This September multiple family housing starts increased by 150% over last September, raising the overall increase in new construction in the Greater Edmonton area by 40%. For the year overall starts are up by 5.7% while multiple units are up by a third. The majority of September’s new multiples were condominium apartments located in Edmonton, Spruce Grove, Strathcona County and Beaumont.
“Multi-unit builders in the CMA are poised to exceed 6,000 units for the first time since 1982,” noted Richard Goatcher, CMHC’s Senior Market Analyst for Edmonton.
Meanwhile single family home starts were down 24% from last September – the third month in a row they fell below last year’s record pace. Even with the decrease this will be the second best year on record for single family starts.
What does this mean? I had a couple of thoughts and I’m sure our readers will add theirs…
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The increase in multi-family units is at least partially due to rising prices, as multi-family units (condos) are typically more affordable.
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The slowing pace in single family starts will help alleviate the rising resale inventory
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While condos are selling very well right now, if there is a lot of speculation on these new condo units then a condo maybe tougher to sell next spring
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Being the second best year on record new home builders aren’t slowing down all that much, so fears of mass lay-offs in the construction industry are potentially overblown
The full report from CMHC is available here: http://www.cmhc-schl.gc.ca/odpub/press/2007/2007_10_09_0900_EPE.pdf
I’d suspect that these numbers should really be examined in light of the existing supply on either MLS and ComFree and relative back to the inmigration trend. With these large supply figures and the in migration trend softening I suspect this “correction” could go on longer than expected. And I’m pessimistic that we’ll see a “spring rebound”.
I also think that now as opposed to later is the time to be selling your condo, if your holding one that’s either vacant or in a negative monthly cashflow position with an existing tenant.
Just some quick thoughts.
O
I’d also be worried about the latest consumer confidence poll by Leger Marketing which indicated that consumers were “highly pessimistic about the timing for buying a house”. Apparently 900 Alberta consumers were surveyed.
http://www.canada.com/edmontonjournal/news/business/story.html?id=a1542928-3d25-4abb-ae56-37f8e346f670
That’s great news. The new apartment/condo inventory will push a lot of the “condo conversions” back into the rental market and make it a lot more competitive for landlords again.
Great for helping with the sprawl too. Commutes in Edmonton are still reasonable compared to Calgary and Vancouver.
Can someone tell me with certainty just who owns all those new condo units ? End users ? Or investors ?
I have my idea which group it is.
There is record condo inventory in both of our cities….we have something like 12 condo towers underway here in Calgary (5K of new units) that are scheduled for completion in 12 months, and as I type……people are not buying the record “EXISTING” (bolded for emphasis) condo inventory in Calgary at a rate capable of eliminating the present listings in anywhere near approaching 12+ months.
Except for the beaches…..we are just like Miami was a year or two ago.
Hi O,
Good points on the level of pessism for buying a confidence.
As an aside, overall consumer confidence hinges greatly on interest rate expectations. These reports are lagging trends. Business leaders have shifted from 84% (August) to 36% (September) expecting an increase in interest rates. With last weeks labour data showing a 33 year low of unemployment, there is no benefit to reducing the interest rates. Going forward, the greatest risk to the economy will continue to be inflation, not unemployment. IMO, the number of business leaders expecting interest rate increases will move back up to 55ish% (putting October’s overall consumer confidence back down). Also, Mark Carney, an ex-investment banker with Bear Stearns, is due to replace David Dodge at the Bank of Canada as of February 2008. Given his previous experience he may be slightly more hawkish on fighting inflation than David Dodge.
Sorry Typo: “Good points on the level of pessism for buying a house.”
Its 1992 and I’m about to buy my first property. Lots of pessism in the air then. Values were stagnant to declining. Condos were a dirty word. Everytime I looked at one with a buyer who had their father there they would trash condos saying homes are better then condos.
If I hadn’t purchased that condo I never would have been able to afford to buy my next place and so on. That was my situation and I’m glad I didn’t listen to people such as yourself.
That doesn’t mean my experience should relate to someone else’s situation.
btw…If you’re worried about inflation then owning your own home is the best protection against inflation…However I don’t think most people see inflation as the number one concern right now. It will be interesting to see Mr. Carney’s take on things.
