Resale Market

Resale Market: Buyers'

Market Conditions

The resale market remained in buyers' market conditions during the second quarter of 2008 because of a heightened level of supply and a cut in demand. Year-to-date June 2008, total resales have amounted to 13,525 units, almost a third lower from the 19,976 sales reported in the same period in 2007. A lower level of inter-provincial net migration and past price gains has impacted demand. With prices below the peak of 2007, the opportunity for speculative transactions has been cut and the flow of investor money into the market likely reduced too. The total average price in June was $418,866, down 2.0 per cent from June 2007. Most of the price decrease from the peak occurred during the second half of 2007. The total average resale price of $416,109 at mid year is 1.1 per cent higher than the year-to-date 2007 average price of $411,634. Active listings remain elevated at mid year after reaching an apparent peak in May, and will continue to moderate price growth.

Price stability will be restored as active listings decrease and this will increase consumer confidence. Buyers' market conditions do not last forever and supply is expected to peak this year. A movement towards more balanced market conditions is expected in 2009 as supply comes down and improved affordability increases demand.

Economy

Economy Continues to

Create Jobs

Employment in Calgary reached a record high of 707,500 in June, up 3.1 per cent from a year earlier. The strong employment gains in June helped increase the year-to-date total by 18,000 jobs as compared to mid year 2007, or up 2.7 per cent. The majority of jobs created in June were part-time. However, full-time positions accounted for 74 per cent ofthe jobs created year-to-date.

The participation rate rose to 77.3 per cent, slightly higher than last June, as students entered the labour market. Calgary's economy was able to create enough jobs in June to absorb the new workers and keep the unemployment rate at a low 3.0 per cent. People looking for work should be able to find it in Calgary. Wage gains at the beginning of the year have increased the year-to-date May average weekly earnings to $948, up 6.7 per cent as compared to a year earlier. So far this year, average wages have grown faster than average housing prices and this has increased homeownership affordability. There are indications that inter provincial net migration is again supporting housing demand. Aftertwo consecutive quarters of losses, inter provincial net migration to Alberta increased by 713 people during the first quarter of 2008. The forecast for net migration to the Calgary CMA is expected to remain relatively flat in 2008 and 2009. And although inter-provincial migration has recently turned positive in Alberta, it has not been strong enough yet to move housing markets into balanced conditions.

Net Migration Estimated

Lower

Inter-provincial migration flows estimated by Statistics Canada's for the second half of 2007 show Alberta experienced a net loss of 4,196 people to other provinces and territorial jurisdictions. The last time Alberta experienced two consecutive quarters of negative net interprovincial migration was in 1994. Thankfully, Alberta is still gaining from international migration and this has outweighed the recent inter-provincial losses. Nevertheless, Alberta net migration in 2007 amounted to 43,242, down 47 per cent from the 81,480 net migrants in 2006. A key indicator of rapid household formation and housing demand is net migration and this has been weak since the second half of 2007 and explains some of the decrease in housing demand experienced in the Calgary CMA. Net migration in the Calgary CMA is estimated to have reached 17,000 in 2007, roughly half the number of 2006. The growing economies in Saskatchewan and British Columbia are attracting people from Alberta's major centres and this will keep net migration close to current levels. In 2008, net migration in the Calgary CMA is forecasted to reach 16,500 and moderate further to 15,500 in 2009.

MORTGAGE RATE

OUTLOOK

Mortgage rates will

remain relatively flat

Posted mortgage rates eased by about 50 basis points in the first four months of this year, although rates in late April were 30 to 35 basis points higher than they were 12 months prior. Mortgage rates are expected to trend marginally lower throughout 2008, but will be within 25-50 basis points of their current levels. For 2009, posted mortgage rates will begin to drift up slightly as the year progresses. For 2008 and 2009, the one-year posted mortgage rate is forecast to be in the 6.50-7.50 per cent range, while three and five-year posted mortgage rates are forecast to be in the 6.75-7.50 per cent range.

