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Long Term Trends in Calgary Real Estate January 13, 2008

Posted by DustinRJay in long term real estate trends.
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House prices have increased dramatically in the past few years.  For people looking to buy Calgary real estate in the near future, it is worthwhile to examine whether or not the current valuations are justified and what is the upside potential or downside risks.  If there is upside potential, how can one capitalize on it, and if there are downside risks how can one hedge against it?

From 1973 – 2007, house prices in Calgary have appreciated at 1.2%/year above inflation (not a hedonic regression).  However, over the last 6 years house prices have nearly doubled. 

This blog attempts to understand whether the increase has been substantiated by underlying rental yields, higher incomes, or lower carrying costs.  In addition, this blog will examine value investing approaches to quantify Calgary house prices.

The following is a summary of the peaks, troughs and recovery times for previous real estate cycles in Calgary (graph is shown below):

  • Peak: 1981 – $234,000 (~21 years to recover)
  • Trough: 1984 – $125,000
  • Peak: 1990 – $192,000 (~8 years to recover)
  • Trough: 1995 – $159,000

Calgary Inflation Adjusted House Prices 

Here are two interesting indexes to compare long term trends in Calgary real estate against:

The New York Times article states:  “Between 1628 and 1973 (the period of Eichholtz’s original study), real property values on the Herengracht — adjusted for inflation — went up a mere 0.2 percent per year, worse than the stingiest bank savings account. As Shiller wrote in his analysis of the Herengracht index, “Real home prices did roughly double, but took nearly 350 years to do so.””

 In summary, recent house appreciation in Calgary is much greater than the long term real estate trends.  For long term trends, house appreciation of 1.2%/year for Calgary seems reasonable.  Also, house prices tend to revert to mean.  Caution may be warranted if buying, as house prices are approximately $150,000 more than the long term trend.

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Comments»

1. RJT - January 13, 2008

Radley77,

Thanks for this informative blog. I happen to agree with you that fundamentals justify much lower prices in Calgary, and that the recent run since about 2005 was more based on “irrational exuberance.”

Based on both rental yields and median income levels, prices do not make sense in historical contexts. Keep up the good work.

It should be noted that markets do not need to be fundamentally rational, this is why bubbles form. In the long run, they do tend to correct, and the difficult part (if not impossible) is predicting when corrections will occur. Will it be in 2008? I’m not sure.

2. BearClaw - January 13, 2008

Radley77,

Like the new blog.

Do you think that Calgary prices will revert to the long term trend? Have rents followed a long term trend or did the ramp up faster between 2005-2007? I think there is some amount of fundamental appreciation above the long term trend due to the “oil boom”. Even with that considered the graphs show current prices are quite extreme. Cheers.

3. Alexander - January 16, 2008

Thanks for the informative post and comments.

4. Crabman - January 16, 2008

Nice graph, the one thing lacking from the other sites, is this kind of data.

5. Calgary Bull or Bear Real Estate Market? « Calgary Real Estate Market Blog - January 22, 2008

[…] Calgary Bull or Bear Real Estate Market? January 22, 2008 Posted by radley77 in short term real estate trends. Tags: bear market, bull market, Calgary real estate, short term forecasts trackback For those looking to buy or sell real estate in the near term it is worthwhile to understand the current trend so that some forecasting or predictions can be made.  This is a complementary post to my Long Term Trends in Calgary Real Estate.   […]

6. Anonymous - February 5, 2008

Kay, I’m scared! we’re thinking about purchasing a house within the next couple of weeks….is this a bad decision??

7. Al - March 4, 2008

I am also looking to build my home..

2300 sq ft home in Auburn Bay built by Cardel for 515K. I am gun shy now…any thoughts on whether its a good buy. It will be my principal residence.

8. Naheed Gilani - March 31, 2008

To Al and Anonymous….for more info you can email broker786@yahoo.ca Graphs (as above) usually relate more to technical analysis (on which basis, yes, we’ve overshot on the upside). People commenting above seem to think the fundamentals are average to weak. I also think Calgary is overpriced…that being said, it may be years before a real drop…it’s always risky to try and time the market. If you are speculating, you should worry. If you are buying for the long term, it’s a different story. What I’m interested in is the level of supply on the market…rising rapidly. Also, looking at Saskatchewan, we have net migration out of Alberta. What we do have is high and rising incomes and strong GDP growth along with favorable taxation and strong surpluses.

9. Naheed Gilani - April 2, 2008

Sounds like there are now well over 12,000 listings in Calgary, some 6x the inventory at the end of March last year! I believe this is a record. People don’t seem willing to drop their price enough to be able to make the sale.

10. Erick - April 4, 2008

I found this blog to be extremely informative great work! However I would mention that it is my opinion the Calgary’s Housing market has rising on strong fundamentals many of which cannot be measured by past historical data. One such item is the high level of foreign direct investment predominantly from the United States and many Asian countries. Thousands of immigrants with large amounts of wealth have settled in Calgary and invested highly in property more so than at any other point in history. Second the wealth created by the constant surge in oil prices and inter provincial development is also at levels never seen before in history. It would make no fundamental sense for prices to depreciate to historical levels as long as these fundamentals exist. I believe Calgary’s real estate market will quickly eclipse that of Vancouver which currently has an average home price of $600,000.

11. DD - August 1, 2008

II don’t think Calgary’s house market will pass Vancouver’s over the next little while. Let’s look at what is happening:

1) Inflation is increasing and therefore interest rates will increase. I wouldn’t be surprised if interest rates are above 10% by 2010. If interest rates increase, house prices decline or at the least will not go up as fast. If you don’t think this is true read about all the oil, gas, mining projectors that are grossly over budget. These costs have to be passed on sooner or later.

