Once Merrel Lynch announced that Western Canada's home prices were over valued we have seen several media reports discussing this topic. My clients and friends often toss this topic of conversation towards me to see what my thoughts are...well here they are :)
Ultimately yes, I do see (specifically Calgary) our home prices as over valued. Why? For a few reasons - most importantly, new home buyers simply are unable to afford to purchase a home. Just 3 years ago a home buyer would easily find a very decent starter condo or townhome under $200,000. In fact, there were many detached homes under $200,000 as well. Now, their choices in that range are just plain crap. So, they are choosing not to buy anything and rather rent. If the first time buyers are not buying, then this will slow the entire market - which is currently happening.
Now whether or not my opinion matters, I (like many potential home buyers) am unable to see the value in a 1700 sq.ft. (above grade) 4 year old two storey home at $450,000. Even at $375,000 in my opinion is too much! If I were to peg a homes "true" value of this size with average finishing in a new community - well, I say $320,000 to $360,000 at most. This is a home that would have sold 3 years ago for $275,000 to $310,000. My pegged value is even slightly higher than the "average" increases in value historically for a new community.
Recently a spokesperson for the Calgary Real Estate Board made a comment to CTV that Calgary’s market has already corrected itself. Well, this is not the first time I will have to disagree with a statement coming from my board. Yes, we have seen a correction - however, I am unable to see this correction as finished.
Here is why - let’s look at a new home similar to what I just mentioned in a new community. Area is Cranston - original purchase price in 2004 (new) $289,000 - 1750 sq.ft. above grade, two storey with an undeveloped basement - hardwood floors, 4 pc master ensuite, double attached garage...yes, there are hundreds and hundreds of this same home for sale all around the city. At its peak, this home would have fetched just around $500,000. This home was on the market in the summer of 2007 at $475,000 (below its competition) and expired off the market 3 months later at $455,000. In May of this year, it hit the market at $439,900 (again below its competition) and by the end of July it was at $414,900. Just recently, there have been a couple sales reported in the high $380,000 range for the same plan.
That specific community has at any given time up to 20 homes offering relatively the same options, all within $50,000 of each other. That is in this specific community - if the buyer is looking in surrounding communities, they can have up to 40 to 60 different homes to look at. Talk about confusing.
Which homes sell? Typically the ones that are priced well below their competition, so home sellers must be willing to see this and understand the way to sell a home in a falling market.
I expect with the lead into September and October’s heavy listing months, the prices will fall into the $360's for this style of home by the time we hit 2009 - getting really close to a proper corrected market.
One report I read stated that western Canada is in for the long haul for house values falling downwards. I would agree with that statement long before I would agree that the market is stabilizing. Our current inventory is simply way to high right now and it needs to be cut down huge before we see any kind of stabilization. The inventory levels will not get cut down until the prices are deemed of value and or affordable to first time buyers.
What are your thoughts? As a consumer or home owner or industry professional - what is your opinion when taking into account the North American and Western Europe's economies? Are we headed for full blown market chaos? Or are we simply just dealing with a historical correction?