By Tom Albrecht | Nov 05, 2017 | Buyers
It’s the most common question we get asked.
And we can’t answer it.
As REALTORS®, we shouldn’t predict the real estate market. We’re not economists and so it’s not our role, so the Real Estate Act doesn’t allow it.
What is our role? Well, we deliver unbiased statistics and interpret them, honestly inform buyers and sellers the value of the properties they are considering buying or selling, and we offer our representation & marketing services. Then, if they wish, we execute the transaction.
But what can we say when someone asks us about the future of the real estate market?
There are a few things, but today I’ll just cover one of them.
Hopefully you will finish reading this blog feeling a little more informed, and satisfied.
I have a Masters in Economics for Development from the University of Oxford, but I really didn’t understand economics until the last few years.
I was taught that economics is the study of decision-making; that it’s rooted in human psychology, and that firms & households make decisions based on prices (e.g., wages & rents), which determine aggregate supply & demand for products and services in the marketplace.
Like a lot of people at school, I learned plenty in class, but I didn’t really know what that all meant.
What’s worse, not knowing that I would become a REALTOR®, I didn’t choose Real Estate Economics modules at either college (isn’t hindsight 20/20?).
I wanted to get a sense of what we were in for.
I happened upon the 2005 master’s thesis of a Massachusetts Institute of Technology (MIT) student named Mercedes Padilla entitled:
“The Effects of Oil Prices and Other Economic Indicators on House Prices in Calgary, Canada.” (MIT Library link)
Now, that paper wasn’t published in a journal, and as a result, was not peer-reviewed, but the work of the supervising professor is peer-reviewed, and enthusiastic readers can read through Professor Wheaton’s list of highly relevant published work here.
The study attempted to figure out what determines house prices in markets that are dominated by oil. Namely:
-What are the main factors? -Which factors are the most important? -How long does it typically take for changes in the resource price, or other determinants, to impact the real estate market?
This was perfect.
This could really help our messaging. If we had a sense of the answers to these questions next time our clients ask us about prices (typically potential seller clients), then we could refer them to this paper so they could draw their own conclusions.
Well, that’s entirely up to you!
What I will say, is that in hindsight, in Fort McMurray, we have seen oil prices change by about $50 and three years later, benchmark home prices for single-family homes have changed by about 20-25%. The interest rate, exchange rate, and employment have also changed, which complicated things (so, of course, does the wildfire), but generally speaking, we have seen the predictions of the academic paper play out.
The business of real estate is done at the kitchen table, and it can be an intense place when decisions are made. Watching those decisions almost as a fly-on-the-wall has been a bit difficult, but I’ve learned a few things:
The rebuild looks sure to continue: Congrats to everyone moving back home! :)
The oil glut may or may not disappear during 2018:
Speaking of the oil market, here are some possibly relevant reading topics:
How Saudi Arabia plans to end the oil glutThe world’s top oil exporter Saudi Arabia is determined to reduce inventories further through an OPEC-led deal to cut crude output and raised the prospect of prolonged restraint once the pact ends to prevent a build up in excess supplies.
Saudi Energy Minister Khalid al-Falih, speaking during an investment conference in Riyadh, said on Tuesday the focus remained on reducing the level of oil stocks in OECD industrialized countries to their five-year average.
The Organization of the Petroleum Exporting Countries, plus Russia and nine other producers, have cut oil output by about 1.8 million barrels per day (bpd) since January. The pact runs to March 2018, but they are considering extending it. Via business.financialpost.com
-US shale -Provincial election (2019) -The electric vehicle (EV) revolution -Completion of Keystone XL -Other pipelines
In relation to credit, we will be closely watching interest rates and their impact, as well as the impact of the new mortgage rules which come into effect January 1st, 2018.
In addition, we will be observing fly-in-fly-out as well as automation, Bill 21 and local issues. Some of these might be influenceable by the new Mayor and Council (or not).
It is well known that many changes to the credit, oil, and housing markets are often cyclical, but there might be longer-term elements, too. When confidence returns to our local housing market (all markets balance!), there may be a bump in demand. But are you expecting a rapid “v-shaped” recovery or more of a “new normal” Fort McMurray house price?
If you want to know what signs of recovery might look like, click here for an in-depth look.
UPDATE: Since this article was published, I've also taken a detailed look at how the real estate market in Fort McMurray is shaping up to be in 2018.
If you find this post useful, please feel free to share it with your friends. Comments are welcome in the space below. Thank you for reading!
1 a) Not peer-reviewed b) Written by a student, not an actual economist c) Calgary (not Fort McMurray) was studied d) 2005 was a long time ago e) Study of a rising, not falling market..
2 For any part of the market, we can divide the current stock of inventory by the monthly rate of sales. This gives us the “months of inventory” or absorption rate. If this number is greater than 5-6 months, then we are in a buyer’s market and prices tend to not be supported, assuming the economic fundamentals don’t change. By and large, for the last 36 months, this has been the case, and that is what has played out.