I would be happy to buy a house or home if values were modestly increasing, stagnant or even declining if it was a smaller proportion of my discretionary spending. The fact that housing costs about 45% of pretax household income in Alberta is not a healthy level of resource allocation.
There is a great deal of other fundamental concerns about the housing market that underlie the conclusion that shows that consumer confidence is “highly pessimistic about buying a house.”
That pessimism doesn’t seem to be reflected in current asking prices!
Perhaps, due to the bid-ask spread, and the record levels of inventory the real estate market should move towards an auction system?
If the real estate market had no speculators, only homebuyers would interact with developers.
However, any new homebuyers in the real estate market who wants to buy will be forced to accept an illiquid market and market prices that have a large bid-ask spread. An auctioneering system may exploit the difference in the spread and, in competition with other people, reduce the spread, thus creating a more efficient market.
Radley,
I like speculators in the new home market! They put down deposits so that builders can build more than they would have otherwise. Its a free country and buyers and sellers should be able to handle their own property and money as they see fit.
I do think that speculators need to be able to accept and handle the risk of their investments. I’m not an expert on how this is done but if things do go south i hope they are forced to pay back every dirty penny!
Question:
for new construction do you need to have a pre-approved mortgage or can you just put down a deposit? The reason i am asking is because “I know people” that have deposits down for several condos that they would not be able to hold for any period of time when they are complete.
If you get a pre-approval for a condo that will be completed a year from now is that on some record anywhere before you take possesion?
The speculator is in effect the middle man, hedging both the developers and homebuyers risks, and hopefully making some upside profit during the good times. They are an important part of the real estate market. I would argue that the more participants there are in the market the more efficiently it should function.
However, with the real estate market being somewhat inefficient at clearing off the current level of inventory, would an auctioneering system be advantageous? I imagine daily carrying costs are approximately $1 million/day in Edmonton. There is a great deal of money to be made in auction sales: see Sotheby’s or Ritchie Brother’s gigantic profit margins as an example. IMO, there could be large potential profits to be realized for real estate agents who adopt this early.
I think people’s “asks” have really left the realm of reality to be honest. You even seem to hear it in the EREB press releases. Maybe I’m looking to much into them. But at this point I’m reading them like the Bank of Canada intereste rate release. “Listen to your Realtor… Work with Realtor to price your product accordingly… Only your Realtor knows the prices in this rapidly changing market…”.
The topper for me was I when I walked by a place on Ada Boulevard that was listed on ComFree. I monitor region 9 (on MLS) quite a bit and said that given current market perception it’d be listed at around $1 million. I was shocked to get home and see it was listed at $1.5 million. The place wasn’t even worth $1 million!
People need to give their head a shake. Housing has been around since people walked the Earth so why is now suddenly “the new way to get rich”. The “new investment you also live in”. Yes owning is typically better than renting. If you’ve got a long investment horizon and you don’t have the will power to save.
If your one of the Albertan’s who own there home or are making payments on a home and have a balanced saving regime with investments and GICs and RRSPs. Good on you for not getting caught up in the frenzy.
The speculators and investors do have a right to do what they want. But they, and the condo convertors, have bid up the housing prices to where new home buyers can’t afford something and people are coming here less and less because of affordability. And Albertan’s are cashing out and leaving to enjoy a Saskatchewan Advantage.
Thanks for helping out the Alberta economy in the long term people. Way to go on that one. Hope they all have rentors paying the full mortgage; wear and tear; property tax; and utility bill. And they better not cry the blues to the government if prices correct and they get burned.
O
sheldon johnston said:
>> btw…If you’re worried about inflation then owning your own home is the best protection against inflation…However I don’t think most people see inflation as the number one concern right now. It will be interesting to see Mr. Carney’s take on things. <<
Sheldon, the problem is about the consistency of the central bank.
If I am certain that the central bank will freeze the interest rate at the current level and let inflation run its course, I will buy a house today.
However, the central bank can change their mind any minute. They can raise the interest rate when CPI grows further.
During the typical mortgage span of 20 years, the financial climate may change multiple times. That’s what is causing such a large spread now and could be troublesome if the buyer doesn’t pick a good entry point.
Sheldon is still saying that we should buy.
Hence proved the Realtor will say it always “Buy it now else…”
We should ask ourselves WHY are there so many multi starts?
