Supply and Demand in Alberta’s Housing Market

It is well known that the Alberta economy is largely driven by the oil and gas sector. One unfortunate consequence of this is that Alberta is subject to the boom […]

It is well known that the Alberta economy is largely driven by the oil and gas sector. One unfortunate consequence of this is that Alberta is subject to the boom and bust cycle that is pervasive in all resource-­‐based economies. In boom periods, the demand for labour increases and there are not enough Albertans to fill a lot of the jobs. Therefore, there is a lot of in-­‐migration during booms. Of course, when Alberta goes into a slump, many of those who came here seeking jobs leave the province to seek employment elsewhere.

This ebb and flow of workers has a profound effect on the housing market in Alberta. During the boom periods, the large influx of workers, combined with higher wages that are needed to attract workers, increases the demand for housing, both for owner occupied and rental units, which lowers vacancy rates and pushes up prices. When the inevitable bust comes, vacancy rates rise and house prices and rents fall.

In late 2015, Alberta is deep into the downside of the boom and bust cycle. The world price of oil has been languishing in the $40 US range for a long period of time, resulting in layoffs and increases in the Alberta unemployment rate. This led the Canada Mortgage and Housing Corporation (CMHC) to forecasting an increase in the overall vacancy rate in Alberta, and indeed, the sale price of houses in Alberta has gone down. According to the Alberta Real Estate Association, the average price for homes sold in Alberta in October 2015 was down 3.9 percent from a year earlier. The national average price, by comparison, rose 8.3 percent over the year. However, according to the latest data provided by CMHC, rents in Alberta actually increased over this past year by 1.2 percent (2.2 percent in Edmonton).

This information has led the armchair economic critics to once again declare that the laws of supply and demand are no longer relevant, and to say the government needs to intervene, because landlords are clearly greedy. Vacancy rates go up, house prices go down, but rent prices still go up. Before we declare economics dead, we should look at how some of these statistics are generated. CMHC gathers rental price statistics from units that are built specifically to be rental units, for instance, a multi-­‐family apartment complex that has no owner occupied component. If people are seeking a picture of the overall rental landscape, they need to be aware of the large so-­‐ called “shadow rental market” that is not covered in the CMHC survey. This is comprised of individuals who buy housing units with the specific intention of renting out these units on a private basis. These units are not covered in the CMHC data. We must remember that the data produced by CMHC, as well as most of the economic data that we take as given, is actually comprised of estimates and forecasts which are subject to a margin of error. In any case, CHMC reported a rental increase of 5.7 percent for Alberta the year before, which is more substantial than this year’s increase of 1.2 percent.

Secondly, tenants must sign a lease, often for one year. Therefore, the rent is set for some fixed period of time, and usually it cannot be quickly adjusted to current market conditions. Another reason we might not see rental prices drop as sharply as house prices is that vacancies are expensive for landlords to deal with, and they try to recoup some of their losses when they enter into a lease agreement. Even if a property is vacant, landlords must continue to pay property taxes and keep up with maintenance.

Given the above, there is no evidence to indicate that the law of supply and demand is not working properly in Alberta or that the housing market is not correcting itself. When Premier Notley was in opposition, she spoke in favour of some form of rent control, but after the election of the NDP in May 2015, former Municipal Affairs Minister Deron Bilous said the government is not looking to introduce rent control. Hopefully the current municipal affairs minister feels the same way.

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