Calgary Housing Recovery Already Underway? October 20, 2009Posted by DustinRJay in Calgary real estate, supply and demand, Uncategorized.
Tags: Calgary real estate, supply and demand
It’s been awhile since my last post, so I thought I would share some interesting information.
The first graph illustrates the historical supply and new listings on a seasonally adjusted basis. Sales and new listings have been adjusted on a seasonally adjusted basis so that it gives a leading edge indicator of of how the resale market is performing. For example, December is typically the worst month of the year for sales and May is the best and there is a fairly consistent seasonal pattern to resale volumes. This adjustment also allows one to determine whether price movements are caused to to changes in supply or changes in demand. In the past few years, sales volumes I believe soared well above demographic demand, and in early 2009 were well below demographic demand. I believe future sales volumes will fall moderately from here due to what has been described as demand driven overbuilding (premature buying) that occurred in 2006.
Looking at new listings, one can see that supply is not the problem that many blogs had predicted would happen due to high foreclosures. Supply is much lower than it was in 2007 and 2008 and this is I believe because a much lower percentage of loans was granted to debtors of poor credit quality as compared to the US. I think there is also a rational component to the ebb and flow of activity in the resale market.
The series of events that occurred over the last few years may be as follows…. In 2005\2006 as rental vacancy dropped to 1%, and perceived slowness to bring new product to market, buyers reduced their personal time horizon to buy. This is driven by a belief that if they do not buy now, then they risk further price appreciation occurring or waiting a long time for house prices to drop. Potential sellers also recognize that there is a lack of supply, and put off selling. Speculators also enter the market to drive up demand in the short term, but do not immediately cause an increase in supply. In mid 2007, when inventory is increasing, and new construction was high, it is apparent that supply can satiate demand at that price point. Potential sellers and speculators that were delaying selling rush to the exits to cashout. Also, buyers suddenly realize that there will be a price correction, and now instead of reducing time horizon to buy, they increase the time horizon to buy as they realize that in the near term there was going to be a price correction. This causes a very sharp and sudden shift in both the supply and demand balance. In 2009, when housing construction nearly ground to a halt (especially with MFH starts) buyers have now begun reentering the market once again as inventory depletes. Potential sellers may also now be once again delaying selling purchases due to perception that the market has turned the corner, and less risk from a wave of supply coming from foreclosures.
In summary, I believe the price correction in the resale market is over for now as indicated by the graphs below… Although, I do not see why a relapse into a bear market is not possible if sales were to drop again. Housing corrections typically occur over a period of several years, and historically taken at least 4 years to unwind so I would not be surprised to see further price drops if the supply\demand situation shifts once again. There are reports that the Calgary commercial office space is overbuilt and vacancies will rise to 20% in the coming years and will halt commercial construction in Calgary for several years. The good news is this will provide stability and growth opportunity for businesses in Calgary as they can better keep a lid on operating costs.
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