One topic that is often close to home (apologies for the pun) for many of our readers is that of housing prices. In a a city such as Calgary that is often abuzz with headlines related to the energy sector, there is a natural and logical desire to connect the fate of the oil and gas industry to that of the local housing market.
Some articles have attempted to directly correlate Calgary house prices to oil prices, producing figures such as the one below:
Although compelling, this is most likely an oversimplification as it ignores other key factors affecting house prices, such as mortgage rates, which have almost continually fallen through the 2008 to present period:
For a broader review of factors that influence house prices, it is helpful to review what the CMHC has to say on the topic. The Canada Mortgage and Housing Corporation (CMHC) is a government-owned corporation that acts as Canada's housing agency and is most familiar to individuals that purchase mortgage loan insurance through it.
The CMHC identifies the following factors as having an important effect on housing starts:
- Mortgage Rates;
- Employment;
- Income;
- Population;
- Resale Market;
- New Home Inventory.
We will review these factors and discuss the probable direction that each one could be headed in.
Mortgage Rates
As previously discussed, mortgage rates in Canada have decreased in general over the past 5 years. Lower mortgage rates means that purchasing a house at a given price requires a lower monthly payment, putting more cash in the hands of purchasers. This also, of course, enables purchasers to increase the price that they are willing to pay for the house until the monthly payments reach either their own personal limit, or limits put in place by lending institutions.
On January 21, 2015 the Bank of Canada surprised the markets by lowering its overnight lending rate from 1.00% to 0.75%. This typically causes other interest rates, such as the prime lending rates, and thus mortgage rates to decrease in suit. As a result, we feel that this could put further upward pressure on house prices in Canada and in Calgary.
Employment, Income, and Population
These factors relate to amount of workers that are employed by the economy, the income that those that are employed receive, and net population migration. In Calgary, these factors could stand to be the most impacted by falling oil prices. The latest CMHC Calgary Housing Outlook from Fall 2014 had anticipated employment growth in the Calgary market slowing slightly from 3.1% in 2014 to 2.4% in 2015 and 2.0% in 2016, however this report was released prior to the recent shocks to oil prices, which could put downward pressure on these values. The report also noted that net migration to Calgary was anticipated to decrease from 2014 through to 2016.
Related to this is that WTI oil futures are trading between $46 - $62 / BBL through 2015 - 2017, which would continue to put downward pressure on local energy companies previously seeing oil prices in the $90 - $100 / BBL range. Note though that in 2006 only approximately 12% of Calgary's economy came directly from the oil, gas, and mining industries, though there are of course numerous ripple effects from these industries reducing spending.
Overall, we would expect that these trends could put downward pressure on Calgary house prices, and it will be key to see if this is reflected when the CMHC releases its next Calgary Housing Outlook report.
Resale Market and New Home Inventory
In general, an increasing supply of homes in either the resale market or in new home inventory should put downward pressure on house prices. While it is still very early in the 2015 calendar year, data from the Calgary Real Estate Board (CREB) indicates that YTD sales in 2015 vs. 2014 are down 33%, new listings are up 46%, and active listings are up 78%. We would expect that if these trends continue that they could cause downward pressure on Calgary house prices. It will be key to watch if these trends continue as the year progresses or are reversed.
Conclusions
While recent record low mortgage rates, which may get even lower could have the effect of increasing house prices further nationally, the Calgary housing market may be more dominated by the employment, income, population, resale market, and new home inventory factors due to falling oil prices affecting the local economy.
One final item to note is that Canadians have some of the highest house price-to-income ratios of all developed countries, according to a study by the OECD.
In addition to this, Canadians have record high levels of household debt, and as an RBC Economics Report indicates, the Canadian household debt-to-income ratio is now greater than the US:
2015 should be an interesting year for Calgary housing prices as well as the Canadian market as a whole.