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Wednesday, December 22, 2010 - Kelly Grant's 2011 Real Estate Market Forecast for the Greater Edmonton Area

This article contains my personal REALTOR® opinions, analyses, and forecasts for the Greater Edmonton Area real estate market in 2011. With the turbulent and plummeting economies and real estate values in many areas across the United States resulting from the stock market crash a few years ago, many investors and resident homeowners are very interested to know what collateral future impacts, if any, may be experienced by the Canadian real estate markets (including Edmonton) and what one should watch for if deciding to invest or sell property in Canada or the U.S. in 2011 and beyond.

There are many factors that affect real estate values in general including but not limited to the following: fluctuating supply for both resale and new builds; fluctuating demand; Bank of Canada interest rates; bank lending requirements; the time of year; consumer confidence in the overall economy; past comparable sales; current actives (choices to buy); net migration / immigration of people moving in and out of an area, regardless if renting or buying a principal residence; other local Alberta factors such as price of oil and gas; etc.

While it may currently be impossible to estimate the exact impact as to how all of these varying forces will intermingle to affect the sale price of a specific property in today’s market, one way to forecast the future market is to look at the past six month sales as a ratio of the current actives.

For example, look at the table I have created below (figures are for December 22nd, 2010) to view details of actives, sales, and the past 6 month sales ratios for a variety of locations and property types (I am not aware of an official ratio term but in this analysis I will assume an acronym ‘P6MSR’):

Past 6-Month Sales Ratio [P6MSR] (area ‘a’ for property type ‘b’) = # of Active Listings divided by # of Sold Listings over the past 6 months (both measured within area ‘a’ for property type ‘b’)

Estimated Months’ Worth of Active Listings [EMWAL] (present sales rate, area ‘a’ for property type ‘b’) = P6MSR * 6 Months (area ‘a’ for property type ‘b’)


 

When reviewing this table for the two largest urban cities in Alberta, it is important to notice that the P6MSR for Edmonton and Calgary are quite similar. For residential housing and half-duplexes, Calgary has a slightly lower P6MSR than Edmonton (0.63 vs. 0.69) which would indicate a slightly better Sellers’ market in Calgary. Both markets are reasonably balanced with an estimated 4 months’ worth of active listings (EMWAL) so I would anticipate between a flat 0% market to a very modest 1% to 2% increase in home prices for both cities for 2011. As for condominiums, the P6MSR are quite similar between Calgary and Edmonton (0.83 vs. 0.85). Because the condo P6MSR are well above 0.75, this indicates a Buyers’ market and thus most condo Sellers will need lower list prices in order to attract the Buyers. I would therefore forecast that condo prices in both Edmonton and Calgary could be headed for a 5% decrease over 2011 in order to balance the Past 6 Months Sales Ratio (P6MSR) in a range between 0.6 and 0.75.

As for other parts of the Greater Edmonton Area, Sherwood Park has the lowest residential and condo P6MSR (both near 0.6) so it is definitely a Sellers’ market and could be expecting in the range of 3% to 5% sale price increase in 2011. St. Albert has relatively stable housing with a slightly weaker condo market. I would anticipate 2 to 3% increase in sale prices for St. Albert housing in 2011 with a balanced, steadily priced condo market.

Next for Leduc, Beaumont, Spruce Grove, and Stony Plain, the P6MSR is over 0.8 so this makes it very clearly a Buyers’ market. To level out the sales ratio, I predict house prices in these communities will drop in the range of 4% to 6% in 2011. For condos, the news for Sellers gets worse. The P6MSR in the South towns are 2.67 and in the West towns are 1.57. In both cases, this is an unbalanced Buyers’ market. To level out the ratios, I think it could take price drops in the range of 15% to 25% in order to entice more investment and resident Buyers to purchase a condo in these communities. I would caution condo Buyers in these areas to be careful and for condo Sellers it may be necessary to list as low as possible in order to sell in that type of market with the P6MSR at such high amounts. Part of the reason for the sluggish condo sales could include slower economies (net outflow) as well as over-building of new condo developments. These condo ratios are expected to substantially improve for these communities within the next three to five years as their economies improve, prices drop, and the over-building slows down.