Since it’s not really a secret how much inventory there is why are the big builders not cutting back, shelving or at least delaying some multi projects? They must have SOME confidence in this market or they would not be risking millions by going ahead and building in the face of rising inventory and declining prices? Maybe they got caught and were unable to put on the brakes soon enough? Maybe they are not nearly as smart as the majority of posters here who seem to know the market is toast? These guys only make their living building multi’s and this time they made a mistake? Doubtful? Managing risk versus reward is part of what they do.
So either they messed up big time or they are correct and prices will not decline by much if any by this time next year. Many analysts still target $375,000 as the average price in Alberta for 2008? This is still 10% higher than today? Round and round and round it goes, where it stops nobody knows.
AA said
>>We should ask ourselves WHY are there so many multi starts?
Since it’s not really a secret how much inventory there is why are the big builders not cutting back, shelving or at least delaying some multi projects?<<
Two reasons:
1) No one would want to waste all that initial planning and investment just because of a price decline of 6%. But if it’s more than 10%, then some will bail.
2) You cannot assume that all the developers are doing the right thing. Some of the them are simply stupid, or just greedy. That’s why we see bankruptcies during every economic cycle.
AA the builders are still building today in the U.S. in places like pheonix miami and las vegas, cities that have already crashed, if you signed papers on a spec condo or house, you had better read them carefully, you may of ACTUALLY bought the place
I think there need to be better investment conduits to real estate development. I don’t know of any publicly traded residential construction companies (Please let me know if I am wrong). Buying and holding property is probably not the most efficient way to spurn development, yet it’s probably the easiest for the novice investor to do.
I had three other reasons to add:
3) It takes about 4 years to finance, design and build. The real estate market is not efficient enough to absorb economic jolts (wherein supply does not meet demand). This multiyear process features a small investment horizon. IMO, Alberta needs to look to at sustained housing development and longterm investment in this area. The current system of supply shortages and inventory gluts is not healthy for investors or homebuyers.
4) IMO, multifamily homes have higher profit margins due to economies of scale and therefore are a more attractive investment vehichle to developers compared to singlefamily homes.
5) There have been a number of papers published that have confirmed that Albertan incomes have not kept up with the price growth in homes. With labour relatively cheap compared to the price of a home, I would imagine that profit margins have grown significantly during this real estate growth phase. Therefore it is still economic for developers to continue building, even if prices continue to soften up.
Radley77
“Albertan incomes have not kept up with the price growth in homes”
Maybe not Joe Blow Albertan, but the building trades have, probably tripled, I know I just had a house renovated… OUCH!!!.
At this moment there is still a big time shortage of qualified trades people in this Province.
alberta building trades raises
for a unionized jourmeyman plumber
2003……0%
2004……2.4%
2005……1.8%
2006……1.8%
2007……0% still in arbitration
alberta buiding trades
our wage in 2002 times 2000 hours at $31 dollrs/hr $63,000/year
in 2007 at $33/hr $66,900/year
Talking non-union, the people who build houses.
they make far less, about $25 an hour
plumbing a house is simple, it pays nothing
Maybe in your city, but not Edmonton.
I work as a petroleum engineer. I would classify this as a high demand, highly skilled occupation similar to the trades. Last year’s annual cash compensation including bonuses increased by 10% for all engineers in Alberta. This compares against a 27% increase in SFH in Calgary during the same period. So for even a high demand occupation, salary increases did not keep up with higher house costs. I would estimate that this would be a similar situation for the trades as well.
The biggest problem developers might have going forward is developing on land with depreciating values. During positive price growth, profit margins would have been buoyed by the appreciation of land. Conversely if land prices start to go south, they are really going to have to examine all their costs.
Radley77:
Depreciating land values won’t be an issue for builders. Most buy land years in advance of actually building on it (I say this first hand after working for a developer a few years ago). So the lots most are building on today – they paid almost nothing for.
They are expensive because the costs to service them are going to the moon. And we only have the city’s planning department to thank – poor infrastructure planning (sewers, roads etc. weren’t kept up). These costs (unjustifiably?) have been passed on to the new home owner. So servicing costs along with high construction costs have driven the price of new homes to the moon and have dragged up the price of resale homes along the way.