Is there a housing bubble in Edmonton? Yesterday we posted some charts on the blog, showing the huge increase in home values this year over last, and suggested that a 50% increase in prices in one year is an indicator that "bubble conditions" might exist. We also promised further investigation into the topic so here goes…
First, thanks to "Bearclaw" once again for your insightful comments. I’ve done a little research on what constitutes a bubble and found a great explanation on Wikipedia:
A housing bubble ischaracterized by rapid increases in the valuations of realproperty such as housing until unsustainablelevels are reached relative to incomes, price-to-rentratios, and other economic indicators of affordability. This in turn isfollowed by decreases in home prices that can result in many owners holding negative equity, a mortgage debthigher than the value of the property.
So lets compare this information to Edmonton. Here is our real estate bubble checklist:
- Rapid price increases…check.
- Prices reach unsustainable levels relative to incomes…nope
- Price to rent ratios…nope – prices have increased faster than rents, however, the vacancy rate is at an all time low and rents are increasing quickly.
- Prices are too high to be affordable…nope – see this article on how real estate is now more affordable than it was in the 80′s. Mortgages are still easy to get, and although you can’t buy the big house on the hill in Edmonton for the bargain basement prices of a few years ago, housing in all price ranges is still selling and selling quickly.
- Homeowners with negative home equity…big nope – this is what is currently facing homeowners in the US. The majority of first time buyers took out "exotic" mortgages (aka 0% down, 40 year amortizations etc.) giving them no equity in their homes, and when prices did fall a few percentage points they ended up with negative equity. These mortgages do exist in Canada, but only make up a small percentage of the mortgages being taken out these days. The other reason so many Americans have negative equity was a huge surge in re-financing, which spurred consumer spending boosting the economy further which all fell apart when housing prices slipped only a few points. Again, the picture here in Canada is much rosier.
In the big picture, you can only definitively identify a housing bubble after it happens. The above information is meant to show that we here in Edmonton are not in the same position as homeowners in the US. Yes, we’ve had huge price increases this year, but we’ve also had a phenomenal economy (the best in the G8), huge migration into the province, tons of employment available, and historically low housing prices compared to the rest of the country. I am inclined to say that we have finally caught up.
I concede that Edmonton RE does not exactly follow Wikipedia’s definition of a bubble. But i don’t buy the Edmonton is cheaper than Los Angeles or Vancouver so there is no bubble argument either.
When prices increase the rational market response is a decrease in demand. In 2006 the opposite happened: the price appreciation itself became the motivation for buyers. This includes 2nd home speculators with HELOCS and panic first time buyers with low down payments. The supply side acted rationally and builders are going gangbusters. Almost 50,000 housing starts for 2006 in Alberta! When prices level out the demand stimulus from the price chasers turn into supply and the builders will keep building.
Whats hard to do is to separate the true fundamentals which do contribute to legitimate appreciation from the speculation. This is why it is difficult to determine a bubble beforehand.
50% increase in 1 year? Well that’s really outrageous! If that will continue in the next 2 or 3 more years expect the bubble to burst sooner than expected.
Johnrey, as you may not know, the 50% increase is not going to continue for the next 2 years. That happened in the last 2 years. It is, in my opinion, very realistic that we are going to see 12-15% increases over the next 3 years. This is NOT a bubble. This is simply supply, DESPERATELY trying to catch up to demand. Unfortunately in Alberta’s case, supply is the tortoise and demand is the Hare.
There is no bubble. There is simply market efficiency.
If you look at the Alberta Oil Sands production, and understand that they recieve huge tax breaks until they begin producing, you will see that only about 30% of the current oilsands projects have begun producing. This leaves ALOT of work to be done in alberta, an ever-increasing demand for PEOPLE, and an ever stronger economy. Although some people say it is “too late” to be buying real estate this year, I will be looking to leverage some of the equity built up in my first condo to invest in some new phase 1 projects. Edmonton RE, is STILL not close to catching up to Calgary, and will continue to increase untill it gets a little closer. I do agree that these prices will level out, but saying it is a bubble would say that it is going to “burst,” and that is the exact opposite of what is happening in this fine provice!
woops.
