JOSH BUCHANAN

October 17, 2015

Where we are today:

Although 2014 saw the highest number of Multiple Listing Service (MLS) transactions for the city ever, the second half of the year began to show subtle signs of an inflating bubble in the residential market. The gap between listings and sales began to widen which led to a noticeable rise in housing inventory. While these signs were small, it was just the beginning of a trend that led to a significant change in economic fundamentals in 2015.

The first three-quarters of sales in 2015 were right in line with the 10-year average and 12.3% below the numbers for 2014. The real game changer, however, has been the drastic increase in listings and inventory which have resulted in big declines in the sales-to-listings ratio and jumps in total month absorption rates.

How we got here:

In May of 2007, Saskatoon saw an unprecedented rise in sales numbers by reaching 581 MLS sales. During the prior twelve months, the average sales per month were only 325 units. Not only was this a very significant jump, but even more surprising was that average inventory going into May was just 275 units which computes to an approximate absorption rate of one-half of a month. Fast-forward to August 2015 and absorption rates were a whopping 6.25 months. The sudden jump in demand for housing in 2007, met by a shortage in supply, led to an astounding $65,000 increase in average sales prices from February to June of that year alone. Although May was a bit of an anomaly, it was just the beginning of a historical real estate boom in Saskatoon that is still maintaining high demand into the start of the 4th quarter of 2015.

There is a long list of factors that shape the dynamic of a residential real estate market. Some of the most important ones that made Saskatoon such a booming market from early 2007 to present include:

1) Low interest rates: After the global economic collapse in 2008, The Bank of Canada dropped interest rates to a historical low in order to stimulate recovery. The ease of borrowing and low rates prompted more residents of Saskatoon to take on large debt loads to purchase homes which ultimately fed demand and increased prices.

2) Immigration: From 2003-2006, Saskatchewan averaged an annual net loss of 4,295 residents but from 2007-2014 averaged an annual net gain of 11,264. After having low, flat and sometimes even negative levels of net immigration for so long, the surge in immigration from 2007-2014 created a shock in housing demand and quickly contributed to the higher number of home sales.

3) Supply shortage and slow adjustments: When provincial immigration numbers started to rise in 2007, the local housing market was not prepared to fill the demand. Right before housing prices began to surge, there were only 250 units of inventory on the MLS system in Saskatoon. With a market such as real estate, adjustments tend to be very slow as it takes a long time for developers to recognize trends and build new homes. This demand shock and supply shortage with a fixed supply in the short term led to bidding wars on the limited available housing.

4) Economic growth and job growth: The increase in housing demand alone created a huge number of jobs. There is a very long list of professions involved in real estate development from architects to carpenters, landscapers, and plumbers. Along with the growth in other sectors such as mining, oil & gas and professional services, Saskatchewan has been an economic hot spot for the past eight years that surprisingly emerged in the midst of a global recession.

5) Foreign investment: Although Vancouver would certainly be leading in this category, Saskatoon has seen a lot of money flow into the real estate market, especially from China. China has unquestionably been the leading source of the global economic recovery since 2008 and has helped prop up Saskatoon’s real estate market both by sending over wealthy immigrants and by purchasing investment property.

What we can expect to see next:

The average sales price for a Saskatoon home on the MLS in 2005 was $144,943 but just ten years later it is now $353,685; an increase of 144%. The simplest explanation for this drastic change was a sudden but permanent change in demand and a shortage of supply that was slow to respond. That being said, looking at current statistics up to Q3 of 2015, we are seeing a slight slowdown in demand with record highs of inventory and a falling sales-to-listings ratio. So logically, if a supply shortage led to a price increase, a supply surplus may very well have the opposite effect.

Buyers are now beginning to see that Saskatoon has shifted to a buyer’s market in terms of selection but they are slow to realize that prices too should be changing in their favour. While many developers are firmly holding their position on prices and adding features such as finished driveways or appliances into the sale to maintain asking prices, resale homeowners do not have as much wiggle room. Most people trying to sell a used home are unable to add such features, not willing to upgrade or simply not able to invest any more money into their properties in order to make a sale or maintain asking price.

Using the neighbourhood of Stonebridge as an example in the category of new single-family houses for sale by a developer on the MLS system, there are currently 46 listings with an average number of days on the market of 210. This means that as of October 17th, the average unit in that specific category has been actively listed for seven months without a sale.

Resale homeowners have little choice but to drop their prices when feeling threatened that their home will not sell quickly enough while developers have the advantage of adjusting the value added. However, all it would take is a few desperate developers or resale owners to create a domino effect. After a few sellers drop their prices, buyers and their realtors will recognize the new comparables and will no longer be willing to pay what less negotiable sellers are asking for, forcing them to compete with the desperate sellers.

