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Glut Today, Excess Demand Tomorrow January 3, 2009

Posted by DustinRJay in Calgary real estate, supply and demand, Uncategorized.
Tags: , ,

A review of inventory trends and prices is useful for helping to understand what the future price trend will be for the Calgary market.  From the following graph, some conclusions can be made:

  • Falling levels of inventory generally lead to higher prices and vice versa.
  • Inventory is dropping at the fastest rate since the Spring 2006 bull market rally.  Inventory has fallen 41% since the peak inventory in May 2008 to December 2008.
  • Inventory rose most dramatically in 2006, by a smaller amount in 2007, and even smaller amount in 2008.  The implications is that resale inventory appears poised to fall on a year over year basis for 2009.  As of September 2008, single family home housing starts are at the lowest levels since 1986.
  • Recent major market events including the oil price decline, and Lehman Brothers bank failure have not increased inventory levels.
  • Major sources of supply were in response to high prices, not foreclosures; that source of supply now appears to be tapped out.
  • Calgary real estate market has crossed into a state of excess demand, after several years of excess supply.
  • Current high levels of inventory require risk management to bring inventory in with long term trends.

Here Today, Gone Tomorrow

Click above image to enlarge.

Data: CREB, Bob Truman – First Place Realty



1. BearClaw - January 3, 2009


You are neglecting that inventory has a seasonal component to it as well. The rate at which inventory has been decreasing is normal for this time of year.

The relationship is between absolute inventory and price not rate of change of inventory and price. (Hypothetical)If there are 20,000 condos for sale and that decreases to 10,000 there would still be downward pressure on prices. Different story if there are 100 and that increases to 500.

Many bubble cities in the states had peak inventory in 2007 and this has decreased in 2008. Prices have fallen anyway because absolute inventory is still high and sales are low.

You had used a different model in the past why the change?


2. radley77 - January 3, 2009

Thanks for your comment bearclaw. I agree, I think the seasonal aspect is important to consider. This was the highest inventory decline in the past several years over a 6 month period and I believed it was noteworthy to show the big picture of supply and demand and it’s relationship to price over a longer period of time. The absorption rate model would not target what the likely medium-term price point would be whereas the above sort of qualitative analysis would be helpful for looking at this aspect. The absorption rate model uses historical data and so looks at very near-term trends (month to month). The above information above helps identify longer-term trends (year to year).

As an example, the absorption rate model would have indicated it was a good time to buy right up until August 2007 (peak prices), wheras the above qualitative graph would have indicated that the market had already likely shifted to a state of excess supply at that time.

3. BearClaw - January 4, 2009

-When inventory is increasing using % change maskings absolute growth. Below are the inventory peaks from 2005-2008 and absolute change from previous years.

2005 5604
2006 6541 +937
2007 9960 +3419
2008 13380 +3420

-You are using a 6 month average so it would be difficult to tell the impact of Lehman and oil prices. Sales show that these events have had a negative impact on the market.

-I disagree that supply is tapped out yet. I agree there hasn’t been as big a wave of listings. I believe that after the peak speculators that were previously holding off all listed at once. This appears to have been a one time event, however even after this shock sales rate is not at levels high enough to handle current supply.

-As for year over year inventory decreases it is a tough call. I would guess that inventory peak in 2009 will be about the same as 2008.

4. Lesson One - January 4, 2009

One thing is for sure: it is almost imposible to predict the RE due to the economic uncertainty and the amount of variables involved. I see you talk about risk management, so I assume you know what am I’m saying. To make an analysis based solely on one variable (inventory in your case) is like calling the 2008 markets best ever based on a single stock (out of thousands) having the best year ever.

I’m afraid it is too late for builders to do a risk assesment now. Risk assesment is done usually before you start a project, not after you done with it. Builders are DESPERATE to unload the excess inventory they have. Most hold huge mortgages themselves, they have to pay while the houses don’t sell. Have you ever asked yourself how did you get the deal when you bought your condo? Why would one sell %20 below the price? Stupidity? Don’t think so, is desperation. Most new houses are listed at %20+ below the original price tag. You can easily purchase a new house for a %30+ discount plus a nice car on top of that. Don’t believe me, if you have close friends or family in the business ask them, they’ll tell you.

