Home prices are going through the roof in Calgary.
HAMMERED ... So you're going to buy a newly built home and quickly flip it for profit' Hold your horses! Experts say the desire to make easy money by buying and selling property is often a ticket to bankruptcy.
The average house price is now above $300,000 and we're closing in on Toronto. So rapid is the rise, the term real estate doesn't seem relevant any more? Unreal Estate is more fitting. In the Calgary Sun's five-part special series on residential realty, we're profiling this red-hot market. We'll examine where the market is and where it's going and we'll provide tips on buying and selling. As well, readers will gain insights on the pros and cons of the current home realty scene. Today, we look at how times can change on a dime.
The headlines of the day promised Calgary's good times would always roll.
But with the turn of the decade, homeowners in the city were heading into the 1980s' perfect storm of economic trouble.
And with the current housing boom, both economists and those who lived through the last bust are offering the following advice: Sure, be optimistic, but also be careful with your cash.
'We learned the hard way,' says Al Westman, whose former company B&H Homes was one of the casualties when the bottom fell out of Alberta's economy in the 1980s.
'There was literally hundreds and hundreds of houses on the market lower than we could build them at.'
High corporate debt, runaway inflation and interest rates soaring near 20% ' coupled with the then-federal government's National Energy Program ' led to massive layoffs and home and business foreclosures across the province as activity in the oilpatch ground to a halt.
And while he's quick to point out it's unlikely we'll be crashing into an economic iceberg anytime soon in Wild Rose Country, Mike Percy, a University of Alberta professor who specializes in energy issues and the area's economy, says slowdowns are a fact of life.
Our economy, though now more diverse, is also still largely dependent on energy prices, he says.
'Inevitably, there's going to be a recession ' the business cycle is not dead,' says Percy, adding all it would take is a major incident in the U.S. or China.
'When it's going to be and its severity is hard to predict ... in the absence of those types of things we can't control, the economic fundamentals look pretty good, but one has to be aware there is still going to be a turning point.'
Bank of Canada brass has indicated if inflation remains in the 2% range, any interest rate hikes should remain modest.
But even a minimal increase would hurt with city home prices currently rocketing through the roof.
In February, the average home in Calgary went for $304,560.
Assuming a downpayment of $30,400, or 10%, and 25 years amortization, monthly property payments at 6% are about $1,754, but at 8% that would rise to $2,092 and a 12% rate would cost $2,829.
In 1981, when many mortgages were a whopping 21%, owning that same house would have set you back about $4,600 a month.
Former Calgarian Brian Norton says he remembers buying a 2,100-sq.-ft. house in the Woodlands area in December 1979 and being stuck paying rates close to that when he renewed his mortgage a year later.
'At the end of that year, our rates went through the roof,' says Norton, adding mortgages had previously been closer to 12%.
'For several years, all we did was struggle to make those payments and we ran up a bunch of debts.'
Adding insult to the injury of his $2,000-a-month housing bill was the fact property values plunged because the cost of borrowing meant many people couldn't afford to buy ' and many of those who did defaulted and faced foreclosure.
'We couldn't have sold it and even got enough to pay the mortgage,' says Norton, now 66 and practising law in Kelowna.
'We were on a pretty tight budget then.'
About the same time, others, such as Elsie and Peter Moore, found $4,000 added to the price of their $74,000 Whitehorn-area honeymoon home literally overnight.
'There was just no way we could afford that,' recalls Elsie Moore.
When the then-newlyweds made their story public, another developer came to their rescue, offering to build them another house at the original price, and Moore says they were then able to weather the storm.
'The house wasn't built for five months after we got married, so
we lived with Pete's parents, but it
all turned out in the end,' Moore says.
'I just thought if we don't sell it, we're not going to lose anything so just hang onto it and hope things get better ' and they eventually did.'
Like the Moores, those who carefully control their finances will probably survive any future downturns, but those swimming in red ink hoping things will get even better will probably drown financially, Percy warns.
'Buying houses to flip and make quick profits in anticipation of ever-increasing housing prices is a ticket to bankruptcy in the longer term,' says Percy.
'They will get burned ' it's only a question of when, not if.'
Builders who balance their books well should also stay afloat, says Westman, who's now 78 and went on to help found his son Jay's firm, Jayman MasterBuilt.
'Today, nobody's carrying anybody's credit ... everybody pays their bills on time,' says Westman, adding Jayman maintains a financial buffer ' allowing it to complete any work it's already started.
