While Joe Vancouver might not blink at paying $500,000 for a starterhome in Edmonton’s suburbs, Jane Saskatchewan just might decide to stayhome.
That quote is from a great article in the Edmonton Journal today, that is basically an "Economics 101" course in Edmonton real estate. The best part is it’s part of a 5 article series that will run in the Journal over the weekend. If any of the remaining articles are half as good as this one I’ll comment on them here and post links to them as well.
The article discusses all the factors that have lead to Edmonton’s housing prices being where they are, what is likely to happen in the short term and long term future and how this boom differs from the last boom in the early ’80s that makes every Edmontonian shudders when it’s mentioned.
This is the Cole’s notes version, you can find the complete article here.
Analysts agree that 50 per cent increases can’t last for long, but theycan’t identify a limit on housing prices. They do, however, offer someexplanations, straight from Economics 101.
- CMHC explains that prices have been driven up by strong net-migration into the city, to the point where new home builders can’t keep up with demand. Population growth is one of the "fundamental" drivers for rising houseprices. Add strong levels of job creation and low mortgage rates, and"you’ve got a pretty heady brew for strong housing demand," Richard Goatcher(of CMHC) says.
- Mortgage rates — which have been steady at around six per cent forseveral years — have fuelled demand for housing in Edmonton and aroundthe world. During the last boom in the early 1980s, buyers facedfluctuating rates that sometimes rose into the 20-per-cent range.
- Low rates lure more people into the market, but that creates increased demand, which translates into higher prices.
What will turn the tide on rising prices?
- Prices are now starting to to outstrip income growth. That should put a brake on demand because many buyers won’t beable to afford the size of mortgage that’s required to get in the door.
- Compared to other Canadian cities, Edmonton is still a relatively affordable place to buy a house. The Royal Bank of Canada, for example, calculates an "affordabilitymeasure" that looks at the percentage of median gross household incomeneeded to own a home. The measure includes costs like mortgagepayments, taxes and utility bills. Edmonton sat at 37% at the end of ‘06 (29% in ‘05) compared to 43% in Calgary, 49% in Toronto and 74% in Vancouver.
- In the last quarter of ‘06 more people moved from Alberta to Saskatchewan than the other way around.
- The slowing in-migration might seem like a solution torunaway housing costs. But it would cost this province one thing itdesperately needs: labour. The home building industry in particular needs workers and the labour shortage drives up costs – if they go too high builders will stop building because they won’t be able to make a profit.
Are housing prices going to crash?
- The analysts never seem to know about a bubble until after it bursts.
- If housing prices are being driven more by capacity constraints than by"fundamentals," a slight decrease in demand could cause the prices tofall as quickly as they rose.
- If the economy is over-heated, inflation rises and makes things more difficult (inflation is up to 5.5% in Alberta which leads the country)
Market demand that is based on speculation rather than fundamentals canlay the ground for a much feared real estate bubble, which forms whenthe rising cost of housing becomes unsustainable compared to incomegrowth.
- Despite 50-per-cent increases in Edmonton housing prices since lastyear, analysts are confident we’re not in a bubble, maintaining thatpopulation growth and first-time movers to this province are fuellingmuch of the demand.
- Many analysts predict the rise and fall of Edmonton’s housing priceswill ultimately correspond with fluctuations in the energy market.
- RBC Financial Group predictshousing costs will start tapering this year, and particularly in 2008,alongside a cooling in Alberta’s overall growth. Whereas theprovince experienced 6.8-per-cent growth in 2006, it’s expected to dipdown towards 3.6 per cent in 2007 and 3.2 per cent in 2008.
Homeowners won’t lose the equity they build up in their homes, but the wild increases are likely to end.
How does this boom differ from the last? (by Mike Percy, dean of the School of Business, University of Alberta)
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What contributed to the last housing boom in Edmonton in the early’80s? Higher energy prices, investment and large net migration to theprovince.
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What was different then? That was a period of rampantinflation — interest rates in the 20-per-cent range, inflation in thedouble-digit range.
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What led to the collapse? The NationalEnergy Program, and interest rates were so high that it was impossibleto carry and finance debt. This was the period of the walk-away, the $1sale of a house. People couldn’t afford to maintain their houses, sothey would sell it for a dollar to get it off their credit record.
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Is that kind likely to happenagain? I think it’s far less likely. The economy is inherently morestable … and what’s driving growth in Edmonton and Calgary issustained capital investment in the oilsands. … After living through’81/’82, I’m still reasonably optimistic that we’ll get the policiesright.
