We have talked about the rising listing inventory in Edmonton a fair bit on this blog in recent months but there are still a lot of people asking "Why are there so many homes for sale all of a sudden?" To start with, it’s certainly not all of a sudden, inventory has increased by 20-30% month over month since February.
Since inventory started at record lows it took a long time before the number of properties for sale started to affect pricing or length of time on market. June 2007 saw near record highs for inventory and a 2% drop in prices. Tomorrow we’ll talk about what we expect for July, so here is our explanation for the increase in inventory that took place in June:
1. Panicked Sellers. A large chunk of the inventory spike is due to people who were planning on selling in the fall, and saw the inventory creeping up in April and May and decided to move their selling plans ahead a few months so as not to miss the peak of the market. In doing so they may actually have helped create the peak!
2. New home completions. Home builders went into overdrive over the past year, and there has been an influx in new homes coming onto the market in the past few months. The new owners need to sell their existing homes (often with only 35 days notice from the builder) to take possession of their new one. In addition many homes were bought solely with the intention of selling upon completion (see point 3).
3. Speculation/Flipping. This one actually relates to both of the above reasons since investors and flippers fall into many categories including panicked sellers and investors that bought spec homes to flip. Speculators also helped decrease listing inventory (and increase prices) last year when everyone saw prices drastically rising, and now see the market has peaked and are taking their money and running. Investors also know that timing the market is very important, and April-June are the months considered by many to be the best to sell… I’m certain many were watching the market very closely and saw that prices increased in March and April and held on to their property
4. Moving out of province. Many people in Alberta have made 100′s of thousands of dollars over the past few years simply by owning a home. Many of those people are retired or close to retirement and see those hundreds of thousands of dollars as an excellent nest egg to retire with and move to their dream retirement location (the trend seems to be moving to BC). Plenty of others are moving back where they came from, and purchasing a home at a lower cost and living mortgage free, thus requiring less income to survive (a popular choice for Saskatchewanites).
5. Seasonal slow down in sales. Add all of the above to the fact that July is traditionally one of the slower months for sales, which in turn means fewer of the properties listed will sell causing inventory to creep up.
What’s to come? We’ll address this in more detail tomorrow, but in general if the inventory continues to increase at it’s current rate this market will see a major correction in pricing. If however the number of new listings slows down, and inventory remains at more normal levels, then the market should normalize and prices will again increase gradually over time.
I think that some people are reading way too much into this market situation. For a long time, houses in Metro Edmonton were underpriced. We are a major centre that attracts lots of new people here. Looking at the graph, prices will stay put in the medium term. There will be no “major” correction in prices due to high demand; what does not sell or actually sells at a reduced price are people’s unkept, junk homes. Look for a spike in sales in August due to interest rates forecasted to go up in September… This alone will confirm that there are no bubbles or price corrections. After, homes will go up with the inflation for the next 2 to 3 years. What Calgary has experienced in terms of sales, prices and trends we are seeing here since last summer.
Ray, I am a little confused why we will see home sales spike in August due to the increasing september int rates? The financial world does not operate day to day. If the BoC makes any implication that rates WILL go up, then financial institutions will raise their rates.
August will be too late, and I believe your theory is flawed and does not follow the efficient market theorem. However, I do agree that we will not see a major correction, and that we are seeing what Calgary saw last summer.
Rate hikes have been going on for months. Fixed mortgages are prices to the banks’ cost of funds, and that is closely indexed to long term bonds, not the prime rate (unless you are opting for a variable mortgage). Even if you go variable, most loan qualifications are based on some fixed rate.
To me, an increase in thew prime rate or BOC rate only impacts my consumer credit cards and lines of credit…it has little to do with my decision to borrow at a fixed rate for a mortgage. I’d be watching a completely different set of numbers for that.
Combined with the massive stock sell-off that’s been happening the last 3 days. Anyone else wondering how crazy the next few weeks might get?
Despite the great quarterly reports from many of Canada’s largest corporations and the great retail numbers, people are selling off and causing the market to drop. US recession fears lead by their housing market might create a drop on our side of the border as well.
I think that the price will go down because:
- Increase in listing, which makes pressure on sellers who are trying to sell
- BoC increased rates
- Strong CAD $ is effecting exporting goods meaning manufacturers
- Last years and beginning of this year a lot of people bought more houses than they can afford with the idea of flipping. I have some friends that they bought 2-3 houses, which they don’t really need and cannot keep up paying for them, but in the beginning their idea was to flip them, so now they have to sell them because with last year and this year prices is hard to get a cash flow positive from renting
- In last couple years the real estate hiked but we can not say the same thing for wages. In Alberta it is true that there are plenty of jobs but not everyone is working in oil to make big bucks.
My last fear (which I hope is not going to happen) is that US economy might effect ours too, and this to all calculation could be pretty true because of trades that we have with them, the biggest partner in trade. Strong CAD $ already is effecting some employers and as effect of this we had some lay offs.
Nate, U.S economy for last month posted a huge G.D.P no of annualised rate of 3.4 percent growth, which is higher than Canadian G.D.P growth, nothing is going to happen to their economy or ours for that matter.
Last month our retail sales grew at a historic high rate.
In the last 6 months Alberta had a job growth of 56K, which is a very big number.
Speculators keep talking about Sask, they actually lost 4K jobs for the first 6 mons this year.
IEA (International Energy Agency ) is predicting a shortage of oil in 5 years..If that is true, there is no end in sight for the Alberta Boom.
Some panicked investors are dumping inventory, but the builders are cutting down on production, and new lots are limited, also for the first time in a few years now new homes are priced way higher than resale inventory.
Speculators will flee the market and things will normalize to a 6 to 10 percent price increases yearly.
All speculation from the realtors nothing else
If you really believe that a normal appreciation rate is 6 to 10 percent annually, you should really load up on more Alberta real estate.
If normal appreciation rates are 6-10% a year after speculation ceases and the market is flooded with the lowest quality homes in the country and the worst environment, then sign me up for as much as I can buy, because in ten years I’ll give Bill Gates a run for his money!
We are looking at a MAJOR correction in Edmonton due to Greed and Speculation. Builders will not slow down and people will not stop selling because they are GREEDY!
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