Kevin O'Leary talks Calgary Real Estate
Kevin O'Leary, a Canadian entrepreneur perhaps most famous as a Shark on ABC's Shark Tank and CBC's Dragons' Den was in Calgary earlier this week for an appearance as the keynote speaker at the Calgary Real Estate Board's 2015 Forecast Breakfast.
Kevin took some time to speak with CREB's Kelsey Hipkin about the impact the volitility of oil prices is having on the real estate market in Calgary, and Kevin was remarkably candid.
His comments may even surprise some of you
Kevin O'Leary Interview: Calgary Prices
Kelsey Hipkin, CREB®: What are your thoughts on the oil price drop? [3:55 of video]
Kevin O'Leary: This is a very interesting time in Calgary, and in Alberta. For not only domestic buyers and sellers of real estate, but for global investors. I look at the real estate data for every Canadian city almost weekly …. .
Remarkably, through this period of tremendous volatility in oil prices, which we’re still in the middle of right now, you haven’t seen a crack yet in real estate here, because it’s such a tight market, there’s such a demand for housing.
Now if we go out six months, or two years, what will that look like? My guess, as an investor, is it’s going to slow capital appreciation, but not have a significant impact on baseline pricing today. My guess would be you’re not going to have a significant increase, in other words maybe a 2% increase in valuation, but not a 30% drop in valuation.
Kevin O’Leary on Interest Rates
Kevin O’Leary: We have no idea what’s going to happen to interest rates. Over the next 18 months, it looks like to me that no more than a 25 basis point increase which is not going to have any material impact on mortgage rates. So I’d say it’s pretty good sailing even though there’ a lot of angst in the market right now.
Kelsey Hipkin, CREB®: Do you see the overnight rate increasing this year? [3:55 of video]
Kevin O’Leary: Yes I do, by about 25 basis points sometime in the fall - that’s what I’m forecasting. Which really isn’t going to have that big an impact. What would really change real estate pricing, both commercial and residential, would be 200 to 300 basis point increase, which I just don’t see happening for years.
Kelsey Hipkin, CREB®: So we’re not headed for a recession? [6:10 of video]
Kevin O’Leary: No I don’t think so. I think what’s going to happen is there’s going to be a consolidation in the energy patch of debt-laden small-cap companies. They’re going to be merged together through forms of bankruptcy. The large players have really good balance sheets. We just have to wait for this finishing decline of oil. We don’t know if it’s going to end up with a 3 handle in front of it or a 4. But we’re in the 7th inning of price declines anyway. That [decline] impact is already impacting the market. This time what’s different is really strong balance sheets, and a more optimistic tonality about pipelines. Obviously, at some point Keystone XL, and this east-west [pipeline], this is all going to be good for Alberta and for housing.
Kevin O’Leary: Investing in Real Estate
Kelsey Hipkin, CREB®: What are your thoughts on real estate as an investment? [6:50 of video]
Kevin O’Leary: Here’s what’s so fascinating about real estate. For 17 years now we haven’t had a material correction. And when I say material I mean North, double-digit, 12, 15, 30 percent. That hasn’t happened. What has happened with real estate is it’s become, I think there’s a little bit of risk in this, but I’ll give you an example:
Probably a glowing example was a transaction recently in New York City, near the Crown Building in Manhattan, for 1.5% cap rate. That is unprecedented. That means rents would have to double to get a 3% return in Manhattan, which isn’t going to happen. So what’s effectively occurring is because there’s absolutely no yield left in the 10 year bond, it’s in fact less than inflation, investors - large institutional investors, and to a certain extent down to apartment and housing purchases - are substituting real estate for bonds. They’re saying a piece of real estate, a hard asset, is as safe as a 10 year Canadian bond in the sense that if rates go up, I have a potential to increase rental rates, or there may be capital appreciation. But if I buy a 10 year bond that’s yielding 2.4%, I’ll lose money if rates go up in the next decade. So real estate has become a substitute in a way that it’s never occurred before. People will actually take money out of GIC’s and buy real estate assuming it’s just as safe. That could be a mistake, but so far it hasn’t stopped them from doing it.
CREB® Market Forecast 2015
The Calgary Real Estate Board released their 2015 Market Forecast on January 15th, suggesting that the strong demand experienced over the past 2 years will pullback due to the significant drop in oil prices.
CREB® predicts sales of Calgary homes and condos will be 4.1% lower this year. CREB® remains bullish on the Calgary economy, and predicts detached home prices to rise 1.8%, attached home prices to rise 1.5%, and apartment condo prices to increase 1.0% from 2014 levels.
I'm not as bullish as CREB® on the outlook for 2015. As of January 25 2015, year-to-date Calgary home sales are down 38% while Calgary condo sales are off by 35% *vs. first 24 days of last year*. The median sale price of a Calgary home is currently 3% lower than the 2014 median price of $484,000, while the price of Calgary condos YTD is 5% lower than the 2014 median price of $310,000.
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