Edmonton Housing Prices – What’s Going to Happen Next?

It’s no secret the Edmonton real estate prices have increased over the last couple of years followed by a correction starting in March 2022.

As an industry professional, I am frequently asked,

• "Will Edmonton real estate prices continue to rise?"?
• “Are prices going to tank?”
• “Is Edmonton in a housing bubble?”

By understanding previous real estate market patterns, this gives an insightful view of what might happen, based on historical trends and relevant data. In this post, I aim to cover a high-level overview of Edmonton’s house price history, including historical sales statistics, new home supply data, and population data.??

Comparing Edmonton’s Housing Market to a Bubble

According to New Palgrave Dictionary of Economics, “Bubbles are typically associated with dramatic asset price increases followed by a collapse. Bubbles arise if the price exceeds the asset’s fundamental value.”

If It Looks Like a Bubble and Swims Like a Bubble…

Economist Jean-Paul Rodrigue came up with this visualization for how most asset bubbles proceed.

Upon first glance at Edmonton’s MLS Single Detached Median Sales graph below, it appears the hallmarks of a housing bubble were present in 2007-2008. In comparing the price trend to Jean-Paul Rodrigue’s visualization of a bubble, the charts appear quite similar.?

Fast forward to today - our trend line looks different than that of 2007-2008. In fact, as we look to the third quarter of 2022, the median sale price for single detached homes edged up 3.5% on a year-over-year basis, compared to the Bank of Canada’s 2% inflation rate target.?

The above graph provides a visible and straightforward manner of visualizing the data. However, the graph doesn’t provide information on how and why the trend lines formed, and the underlying fundamentals of how the price got there. As we ask the question “Where does the Edmonton housing market go from here?”, I want to evaluate the fundamentals that influence the price and draw insights for what might happen, based on historical trends.

Low Supply + High Demand = Housing Appreciation

Most markets are driven by the basics of supply and demand, and the housing market is no exception. Decades of price gains and appreciation in Canadian housing have been due to housing supply being outpaced by demand.?

1. Supply: New Housing Starts

Housing supply is easier to calculate than demand, as we can identify how many new homes were started per year. Since 2016, Edmonton housing starts have ranged from 10,000 to 12,000. This number represents new additions to our overall supply side.?

The Bank of Canada has raised its benchmark interest rate by over three percentage points since the beginning of the year and is largely expected to do so again before the end of the year. This, in turn, raises the cost of borrowing and drives up mortgage rates.?

How does this impact housing starts and housing supply? Interest rate hikes pose a downside risk to consumer confidence and in response, Canadians cut spending on homes. If consumer confidence remains low for a sustained period, home builders are forced to cut back on housing starts as it becomes financially unviable. As seen in the chart above, this is what happened in 2008 and 2009 in Edmonton as housing starts decreased to just above 6000 each year, compared to over 14,000 permits the year previous.?

Historical trends support the likelihood that home builders will reduce housing starts in 2023, as they sell through unsold homes they started building in 2022. If builders have too many unsold homes in-progress, it becomes a financial risk to their business. As a result, builders must first remove risk by selling current inventory, before adding more risk.?

But what is the result of lowering overall supply levels? If accompanied by demand growth, supply deficits worsen and this can put upward pressure on affordability. This begs the question, what is developing on the demand-side?

2. Demand: Immigration Growth

Population is by far the strongest indicator of demand. The need for housing increases proportionately to the net population gains. After all, everyone needs somewhere to live.

Edmonton sees population growth every year. The influx of residents comes primarily from out of the country but also intra-provincially.

Since 2018, the metro area population of Edmonton has seen an average 30,000 population increase per year.?

Edmonton adds approximately 11,000 new housing units per year and gains close to 30,000 people per year. With an average household size being 2.4 people, this leaves Edmonton in a growing supply deficit of approximately 1500 housing units per year. This deficit can worsen if builders reduce housing starts, such as we saw in 2008 and 2009 where housing starts decreased to just above 6000.?