As of the end of September 2015, the Canadian Mortgage and Housing Corporation (CMHC) is reporting 1,016 fewer new home building starts in Saskatoon for the year-to-date compared to the same period for 2014. One can only imagine how many jobs will be lost by a reduction in construction of that magnitude and what kind of spillover effect it will have on the economy. From realtors, to framers, landscapers, architects and roofers, a wide range of professions may find their workloads drying up. Also, The Government of Saskatchewan is reporting only a 1,959 increase in net provincial migration after the first two-quarters of 2015, a 69.9% reduction compared to the same time last year. If this pace were to continue in the remaining two quarterly reports of 2015, it would equate to a 65.2% drop in annual net immigration for 2015 compared to the 2007-2014 average.

How we could have avoided this bubble:

Just as there are key factors that inflated the bubble, there are key factors that could have mitigated it.

1) Interest rates: Interest rates in Canada are a flat, nation-wide rate. Although banks do have some flexibility in setting mortgage rates, the prime rate is fixed regardless of location. The Bank of Canada lowered interest rates in hopes of stimulating growth across Canada but Saskatchewan, however, did not require the extra stimulation. We were already in the initial stages of a booming market and the cut to rates created unnecessary overstimulation.

2) Foreign investment: For a country with such a low population and a large amount of land, we certainly pay more than our fair share for property. Not only is this notion counterintuitive, but it’s also odd to think that, for a country with high levels of immigrant regulation and government intervention, we have such lax regulations on foreign property investment. A tightening up of this policy would have regulated the number of foreign home purchases and controlled the surging level of demand.

3) Population growth: While immigration is what made this country what it is today and we all appreciate the social diversity that comes with it, we may have forced population growth in Saskatchewan just a bit. Rather than setting specific population targets and forcing that growth, perhaps we should have just made it known that we are willing to take immigrants and then let the market take care of itself and grow as necessary, not as desired.

4) Watch the signs: While the sudden shift in demand in 2007 would have been difficult to predict, it is easier to notice the swelling supply of home inventory in 2015. If the City, developers, realtors and other involved parties would have recognized the signs and adjusted accordingly, it would have been easier to reduce the number of new builds and limit the growing inflation of prices.

Alternative outcomes:

The quickest factor that would allow our local real estate market to maintain current price levels and absorb current excess inventory would be to see further increases in demand. However, considering the fact that economies are slowing both locally and nationally and we are beginning to see a sizeable drop in immigration, it is difficult to see where that extra lift in demand could come from.

Throughout our economic growth cycle, we have witnessed a disproportionate increase in home prices compared to wages. Home ownership and even rental prices are becoming too high for Saskatoon’s residents and debt levels are becoming unsustainable. A continuation of this trend would begin to price much of Saskatoon’s middle class right out of the market. A wage increase is necessary to match the increased cost of living and return purchasing power back to reasonable levels. This, however, would also lead to higher input costs for goods and services and therefore increase consumer prices, subsequently cornering us into a hyperinflationary situation.

Inflation levels have avoided risky territory thanks in large part to the drop in oil prices. A return to previous prices would increase inflation significantly and quite possibly force the hand of the Bank of Canada to increase rates as seen by the oil price shocks in the early 1970s and early 1980s. This increase in interest rates would also put downward pressure on housing prices and increase the cost of living for those exposed to sudden rate changes.

Conclusion:

As we currently witness a slowdown in sales, an enormous increase in listings and inventory with a significant number of units under construction -especially in the case of apartment-style condominiums-, a provincial economic slowdown, national recession, immensely receding net immigration levels, unsustainable debt levels, an inevitable inflationary period and potential interest rate hike, it is hard to imagine what factors could overpower these trends and create future stability in the market. It appears as though 2014 was the beginning of signs, 2015 has been the beginning of adjustments and 2016 is likely when we will see the real impact on prices from what is starting to look like a near-perfect storm.

Data sources:

Government of Saskatchewan: http://www.stats.gov.sk.ca/monthly/2015

CMHC: https://www03.cmhc-schl.gc.ca/hmiportal/en/#Profile/1700/3/Saskatoon

Royal Lepage Vidorra: http://teamfisher.com/tag/srar

Ratehub: http://www.ratehub.ca/prime-mortgage-rate-history

Harvard University: http://www.dce.harvard.edu/professional/blog/how-use-real-estate-trends-predict-next-housing-bubble

City of Saskatoon: https://www.saskatoon.ca/sites/default/files/pdcs_-_status_report_on_the_ten_year_2013_-_2022_housing_business_plan_-_attachment_2.pdf

Saskatchewan Multiple Listing Service Database

The views represented are solely those of Josh Buchanan and are independent from any professional organization.