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Calgary Market Falters as Oil Prices Fall

Posted by Jim Sparrow on Tuesday, January 27th, 2015 at 2:29pm.

Calgary Market Falters as Oil Prices Fall

Oil Price Falls 60%

 In the past 7 months the price of WTI oil has plunged 58%, closing Friday at close to a five-year low of $45.29 US per barrel. The economic consequences of the collapse in oil prices can’t be understated and are bound to cause a shift in the Calgary real estate market, which has experienced a mini-boom for the past 43 months.

It will come as no surprise that Calgary real estate sales have plunged this month. January month-to-date property sales in Calgary are down 36% from the same period last year, while listing inventory in the city is 81% higher than a year ago *January 28th*.

What is a surprise to some is that the price of Calgary homes - to this point - has not plummeted. While the median sale price of Calgary homes remains 4% higher than the same period in 2014, current prices are 2.7% below the overall median sale price for homes last year. The sale price of Calgary condos hasn’t  fared quite as well, with month to date median prices only a slim 0.2% higher than the same period in 2014. Condo prices this year are currently 3.7% lower than the $310,000 median sale price recorded for 2014.

ProTip: According to CREB economist Ann-Marie Lurie, Median Sale price is the preferred metric for analyzing real estate market changes. The Average Sale Price is a “fun number” highly skewed by a non-uniform distribution of sales.


Closing Price of WTI Oil Jan 23 2015

 

What’s behind plunging oil prices?

Since OPEC announced six months ago that due to oversupply they would not continue to act as the swing producer, oil prices have plunged nearly 60%. National and international media quickly bought into the oversupply explanation. What the media haven’t focused on are the other reasons OPEC’s largest single producer have actually produced more oil than any time in recent history. I’m talking about Saudi Arabia.

Conrad Black penned an eloquent article in the National Post 5 weeks ago that explains what’s really going on with world oil markets: Saudi Arabia’s motives are, for the most part, political:

The Saudis believe the West is about to give in to Iranian demands. Crashing the price of oil is how it fights back

The Middle East is in crisis, and Saudi Arabia faces challenges on numerous fronts: To the immediate south in Yeman, the US has closed its embassy amid political turmoil following the collapse of the government under pressure from the Shiite Houthi rebel movement. Egypt, to the west, recently in chaos following their Arab Spring, is struggling under new rule. And to the east lies Iran, the largest single threat to the state of Saudi Arabia. The Iranian Republic has been expanding its influence throughout the Middle East, backing Shiite forces in Palestine, Bahrain, Syria, Lebanon, Iraq and Yeman. Saudi Arabia feels threatened, and has chosen to use the oil-price weapon in an attempt to disable the Iranian economy.

Then there’s Russia. Russian support of the Assad regime in Syria, along with their forays into the Ukraine lead some to believe the US administration support Saudi Arabia’s use of the oil-price weapon to put pressure on the Putin regime.

Given the state of oil supply and the complicated political dynamics, the world isn’t likely to see an average oil price of $60 a barrel in 2015. Jim Prentice’s government of Alberta has already acknowledged this, and significant cuts to the provincial budget lie ahead. Likewise, the Harper government will no doubt have difficulty balancing the federal budget, and I wouldn’t be surprised to see 2015 Canadian GDP struggle to reach even 2.0% growth.

What does that mean for Calgary real estate prices?

The Calgary Real Estate Board’s (CREB) 2015 Market Forecast predicted sales of detached homes to fall by 4.8% and prices to increase by 1.8% vs 2014. I find these numbers to be highly optimistic, especially in light of the nearly 40% drop in sales year-to-date.

The positive market sentiment held by Calgary buyers has completely changed over the past 2 months. The market velocity Calgary has experienced since 2012 has evaporated.

Based on the recent sales and the significant increase in active listings, I anticipate a 20-30% Yr/Yr decrease in sales over the next 3 months, with Yr/Yr declines in median sale price falling by 5% by the end of June. Calgary condo prices will likely drop by at least the same number, perhaps slightly more *there are now twice the number of condo listings on the market as there was this time last year*. Should the price of oil fall below $40/bbl or rise above $50/bbl before the end of June, these numbers could be larger or smaller.

The good news is buyers will have a far better selection of properties, at prices not seen since late 2013. Seller’s should keep in mind the sky is not falling. Calgary home prices have risen 15.2% in the past 2 year, condo prices are up 15.9%. Demand for higher priced property will certainly be impacted more than homes & condos in the median price range. As always, every property is unique.

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