Calgary house prices: Nothing stays up forever

Worries about Canada's housing market typically come in a few popular shapes. Overinflated prices may crack due to a recession or higher interest rates will send mortgage costs past the limits of stretched household budgets.

The Bank of Canada, safe to say, is determined to fend off the rates scenario until either the economy is humming or consumer debt levels become more manageable. As for a recession, Calgary's once-sizzling housing market is now offering something of a blueprint for what might happen to prices in other cities with seemingly indomitable markets, like Vancouver and Toronto, when an eventual turn finally arrives.

The takeaway so far? House prices don't fall nearly as fast they go up.

High-profile layoff announcements from some of Calgary's biggest employers are weighing on the mood of the city, as well as expectations for its real estate market. At some point, the thinking goes, the ramifications of thousands of job losses will surely start biting other parts of the economy.

That's starting to be the case for Calgary's housing market. After an uptick in August, prices which were down around three per cent, are now basically flat on the year, according to the Teranet-National Bank house price index. 

On a $500,000 home, the three per cent drop that prices were clocking equates to a $17,000 haircut, which isn't insignificant. Still, a softening market that's now clawed its way back to flat isn't the bubble-popping plunge that might be feared given Calgary's spot at the epicentre of an oil-inspired downturn that's sideswiped the growth from the country's economy.

It is, however, par for the course given how housing markets rise and fall.

"House prices tend to adjust by being stagnant or declining slightly over a long period of time. That's a more typical adjustment process than a sharp decline," said Tsur Somerville, a director at the University of British Columbia's Centre for Urban Economics and Real Estate. "People leaving and incomes declining is what's going to push house prices down, but it's very hard to see Alberta turning back the clock 15 or 20 years on employment and population."

Seller's paradise

During good times for a city's housing market, when employment prospects are juicy and incomes are rising, population gains create a surge in demand that swamps the available housing supply. It's a seller's paradise familiar to house hunters across the country.

Consider Calgary, which saw its population jump from 750,000 in 1995 to more than 1.2 million last year. At peak housing craziness in 2006, year-over-year price increases reached 50 per cent.

The city's recessionary experience is illuminating the differences between market dynamics on the way down versus the way up. As ever, supply and demand fundamentals will eventually win out, but before that happens considerations such as consumer psychology, family finances, and job market expectations will all factor into the pace of any house prices declines. 

"If a downturn is not expected to be particularly prolonged, then people may be prepared to sit tight and wait it out and not list their house," said Robin Wiebe, a senior economist at the Conference Board of Canada. "Like anything else, people don't want to take less than what they paid for their house and they're going to resist selling it for a loss."

While the relationship between employment and housing is straightforward — jobs make houses and mortgage payments affordable — the timing of when layoffs start showing up in the real estate market is more complex.

The nature of a downturn and the perception about future job prospects among the recently unemployed both factor into the lag time between unemployment rising and house prices declining.

If a slump drags on long enough, financial imperatives will eventually dictate whether houses get dumped onto a market, but in the short term, layoff announcements don't necessarily translate into an immediate spike in listings.

A dual-income household, for instance, may be able to manage through a rough patch without having to make a snap decision about moving to greener pastures. Severance packages can also help bridge the financial gap of covering mortgage costs, as will any savings that may be tucked away.

Will jobs come back?

Financial and emotional costs also make relocating a decision that's not entered into lightly.

In Calgary, in particular, the nature of the oil industry means the job market could turn around in short order. Expectations for a recovery, especially for those with a skill set specialized for the energy sector, will encourage people to ride out a downturn rather than head elsewhere.

"It's going to take six months, a year, perhaps longer for someone to say, 'Hey, I have to move back to the States or I have to go to B.C. or move to Ontario, wherever the jobs are," said David Dale-Johnson, head of the real estate program at the University of Alberta's business school. "Those decisions aren't made quickly, you have kids in school, you have all kinds of things going on."

During the last recession, the drop in Calgary's house prices troughed at 11 per cent. This time around, any declines will be determined by the length and intensity of the downturn.

If house price gains in the last decade were a function of rising incomes and population, then those factors will eventually need to reverse to cause a dramatic revaluing of the market. As rough as the next few months could be for Calgary's job market, people still aren't expected to pull up stakes en masse. 

Until that happens or the economy recovers, the housing market, if history is any guide, won't be in for a sharp plunge, as much as a steady grind lower.