Is Homeownership Still the Path?

Posted on: April 14, 2019

House Prices in Edmonton

If you had asked me 5 years ago where Edmonton’s real estate market would be today, I would not have guessed that the average house prices in Edmonton would be lower today than they were then. This has concerned many of us with the future of our local market. We have developed an expectation that our homes not only appreciate over time, but that they double in value over each decade. The past 10 years has not only failed to double but despite our average selling price showing a slight increase, the true value of most homes actually depreciated. It is not uncommon to see properties selling 20% lower today than they were purchased for 12 years ago. In rarer cases, others are selling as much as 40% lower than the original purchase price. Frustrated home owners as well as the new generation of buyers are left scratching their heads, wondering if home ownership still makes sense. Is real estate behavior changing for good?

The most effective way to predict the future is to study our past. Patterns re-emerge and always leave clues. Our closest comparable circumstance would be the market crash of the 1980’s. Historical data indicates that following the crash, our growth remained negligible for nearly a decade. We then experienced a modest spike in 1990, ensued by another 10-year period of mediocre growth. In 2000, the pot started to bubble with healthy year over year increases, leading up to the boom of 2006-2007. Prices had doubled in less than a 3-year span. Despite the correction that followed, the net annual price gain was sustained and became our new normal. 12 years has since passed and our average sale price remains nearly the same. (note that the graph included depicts price growth. When factoring growth by percentage, the gaps would look much smaller from the year 2000 and on)

The question we’re left wondering is when, if ever, do house prices start moving in the opposite direction? Can we still count on our homes to appreciate in value?

No one can deny the uncertainty in our situation. But within uncertain times, we can still depend on 2 constants:

1. We will always need homes to live in.

2. The law of supply and demand will never perish.

The demand for housing will continue to rise as our population increases both locally and globally. The recent mortgage rule changes coupled with our economic challenges have triggered renting as a more popular option over purchasing. As a natural result of higher demand, rental rates have increased. Savvy investors are beginning to identify a big opportunity. Comparing all Canadian cities, the gap between rental rates and the costs of purchasing point to our city as having one of the strongest investment potentials. That gap doesn’t exist in many Canadian cities as renting is often more affordable than owning in most major centers. Those who recognize this are quietly taking advantage. That is, until it is no longer a secret… As the trend swings farther into the opposite direction, it becomes more apparent. Social proof sets in and renters once again begin to evaluate the viability of renting vs owning.

Sale trends generally follow rental trends precisely for this reason. That is where the pendulum shifts within the economic cycle. Though timing isn’t perfectly predictable, behavior is…

At the moment, products are selling below replacement value. In some cases, well below. This is a trend that cannot be sustained. Builder activity is slowing as feasibility diminishes. Despite this, some buyers still insist on new product vs resale. Yet builders can only agree to move forward at rates that pay the bills. Though the local economy can force downward pressure on labor costs, the neighboring economies still influence us. If wages aren’t feasible here, workers can (and will) move elsewhere. The cost of building materials is controlled by a larger economy than our own. Building materials are seldom sourced locally and if they are, they are additionally supplied to other markets where demand is still high. As a result, costs continue to rise and builders’ hands are tied when it comes to price breaks. Price decline is not bottomless. In fact, the floor is rising beneath us….

When in the midst of a challenge, we can’t help but focus on the weeds we’re presently fighting through. Whether it is the political climate, the labor market or the attack on oil, it is easy to feel like we’re going through something we’ve never been through. Why? Because the details of our issues are legitimately new and the uncertainty it accompanies is disconcerting. But removing ourselves from our situation and observing from a 20,000 ft view, we’ve been here before. In fact, it is a predictable part of our economic cycle. The details are always different, and we can create compelling arguments as to why this particular situation will bring unique outcomes. But the cycle remains consistent….

When things are good, just wait-that will change. And when things are bad, just wait-that too will change. Our expectations often seem to get the best of us and so can our imaginations. When we’re caught up in what is happening right now, we tend to forget that nothing lasts forever. We discount our own resilience and ability to adapt to change-the most constant component in life.

When retail companies call for a sale, we typically run to take advantage of it. Whether it’s clothing, a new car or groceries, we all feel good about paying less for things that are cheaper today than they were yesterday.  Excitement substitutes anxiety because we know that if we wait until tomorrow, we’ll be paying more for the very same stuff. Real Estate and stocks are different. When sold at a bargain, rather than being excitement in taking advantage of the deal, we’re overcome with fear. Why? Because nobody tells us in advance when that “sale” is going to expire. The savvy stock broker or real estate investor understands this. They know that the true win of an investment is in the purchase, not in the sale. They recognize that when an opportunity (the “sale”) arises, they must master their natural human emotions and accept that they cannot time the bottom.

I see better bargains today than I saw in the midst of the correction in 2007, almost 12 years ago. In studying the line graph, I see an uncanny resemblance to the lull of the aftermath of the 1980’s crash. What’s missing though, is the spike that follows a long period of dormant growth. No one can accurately predict when that comes. But history shows us that the longer prices are depressed, the harder they bounce back. Opportunity lies in the midst of uncertainty. It is meant to be uncomfortable. While people are taking advantage now, the moment the masses catch on, that opportunity no longer exists. There are no advertised warnings for the end of the sale. If there were, it would be over as soon as it started….

Is buying real estate in Edmonton still worthwhile? Despite the economic climate, I see nothing unique in the patterns of today than those of our past. The tides of economics forever pull back and forth as we ultimately advance. There is no perfect prediction method, but my faith is in Edmonton not only continuing, but increasingly becoming an attractive place to live. As population increases, so will housing demands. One constant I have heard in my 12 years of selling real estate is: “I’m sure lucky I bought when prices were low. The only mistake I made was not buying more”. The opposite statement comes often as well: “I wish I hadn’t bought in the midst of the boom when everyone else was buying. I got caught up in the hype”. The former appears to have had luck on their side while the latter appears to be a victim of bad timing. The former likely bought without expectation. They intended to pay down their mortgage over time and own an asset. The boom just happened to accelerate their financial plan. The latter bought because they didn’t want to miss out, which is simply fear in a different form. Warren Buffet, one of the greatest investors of our time, attributes his success to being “fearful when others are greedy and to be greedy only when others are fearful “. It is a strange coincidence that Luck, as we call it, seems to favor those who create social proof, rather than follow it….

For a deeper explanation of social proof, “click here” to see my past blog.

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