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September 07, 2006

Edmonton's "Housing Bubble"

Housingbubble Every few months for the past 6 years someone in the media has screamed the word "housing bubble." Mass fear and panic spreads as countless media outfits jump on the bandwagon and spread the word. And then the stats come out, prices haven't dropped, sales haven't slumped and everyone forgets it ever happened. If I had the time I'd grab all the headlines from the last few years and publish them here...

It happened again last week... TD Bank published a report called the Housing Bubble Watch. Shortly after articles started appearing in newspapers across the country, with various takes on the information, but the long and the short of it was Alberta's bubble is about to burst. We even posted two articles on this blog TD Warns of Potential Housing Bubble in Western Canada, and Western Canada Housing Bubble an Exaggeration. When you read the actual report from TD you see that the opinion of TD is that if the huge price increases we've seen in Calgary and Edmonton continue, we are in trouble. It also states that affordability in Calgary is better than Toronto and Montreal, and affordability in Edmonton is extremely good - far more affordable than Calgary. Unfortunately that type of information doesn't make for very interesting news, so if you remove a few sentences from the study it can easily be turned into this latest article that appears in today's Edmonton Sun "Housing Bubble Watch."

My thoughts are this:

  1. Housing prices will not continue to increase at their current rates, in fact the market already shows signs of cooling.
  2. Supply (the number of listings) will increase, relieving some of the pressure on the market and therefore slowing price increases. And in fact the number of listings were up almost 20% in August over July.
  3. A correction is likely in our future. A correction is much different from a bubble and can mean anything from a slow down in sales, and increase in inventory, a decrease in demand...it does not necessarily mean prices will drop but more likely means the rate at which prices increase will decrease (hope that makes sense).

Here is the article from today's Sun. I've made some comments throughout the article in italics, I look forward to any comments we receive from readers :)

Housing Bubble Watch
By NEIL WAUGH

It’s official, Edmonton’s percolating residential real estate market is now under a “bubble watch.”

And the heads-up about “warning lights flashing” came even before Edmonton Real Estate Board president Madeline Sarafinchan released her record-riddled August sales stats earlier this week, or her competition, upstart ComFree franchisee Travis Holowach, put out similar happy results yesterday.

All subject to conjecture, of course, after the Alberta Real Estate Association filed an official complaint on behalf of the province’s 11 real estate boards with the Alberta government’s consumer affairs branch claiming the commission-free outfit is in violation of the fair trading act, and allegedly is “grossly misleading” the public.

It’s a beef that Holowach puts down as proof that ComFree’s “growing presence” in the Edmonton real estate market is having a “strong impact on our competition.”

The red flag was raised even before Bank of Canada governor Dave Dodge did what most money market watchers expected him to do yesterday, and left the key overnight rate well enough alone at 4 1/4%. But not without a warning about factors which could change things fundamentally.

And Dodge talked specifically about “momentum in household spending and housing prices.”

Yup, the bubble.

If momentum equals bubble we're in trouble on a lot more fronts than the housing market ;)

Dodge talks of risks

Dodge noted that the risks “appear to be a little greater than they were in July.”

And how he will be paying “close attention” to them between now and when he releases a full analysis of the Canadian economy on Oct. 19.

The first official Edmonton housing market warning signal came from Toronto Dominion Bank’s economics department in it’s latest Housing Bubble Watch update.

Unfortunately TD doesn't keep the old "Housing Bubble Watch Updates" on their website. The fact that they've had an update for a considerable period of time proves they've been wrong many times over, since no bubbles have burst.

While the most immediate concern was residential markets in Vancouver and Calgary – which the TD report described as “unsustainable” and vulnerable to the “possibility of a pullback” – Edmonton is also experiencing “explosive price growth.”

You won’t get any argument from Sarafinchan, especially when the average selling price for a single-family dwelling hit $316,480 up an incredible 44.3% from August 2005. The condo average also crested $200,644 – an equally impressive 34.2% rise.

Actually the single family dwelling average price is up 41.9%.

And even with the sharp jump in prices, the EREB has set sales records every month this year. Sarafinchan talked about “breaking through a psychological barrier,” and how Edmonton home buyers are “beginning to accept the pricing realities” of other Canadian cities. The 2,079 residential sales in August are proof of that.

But she did admit that the market appears to be “cooling slightly” and sales are not as “torrid” as they were earlier in the year.