Alberta's population growth also gathered high levels of momentum this year. In the second quarter of 2022, Alberta added 40,253 residents, supported by accelerating interprovincial migration gains and continued increases in immigration. The federal government recently announced intentions to significantly expand the amount of immigrants entering the nation, with an aim of seeing 465,000 permanent residents in 2023, 485,000 in 2024 and?500,000 in 2025.

A report from Ryerson University's Centre for Urban Research and Land Development (CUR) highlights the continued growth of Edmonton. When compared to the fastest growing metropolitans in the US and Canada, Edmonton sits in the top 20 in all of North America for population growth ??.

Is now the right time??

The industry saw a price correction occur during the summer and fall months and prices are showing signs of stabilization. Does this signal a “buy the dip” scenario?

What exactly is Buying the Dip? According to the Corporate Finance Institute, buying the dip is a strategy used by investors that involves buying or adding to an existing long position of an asset during a period of downward price pressure, hopefully with the opportunity for the price to recover.

We are seeing trends form in cities such as Toronto, with multiple months of median sold price increases, after falling 18% in Toronto starting in February. Toronto Average Sales Price has leveled off and we are observing incremental monthly increases since August.?

For the sake of comparison, Toronto's population growth is 0.93% from 2021. As of October 2022, Toronto home sold prices have increased 3 months in a row.? Comparatively, Edmonton’s population growth is 1.88% from 2021. The median sale price for single detached homes edged up 3.5% on a year-over-year basis to $433,750 in the third quarter of 2022.

If you look at the laws of supply and demand, both supply deficits and demand surges support a buy now decision.?

This of course comes with a caveat that interest rate hikes by central banks around the world could trigger a global recession. The synchronization of rate increases across the globe increases the risk of recession as it can cause economies to contract. According to Deloitte's latest economic outlook, Alberta, powered by its resource sector, is expected to be an economic outlier if Canada slips into recession at the end of this year. Alberta is projected to lead the country in economic growth both this year and next.

Nonetheless, every prospective buyer and homeowner is concerned about how far property prices in Canada can fall during a recession. With memories of the 2007 financial crisis still fresh in many people’s minds, homebuyers want assurance in all aspects of their financial well-being.?

According to data from the Organization for Economic Cooperation and Development (OECD), which investigated home prices throughout four recessions, recessionary times in Canada can depreciate property values by 6.1% on average. The recession impacted house prices by -6.01 percent (adjusted for the rate of inflation per recessionary period, and the nominal price of homes decreased by -1.41 percent.?

Quick Summary:

If you already own real estate, the laws of supply and demand suggest optimism about your property’s prospective price growth. If you’re renting now and you are looking to break into the real estate market, this may be a great time to buy.?

High Demand:

• Edmonton ranks in the top 20 fastest growing metropolitans in North America.?
• Population is projected to grow at record levels for several years to come.?
• Alberta is expected to add 2 million people by 2046, and regions like Edmonton will see higher growth due to a strong trend towards urbanization.

Low Supply:

• Housing supply will continue to struggle to keep pace with population growth, especially in the short term, as we try to fill labor shortages across the country.
• Housing supply deficits will worsen the longer builders face lowered consumer confidence levels.?
• Even though the fundamentals of supply and demand would make you believe housing starts would increase accordingly, builders must first remove risk by selling current inventory, before adding more risk. The banks don’t want builders to bet the farm, so to speak.??
• Another major factor that continues plays into the lack of housing supply is that there are not enough skilled workers to build the new homes needed to meet increasing housing demand in Alberta. While the pandemic has demonstrated that the workplace can pivot and handle higher building volumes with fewer people, labour deficits still result in construction backlogs, causing delays and delaying the provision of new units to markets in need of increased supply.

Note: Opinions expressed are solely my own and do not express the views or opinions of my employer.