Calgary in 2013 – Where Is Everyone Going To Live?

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Excerpt from CMHC Housing Outlook Conference Calgary November 2012

By Richard Cho

Supported by low mortgage rates, strong job growth, and a sharp increase in net migration, demand for new homes in the Calgary Census Metropolitan Area (CMA) has increased in 2012. In addition, the supply of existing homes and new multi-family units has also declined from their previously elevated levels. Under these conditions, total housing starts in 2012 are on pace to increase 33% to 12,400 units. Although economic growth next year will continue to support demands, we expect a slight moderation in job creation and net migration. At the same time, multi-family builders will reduce production to adjust to the higher number of multi-family units under construction and potential inventory additions. CMHC is forecasting total housing starts to decline to 4% year-over-year, reaching 11,900 units in 2013.

Single-detached home builders have been busier this year, benefitting from less competition in the resale market and lower mortgage rates. At the same time, average weekly earnings have risen and employment growth is on track for its strongest performance since 2008. Single-detached starts are forecast to finish 2012 with 5,700 units, up 12% from 2011 levels. Demand for new homes will continue to improve in 2013 as buyers and migrants take advantage of Calgary’s labour market and some existing home owners capitalize on the equity gains and move-up. In 2013, CMHC forecasts single-detached starts to increase 4% to 5,900 units.

The upward trend in Multi-family productions which gained momentum in the second half of 2011 has continued this year. By year- end, multi-family starts are forecast to reach 6,700 units. With the start of many new multi-family projects this year, the number of units under construction has also increased. Some of these units will represent additions to inventory when completed and will inhibit construction in 2013. CMHC is forecasting multi-family starts to remain above historical norms in 2013, but to moderate 10% to 6,000 units.

Demand for homes in Calgary’s existing home market has been impressive thus far in 2012. Labour market conditions in Calgary have been favourable, attracting migrants form other regions and increasing housing demand. Sales in Calgary are forecast increase 16% in 2012 to 26,000 units, the highest level since 2007. In 2013, modestly higher mortgage rates, combined with slower pace of job creation and net migration, will moderate sales growth. MLS® residential sales are anticipated to rise 2% to 26,500 units.

The average price in Calgary has been rising in 2012 as a decline in active listings has coincided with an increase in sales. The average price for the Calgary region is forecast to increase 2% from $402,851 in 2011 to $411,000 in 2012. Balanced market conditions are expected to persist for the remainder of this year and into 2013. The average price in 2013 is expected to reach $422,000, up almost 3% from a year earlier.

After declining to 1.9% last year, the apartment vacancy rate in October 2012 is forecast to decrease to 1.7%. The vacancy rate in October 2013 is forecast to remain near current levels, averaging 1.5%. With the vacancy rate in Calgary declining for the third consecutive year, incentives will disappear and average rents will move higher. The average two-bedroom rent in October is expected to reach $1,150 in 2012, up from $1,084 in 2011. The upward pressure on average rents will extend into 2013 as a result of low vacancies. CMHC is forecasting the two-bedroom rent in October 2013 to average $1,200 per month.

Full Calgary Housing Market Outlook Report

Richard Cho is a Senior Market Analyst with Canada Mortgage and Housing Corporation. He can be reached at rcho@cmhc.ca or (403) 515-2996.

 

REIN™ Insights

REIN is HOT on Calgary’s potential and in fact, named it THE top investment city in all of Canada for the period of 2013 – 2016! This ranking came as a result of extensive research into the underlying economic fundamentals driving Calgary’s economy as well as the current housing market’s response to these fundamentals.

CMHC’s outlook on the city is also positive but we believe their forecast understates the potential for growth in the coming years. The job market IS strong and is poised to lead the country in job and population growth. Immigration from other parts of Canada as well as abroad is putting a steep downward pressure on vacancy rates and a strong upward movement on rents. This pressure is not predicted to ease significantly in the coming years. The high average-weekly-earnings in the city mean more disposable income in this PST free province, which is creating a country leading consumer confidence level. This is creating further stimulation of the economy through consumer spending, which in turn brings increased employers, people, and demand for housing.

This brilliant circular phenomenon is a powerful economic trend that real estate investors can get in front of. Consider the vacancy rate of 1.7%, which might as well read “no vacancy!” This puts upwards pressure on rents. And speaking of rent, CMHC reports that that average rent for a two-bedroom unit was to increase to $1150 in October 2012 (a date that has already passed, and in fact an average rent that has already been surpassed. In 2013 they project that rents will increase to $1200, which is also understated. CMHC measures its apartment rents from purpose-built rentals which typically command less rent than privately rented units, so in reality average rents are much higher. Although CMHC’s rents are a good apples-to-apples measurement, REIN finds their conclusions quite low versus on the street prices. Rents are moving monthly so an investor must pay very close attention to the current rents for properties like they own. Take a look in local papers and online sites for rentals to find current rents.

According to CMHC, Calgary housing prices will increase by 2% in 2013. Calgary remains an affordable place to live when one considers the income levels compared to the housing prices. For example, RBC’s Affordability Index shows that 36.7% of a median pre-tax income is needed to service the average cost of mortgage payments (principal and interest), property taxes, and utilities on a detached bungalow. Compare this to any other major city in Canada and Calgary is the second most affordable place after Edmonton (Vancouver residents would have to fork out 91% of their pre-tax salary).

Further, today’s market is more affordable than the average of 40.1% (calculated from 1985 to today) due to average weekly earnings moving upwards quickly, low mortgage interest rates and the overall market performing at economic fundamental level. The current affordability percentage falls in the sweet spot for investors: houses are not so affordable that everyone can buy one, but they are not so high as to prevent cash flow for the real estate investor. Calgary Transportation Effect Report

Remember, long term cash flow is the result of a good deal negotiated in an area just like Calgary that is rich not only in employment and in-migration but also has a sustainable economy.

 

Melanie Reuter is the Director of Research for The Real Estate Investment Network™

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