Is Alberta Poised To Surpass Their 2007 Boom?

Excerpt from CMHC Housing Outlook Conference Calgary November 2012

By Lai Sing Louie

According to CMHC, the pace of economic growth in Alberta is moderating but will remain above the national average. Following a 5.2% gain in 2011, expect the economy to expand by 3.1 and 2.9 percent in 2012 and 2013. Global economic uncertainty and stable growth in the US, will slow the gain in Alberta’s energy exports. The value of Crown Land Sales, a leading indicator of drilling activity, is substantially lower this year and will lead to less drilling in 2013. On the positive side, oil sands development will remain a major driver of investment, supporting economic growth. The economy will also be propelled by consumer spending, which is expected to increase into 2013.

Moderating economic growth will ease employment growth next year but will keep the unemployment rate below 5%. Economic opportunity in Alberta has been a draw for migrants. Interprovincial migration is expected to show large gains through 2012 as unemployed workers move to take advantage of employment opportunities. Also supporting migration is international migration and a rise in temporary foreign workers, those from outside the country helping to address local labour needs. Overall, net migration is projected to rise from 45, 039 in 2011 to 66,500 in 2012 and remains elevated at 49,500 in 2013. Migration inflows will be lower next year but supportive of housing demand.

In Alberta, housing starts are projected to rise 26% to 32,400 units in 2012 and then moderate to 31,200 in 2013. Single detached starts are projected to rise by 15% in 2012 to 17,500 units and remain near this level in 2013. While construction has moved higher this year, the number of units accumulating in inventory has decreased from last year. In 2012, single detached builders have been able to increase production to meet demand without significant additions to inventory.

Meanwhile, multiple housing starts in Alberta are projected to reach 14,900 units in 2012, a 425 increase over 2011. In 2013, supply management will ease new construction to 13,600 units. Since the low production of 5,954 units in 2009, multi-family starts have increased in each successive year. As a result, the number of units under construction is back to the ten-year average. Inventory levels have declined over the past year but remain elevated and are at risk of rising next year. Without some moderation in new condominium construction, expect additions to inventory as constructions progresses in 2013.

In the resale market, MLS® sales in Alberta are on track to rise 12% to 60,200 units in 2012. In 2013, MLS® sales will increase less than 2% to 61,000 units. Incremental increases in mortgage rates in 2013 will increase monthly carrying costs, but this will be offset by employment and income growth as well as elevated migration. Many of Alberta’s resale markets have transitioned from buyers’ to balanced market conditions in 2012. As a result, the marginal price growth of 0.3% in 2011 is projected to increase by over 2% in 2012. In 2013, all major markets are projected to be in balanced market conditions. This will allow the average MLS price to rise from $361,700 in 2012 to $371,600 in 2013.

To read CMHC’s latest Housing Outlook for Canada and the Provinces click here: https://www03.cmhc-schl.gc.ca/catalog/productDetail.cfm?lang=en&cat=63&itm=43&fr=1355251910607

Lai Sing Louie is a Regional Economist for Canada Mortgage and Housing Corporation for the Prairie and Territories region. He can be reached at llouie@cmhc.ca or (403) 515-2991.

REIN™ Insights

REIN has always favoured an economic fundamentals approach to forecasting housing market performances. Using this more structural approach, Alberta will once again be the favoured choice over the other provinces for long term sustainable real estate market performance. Although the province is mostly known as a pure oil and gas play, the province is actually a source of four of the top resources that the world will have an increasing demand for, we call them the 4 F’s (Food, Fuel, Fertilizer and Forestry). This demand is already proven to bring country leading job growth to the province, which in turn attracts people from across the country and around the world. In fact, it has been forecast that the unemployment rate will drop below 4% in 2013 despite the large influx of people. Meaning, no matter how quickly the population grows, the provinces economy will create even more jobs that need filling. And these 2013 growth numbers do not depend on either the Northern Gateway or Keystone XL pipeline being approved. If either of those projects receive the green light, there is no telling how we will house the next wave of workers that are going to be required.

For the investor, this is great news as the majority of these new Albertans will need a place to live and due to a move to a new job or region will need to rent (rather than purchase).

Another plus for property investors in Alberta are the Landlord & Tenant laws which are considered the most balanced in the country. Average weekly earnings are high and consumer confidence is up.

What does this all lead to from a housing market perspective? First off, using this economic structural analysis approach Alberta was recently ranked as having five of the top ten Canadian cities to invest in real estate over the next five years. That is an amazing feat for a province with only about 10% of the nation’s total population. Here is a direct link to this extensive Top Cities research.

The influx of workers expected to move to Alberta over the next decade will fuel the province’s housing demand. Housing starts are projected by CMHC to rise 26% to 32,400 units in 2012 before moderating to 31,200 units in 2013. Knowing the underlying economics and the demand for multi-family housing options, REIN believes that housing construction should surpass 2012’s numbers, which were the highest level since the recession, showing Alberta’s economy is once again firing on all cylinders.

If the united States heads back into recession (a very good possibility) this will slow Alberta’s , we will see a slowdown in the province’s exports (particularly in the energy sector), which of course will slow the rate of job growth in the province and put a bit of a damper on new home construction. However, even if the province’s housing market does experience a slowdown next year, Alberta will still come out at or near the top of all Canada’s provinces when it comes to economic growth. With the prevalence of the province’s oil and gas industry in the news as of late, it is important to remember that Alberta is not a one-industry province – the performance of other sectors will continue to boost economic and job growth in 2013.

CMHC’s housing outlook projects net migration levels to remain elevated in 2013. The organization’s prediction of 49,500 people in 2013 is based on Statistics Canada forecast data, which is the most reliable data around. While this number is quite a bit lower than the record 66,500 expected to migrate to the province in 2012, migration levels are now back on par with pre-recession levels. However, provincial intra-migration inflows will most likely be lower in 2013, as other regions in the province begin to grow economically, but the population growth will still be very supportive of housing demand.

Alberta’s low unemployment rate and booming economy will continue to attract workers for years to come. According to the Government of Alberta, the province’s labour market is forecast to grow by approximately 607,000 workers in the next decade, an annual increase of 2.4%. A net increase of approximately 492,000 workers is expected to join the labour force, leading to a potential labour shortage of 114,000 workers. This crunch will further decrease employment rates and increase average wages as employers look to attract workers from across the nation and the globe. And since people that are new to a region tend to rent for a minimum of two years, we will also see a boost in demand for rental accommodation.

According to CMHC, the average price of a home in Alberta will grow by 2% in 2013. While this may seem like a large increase, Alberta remains one of the most affordable provinces to live in the whole country (only Atlantic Canada is more affordable). RBC’s Affordability Index shows that as of November 2012, only 32.7% 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. In addition, the real estate market is more affordable today than the long-term average of 35.6% (calculated from 1985 to today). Even as the market values begin to move upwards throughout the year, so will the rents which means that in 2013 real estate investor should still see decent cash flow on well selected rental properties.

The province of Alberta is still one of the best places in North America to invest. Although it is important to note that not every property will do well and additional property specific analysis is important, Alberta’s economic fundamentals are pointing to a continued Alberta Advantage for those who focus on long-term economic realities.

Melanie Reuter is the Director of Research for The Real Estate Investment Network and has been with the company for seven years. She has a Master of Arts Degree from California State University, San Bernardino and a Bachelor’s Degree from Simon Fraser University. To read more of Melanie’s insights, please go to www.reincanada.com.