Some people believe builders don’t build anymore as they wait for prices to go up again. The truth is that they sit on a big house inventory right now and no sane business would build on inventory only, expecially now with the credit markets the way they are. Obviously at some point the excess inventory will sell somehow. At that point they’ll start to build again, however they’ll build where the demand is and right now the demand is in the $275k-$400k range, that’s going to be the bulk of new residential construction IMO. They can build in that range and still make good money as the contruction material prices are down and so are the labor costs.

As for resale market I see more of the same we’ve had last year. MAYBE slightly lower inventory, but with even slower sales, that’s not going to make an impact on prices (upwards speaking). I see a possible %10 down YOY for 2009.

I just don’t see how a glut today can turn into excess demand tomorrow when you have a slowing economy. It did not happen last year when the economy (provincial) was red hot (at least for the first half).

5. Greg Williamson - January 5, 2009

As to the seasonal component argument of Radley’s analysis those of you thinking that the drop in inventory is largely to do with the season are missing the fact that never in this same time period did inventory fall 41%.

With respect to supply forecasts for 2009 consider this as a possible alternative to the doomsayers. MOST of the increased supply since mid 2007 was due to speculators (especially in the condo sector), and people who thought they would sell their home for no other reason hen to cash in.

So what has changed? Well number one, builders (who were arguably the biggest contribution to spec construction) have adjusted spec construction. At the height spec building was 15% of total residential construction, now that number is just below 5%.

Builder spec inventory and houses they got back from people who did not close have been drastically reduced. Despite what Lesson One is saying there is very little inventory for builders to absorb in 2009. Again, their spec construction is down 10%, and starts are projected by CMHC to be at around 4,500 (down from almost 11,000 during the peak) so less inventory will come on from builders, and the trickle down of more re-sale homes going on from those absorbing the newly constructed homes.

For certain people who were selling to simply cash in and get a big payday are re-thinking that strategy and many will likely abandon the idea of coming back to a market that is not going up.

I am not ready yet to call it, I want to see both the “new listings added” and “inventory” numbers for January, February, and likely March. If we see them still going down then the market will stabilize and a flat year will be welcome. IF the “bounce-back” happens (some people think that all the listings that came off the market in Q4 will come back in spring for a ‘better market’) then we will see a drop in the neighborhood of 10%-15%.

6. lu - January 5, 2009

The inventory has been decreasing but the absorption rate has been increasing significantly. There are 10 months of condo sales listed and 9 months of house sales listed as of Jan 03. Normal should be 3ish months. This means that sales decreases have outstripped inventory decreases.

So the decrease in inventory is driven by expired listings and not sales. Just because a listing expires doesn’t mean that the owners no longer intend to sell. If you believe that the the lapsed listings will not re-list anytime in the near future the above chart makes sense.

I’m thinking that we’ll be seeing a bunch of re-listing in the next quarter which will change the conclusions drawn from this chart

7. Ryan Philipenko - January 5, 2009

It’ll be a good time to buy at the bottom of this current market trend that is for sure. Once the price of oil goes back up and the financial markets correct themselves, a lot of money can be made when buying at the right time.

Ryan Philipenko – Real Estate Edmonton

8. Newt - January 5, 2009

Your chart is misleading. You should plot charts such as ab. rate vs price… you know, that same types of charts you used to do. Why not take a realistic approach to the market, you don’t have to be bearish or bullish on things depending on your vested interest.

“…a lot of money can be made when buying at the right time.” A lot of money can be lost buying at the wrong time!

9. RJT - January 5, 2009

Your chart should use 12 months change to take into account seasonality.

In 2005/2006 inventories dropped because sales were huge compared to new listings. In Dec 2008, inventories dropped because de-listings were much higher than sales (3.9x)!

Inventory is a function of sales , listings, and de-lists. You cannot look only at inventory levels without understanding the cause for the change.

Why don’t you put up the chart of absorption rate over the same time period? The reason is that you are trying to spin a “positive” market story, and that data does not support your story.

At some point, I agree with you that there will be excess demand Calgary, but we are likely 3 or 4 years away from that given the current high price levels, which still need to correct significantly before you will get a large amount of new buyers into this market.

10. radley77 - January 5, 2009

I have researched this and try to make posts that highlight significant trends from both points of view. There are charts that I believe are excessively bearish on this website, but have not taken them off. And I have added other charts that portray bearish scenarios since buying. The standpoint I come from, I did my research and feel that the long term rewards still outweigh the short term risks. And hopefully, some of this information is useful so that people can make somewhat better informed decisions about the marketplace.