When EREB realtors have so far brokered deals worth $4.43 billion – up 47.2% from 2005 – “torrid” may be an understatement.

Meanwhile ComFree is also claiming $744 million in sales to date and 463 units turned over last month. My math says that’s about 18% of the Edmonton real estate market.

That’s a little lower than what ComFree has been boasting about on its website, but it’s a big enough bite out of the EREB’s exclusive territory to justify the intensity of the real estate hostilities not seen since ReMax moved in back in the 1980s.

"They say they have 25 per cent of the Edmonton market, but how are they measuring that? Our stats, which we get through land titles, show 91.8 per cent of sales are though MLS." Edmonton Real Estate Board president Madeline Sarafinchan said. - in another article in the Journal.

“We’re not objecting to any company existing in the marketplace,” said EREB spokesman Jon Hall. “But let’s play on a level playing field.”

But the pasture could get a little more tilted if what the TD Bank economics department gurus are predicting comes true.

Supply is dwindling

While the “affordability” of Edmonton house prices remains good, the TD report noted, the same can’t be said for the supply.

The bubble watch talks about a two-year low in inventory and the “frenzy” of housing starts the shortage has created.

As I mentioned earlier, supply is up almost 20% since July.

While “economic fundamentals” (which means the oilsands) support the “explosive” house price growth, things can’t go on forever.

“Prices cannot go up at this pace indefinitely,” the bankers warned. “If the pace doesn’t soften, a bubble could form.”

And there’s another troubling thing about real estate bubbles, as anyone who was around during the Great Real Estate Crash of ’82 can testify.

“By definition, it is impossible to identify a bubble before it bursts,” the Bubble Watch sadly concluded. But when it goes pop, watch out.

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Oh, everything is just fine in the Alberta real estate scene, pop! Oh, house prices will just slow down a tad on their appreciation, pop! pop! The first pops to be heard will be those 2 story starter out houses being slapped up by Jaymans and the like pop! pop! pop! Watch 50 grand disappear in the blink of an eye on those Archie Bunker Specials.

I am sorry, are we talking about all the bang's from people shooting eachother in Texas? Some people CHOOSE not to live in Texas. I would much rather live in the Edmonton house than that house in Texas. Not only that, how do you figure that people are just going to lose 50 grand?? Why pick on Edmonton? If you had any sense of the real estate market, you would understand that those Jayman homes are AT LEAST 100 grand more in Calgary than they are in Edmonton. Edmonton is cheap still in Western Canada, and while we are already seeing Vancouver and Calgary SLOW DOWN (I REPEAT.. SLOW DOWN. NO WHERE DO I SAY POP, BURST, OR BOMB), Edmonton still has alot of catching up to do. Untill that happens, real estate is going to continue to increase in this city. Sure, maybe I can get a better house for the same price or cheaper in Texas... but it's Texas. I will enjoy my life in the beautiful and safe city of Edmonton (and don't even get me started on the political BS of living in the US)

You are certainly right Texas is a better bang for your buck. I take it you don't like Jayman. Disgruntled ex employee or customer maybe? Can't say as I blame you on that one but really come one Texas for Alberta, the fumes you must be working around could be life threatning. I have had numerous relocations from Texas through Haliburton and they are all bloody ecstatic to get out of there. However, I am a proud Edmontonian so I am slightly biased. You are right about the two houses though. nice. But Ft. Worth Has an even higher unemployment average than the u.s. national average which is 5.1%. I won't go any further because the rest of us are too busy working here. Enjoy your nice walks at night in ft worth.

I was born, raised and lived all my life in Edmonton, don't be telling me about Edmonton. The place has got nothing. The downtown is a ghost town at night, the surrounding lakes are nothing but slews and I could go on and on. It's just a verrry expensive blue collar town now and nothing more. Oh ya, you had your best summer in 20 years.

Obviously you grew up in a closet and I'm certainly glad you are gone. Don't bother responding your posts are neither rationale or constructive. They will be deleted. Have a happy life in Texas. Texas deserves you.

Is it possible the cooling you see and the supply increasing can be simply attributed to the changing of seasons? Prior records show that in late summer/early fall, the market generally cools and supply is higher.

