With the arrival of 2017, we have more question marks and uncertainty than ever before. I am getting bombarded with questions about how the market will perform in 2017 in comparison to the previous year; when we will finally see the bottom; and how the revitalization of the oil industry will affect the Calgary real estate market. Here is a detailed analysis of the market influencers for the Calgary real estate market and their outlook for 2017.
Today, we will be talking about the Housing Market Activity:
The current economic climate has reduced housing demand across the resale, new home and rental markets. Transactions are down across all product types, and while supply levels have been slowly adjusting, market oversupply stood out as a dominate theme for the local housing market in 2016.
A weak demand environment is expected to persist in 2017, but supply growth should start to ease. These changes will help narrow the gap between housing supply and demand by the end of 2017. However, the oversupply will likely persist in higher-density sectors, resulting in a divergence in price activity from the lower-density detached sector to the higher density apartment sector.
Based on the most recent CMHC rental market survey, 2016 purpose-built apartment vacancy rates reached new highs at seven per cent. The main contributors were new rental supply, job losses, high unemployment rates and an outflow of migrants from the city.
Higher vacancy rates placed downward pressure on rental rates, with estimated declines of 7.5 per cent for two-bedroom purpose-built units in 2016.
The secondary rental market measured by CMHC is primarily focused on condominium apartments. Based on its survey, more than 30 per cent of condominium apartments are identified as rented units. The surveyed vacancy rate in this segment of the market remained unchanged from the last survey as it is expected that renters will be incentivized by improved services and a more than 12 per cent drop in rental rates.
Elevated supply in the rental market can influence investor ownership demand. Higher vacancy levels and lower rental rates may impact expected returns. As vacancies start to ease and rental rates stabilize over the next several years, interest from investors could improve.
In the meantime, higher volume of rental supply, combined with more stringent ownership qualifications, could limit ownership demand growth from first-time buyers.
New Home Market
Calgary’s housing starts have been declining for the past two years. This pullback has helped reduce the amount of product under construction, but inventory levels continue to remain elevated.
While supply is expected to ease in 2017, Calgary will likely continue to feel the influence on pricing in the resale market until current inventory levels reach normal levels (particularly in the higher-density markets).
• Housing starts for Calgary Census Metropolitan Areas (CMA) are forecasted to range between 8,300 and 9,300 units in 2016 and 2017. Canada Mortgage and Housing Corp. (CMHC) isn’t anticipating a decline below 2016 levels, but does expect starts to remain well below historical norms;
• Single-family starts are expected to improve by a minimum of six per cent for a total of 3,400 units in 2017, while multi-family starts are expected to range between 5,100 and 5,500 units, which are just below 2016 estimates. The single-family sector has not seen the same rise in inventory levels as the multi-family, making the dynamics very different;
• Inventory levels more than doubled by November 2016, reaching levels not seen since 2001. The largest increase in supply occurred within higher density product. Apartment product represents 53 per cent of the total inventory and was nearly five times higher than levels recorded last year. Meanwhile, detached inventory only climbed by 15 per cent over November 2016 levels;
• As of November 2016, year-to-date single-family starts totaled 3,195 units, making it one of the lowest on record since the late 1980s. Multi-family starts also contracted for the second consecutive year, but activity well above the lows recorded over the last decade;
• Slower population growth due to weaker net migration levels is expected to reduce household formation numbers in 2017, impacting demand for new home construction. The City of Calgary expects household formation levels to average 4,000 units over the next two years, which is well below historical averages.
Demand for resale product in 2017 is expected to gradually improve over 2016 levels, but remain well below long-term trends.
Most economic indicators point toward stability or modest improvement. While this will take some time to filter into substantial improvements in the Calgary resale housing market, no further annual pullbacks are expected.
Prices are also expected to stabilize in 2017 in the detached and attached sectors of the market as economic conditions start to improve. However, downward price adjustments may persist in the early portion of the year as the market transitions toward more balanced conditions.
New listings are expected to fall just short of last year’s levels and narrow the gap between the amount of sales and new listings. Improvements in the sales-to-new-listings ratio should place some downward pressure on overall inventory levels and slowly bring the market back toward more balanced conditions.
Annual detached home prices in 2017 are expected to be 0.8 per cent higher than levels recorded in 2016. While further monthly contractions could occur in the beginning of the year, modest improvements are anticipated in the later portion of 2017, which will help balance out the early pullback. Despite the expected gains, it will not be enough to compensate for the 3.23 per cent annual decline recorded in 2016.
The detached sector of the market has seen the least amount of downward pressure on prices since the start of the downturn. While demand eased, so have new listings, limiting supply growth. In addition, there has been less inventory buildup within the competing new home detached sector.
