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Making Sense of Edmonton’s Real Estate Market-What’s happening and Where are we Headed?

Under Market Update


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Written on October 24th, 2018

The real estate market in Edmonton isn’t hot. Though the average sale prices reported portrait a minimal decline, the true market value of a given home has decreased far more than it appears. An average sale price reflects what people are spending and is not parallel with actual home values. While we’re spending about the same, buyers are getting more house for their money. It is the largest correction in over a decade. In 2006 – 2007, we saw a sharp upward spike and the market began to correct itself quickly. Adding fuel to the fire, the Global Financial Crisis hit us the following year and the result was a significant price correction. When comparing the numbers, there are some close parallels between the corrections of 2008 and 2018; Supply and Demand levels are almost identical with 45% of homes selling in 2008 compared to 46% this year. There was more inventory then by comparison, but surprisingly more homes were selling as well. 2008’s market conditions were an easily explained recipe. Boom-Bust + Global Recession. 2018 is a different story; we’re not coming off of a boom cycle & the Global economy is doing well. Locally our labor force is recovering (albeit slowly) & oil prices have gradually risen. By no means is our economy hot but it’s improved from 2 years ago. Given this, it would be fair to expect the real estate market to follow suit-except it hasn’t. At least not yet…

Today’s market conditions are not a result of one major culprit and if one of any were the lone factor, it’s effects would be nearly inconsequential. The largest influencers affecting our market can be abridged to the following:

1.       Mortgages (Stress Tests and Rate Increases)

2.       Climates (Political, Economic and Weather)

3.       Social proof

 

In January 2018, the Bank of Canada initiated yet another tightening in mortgage lending criteria. They had been warning us for several years that lending rates would soon be returning to “normal” levels. In effort to avoid future chaos, they implemented a qualification process that would have all buyers, regardless of their down-payment amount, qualify for a payment with a higher rate than that which they actually pay. It was expected that the change would cool down our largest markets-Vancouver and Toronto, where prices were rising to levels out of reach for most buyers. But in the remaining markets where homes were still affordable, the new lending criteria should simply force buyers to make a more sensible choice. This reduced an average buyer’s maximum purchase price by roughly 20%. The buyer who previously qualified for a purchase of $400,000 might now only qualify to spend $320,000. Logic would suggest that in a market like Edmonton, this buyer might purchase a Duplex or Townhouse product instead of a Detached house. If this were the case, we could expect the higher end market to soften but the lower end market to improve. It hasn’t worked out that way. On the contrary, the condo and townhouse category actually suffered more than any other. It appears that this buyer demographic chose to hold off on their purchase entirely. Meanwhile interest rates have been steadily increasing throughout the year, finally reaching the “normal” levels the Bank of Canada has been targeting. The result is yet another factor in tightened qualification amounts and we must now acclimatize ourselves to a new status quo.

 

Though better than it was a few years ago, the political and economic climates haven’t been kind to our province. With a never-ending stream of challenges- attacks on our oil industry, pipeline disagreements, Fair-Trade renegotiations and a general lack of confidence in both our Provincial and Federal Governments- we’ve been riding a roller coaster of uncertainty. Skepticism in our economic future will naturally cause consumers to spend more cautiously. When we’re playing defense with our finances, we’re not thinking of upgrading or making any moves that aren’t necessary. Only those with a clear purpose for moving are doing so, naturally producing a smaller pool of buyers. In regard to our more recent slowdown, the actual climate (as in the weather) has been a legitimate factor. Though August was warm, the smoke from the forest fires of BC took our sun away, then rather than the beautiful Septembers we’ve come to expect, we were hit with snow and rain in its stead. 2 months without sun; a lack of Vitamin D contributes immensely to our energy, and our energy contributes immensely to our motivation- this includes buying homes.

 

Social Proof is a factor we rarely give attention to, yet it is one of the most powerful. Humans indisputably need reassurance when making decisions in which they aren’t accustomed to regularly making. When making decisions as significant as a home purchase, our human nature will prompt us to seek validation from others. When others are doing similar things, it makes us more comfortable. When they aren’t, we’re more likely to question our choices. We only need to look at the stock market to compare. The best investors in the world will tell us that the proper way to invest is to buy low and sell high, yet evidence shows us time and again that despite what we know, this is not how we generally behave. Managing our emotions is difficult and the majority of investors default to following the herd. We play not to lose. How much more confident would you feel in your purchase if you knew that another buyer wanted the same house and was willing to pay an amount equal or greater?  That home’s value would immediately increase, simply by your perception. Conversely, when we believe that nobody else is interested, we’re likely not as willing to pay the same amount-or even farther, we may not be convinced to buy it at all. Social Proof is playing a large role in our current market situation.

 

2018 hasn’t been a kind year for Edmonton Real Estate. When does it change? No one can say with absolute certainty, but I believe we’re close. We have both a provincial election and a federal election coming in the new year. The new mortgage criteria are already being accepted as our normal and new inventory is starting to slow. Prices have come down to levels where it’s an obvious bargain in comparison to where we have been, and consumers are beginning to recognize this. For the pendulum to swing in a positive direction, it takes only a simple change to ignite a spark. When the media recognizes the change and announces positivity, consumer confidence is strengthened. Demand increases with more buyers in the mix, while home owners who don’t need to sell begin to hold because they perceive their homes as a worthy asset to retain. Supply levels cool down, and then Social Proof is in full effect-this time in a positive direction. It becomes a self-fulfilling prophecy. This is not an occasional occurrence. It is consistent and predictable. Those who recognize it take advantage early and those who wait might wish they had acted sooner. Real Estate can be unpredictable on a micro level, yet very predictable on a macro level. Respect that emotion is its greatest influencer. If you can do this and still separate yourself from your own emotion, you can make better strategic decisions. Those able to do so will reap the benefits and those who cannot, will look back once it’s too late and think “that was so obvious!”. If your confidence in our city is currently low, simply remind yourself of where you’re living. Edmonton is still in growth mode. Intelligent people and businesses continue to bet on us, with so many exciting projects in motion. We’re also located in one of the most resilient provinces, in the one of the greatest countries in the world. That is as safe a bet as they come…

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