A housing demand that outstrips supply is almost unheard of in the current U.S. market, but conditions are radically different in the Canadian province of Alberta, which is facing a housing shortage and rapid price acceleration.
Edmonton, Alberta’s capital, is the closest major city to the lucrative oil sands projects in northern Alberta. The oil sands have attracted almost $140 billion to the province, and people are flocking to the area in search of high paying jobs.
With unemployment at approximately 3 percent, Edmonton has redefined the concept of “full employment”; job opportunities far outnumber potential workers.
The population influx has driven rental vacancy rates to less than 1 percent in Edmonton and the surrounding areas. It has also spurred rapid price acceleration, much to the delight of property owners, who saw values increase by 52 percent in 2006.
While competition is growing, Edmonton may still offer opportunities for profit.
Energy drives growth
Alberta was Canada’s fastest-growing province from 2001 to 2006, with a 10.6 percent population increase—twice the national growth rate, according to the 2006 census. The previous five-year period saw a similar rate of growth, the census showed.
The province now has a population of more than three million, with one million in the greater Edmonton area.
Alberta averaged annual economic growth of 3.8 percent for 10 years, outperforming Canada’s 3.3 percent overall rate, according to the provincial government’s website. Alberta’s productivity was $58,535 GDP per paid worker in 2004, the highest in Canada, the site said.
The oil industry in particular has contributed to Alberta’s growth. Oil and gas produce one quarter of Alberta’s GDP, almost 70 percent of Alberta’s exports and 35 percent of the provincial government’s revenues, according to the Alberta government’s website.
“Alberta’s driven by the oil industry,” Jon Hall, marketing manager for the Edmonton Real Estate Board, said, and there has recently been a “massive expansion” in the oil patch. “There’s $140 billion worth of capital infrastructure, industrial commercial capital infrastructure, being built in Alberta.”
As the projects grow and technology improves, oil sands become cheaper to convert, enabling energy companies to see greater profits. This attracts even more companies to the area.
“Pretty much every weekend that you open up the newspaper, there’s some new expansion being announced that’s billions of dollars in the north somewhere,” local RE/MAX realtor Rhonda Navratil said.
Almost 70 percent of the oil sands remain open for exploration and lease, according to the Alberta government’s website, and skilled workers are in high demand.
“There are billions of dollars worth of projects that are on the books that haven’t even been started yet because we don’t have enough manpower,” Les Michaelson, president of the Edmonton Revenue Property Investors Association, said.
After Alberta’s unemployment rate reached an astoundingly low 3 percent, “I think [economists have] taken their economics textbooks and thrown them out the window,” Richard Goatcher, the Canada Mortgage and Housing Corporation’s senior market analyst in the Alberta capital region, said.
“We just can’t get enough people in here to get the job done. So that’s drawing a lot of tradespeople here…any kind of construction worker on the planet who’s willing to work can find work here,” he said.
Energy dependence
Alberta’s reliance on the energy sector may seem risky to outsiders, but the money invested into Alberta is “smart money,” Todd Millar, owner of local real estate investment company Glenn Simon Inc., said. Companies “don’t invest that without doing a lot of research.”
“Unless they find an alternative energy source to oil, I think it looks fairly strong for the next decade or two,” local realtor and investor Brandon Rolheiser said.
The U.S. prefers to import from Canada rather than the Middle East or Venezuela. Alberta/Canada has been the largest oil supplier and the largest gas supplier to the U.S. for six years in a row, according to the Alberta government’s website.
The Kyoto Protocol could generate new environmental regulations, but “there is such a need and a demand for oil…the demand is so high from the States that I don’t think that they could really get away with shutting down what’s happening up here,” Michaelson said.
Alberta is “diversifying to create more stable economic growth,” the provincial government’s website said. Energy now comprises a quarter of Alberta’s GDP, down from one third 20 years ago, the site said.
Agriculture, lumber, manufacturing, nanotechnology and biotechnology are also strong economic components, said Millar, who said he considers the economy diverse.
Edmonton’s large population base is not focused on just one industry or business, so “there’s quite a lot of diversity in the marketplace here,” Navratil said.
Competition
High paying jobs are attracting many new residents in need of housing. “Everybody seems to want to come to Edmonton, especially for a job,” Michaelson said. “And in reality it’s work that ultimately drives real estate prices.”
“The builders are pretty much running as fast as they can, trying to put as much product out there as they can, and they can’t keep up,” Goatcher said. “Demand still outstrips supply, so we’re seeing all kinds of price acceleration.”
The major markets in Alberta “have vacancy rates below 1 percent and are seeing rental increases of double digit percentage levels…of course, that’s enticing investors to purchase revenue properties,” Goatcher said.
