The Calgary in the coal mine

Why is Cowtown the one place in Canada where housing prices aren’t climbing?

Home prices in Canada continue to defy gravity, rising another 8.9% in the 12 months to March 2011, on top of what most economists already consider overvalued levels. The appreciation was still greater in the major cities, except for one: Calgary. Average resale prices there fell 3.3% in March compared with a year earlier (the sixth consecutive month of year-over-year decline), according to the Teranet-National Bank National Composite House Index. Does this reflect the unique dynamics of one market, or will the city become, like Washington, D.C., in 2006, the first domino to fall in a coast-to-coast crash?

“Calgary may be the first and others may follow,” muses David Madani, Toronto-based economist for Capital Economics, among the most bearish economic consultancies on the subject of Canadian real estate. While acknowledging that “the volatility in Calgary is a little more pronounced” than other cities, Madani reiterates his firm’s view that all of Canada is probably in for a U.S.-style housing contraction, and soon.

“This housing bubble is pretty much a national issue. It’s not just a Vancouver issue or one or two markets,” Madani says, summarizing a report that Capital Economics issued April 29. Income growth is insufficient to close the gap with residential price growth over the past decade, which is why the firm is predicting a nationwide price correction somewhere in the neighbourhood of 25%.

Calgary realtors dismissed the report, blaming the decline in prices and sales on the 40%-plus increases of 2006 and 2007, as well as a brutal winter that kept buyers indoors. Speaking in Calgary on May 4, Scotiabank chief economist Warren Jestin expressed optimism for a pickup in sales activity, based on the city’s “very, very solid” job growth and demographic fundamentals. But data recently released by the Canadian Bankers Association show 0.83% of mortgage holders in Alberta have not made a payment in the past three months, the highest rate of delinquency in the country. There may be many more homeowners who could be pushed to the edge by a rise in interest rates. Nevertheless, that’s barely one-tenth the delinquency rate in the U.S., even after the property crash.

One astonishing sign of the times is that, with the Canadian and U.S. dollars at par (at press time the loonie was at US$1.04), Canadian homes now cost around double what their counterparts do south of the border. The Canadian Real Estate Association reported an average national home price of $371,286 in March, while the National Association of Realtors’ median for homes in the U.S. stood at US$159,600. CREA is projecting a 12-month average price of $352,500 for 2011.

Should Canada repeat the American experience, Calgary homeowners can console themselves with the knowledge that while Washington, D.C., was the first major market to crash, it was also the first to see prices start rising. It just took four years, and a quarter of homeowners’ equity.