EDIT:
Demand is the tortoise and Supply is the hare.
guess i should proofread next time
Disregard my EDIT. It is obviously late and i need sleep
Is anyone else out there tired of listing to co-workers brag about how much their house is worth?
The prices are ridiculous and no real estate sponsored site like this one is going to say anything negative that will slow down sales.
The junk that is on the market right now for 300K is laughable. It’s greed that is the motivator right now. Once buyers decide enough is enough, the supply will shore up again and once price appreciation slows, so will the mad rush to buy a home, which is feeding this crazy frenzy.
Supply and demand is only half the story. It’s also fueled by greed of gaining quick equity and fear of losing out on what others are all talking about.
That junk is closer to 400K, truely laughable. I could accept it if it was ocean front property in the Carabbian, but -20 Edmonton where everyones vehicle is the color brown. LOL
The comment “were just catching up to the rest of Canada” is also laughable. I was born in Edmonton but it wouldn’t be my first choice to live.
I honestly don’t know who’s buying these houses and condos in Edmonton. It’s not the Maritimers who make up a big portion of the labour in the oil patch. They are sending all their money back home. There is also a charter airline now from the East Coast to Alberta to take them back home for their two weeks out of the camps.
Many of the buyers are young couples who are making a combined income of 100K and taking out big mortgages, some over 35 years. Having instant equity of 50K is great, but it’s a once in a lifetime event. It’s like trying to time the slot machine for the big payout. Real estate agents are also in on much of the action, they are buying the good deals and renovating and flipping, although the cost of reno’s is so high that I’ve noticed they’re just now flipping houses that need TLC.
Anybody who paid on a home in the mid nineties had to pay off their home the old fashioned way, one year at a time.
Condo sales are being fueled by home owners who are speculating on a second property. Many are using their HELOC accounts as downpayment. I think many of them intented to sell once they were built, but with appreciation so strong, nobody wants to lose out on an extra 20K by waiting a few months to sell. I don’t blame them but I think there will be a flood of condos on the market if prices stay flat for a couple months this year.
The real estate market has become like the stock market, thanks in mart to powerful marketing campaigns by businesses and banks who profit from home ownership.
No real estate bubble has ever been predicted. House prices are flat in much of Ontario. Many people who bought about two years ago haven’t seen the gain in equity that they hoped.
I can’t complain that my house is worth $100,000 more than it was 12 months ago, but if I put in new windows and renovated, how much of that 100,000 would I have left?? I can tell you that the cost of renovations is as crazy as the cost of buying.
I guess it’s irrelevant whether your home is worth 100 g or 400 g if you have had your one house for sometime and your stuck in Edmonton because your work is there. But for someone new buying at these prices they better hope this oil party doesn’t turn into an oil slick it. Everyone has to admit that there is only one reason the price of housing is what it is and it ain’t the climate.
You know I was just thinking. I’m a baby boomer and back 25 years ago when I was buying my first condo it was the one trick pony driving prices into outer space. Then Trudeau brought in the National Energy Program and killed it overnight. Real Estate took a nose dive, foreclosures were every where. Here it is our kids buying now, things do go in cycles.
My opinion is that, our realestate market is getting to be much like the stock market, driven by speculation, and open to dishonesty and greed. I wish that home ownership could become a reality for all hard working people and that all young people had the ability to purchase houses and make them homes to raise there children. In my opinion all these speculation buyers, investers, house flippers are driving up the cost of houses and forcing young people out of the market or forcing them to take on huge debt. The bubble might come when greed has driven up the price so much that people will refuse to buy a 1400 sq ft home for $400,000 when they know that someone the year before paid $200,000 for it.