Edmonton’s 52 percent jump in property values in 2006 has also attracted investor attention.
“It’s a hot market,” Michaelson said. “There’s an awful lot of competition from other investors from all over the place…it’s very possible to overpay for a property if you don’t know what you’re doing.”
“There’s a lot of money in this province now looking for investments,” and many outsiders accustomed to higher prices are paying “ridiculous prices for property,” Rob Winters, local investor and managing partner of EGM Properties Inc., said.
The “snowballing effect” caused by outside investors concerns Goatcher. “We’ve got way too many people trying to do too much at the same time,” he said. “Everybody wants to come here and spend money.”
Many people are making unconditional offers because they are “desperate to buy any property,” Winters said. “I think that is very short sighted…there’s just a lot of money being thrown at properties.”
“If you’re familiar with the market or you work with someone who’s familiar with the market, you can take more time and get involved in private deals or opportunities where there is less of that frenzied competition,” Winters said.
Average House Prices in Q1 of 2007 | |||
City | Detached | Standard | Standard |
Calgary | $ 402,933 | $ 441,456 | $ 261,336 Claim up to $26,000 per W2 Employee
|
Edmonton | $ 350,000 | $ 384,750 | $ 261,600 |
Montreal | $ 221,583 | $ 338,857 | $ 204,929 |
Ottawa | $ 298,083 | $ 294,667 | $ 187,333 |
Toronto | $ 387,744 | $ 489,889 | $ 269,210 |
Vancouver | $ 758,000 | $ 837,500 | $ 403,500 |
National | $ 316,993 | $ 378,148 | $ 230,146 |
*Source: Royal LePage
Affordability
In spite of increasing competition, many experts feel that prices remain reasonable. Edmonton is “a very affordable city even though we’ve had record increases in the last two or three years,” Vince Laberge, president of the Canadian Home Builders’ Association—Edmonton Region, said.
Small investors may get pushed out by rising prices, Millar said, but “when you look more long term it’s still so affordable.”
The affordability index in Alberta is still very good compared to other regions of Canada, Winters said.
Alberta’s per capita investment was $18,520 in 2005, more than double the $7,764 per capita for Canada, the Alberta government’s website said. “One attraction is Alberta’s tax advantage: lowest personal income tax, low corporate income taxes, no capital tax, no provincial sales tax, no payroll tax and the lowest gasoline taxes in the country,” according to the site.
“In Alberta, the salaries are higher, the taxes are lower and the houses are incredibly affordable. They’re much cheaper than Toronto or Vancouver,” Millar said.
A lack of rent controls attracts investors, Michaelson said. Ontario and British Columbia restrict increases, but in Edmonton, “it’s whatever the market will bear,” he said. “It’s an all-round free economy up here…the rents have been depressed for such a long time that now we’re trying to play catch up here.”
“Edmonton’s just done a catch up,” Hall said. “We’ve been so far behind the curve.”
Condos edge out rentals
Edmonton has one of the lowest population densities of any major North American city, according to the AlbertaFirst website, but it is filling in as the population grows.
Some of the less desirable areas near downtown and the university remain relatively inexpensive and are likely to undergo revitalization, Rolheiser said.
More developed neighborhoods just outside the downtown core, such as Oliver and Glenora, can be good investments, Millar said. “They’re mature neighborhoods, they have easy access to the downtown core, but…there’s less product there…it’s more expensive to get in.”
Condominium apartments, which are popular because many newcomers cannot afford single detached homes, comprise most of the downtown activity, Goatcher said.
Condo conversions are removing apartment buildings from the rental market, Winters said.
“Some of those get remodeled and put back in rentals, but most of them are being purchased by homeowners” because houses are less affordable, he said. “Even though there’s rapid and record housing construction, it almost seems that the rental market is shrinking.”
“Highrise condominiums are going up a dime a dozen downtown, and many of those are being purchased by investors,” Hall said. “Nobody’s building rental properties at this point…they’re mostly building condominiums.”
As condo conversion projects reduce supply, the rental market may become even more competitive—and more profitable for investors who own rental properties.
Edmonton’s Rental Rate Increases | |||
Type | 2004 | 2005 | 2006 |
Studio | % 0.2 | % 1.8 | % 9.4 |
1 Bed | % 1.5 | % 1.8 | % 9.5 |
2 Bed | % 1.1 | % 0.3 | % 10.4 |
3 Bed | % 0.9 | % 1.2 | % 10.8 |
Numbers are for strutures with at least 3 rental units
*Source: Canada Mortgage and Housing Corporation’s 2004, 2005, 2006 Rental Market Reports for Edmonton MSA
Directions of growth
Edmonton may be growing denser, but “the real growth is outside the city of Edmonton itself,” Hall said. Census Canada reported that areas just outside the city are all in the high growth category, with population growth of more than 10 percent in the last five years, he said.
