Wednesday, September 28, 2005

No Bubble in Calgary

Duane Page of Coldwell Banker Lifestyle Realty in Calgary, AB sent me this article he wrote about the housing bubble in Calgary (or lack thereof):

In Calgary, house prices have gone up by an average of about 6% - each year - for the last ten years, almost doubling in price since 1995. This is great news, especially if you bought a home back in 1995. However, some people start to get nervous when they see prices increase steadily; they assume ‘what goes up must come down’ and therefore, the real estate ‘bubble is going to burst’. To find out if house prices are going to go down, you have to figure out why are house prices going up.

The simplest reason is that everything goes up; it is called ‘inflation’. In Canada, the inflation rate has been at around 2% over the last ten years. House prices in Calgary have tripled this amount. Inflation can’t be the only reason.

Supply and demand is always a factor. According to CMHC, demand is high when the number of places sold is 60% or more than the number of places for sale. This percentage, or what is called the ‘sales to listing ratio’, has averaged around 0.65 for the last 10 years in Calgary indicating that demand has been high. But what is the cause for the high demand? The economy; factoring in taxes and wages, Calgary has the second most affordable houses for all the major cities in Canada (Edmonton is first). There are also plenty of jobs here. Calgary has one of the lowest employment rates in the country.

Another factor is affordability. Interest rates are still lower than they have been for over 40 years. But this tends to scare people too – we know rates are going to go up and when they do, what will happen to those that bought with little or nothing down? If rates go up only 2%, your payments could go up by 22%. A lot of people remember the early 80s when rates went way up, and people were walking away from their mortgages and selling their houses for a dollar – yes a dollar! But remember; only about half of us in Alberta have a mortgage these days. And those that are getting mortgages are still using 5 year terms, and at fixed rates, and those that use variable rates still have to qualify at a 3 year fixed rate.

You also have to look at who is buying these places. Older people still buy houses. In fact, the 65 to 74 year old age group is showing one of the fastest growth in homeownership. They are buying secondary homes, more expensive homes, and recreational properties. And if things do go wrong, older buyers tend to have more disposable income and liquid assets to help ride out any hard times, if they occur. Also we are seeing fewer investors buying houses and more homeowners buying, revealing that it is not mere speculation that is behind the increase in house prices. Another concern is that the number of fist time buyers is declining as the population ages. Although this is true, there are still a lot of people in the 25 to 39 age range buying homes.

There will always be those that believe real estate in a risky investment because they are afraid that house prices will crash because of a bubble. The truth is that there is no bubble. Houses are not stocks. You don’t wake up one morning to find out that your house is worthless; real estate always has value. Shelter is a necessecity. Historically, on the average, house prices have actually never gone down except for the depression in the 30s when unemployment was over 25%. The pace in Calgary may level out, and there may even be correction or two in the coming years.

In the long term, the worst that should happen is that house prices will continue to increase at about 1% above inflation –as they have historically done – meaning that if the Bank of Canada is right and inflation should run at about 2% in the upcoming years – then the average return should be 3%. The good news is that if prices do go down, you will hear a ‘hissing’ sound if the bubble leaks not a bang because the bubble can’t burst.



By Duane Page,
www.duanepage.com,
duane-page@coldwellbanker.ca.

1 Comments:

At 12:09 AM, Anonymous Anonymous said...

there is a bubble and ur an idiot if u buy a house now

 

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