For my commercial properties forecast, it appears the Greater Edmonton Area has a stronger commercial market than the Greater Calgary Area with P6MSR much less at 4.11 vs. 6.07 for Calgary and a whopping 6.52 for Vancouver. Note the P6MSR is expected to be much higher for commercial properties than for residential properties however a ratio above 3.0 (despite the rareness and uniqueness of commercial properties) in my opinion is an indication prices are expected to drop. I predict in 2011 that commercial sale prices are likely to go down in Calgary and Vancouver by as much as 10% to 15% or more as the sales ratio becomes more balanced in favour of Sellers. As for the Edmonton market, a 4.11 ratio would indicate that commercial sale prices could also be heading down but I would forecast a lesser drop (e.g. 4 to 6%) to balance out the sales ratio. Using the Edmonton commercial market as an example, aside from the common known factors of higher interest rates and increased banking requirements for commercial purchasers and on purchases, I believe two other important reasons exist for sluggish commercial sales: (a). there is a high demand for stand-alone buildings while there is only a modest demand for connected condo-style buildings; and (b). There is a high supply of connected condo-style commercial buildings while there is a relatively low supply of stand-alone commercial buildings. While it may be cheaper to build and easier for builders to make a profit by building connected buildings and sell out the units, I predict the commercial market in the Greater Edmonton Area will not drop as much for the higher-demand stand-alone buildings as it will for connected condo-style buildings. Commercial land parcel average sale prices could drop the highest % over all types in 2011 with many parcels listed at extremely high $ per acre prices and lingering on the market for months.

The final category is acreages (not illustrated on the table above) - while acreages usually are a much tougher sale than houses or condos, the rural proeprties market outlook for both the Greater Edmonton Area and the Greater Calgary Area (i.e. rural properties located within about 40 minutes from the urban centres) is not positive. In the case of Edmonton, there are 1028 active acreage listings, 387 sales in the past six months, P6MSR of 2.66 and EMWAL of 1 year, 4 months. For Calgary, the numbers are slightly better but very similar: 763 active listings, 300 sales in the past six months, P6MSR of 2.54 and EMWAL of 1 year, 3 months, 8 days. In both areas, I would estimate an average sale price decrease in the range of 10% to 15% in 2011 to level out these ratios, and more sale price decreases for acreage properties could be coming up in the following years. I would caution acreage Buyers to be careful for a number of reasons, most significantly for Buyers buying to hold for a short time and may need to sell quickly to extract equity. Western Canada acreages are not as liquid of assets as are houses and condos, so I believe acreage Sellers will need to be very patient for a sale and in most cases (unless it is a very unique and desirable property in a fantastic location) acreages will need to be very aggressively priced throughout 2011 in order to have a good chance of selling. 

In summary, while these ratios may be somewhat helpful for investors and anyone looking to decide the right time to sell or buy within the Greater Edmonton Area, I would advise that these ratios are incredibly important for anyone looking to scoop up properties in other markets such as the United States. Many Canadians could mistakenly believe that investing $150K or $300K for a property in the U.S. looks like a good deal vs. pre-2007 market crash levels, however if the P6MSR are well over 1.0 (with the massive foreclosure rates in many areas it is possible many of these ratios might be well over 3.0 or 5.0) with many years’ worth of listings (e.g. EMWAL over 2 years) currently on the market then this means that prices will still continue to drop for many months and years in the future in order for these ratios to balance (i.e. it can be a situation in many areas of the U.S. and elsewhere there are thousands more Sellers than there are willing, able, and qualified Buyers). As a result, when buying in the U.S. or any other struggling economy my advice would be as follows: (a). Do your homework in advance to find the best REALTOR® available to work with; (b). Ask the REALTOR® to provide you a list of properties that closely match your criteria along with statistics on # of current actives, # of past 6-month sales, etc. in varying areas; and (c). Compare the P6MSR and EMWAL in that market with those ratios in stronger Canadian markets to make sure you understand the type of market and associated risks you are buying into. For example: if you are buying with the intention to exit the market in five years with your investment, it makes no sense to buy in a depressed market for $150K if there are currently 5 years’ worth of listings on the market (and no Buyers), and in five years the taxes go up while the property value drops much further for example to $80K or less. Compounded to this fact: the very high and increasing risk, time, effort, and expense of owning and maintaining properties at long distance (including some U.S. cities, counties, and states facing bankruptcy and escalating property tax hikes as well as forced cutbacks in essential government services such as police and firefighters causing increased danger for residents and property-owners). For these reasons it may be much wiser to invest that same amount of money in a higher-priced but more stable Canadian market with better P6MSR and EMWAL ratios.