The northeast, the southwest, and the west are all growing with new construction, Hall said. “New home construction happens on the outer edge. The city is being built in concentric rings.”
Winters prefers to invest in the northeast and southeast because of the proximity to industrial mega projects located 30 minutes northeast of Edmonton.
Northeast Edmonton has been underpriced compared to other areas of the city, Rolheiser said. “But it’s in close proximity to a lot of the refineries” and draws people who commute to the oil sands, he said.
The east side of Edmonton is “the depressed part of the city” and may offer low prices for properties that will become more valuable as the city expands, Michaelson said.
Laberge sees more opportunity for expansion in the south and southwest because the industrial corridor in the north limits the amount the city can expand in that direction, he said.
Infrastructure developments, such as the ring road connecting outlying neighborhoods to downtown, will improve real estate values. Communities in northeast, southeast and southwest Edmonton are being built out to meet the ring road, Millar said.
There is also “interest in building along the existing commuter train line and on the planned commuter train line that’s heading south,” Goatcher said. Properties within walking distance of the lines will benefit, he said.
Outlying towns
The small towns surrounding Edmonton have suddenly become boom towns straining to support the growing population.
“Many communities are struggling to cope with the influx of people,” Winters said. “It’s not just housing, but all of the support services and community services and infrastructure that have to be developed to support that kind of growth.”
“Basically all towns in this region are expanding,” Michaelson said. “The towns are looking for more land to bring on stream to build more housing. And basically the whole province is completely taxed out. This is almost the same as in the 1800s up in the gold rush in the Yukon…the fervor is just unbelievable.”
“Virtually all of the communities within 30, 40 minutes of Edmonton are getting a lot of attention,” Winters said.
Navratil recommended looking toward towns with established services and infrastructure, including schools, recreation centers and shopping.
Some towns, such as Redwater, Leduc and Devon, market themselves as bedroom communities to Fort McMurray, Hall said.
Fort McMurray is about five hours north of Edmonton, in the heart of the oil sands. Its convenient location means intense competition for housing, with limited availability and exorbitant prices.
“There’s no housing in Fort McMurray at all. People are living in holiday trailers and backs of trucks,” Hall said. “There’s tens of thousands of people living in camps.”
Bedroom communities encourage families to settle in town and commute to the oil sands. In addition, Redwater has industrial development in progress that will generate local jobs. A $5.9 billion USD refinery is in the works.
Investment strategies
Rapid price increases mean Alberta is “not really a cash flow market, so that should be something that investors going into Alberta realize,” Millar, who specializes in small residential properties, said.
It will generally take about two years to “pump up the cash flow” on a single family home, Millar said. “It’s a capital gains market…I think long term appreciation is what investors need to look at.”
Single family homes may currently be “a little undervalued,” Navratil said, because “there’s not enough of a gap” between single family home and condominium prices.
Because single family home prices have outpaced rental rates, Michaelson said multi-family properties offer more cash flow potential. When investing, “I would be looking for areas that have had a fairly low vacancy rate even in times when the vacancy rate has been high,” he said.
For rehabs and flips, Millar recommended “inner city areas that are already in transition…it’s always good if you can buy a few properties on one street and start that trend.” Labor and building material shortages can delay rehabs, so those who prepare a crew in advance have an advantage, he said.
Opportunities for flips are hard to find, Navratil said. She sees opportunity in buying a single family home with suite potential and converting the basement into a suite or multiple suites, if the zoning allows for it.
Common mistakes
One of the biggest dangers for Edmonton investors may be the fact that nearly all investors succeeded in 2006—even those who made what would normally be bad purchases.
For example, Navratil had a client who purchased a property that she thought was “just awful,” yet the property sold a year later for $110,000 more. “Everything went up, so it just didn’t matter.”
“You don’t get really punished for mistakes in this market too badly” because of the rapid appreciation, Rolheiser said. “But you can overpay for a property. You can buy a property that requires too much work” or can select the wrong tenants, he said.
“I would very strongly recommend working with people that are here, professionals that are here,” Winters said. “It’s just really easy to overpay…if you come in on your own and look for something to put your money down on.”
Boom town lessons
Edmonton’s growth has followed a classic boom town pattern, and the increases of 2006 may scare off investors who consider that rate unsustainable.
Though price increases of 52 percent a year are unlikely to continue for the long term, most experts on the ground feel increases will settle to a steadily climbing, sustainable pace. Whether or not an investor sees opportunities in Edmonton, the area provides a useful example for identifying future opportunities in areas with similar fundamentals and similar potential for rapid growth.
