Alberta property markets could be a buying opportunity, but maybe not yet

What a fabulous buying opportunity. Or is it? After years of sharp price increases, the costs of Calgary housesare finally down nearly fourper cent from where they were a year ago.

While real estate company statisticsshowprices and sales continuingto climbacross the country, a number of markets have turned, offeringCanadians a useful experiment in the behavioural economics of the housing market.

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About a year and a half ago, I wrote a piece saying that house prices could fall like oil. The point was not to predict a property market crash,it was merely to remind usthat the smartest people in the oil industry failed to predict the current tumble inenergy prices that now seems so obvious.

Unsatisfied demand

At the time, the response from many was that a property market crash could not happen, simply because there were so many people waiting to get into the market. As soon as prices declined, those hungry house hunters would respond by snapping up anything that was offered.

According to long time investment adviser and real estate guru Hilliard MacBeth, the bargain hunting in Alberta has already started.

"I've heard of lots of people who say, 'The prices are down.I'm going to jump in,'" saidMacBeth, Edmonton-basedauthor ofWhen the Bubble Bursts.

In fact, some of the people he advises have already identified a buying opportunity and jumped into the market, at least on behalf of their kids, who they are helping out in the role of bank of mom and dad.

"I would have counselled them against it," said MacBethby phone as he puton his ski bootsin the Lake Louise parking lot. "I would have said, 'Wait,' because we're early days yet."

Lagging indicator

Housing is considered to be what'scalled a "lagging indicator," meaning that real estate markets onlyrespond long after the economy has started to go sour.

And according to Calgary-based behavioural economist Robert Oxoby, that's at least partlydue to something behavioural economists refer to as"loss aversion"by current home owners.

Behavioural economists love to point out when conventional market rules are overturned bypsychology. Especially when human behaviour makes us act contrary toour own interests.

Normally, economic theorytells us that when thingsget cheaper, we buy more. Whenthings become more expensive, we buy less. In the property market, that often turns upside down.

"There's a lot of herd behaviour here. We behave like cattle," saidOxoby,a professor at the University of Calgary.

"People see the prices going up, and they go, 'Oh, shit, I better buy a house now before it gets worse.'"

Fraser Valley rising

In a place like B.C.'s Fraser Valley, where prices have risen 27 per cent this year, following the herd doesn't look so stupid.

"Speculative fervour thrives on expectations of rapidly rising prices rising rapidly enough that buyers find it rational to make bets they could not normally afford," said a writer for The Economist discussing not housesbut the price of baseball cards.

It ison the way down when loss aversion kicks in, this time hurting people who want or need to get out of the market.

"When the value of that house is high, they tend to view that as a gain," said Oxoby.

Loss aversion makes sellersrefuse to sell, preferringinstead to wait until house prices bounce back again.

The problem arises when that bounce-back fails to happen. And the people it hurts most are those who bought just before the downturn began, when the market was at a peak.

"So, what happens is as prices start to fall even more, peopleget trappedwiththose bigassetsthat they have a lot of debt onbut aren't worth as much anymore," said Oxoby.

MacBeth calls the price the seller expectsto obtainthe "anchor price" and says therefusal to accept anything lower seizesup the market. That's because buyers are expecting a bargain.

He says that theconflict between highselling prices and low offers, demonstratedin the current slowdown in sales in places like Calgary, can take a long time to resolve itself, often only does so after banks begin to call in loans, forcing foreclosure sales at the true market price. Thus the lag.

According to colleagues in Calgary, the market for houses priced at less than $500,000is stronger than more expensive offerings, but as the latest figures show, the entiremarket is slow.

Timing the market

For prospectivebuyers, suddenly, the challenge is exactly opposite from what it was a few years ago. Instead of being forced to buy before prices become unattainable, they wait, wondering when the market will hit bottom,fearful that furtherdeclines will wipe out their downpayment and leave them owing more thanthey own.

There is only so much people in other parts of Canada can learn fromhousingmarkets devastated by falling energy prices.

"One of the things that was supportingAlberta home prices was the fact that our incomes were 40 to 50 per cent higher thanthe rest of Canada, and that's changing very rapidly," saidMacBeth.

But property owners and prospective buyers elsewherewould be wise to watch and see if, indeed, the plunge is nipped in the bud by bargain hunters or whether prices continue to fall for a while yet.

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