Sales growth of three per cent is anticipated in 2017, as economic conditions improve. This will help push the market toward more balanced conditions and prevent further downward pressure on prices by the end of the year.
• Benchmark prices reached a new monthly high of $522,400 in October 2014. By December 2016, prices had declined by 4.7 per cent;
• Communities with higher priced detached homes generally recorded steeper declines relative to communities with lower-priced detached homes;
• District-wide, the range of annual price adjustments spanned from a low of 1.77 per cent to a high of 5.10 per cent in 2016.
A LOOK AT ACTIVITY IN DIFFERENT PRICE RANGES
Detached price trends can vary significantly depending on price range and location. While overall detached inventory levels did not surpass the highs previously recorded in the last downturn, inventory for homes priced over $600,000 was comparable.
The sector reacted quite differently for lower-priced product. Despite some noticeable inventory gains in the $400,000 to $600,000 range over the past two years, overall inventory for homes priced below $600,000 remained well below previous highs.
When you compare inventory with sales activity, it's clear that most of the market imbalance has occurred with higher-end product. This partially reflects the dynamic of the employment market, with the bulk of early job losses occurring in some of the higher-paid professional positions.
The high end of the detached housing sector has seen months of supply rise above expected norms, likely resulting in steeper price adjustments in those segments. While even the lower price ranges have seen supply gains exceed demand growth, it remains relatively low by comparison, suggesting price adjustments have not been severe in those segments.
The attached segment of the market includes two main property types: semi-detached and row. Together, they make up nearly 22 per cent of all sales activity in Calgary, but both have demonstrated very different trends when compared to each other.
In 2016, semi-detached sales grew by 3.98 per cent over the previous year. While still below highs recorded in 2014, sales in this sector kept pace with longer-term averages. This is partially related to growing supply in the $200,000 to $400,000 price range. Semi-detached sales also improved in the $600,000 to $699,999 range, which was likely related to price adjustments that supported sales growth activity.
City-wide semi-detached prices have declined by 5.49 per cent since the start of the recession. This pullback was at a faster pace than the detached market, and may have supported sales growth for consumers who wanted an alternative to a condo, but could not afford a detached home in the community they preferred.
Row sales went the other direction and declined by 11.84 per cent in 2016, well below recent highs and 19 per cent below long-term averages. Inventories for this product neared all-time highs in 2016, pushing the months of supply up to near record levels. This resulted in steeper price declines for this product type. Row prices declined by 4.8 per cent on an annual basis in 2016 and more than 7.01 per cent since recent highs in March 2015.
Price declines and a shift in demand toward more affordable product could benefit this sector of the market in 2017. While discrepancies will continue to exist in both the semi and row product, prices are expected to stabilize as inventories ease with modest improvements in sales.
The apartment sector faced the largest adjustment in terms of sales, inventory and price in 2016. Rising supply and a significant drop in demand caused the average months of supply to rise to levels similar to those recorded in the last recession.
The apartment segment has seen elevated supply in the resale sector, and it has also faced increased competition from the new home and rental markets. A higher volume of rental supply choice, combined with declining rental rates and stricter ownership conditions, have reduced any sense of urgency for renters to consider home ownership.
There are also currently 4,320 condo apartment units under construction in the new home sector in Calgary, and 780 units in inventory. The added competition, combined with excess resale supply, contributed to steeper apartment condominium price adjustments.
Oversupply in the apartment market has pushed prices down by 11.3 per cent since the start of the recession. While the oversupply scenario may start to ease by the end of 2017, it will likely persist for most of year and cause prices to contract by another two per cent.
Calgary's housing market is expected to show signs of stability in 2017. City-wide sales are forecasted to total 18,335 units, a 3% gain over 2016, but 12% below long-term averages. This will help reduce supply levels and support some price stability in the second half of the year.
The transition in the housing market will take time. Alberta's economy was much softer than many predicted over the past two years, as prolonged weakness in energy weighed on other sectors of the economy. We enter 2017 with high unemployment rates, weak migration and tightened budgets for consumers. Economic recovery is expected in the year ahead, but the pace of growth is forecasted to be slow, particularly in the labour market. This will impact the timing of recovery in the housing market.
While a shift is expected this year, it is important to keep some perspective. Housing sales activity is still forecasted to remain well below normal levels for the city and prices are not expected to be stable across all segments and property types.
Home prices are expected to remain relatively unchanged over 2016 levels in the detached and attached sectors of the market,. while the apartment condominium sector faces more downward price pressure due to the excess supply. This will continue well into 2017 until inventory levels ease and the market returns to more balanced conditions.