In closing, I will take this opportunity to wish everyone (my past clients and future clients) a safe, warm, and prosperous holiday season and Happy New Year!

[Article written and ©2010 by Kelly Grant, M.Eng., ABR, NCSO, P.Eng. - REALTOR® at Maxwell Devonshire Realty in Edmonton, AB]

Disclaimer: for those readers not currently represented by another licensed REALTOR®, to obtain more information on this topic and / or if you are serious about selling or buying in the Greater Edmonton Area, call Kelly at 780-414-6100 (pager) or send Kelly an email to SOLD@KellyGrant.ca to schedule a confidential appointment.

* Note the following assumptions were made when analyzing the Past 6-Month Sales Ratios (P6MSR) and Estimated Months’ Worth of Active Listings (EMWAL) illustrated in the above table:
(1) The number of past 6 month sales can be used to forecast what will happen in that same market over the next six months. While this will definitely not be 100% true since markets will fluctuate (sometimes month to month or week to week) it can be argued that reviewing the most recent sales when forecasting makes more sense than reviewing sales from two or three years back because those markets are less reflective of today’s current events. Going back only two or three months can also be deceptive as markets can fluctuate wildly from month to month so looking at a 6 month timeframe can help to level out this effect. Note that the inconsistencies of the past 6 months analysis timeframe is balanced by including all current actives.
(2) Only residential and commercial properties that are offered on the MLS™ and CLX™ (i.e. listed with a licensed REALTOR® and brokerage in the Province of Alberta and who are solvent members of the local real estate board in good standing) are being used for this analysis. Other properties (e.g. for sale by owner offerings or offerings by non-REALTORS® with unlicensed real estate companies or commercial companies who are not members of a local board) are not used for this analysis since the substantially higher Buyer risk typically incurred in dealing on these properties can skew the market data vs. licensed REALTOR® listings that help minimize transaction, viewing, and legal risks for Buyers and Sellers. [To check if a company is properly licensed with RECA to practice real estate in Alberta visit www.reca.ca.]
(3) Buying rates will fluctuate so if the market heats up or slows down the ‘estimated months’ worth of active listings’ (EMWAL) will correspondingly increase or decrease as time progresses.
(4) Supply rates (i.e. property listings) will fluctuate as more properties are added to or taken off the market (i.e. expired) so again the EMWAL will correspondingly increase or decrease as time progresses.
(5) It is presumed that the days on the market statistic is irrelevant (ignored in this particular analysis) because days on the market do not account if a property has been listed and relisted multiple times nor does it take into account the rapidness of sale (i.e. actual days on the market) with a sudden price reduction which is a different measure of days on the market.
(6) When looking at P6MSR, as the ratio gets larger, it becomes more of a slower Buyers’ market and above a residential P6MSR of 0.75 (commercial P6M ratio above 3.0) I would expect sale prices to become lower as time progresses. Conversely, as the P6MSR gets smaller, it becomes more of a faster Sellers’ market and below a residential P6MSR of 0.6 (commercial ratio below 2.0) I would expect sale prices to become higher as time progresses.
(7) Commercial properties are more complicated to analyze as a grouping since most properties are unique – businesses can have very specific requirements and when the perfect property in a prime location comes along, often the business must act fast despite the risk of overpaying because the cost of not having the space to use for the business can outweigh the extra cost of waiting a few months or years until a more suitable cheaper property comes onto the market.
(8) P6MSR will vary somewhat for unique properties and for specific neighbourhoods within large geographic regions.
(9) Other varying factors can include: condition; upgrades; lot size; property size; age built; basement; parking; features; etc.
(10) When buying or selling property, Buyers and Sellers are encouraged to contact and hire a qualified and experienced local REALTOR® for information on statistics, risks with buying and selling, and handling facets of the real estate transaction.

 

posted in General at Wed, 22 Dec 2010 18:15:40 -0700

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