City's housing market going through a correction, not a crash

After six years of escalating prices, only surprise is that it took so long

EDMONTON - Relax, folks. It's time for a chill pill. The sky isn't falling on Edmonton's once-torrid housing market.

Yes, prices are softening a bit. The average price of a single-detached home slipped 3.2 per cent in August, to $403,757. The average condo price slid one per cent, to $269,139.

With MLS inventories at record levels, buyers can now take their time. The pressure on buyers has lifted. Multiple offers -- common just a few months ago -- have all but disappeared. Sellers are reducing their prices.

In stock market lingo, this is called a correction. Every other housing market in the country has had one. Now it's Edmonton's turn.

Realtors say they wouldn't be surprised if average prices fall by six or seven per cent from their July peak, before levelling off in early 2008. If so, that would take the average single-detached home price down to $388,000.

Still, for anyone who has both feet planted firmly on the ground, none of this should come as a surprise. The only surprise is that it took so long for Edmonton's overheated housing market to take a breather.

Consider a few facts. Between January 2002 and July 2007 -- a period of 72 months -- local house prices went virtually straight up.

During that period, the average price of a single-detached home rose from $162,780 to an all-time high of $417,150, for a gain of 156 per cent. At the same time, average city condo prices soared by 173 per cent -- to $269,139 from $98,554.

The biggest gains occurred between the end of 2005 and July 2007, when inventory levels simply couldn't keep up with rising demand. During that 17-month stretch, average single-detached house prices rose from $225,130 to $417,150 -- a gain of 85 per cent. Condo prices soared 82 per cent, to nearly $272,000 from $149,254.

There were sound reasons for the big jump in demand, of course. Interest rates were low, and Edmonton's economy was among the hottest in Canada. That drew thousands of newcomers from all parts of the country.

On the economic front, not much has changed. Edmonton is still a magnet for job seekers. Unemployment remains low, job creation is still high and local rental vacancy rates are puny.

Oil prices -- the key driver of Alberta's economy -- hit the highest level in history Wednesday, touching $80 US a barrel.

Roughly $150 billion (Cdn) worth of oilsands megaprojects or related upgraders are planned or underway.

Oilsands output is expected to triple to three millions barrels a day over the next decade.

Roughly a dozen upgraders are slated for the Edmonton region. Thousands of new jobs will be created.

If anything, Alberta's oilsands, despite rising costs and growing pressure to curb greenhouse gas emissions, are only growing in stature, accounting for much of the gain in worldwide oil reserves in recent years.

There's another key factor behind the big surge in Edmonton house prices. Much of it was catch-up. While house prices soared in cities like Vancouver and Toronto in the 1980s and 1990s, prices in Edmonton stagnated.

Even after including the gains racked up through the end of 2006, local house prices rose by less than one per cent annually, on an inflation-adjusted basis, over the previous quarter-century.

By comparison, average house prices in Vancouver rose three times as fast, and prices in Toronto, Ottawa and Montreal rose more than twice as fast. Even cities like Halifax and Winnipeg outpaced Edmonton.

So where does all this leave Edmonton today? Well, despite the gains of recent years, local house prices remain among the most affordable of any major city in Canada.

According to an RBC Economics study released Wednesday, which measures the percentage of median pre-tax household income needed to cover the cost of mortgage payments, property taxes and utilities on four common housing types, Edmonton still looks like a bargain.

Whether the house in question is a condo, a townhouse or a standard two-storey home, Edmonton trails only Ottawa in terms of affordability. For detached bungalows, Edmonton ranks third, behind Montreal and Ottawa.

At the other end of the spectrum is Vancouver, which consistently ranks as Canada's most expensive city. If anyone can explain to me what keeps the housing market in Lotus Land afloat, I'm all ears.

To keep a roof over your head on the West Coast, RBC calculates that you'll need to allocate nearly 71 per cent of all pre-tax household income for a bungalow, and more than 73 per cent for a standard two-storey home. That's roughly twice what any financial adviser considers sustainable.

The benchmark price for a single-family home in Vancouver? It hit $726,067 in August, up 11 per cent from a year ago. That's roughly $323,000 or 80 per cent above the average price for a single detached home in Edmonton.

Curiously, I don't hear any economists ringing the alarm bells over a pending housing crash on the West Coast, where the economy is less robust and median household income levels are lower than they are in Edmonton.

The lesson in all this is clear, friends. Don't worry. Be happy.

The Edmonton Journal - September 13, 2007