'If we can't pay for them, we don't build them.'
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- RICH PRICES LEAVE CITY'S POOR IN THE COLD
If nothing more is done to make housing in Calgary more affordable, those who help the city's poor say one thing is certain ' their business will continue to boom.
'There's no question about it,' says Dermot Baldwin, executive director of the Calgary Drop-In Centre.
'The market's giving us less options to place people and less hope for people coming in who could have otherwise made it.'
Baldwin estimates the client base at his centre is up about 15% from last year and with costs on even the lower-end homes soaring, the pool of people who qualify as poor in Calgary is increasing.
'I have a staff member who paid $480 for an apartment with free parking and cable ' the same place 3+1/2 years later, it's $780, plus you now have to pay for the cable and the parking,' says Baldwin.
Now the rush for homeless help isn't confined to the Christmas season, either, adds Diana Segboer, the Inn from the Cold Society's executive director.
'We have been full of families in March, which means no single women or single men are getting in ' we're definitely at an all-time high,' says Segboer.
Serious government help is about the only thing that will ease the crunch for the poor in this market, says Terry Roberts, president of the Calgary Homeless Foundation.
'The one big difference from the housing boom of the 1980s is interest rates are so much lower now ... however, with high purchase prices, land and construction costs that advantage is more than wiped out,' says Roberts.
'We're not keeping up now, but we hope the new federal government, and the province, will develop long-term affordable housing programs.'
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- NEW AGE TAXING ON SOME
Soaring house prices won't necessarily result in higher taxes for Calgary homeowners ' so long as your property isn't on the leading edge of inflation.
Deputy city assessor Roy Fegan says Calgary's Market Value Assessment system isn't designed to profit from rising real estate prices, and only those homes that increase in price by more than the city average will end up with a higher tax bill.
'We refer to it as revenue neutral ' if city council could operate on the same budget, with the same money, it would actually lower the tax rate,' said Fegan.
It comes down to where you live in Calgary, and whether your neighbourhood is rising in price faster than the average.
Each year, the city's assessors determine what the average price increase was for Calgary's 400,000 homes over 12 months, measured from July to July.
Between July 2004 and July 2005, the average increase was 8.4% ' homes that rode in price by more than 8.4% saw a tax increase, and those that increased by less, saw a tax decrease.
Because a select few communities are increasing in value faster than others, residents there are seeing substantial increases in the annual bills.
'When values increase, they don't increase uniformly across the city,' said Fegan.
'The city centre increases more than extreme suburbs.'
This year's tax bill, which will be mailed out in June, saw homes in communities such as Elbow Park and Roxboro increasing in price by more than 30%.
Because those desirable, inner-city mansions rose so much, it actually resulted in a tax decrease for 63% of Calgary homes.
What Market Value doesn't take into account is whether city council increases taxes in a given year.
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THEN AND NOW
- Energy Policy
The National Energy Program (NEP), enacted after the 1980 federal election by the government of Pierre Trudeau, was billed as a corrective measure prompted by a more than 150% rise in world oil prices.
It was designed to redistribute wealth, stabilize prices, and give Canadians more control over their own energy sector ' but it served only to plunge Alberta's economy into recession.
World oil prices fell on their own shortly afterwards.
Subsequent federal governments have vowed a program such as this will never be enacted again.
Analysts Goldman Sachs are sticking to their forecast the price of Alberta benchmark West Texas Intermediate crude will average $69.50 US a barrel, just shy of its record high, over the rest of 2006.
- Housing
In February this year, the average home in Calgary went for $304,560, up 26% from the same month in 2005.
The average local home resale price in December 1982 was $100,000 down $7,000 from the same month in 1981, but at the time some owners saw their property values crash by nearly 30%.
Housing starts in 1982 were 9,599 down from the 1978 record 15,382.
Total housing starts for 2005 were 13,667, down 2% from the previous year, but besting the 13,000 mark for an unprecedented fourth year in a row.
- Inflation
In July 1982, the consumer price index (CPI) in Alberta was 12.2%, compared to the national average 10.8%.
To stem that inflationary tide, federal regulators raised the Bank of Canada's trend-setting lending rate to nearly 20% ' meaning mortgages in the 21% range were common.
Currently, the national CPI, a measure of inflation used by Statistics Canada, remains in the 2% range and, as long as price increases stay in that range, the federal bank says rate hikes, if any, will remain modest.