2) Liquidity crisis in the US will spread up to Canada. Simply put, it will be more expensive to borrow money. Bank will have to clear up their books which mean writing down assets or selling assets. More assets on the market means cheaper valuations

3) Not all people work in the oil and gas sector. Actually very few of the total working population do in Calgary. If that was the case the $150.00 barrel of oil will directly have an impact on housing today. I think more people are being squeezed because of higher energy prices.

4) Prices: For the median price (lets us this instead of average) a combined family income would have to be at least $150,000. A family can borrow about 4 x salaries. Calgary median income is about $90,000 (2008). So when will this 60% increase take place?

5) I find it hard to believe the cost of Calgary Real Estate. Look at Houston Texas. The city is in the middle of oil country. They are not paying the same prices we. Sure through in the tax break but the median house price there is $250,000.

12. Naheed Gilani - September 7, 2008

Erick, do you happen to work in the real estate business? Fact is, every bubble bursts. We don’t know when, but it always happens. Here is something on the current US situation
http://finance.yahoo.com/tech-ticker/article/53094/U.S.-House-Price-Decline-Could-Be-Worse-than-Great-Depression?tickers=%5Egspc,fre,fnm

13. B - October 2, 2008

The Calgary bubble is already deflating with the oversupply that some of you have pointed out. Now bring into this the numerous condo projects that were started within the last couple of years where, in my opinion, most buyers got in purely to turn a profit and not for a residence for self.

Most of the major oilsands projects that haven’t started yet (Fort Hills, Kearl, McKenzie, Quest etc.) are already facing major hurdles raising money to fund the huge cost overruns so they may not start for a while or may be broken into much smaller phases (the way the existing projects should have been executed in the first place). Since Calgary does a lot of the Engineering and Financial work on such projects, there will be less work to go around. Things are already slowing down in the EPC world.

All this and other factors that you all pointed out signal a consistent decline in the Calgary housing values over the next little while. The funny thing about peaks is that the fall after the peak is just as dramatic as the rise to the peak.

14. Philip - January 8, 2009

Now where is the Calgary housing market going to go?
Up, Down or sideways?
Should I sell now or keep my house?

15. Anonymous - January 29, 2009

I vote sideways

16. Cori - June 14, 2009

Can any of you tell me what the market did prior to and after the Olympics. Were sales stronger after the games?

17. Mabel - July 19, 2009

Annoymous/Philip:

Real Estate in calgary is sizzingly hot. All lots were sold in a NW community and you have to put your name on waiting list. crazy uh?

18. A Tale of Two Cities - Edmonton Housing Bust - January 23, 2010

[…] discussion in the last entry, someone brought up a similar inflation adjusted graph done on a Calgary specific blog about a year ago. They conversation concerned the best-fit line in that graph, finding annual 1.2% […]

19. Henry - August 13, 2010

looking at the past blogs of people thinking that we will have 10% interest by 2010. Yes, it is posible in the past where market dictates the rates. Now the rate is a tool for the government to either inflate or deflate a hot economy. the government have figure out they can do what ever they want and this actually creates a more stable economy not like the past. Housing is a lifestyle choice just like a big 4×4. 90% of the people that drives one don’t really need one but because they can afford one, they get one. Same as housing, as long as there’s steady employment in calgary and the oil stays around 70 to 80. people have a job and can qualify for a home . They will buy one and live in one more than they need.

20. Brad - October 19, 2010

Fort McMurray is booming, Calgary is picking up, September we saw a great uptick in housing prices compared to August. Of course we’ll have a slow winter, which is normal, but I think these housing prices are here to stay. We’ll see the increase of 1-2% per year for the next 10 years. People are working, people are making money, and people are still moving West. Calgary is turning into a great city, with highways and new C-Train transportation being built all over.

21. givewedgy - February 6, 2011

Great site,good comments. I think several things have caused this inflation.
1 In 2005 the US was inflating it’s economy.
2 Oil prices were rising because of inflation (Asset Backed Real estate Certificates) and demand.
3 In 2005 Calgary had a huge influx of Oil people buying houses as a percentage of those buying houses at that time (Their incomes exceed others by at least 70%).

For the future several points need to be considered of which I will state a few.

1 Interest rates in the States are being kept down to stop the deflation in housing prices. This means that until the States housing market stabilizes interest rates will remain low unless a new policy is introduced. Housing prices in the States will probably stabilize in the final quarter of 2011.
2 Because of the world high demand of oil and commodities the Canadian dollar is strong. The high dollar will continue to slow the Bank of Canada from raising rates causing an even higher dollar and hurting manufacturing in Canada.
3 After 2008 Oil companies and others have been down sizing in Calgary causing housing prices to drop because of increased defaults and people leaving Calgary.
4 Canada has made changes to mortgages rules causing house prices to drop some.
5 Some economists are predicting rates to raise by 1% by end of year. If this happens house prices will drop by 10% by the beginning of 2012. I do not expect the rates to increase this much because of points 1,2 and even 6.
6 The reduced effect of oil personnel on the Calgary housing market will deflate prices possibly to 2006 housing prices by 2014 if oil stabilizes at $80-$95 (just a guess but the lower percentage of oil people personnel buying in the housing market will deflate prices).
7 Gas prices will take years to increase substantially though it’s use in power generation will increase demand for it therefore gas in Alberta will not have an effect on housing prices for several years though the influx of gas personnel.

Those are a few thoughts to consider when buying in Calgary.

22. Shoshana - August 31, 2013

You are so interesting! I don’t think I’ve truly read something like this before.

So great to find another person with some genuine thoughts on this issue.

Seriously.. thank you for starting this up.
This site is something that is required on the internet,
someone with a little originality!

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