I believe that there was a point in which people continued to buy irregardless of that the market was capable of supplying excess inventory. They looked at the absorption rate, and thought it was a great time to buy right up until the peak. I think that the same stance is happening now with people looking at the absorption rate, and coming up with the conclusion that now is not the time to buy and holding off. The same analogy still applies, people may choose not to buy irregardless that the market may no longer be capable of supplying adequate inventory at today’s prices.

I think this also explains why inventory dropped more dramatically in latter part of 2008 compared it did in 2006, 2007. People will not sell or opt to delist, if they believe that inventory can not be supplied at the current prices. Why sell, if one can not build at today’s resale market prices or can no longer sell for a quick buck at premium prices and buy in say Saskatchewan where prices were once cheap?

Furthermore, single family home under construction supply is as low as it was in 2001, and population growth has rebounded to 2006 levels. As Greg had mentioned, spec building has dropped from 15% to 5%. The other significant point that I think is worth mentioning that qualifies some of the additional remarks is that over the last year the absorbed price of a single detached house price has risen 23% year over year from $518,000 in November 2007 to $635,000 in November 2008. The resale market appears to be priced at a significant discount to the new construction market, and this gap has widened over the last year.

Essentially, what I think you see in terms of inventory levels may be what you get. I could be wrong, but hopefully I have researched this enough to make an educated guess.

11. BearClaw - January 5, 2009

Missing December avergae price on chart. December 08 should be lower than January 07.

12. Andrew Kyle - January 6, 2009

This is an interesting post and comments. It’s true that inventories are falling fast – the peak was 10,736 in Calgary Metro on May 31, 2008 and we stand at 5,727 as of last Saturday (Jan 3, 2009). But sales have dropped off at an even faster rate since the economic turmoil which began in mid-late September. Last-30-days sales peaked last year on June 28 at 2,173 and on Jan 3, 2009 it was 612. So we have a somewhat rare situation… declining inventory but rising Absorption Rate.

For all the discussions about the local real estate market still being inflated and prices being out of whack compared to affordibility, a new phenomenon has now been thrown into the mix – people simply closing up their purse strings and declining to spend at this time until the economic situation becomes more clear.

13. Kevin - January 6, 2009


Somehow I don’t think your opinion a year ago would resemble what yours of today… seems your opinion today is backup with little more than blatantly cherry picked info

14. SL - January 11, 2009

I think inventories are dropping fast due to expired listings although I am seeing more terminated listings lately so maybe people are fed up with trying to sell and if they do not have to then they will sit and wait just as many buyers are…so it is a stalemate for the time being. I really cant see people building a new house now while living in an existing since the risk is so high they will not be able to sell when the new one is ready…..what will cause the breaking point or will things level out? I say they will definitely level out to more sane and logical activity.

Condos, well not much to say here but time and time again condos are the big losers in the end of a cycle….

You have to be a gambler (moreso than Vegas)and optimist to live in Calgary and AB for that matter since everyone’s life pretty much depends on the price of oil here.

15. Mike - January 16, 2009

This chart is now irrelevant as inventory has shot up since by 323 properties in 16 days. Sales are currently down by over 55%.


This would indicate the continuation of dropping prices to continue as absorbtion rate is now 11 months for SFH and 13 months for condos. See: http://www.andrewkyle.com/


16. Carioca Canuck - January 22, 2009

What if tomorrow never comes ?

17. section 31 - January 27, 2009

Does anyone have the figures showing the price per square foot for Single Family Homes in Calgary over the past couple of decades? Say since 1980? I strongly believe housing prices are still as high as they are due to the size of the properties? I mean nobody builds anything under 1700 square feet. Pretty interesting that family sizes have been cut in half in 50 years but the size of the houses have doubled. – on a smaller lot at that :o(

Curious as well, who approved these new developments in Calgary? The lots are so small???

Also, Does anyone know what the developers paid for the lots (b4 development).
I imagine Calgary lot costs are significantly higher than most of Canada? To what degree do lot development and purchase costs drive the costs and sizes of the homes built on them? Just food for thought.

None the less, I imgagine Februart 2010 will be the very bottom of housing prices. How far will it go from 471 I don’t know, but hey if they keep increasing the sizes of the homes I guess it wont really matter?

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19. Inventory Zenith | Real Estate Toronto Canada - November 17, 2009

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20. Best Wholesale Deals - October 19, 2011

I enjoy your site and its design. You do a fantastic job here; continue the fine work.

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