPP) 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. CAPP has delayed its 2021 forecast because of COVID-19 related uncertainty.
Restrictions on foreign travel that are part of Coronavirus containment efforts will also reduce foreign capital flowing to Alberta real estate.
We expect low foreign investment in Canadian real estate until an end to the pandemic is in sight.
Long-term Rentals
Rental investments are a significant driver of home prices.
The Alberta government restricted evictions of tenants who are unable to pay rent until mid-August. Renters were then required to pay their rent in full from September onward and pay any rent arrears accrued until the end of August.
For example, a tenant who typically paid $2,000 per month and couldn't make their April, May, June rent payments would need to pay $2,800 per month for the 10 months beginning in October to pay back their arrears.
Some advocates now fear that there will be mass evictions and homelessness. How will tenants repay three to six months of rent arrears?
On the other side of the coin, if there are mass evictions, will landlords now struggle to find new qualified tenants?
As well, most International students are now barred from entering Canada.
All of these factors have led to falling rents across Canada.
Short-term Rentals
In September 2019, Calgary city staff estimated there are 6,000 short-term rentals within the city limits.
International travel restrictions will make many short-term rentals unprofitable for the foreseeable future. Statistics show that, since the travel restrictions were put in place, international travel to Canada has dropped 98 percent.
Fewer investors will be buying real estate for short-term rentals until travel restrictions are lifted.
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 the proceeds of crime or money that are transferred to Canada illegally. Dark money includes funds earned legitimately that are transferred illegally from countries with capital controls (e.g., China) and legitimate earnings moved from nations subject to international sanctions (e.g., Iran, Russia, and North Korea).
To hide the illegal nature of funds, they are laundered in the real estate market. Sometimes, the property's true owner 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.
A report says Alberta is to blame for most of Canada’s money laundering, and we see no evidence of a diminished role for dark money in local real estate.
Overall Non-Core Demand
The net effect of all the recent changes will reduce capital inflows toward residential real estate for non-core uses, putting downward pressure on Metro Calgary home prices.
Government Policy
Governments have shielded Canadians and the housing market from the impacts of the pandemic induced recession using the CERB program, mortgage payment deferrals, and suspending tenant evictions. Most of these measures have now expired.
Mortgage and Housing Agency Tightens Mortgage Rules
From July onward, 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 be eligible 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.
These changes effectively offset any benefit that lower qualifying mortgage rates provide.
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 August, show that 18 percent of Calgary mortgage holders were still unable to make their regular mortgage payments. Mortgage deferrals expire after 6 months and that means by October, many of these deferrals will expire. Unless these borrowers have found new work, they will fall into default.
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.
Overall Government Influence
Overall, the government is now unwinding many of the programs supporting home values through the recession. Compared to three months ago, there is now much less support from the government to maintain home values.
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, 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
Spring is traditionally the busy season for real estate activity; however, 2020 was one of the slowest Springs in over a decade. A bounce-back has followed the slow Spring under lockdown, but current activity levels are not a 'new normal.'
Houses and townhomes are in a ‘sellers’ market’ while condos are a ‘balanced market.’ It’s easier to negotiate for a good deal in the condo apartment market.
Coronavirus short-term rentals sold or converted (medium-term impact)
International travel restrictions will continue to make the short-term rental business difficult through to the end of 2021. 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. In contrast, 25% of agents expected most short-term rentals would be sold.
Mortgage Delinquencies and Foreclosures
Data indicates that more Canadians are missing their monthly payments, and 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.”
Although the CMHC can help Canadians via Canadian lenders by refinancing mortgages, it will not help overextended Canadians who chose to finance their homes with private mortgage lenders.
Baby Boomers Downsizing?
According to a recent survey, 44 percent of Alberta Boomers who own a home plan to downsize in their 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 buy 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, compressing prices for townhomes and condo apartments.
In the near-term, supply is tight, but there are risks of excess housing supply in the medium-term.
Pre-sales and Completions
New Construction
A near-record number of condos were built in 2019, and completions in 2020 are not far behind that record.
As more buildings complete in 2021 and 2022, 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 an excellent lagging indicator that pre-sales are weaker than in prior years.
In 2020, housing starts have fallen behind in previous years. As the recession progresses, we expect pre-sales to remain weak; however, today's soft housing starts won’t impact supply for about 18 to 24 months. It takes that long for us to exhaust the committed construction projects that are already in the pipeline.
Popular Sentiment
There's no way of predicting popular sentiment, but sentiment can shift quickly, as witnessed in the past two years. Recently many Canadians have been carried away by post-lockdown euphoria.
Ninety-six percent of Canadian oil is exported to U.S. markets, but the United States has not managed the pandemic well. This suggests a long road to reach full economic recovery.
Canadian Consumer Confidence
The Ipsos-Reid and Nanos Canadian Confidence Index has shown a noticeable drop in confidence. “Consumer confidence among Canadians has improved significantly, buoyed by positive views on real estate.
Confidence has recovered remarkably well when compared to the 2008 Great Recession.
It would appear that sentiment is the primary driver of real estate market activity because the other four drivers are materially weaker.
Coronavirus Containment
If Alberta cannot contain the second wave, we expect localized restrictions and lockdowns that will depress sentiment.
In a nationally broadcast address, Prime Minister Trudeau has clearly stated that the second wave of Covid-19 is already happening across Canada. Chief Public Health Officer Dr. Theresa Tam has said that "Unless public health and individual protective measures are strengthened, and we work together to slow the spread of the virus, the situation is on track for a big resurgence in a number of provinces."
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.
3. Should Investors Sell?
From a seller’s perspective, more market changes 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.
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.
Planning to Sell? Check out our Complete Home Seller’s Guide.
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.
Prices will likely drop significantly in 2021, 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.
Are you planning to Buy? Check out our Complete Home Buyer’s 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:
Calgary's new home market sees growing selection (Calgary Herald, Oct 16)
Multi-family apartment sales continue to face headwinds (Calgary Herald, Oct 16)
CMHC: Mortgage Deferrals On Toronto Real Estate 12%, Vancouver 11% (Better Dwelling, Oct 14)
Archives: When Vancouver real estate prices were falling in 1982 (CBC, Aug 18)
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