Calgary Bubble: Time For a Mid-2014 Realty Check

bubble_blog

By Don R. Campbell

Be There or Be Square

In 2014 the Calgary real estate market is gaining a reputation as THE PLACE to be. The market seems very hot, some would say too hot (oh no, not the dreaded bubble word), while others keep making random guesses as to what’s driving it. Speculation and guessing runs rampant…

So, let’s take a breath and take a look at it from a technical point of view – and point out some danger points along the way. This strategic, non-emotional view will arm you with a much clearer view on today’s market and also where we will be in 18 months.

However, to get there we first have to begin back a few years to gain perspective…

Those Dreaded Bears

Just like we have experienced over the last 22 years of analyzing markets across Canada, back in 2011, just 3 years ago, the Calgary Housing bears were aggressively attacking anyone who believed that the Calgary market was poised for a long run-up. This included realtors who were touting that buying real estate in Calgary was a big mistake.

(I found this quite odd, given that selling real estate is how they make money and feed their family. A bit like a car salesman saying ‘Don’t buy Cars Because They Depreciate.’ – But that is for a whole other blog post.)

Simply put, their fear of the future was based on what HAD happened, their misunderstanding of how markets really work, not what was about to happen. Their analysis seemed to be based solely on housing numbers and not the most basics of economics.

These fears were shouted at the top of their lungs and were given a lot of attention, thus causing pause for many home-buyers and investors who missed the early signs of market recovery. Buying into the fear, instead of the market, cost them tens of thousands of dollars in market increases. It also began the increase in pent-up market demand which, you will see, is playing a role in today’s market conditions.

REIN: The Bear Trappers

At that same time, our research at the REIN Research Institute was focused on what was really going on and how it would play out in the Calgary Real Estate market over the next decade.

What any strategic investor knows is that the Calgary real estate market has a pattern of hot-cool-hot-drop-hot-cool repeat. This comes from the underlying economics of the city, the ebbs and flows of a resource based city coupled with the psychology and business patterns of the oil & gas industry as its base.

This market pattern should be no surprise to anyone, yet it always seems to catch the over-emotional off guard and gets them “Stuck In The Moment.” Back in 2010 and 2011, the research we were conducting on the underpinnings of the marketplace, the economics that drive the market, were pointing out some very interesting signs. These underpinnings, and many of our analysis tools, I had clearly laid out in our best-selling real estate book “The Secrets of the Canadian Real Estate Cycle.”

That is why in 2011 it was easy for us to see that the Calgary market was setting itself up for a strong run beginning in late 2012 and heating up after that. So, despite the many bears, we were recommending to our clients and potential home buyers that if they wanted to get into the market that beginning in 2011 was a great time. Those who took action between then and now had the opportunity to be in a buyer`s market and thus position themselves well for this current run up.

So What Does The Future Hold?

Why are we seeing this first half of 2014 being so strong?

Simply because the underlying economics started to come into play in 2011 and we are feeling those effects today. GDP and job growth was in recovery in 2011, which lead to stronger in-migration in 2012 and 2013. As the economics spurring this in-migration continued as did the population growth. This time not just from other provinces, but now from International Immigration. The cycle was playing out just as it should.

In fact, in one article in the Calgary Herald, we stated that it was an excellent case-study on how a market responds to economic shifts. But then the unfathomable occurred in June 2013…

The economic Black Swan of the big flood hit the city…

This flood changed the dynamics of the market. The combination of citizens needing places to stay while their homes were re-built, and the growing population of new citizens needing places to live as they continued to move to the city for jobs, hit the rental market hard.

Vacancy, already very low, dropped to unsustainable almost 0% rates. Affordable housing options, such as secondary suites, were removed by city policy from grandfathered areas that were flooded and thus tightened the rental market even further. Now that their affordable rental options were removed, the new economic migrants to the city were finding it incredibly difficult to compete for the very limited rental units available. And when they finally found one, the rents were priced substantially higher than before the flood.

The Cycle Was Accelerated

This tight rental condition, combined with continued economic strength, pushed the cycle much more quickly than would be expected. Those who would traditionally stay renting for another 2 years, started to move into home-buying due simply to availability and affordability; cheaper (and easier) to buy than to rent given the big rental increases. People began to look for the certainty and control of owning their own home.

This, of course, created more buyers than a typical cycle would produce. And, as with all things real estate, it intertwined with a dwindling supply which drove prices upwards strongly (despite the strong and long winter). The market now became a seller’s market and those who sat on the sidelines in 2011 – 2012 out of fear got caught. (current market stats)

Fast-forward to NOW…

So, here we sit in 2014, a lost opportunity for some and a fantastic opportunity for others. Spring and summer seasons have hit the market with more units coming for sale, but the pent up demand is still there. So these properties, especially those out of the flood zones, are being snapped up. Availability drives sales volume numbers more than even demand does. (A bit of a chicken and egg situation, right?)

We have well surpassed the pre-recession sales prices as well.

No Longer a “Goldilocks” Market

So, right now, Calgary is NOT the goldilocks market it was right before the flood and all indications are that the market will stay strong for the 2nd half of 2014 as the supply and demand issue sorts itself out.

Not All is Rosy in Calgary

Could there be another big “Black Swan” on the horizon?

Quite possibly. Given the inevitable Calgary market gyrations we are keeping our eye on the number of layoffs and slowing of hiring occurring in the main offices of the oil and gas industry. Yes, it is true, many companies are still hiring, but many others are quietly not bringing on new staff or letting some contracts end.

This, of course, has potential ramifications to real estate demand in the city if the trend continues to accelerate. But this won’t be felt in the real estate market until 2015.

There is a lot of very good news to celebrate in Calgary right now and the market continues to be poised for long term strength. The best way to keep your eye on what will be occurring 18 – 24 months out is to, frankly, ignore the actual housing stats (they only tell you what has already happened) and start focusing on what really drives the market – our underlying economics.

By changing your focus, you won’t get caught missing out (as many did in 2011 & 2012) and you won’t be surprised when the market slows.

Be Strategic!

Get your personal copy, at a discount, of the “Secrets of the Canadian Real Estate Cycle” book here.

Don Campbell began his investing career in 1985 with a house purchased in Mission, BC. He is Founding Partner and Senior Analyst at The Real Estate Investment Network and currently owns nearly 200 doors in BC and Alberta. A seven-time best-selling author, Don’s expertise and passion for teaching Canadians how to create wealth through real estate are far-reaching and have made an impact on the lives of thousands. You can follow his daily thoughts on Twitter – www.twitter.com/DonRCampbell and on Facebook at www.facebook.com/thereinman.

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