RENTAL MARKET

More Choice for Renters

Net migration to the Calgary CMA has been revised downward. Although Calgary's migration numbers for 2007 have yet to be released, it is expected that Calgary contributed to the negative inter-provincial migration Alberta experienced during the second half of 2007. The lower level of net migration will continue to impact demand for rental accommodations in 2008 and 2009. In 2006, Calgary experienced a record level of net migration and this was a dominant factor pushing Calgary's rental vacancy rate to a record low 0.5 per cent. Since then, vacancy rates have been rising in the face of declining net migration. In October 2007, the vacancy rate increased to 1.5 per cent and is forecasted to rise to 2.5 per cent by October 2008. Renters are expected to have even more choice in 2009 as the average vacancy rate is forecasted to rise into the three per cent level. There have not been any market rental starts in the Calgary CMA in 2008 and there will likely not be any significant supply of purpose built market rental apartments over the forecast period. However, this does not mean there is no new supply being added to the rental market. With a record number of condominium units being built in the Calgary CMA, it is estimated that over 20 per cent of these units have been bought by investors and that at completion these units will be made available for rent. Another area of supply for renters is the secondary rental market of single and semi-detached units, row units, and suites. Originally built for homeownership, many of these dwelling types are finding their way into the rental market. CMHC's October 2007 survey estimated a total of 49,052 secondary rental units of this type. Furthermore, this type of secondary rental product is larger than the universe of purpose built apartment units. When condominium prices were rising rapidly in 2006 and 2007, there was a large economic incentive to convert rental apartment units and sell them as homeowner condominium units. Given the current level of condominium supply in the market place, lower level of demand and price uncertainty, the number of rental conversions is expected to have peaked last year. Overall, the rental market will be more balanced in 2008 than it was in 2007. In 2008, renters will likely not face escalating rents as property owners will want to maintain quality tenants in an environment of rising vacancies. In October 2007, the CMHC rental market survey found the average two-bedroom rent to be $1,089 per month in the Calgary CMA, a $129 per month increase over the previous year. CMHC projects the average two-bedroom rent will be $1,140 per month by October 2008. With the vacancy rate moving up in 2009, rent growth will almost be flat as the average two bedroom rent is forecasted to be $1,150 per month.

Single-Detached Starts

Down

Single-detached starts continue to be impacted by a high level of competition from the resale market, the rapid price escalation from previous years, and weaker net migration. Rising inventories are also a contributing factor leading to lower production. After one quarter, single-detached starts have amounted to 1,067 units, down almost 38 per cent from the first quarter of 2007. The drop in single-detached starts has contributed to a lower level of construction activity this year. At the end of March, there were 3,888 single-detached units under construction, down 37 per cent from a year earlier, and to a level that approximates the average monthly construction activity in 2005. In March, 729 single-detached units were completed while 614 units were absorbed. As a result, inventory rose by 115 units to 613 completed and unabsorbed units, up 46 per cent from a year earlier. The inventory of 613 units consisted of 371 show homes and 242 spec homes, the highest number of spec units in inventory since May 2005. Slower new home sales, rising inventories, competition from the resale market, and unstable pricing has been a sign for builders to cut production. The pull-back of construction in 2008 should ensure inventories are managed appropriately, and allow for some growth in starts in 2009. In the Calgary CMA, the average absorbed price of a single-detached house was $561,659 in March, up almost 33 per cent from the average reported in March 2007. While the average absorbed price reflects new home prices absorbed in March, it should be noted that the price pressures reflect those from an earlier period, as the price was likely negotiated before construction began. Twelve months ago, the annual gain to Calgary's New Home Price Index was sitting at 38 per cent, but has since moderated substantially. Currently, new home prices are under pressure from intense competition created by weaker demand, heightened inventories, and huge competition from the resale market. By year-end, when builder incentives are factored into the average price, the average absorbed price of a single-detached home is forecasted to be $550,000,

up almost 16 per cent from the $474,512 reported in 2007. As the market moves into more balanced conditions in 2009, price growth will be in the single digits taking the average absorbed price to $564,000.