I'm curious at what point next year we'll see heat again. I think in general it's usually May, but in 2006 it started earlier. I'm hoping for an upturn again in March :)

First, to the Texas girl, I just came from downtown Edmonton, and it was hopping. This is the last of the attention I will pay to you, as that is obviously what you are looking for. You seem better suited for Texas anyways.
To reese, I agree, this is a slower time for the market, but mls stats don't lie. Things are still climbing. I am enthusiastic, however, to see what happens next spring!

Kendal - your comments are much appreciated. "Slower" is all relative... our experience shows that single family homes are selling a little bit slower, condos are going off the shelves as fast, if not faster, than ever. The long weekend was slow, certainly slower than most weekends. Once school is back in things tend to pick up again, we'll just have to wait and see. I can say the house across the street from me sold within hours of listing, for about $50k more than I thought it would go for. My thought...if it goes that fast, it could have gone for more if the full market had access to it.

I agree with Sheldon. Why are we comparing Edmonton to Calgary, Vancouver or even Texas. Calgary has mountains within 1 hour drive, Vancouver has mountains and ocean. I haven't been to Texas but I'm sure their landscape is much like ours "flat". Edmonton is a working fools blue collar town that is "hung up" on the Oilers because they know if they weren't they would be bored. We need to get back to nature to be fully happy. Real estate here "will" burst, because how high do you think it will go before people ask themselves what are we paying for in four walls and a roof. The land is not that desireable ie: no mountains or ocean. Edmonton will be made up of people that stay in their houses ??? because that's what they paid for or should I say "are in debt for". Sorry for being so harsh but it's the truth.

So Debbie, the only desirable characteristic for a city is for it to be near mountains and/or the ocean? I have spent lots of time in both Calgary and Vancouver but I live in Edmonton. There is plenty of "nature" within our city boundaries, in the form of a heavily forested river valley that happens to be the largest continuous park system of any city in North America. I don't have to drive for an hour to get somewhere nice like Calgarians do. Sure, Calgary is closer to the mountains but that is about the best thing about it, since the city itself is a barren wasteland. So to enjoy the best thing about Calgary, you have to leave town! By the way, the mountains in Alberta are nicer farther north. And don't even get me started about Vancouver's cost of living, traffic congestion and air pollution.

I do agree with you that Edmonton has a beautiful river valley. But what I am saying is that Edmonton shouldn't be compared in price relation of homes to Calgary, Vancouver, Toronto or anywhere else for that matter. Our geography is totally different from those places.

Hello everyone,

The problem is that house prices a starting to reach a point where they are getting out of the reach of middle and upper middle incomes
For example if you are grossing about 110 K per year, the bank will give to a maximum mortage of about 250k and yet an average price in Calgary is about 340 K last count.

My lawyer who does many transactions for this industry says part of the money for the expensive homes is coming from baby-boomers' parents who are starting to die off like flies and leaving their kids some estates which makes for a good, hefty downpayment on bigger, costlier homes. What happens after all this group goes through the system?

I work as a consultant in the oil patch and over the last two months I hear quite a lot of doom and gloom in Calgary. Already the oil companies are getting fed up with the high costs of services and intend on pulling their horns in quite a bit. Holes that cost 1 million to drill 3 years back cost 2.5 million now. The ripple effect takes a year or two but ultimately down it comes for everyone.

To add insult to injury, over environmental concerns, global warming et al, the feds may well do an about face and clamp down on oil sands development. I see the machinery is in motion and the Conservatives have no choice but to kowtow to the will of the people and other parties if they wish to survive. The Income Trust situation will not help matters much either.

In 1981 I came to Calgary for work. You could cut the aura of ambition and greed in the air - my investment properties, new BMW, oh my house is doubling and what about time sharing? The next year (after the NEP) the line was, oh he's gone, who is getting laid off next, a manager comitted suicide after his big layoff!

They say those who do not learn from history are doomed to repeat it. Personally I'll be content and keep my feet planted in my small but comfortable home over the next 24 months.

Regards,

Michael Kelly

I THINK YOU REALTORS HAVE OVERPRICED HOMES IN A SENSE THAT YOU ARE NOT TAKING INTO CONSIDERATION THE AMOUNT OF WORK SOME OF THESE HOUSES/CONDOS/APARTMENTS REQUIRE AFTER PURCHASE...ITS OUTRAGEOUS, 30 YEAR OLD HOUSE NO UPGRADES AND SELLING FOR 300,000.00 GET REAL..

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