This bubble is going to burst no matter what hoopla the real estate agents pump at you and want you to think. I totally refuse to pay these ridiculous prices in minus sub degree Edmonton that has 2 months of summer. I would be hard pressed to pay 200 g’s let alone 400 g’s for a particle board 1200 sq ft 2 story house with zero lot line and no garage. It’s an absolute joke. Oil is supposedly fueling all this but the Americans are running the show and bringing in cheap labour, just talk to anyone in the patch and they tell you what’s really happening.
I agree. Buying a house in Edmonton is a poor investment right now. The real estate agents are not buying anything themselves unless it’s a quick flip. It’s crap that Edmonton is just “catching up” to the rest of the country. The truth is that investor greed, poor planning, lack of labour, uncontrolled oilsands growth, and just plain buyer exhuberance is jacking up the prices. Personally, I’d never buy a piece of crap 1000sq ft 2 storey in Millwoods for $315,000.00, but to people new to Edmonton, they’re being fed a bunch of crap by the Real Estate Agents, and as long as they can get the big mortgages, the prices will go up.
I don’t know how people can keep immigrating here with prices the way they are? I have lived here most of my life and am seriously considering relocation – probably Saskatoon – to afford housing. The sad thing is, I have a good income and good credit but I made the misatke of delaying a house purchase to go back to school (that Masters Degree aint much help now). Not being in this market, I can’t get in now. Clearly these prices increases are not sustainable, but I can’t wait indefintly to start a family (and who’s to say they will ever go back down?).
I have always loved this province and city and the thought of having to leave makes me feel sick.
Housing is just plain crazy. People have brought this on themselves. This is called inflation. We’ve been in a period of mass inflation for 10 years yet no ne seems to notice because they think they can retire off their house. The problem with this is housing costs have gotten way out of hand and are taking rental prices with them. This obviously cannot continue as everyone cannot be rich. In order for one person to profit 1 million dollars several others have to lose 100k each. This is just like stock or Casinos. For the few big winners there are many many small losers. UNfortunately its these small time earners that are buying the most house! All on credit of course.
I cannot stomach all the rhetoric anymore. Its obvious what will happen. 95% of people “investing” in homes are going to go broke. The other 5% are going to get rich of their stupidity, just like always.
This housing boom is like the tech bubble in stock market, the only difference is the length of time. Market is driven by supply and demand… and also FEAR & GREED.
My spouse and I have been looking into buying our first home but we decided to wait out a couple more years when supply catches up… Once the interest rate go up, most people who have maxed out their mortgage will have trouble paying their bills. Actually, a few ppl i know are in that category.
One guy i know bought a 40G car, a townhouse worth 200k+, a baby on the way, and the guy is barely making $18/hr.
Crazy i tell ya!
Home prices continued to rise in Canada in the first quarter of 2008 in every major market except Edmonton, according to a Housing Price Survey report released Thursday by Royal LePage Real Estate Services.
In Edmonton prices dropped for each type of housing measured in the study, with the sale price of a standard condo unit falling by 7.7 per cent to $235,000. The average bungalow fell by 4.9 per cent to $330,000, and the price of a two-storey by 3.7 per cent to $363,707.
http://www.reportonbusiness.com/servlet/story/RTGAM.20080403.wcdnhousing0403/BNStory/robNews/home
I’m a first time buyer too and I’m a blue-collar worker like most people in this city and there is no way that I’m going to pay such high prices for the type of garbage that you get in this city. Especially when prices are currently falling.
I mean, the only thing I can get for my income is a shack near the stadium that used to be $60,000 in value only 3 years ago…lol. Ridiculous.
The real-estate community is in a state of denial.
I’m a first time buyer too and I’m a blue-collar worker like most people in this city and there is no way that I’m going to pay such high prices for the type of garbage that you get in this city. Especially when prices are currently falling.
I mean, the only thing I can get for my income is a shack near the stadium that used to be $60,000 in value only 3 years ago…lol. Ridiculous.
The real-estate community is in a state of denial.