It sure didn’t take long for the questions to start coming in on how the flooding will affect the real estate market. While we at the Real Estate Investment Network were focusing on doing whatever we can to provide updates/answers/an information hub/support/insurance info throughout the weekend – in the background the real estate questions began to come in.
Of course, we have been focusing initially on the flood’s effect on the obvious first priority: people (Dr. Paul Stoltz's Insights on Flood Adversity). We have also begun our preliminary analysis on the economic and real estate side of the equation. Its impact will be felt for months and will ripple into many areas of the economy. Here’s what we should see in the coming months (more detail to come as more facts are known):
#1 Housing Market
The most important fact for everyone to remember throughout the next few months is that Housing sales, number of listings, days-on-market, average sale prices/ building permits will no longer reflect the true ‘direction’ of the market. These numbers will all be skewed by the after effects of the floods. Sounds rather obvious when you think about it; however, watch what happens in the coming months as the numbers are released and those who love to scare the world to get attention will use these skewed numbers to support their very weak real estate arguments that the market is collapsing/over-valued etc. Chuckle a little bit when you read it, but don’t get drawn in to the drama; know that the numbers are just not normal.
Skews even “Canadian Housing Numbers”
As we know, Calgary was on a nice and steady growth curve that matched the underlying economics, and this is no different now. Over the coming months, the number and quality of the sales transactions will not be on trend and should actually be ignored, or at least ‘seasonally adjusted’ in your big picture analysis. The next few months, the housing stats will not be indicative of market health. As people focus their attention to getting their lives together, getting their properties together and resetting their housing goals, selling or buying a property won’t be top of mind as priorities shift.
Calgary’s market strength over the last number of months has helped to support the “National Averages” often used as bell-weathers of the “Canadian Real Estate Market.” With Calgary’s market knocked off track, its influence could put negative pressure on the national number. Watch for this influencer create unsupported headlines and arguments.
Days On Market To Be Skewed To Higher Ground
Following this, we should see a ‘shift’ to higher ground. After a traumatic event such as this, many will sit back and evaluate their lives, as well as their housing choices. Most will choose to remain in the same neighbourhood; however, there will be a larger than average cohort who will make the decision to move from flood risk areas. The impact of these decisions won’t be felt all at once in the market; yet, there will probably be an increase (over average) of listings in these areas in the following 12 months. Increasing the number of ‘days-on-market,’ while at the same time decreasing the ‘days-on-market’ in higher ground un-affected regions of the city as both new-comers and those wishing to change residence in the city will have the ‘flooded regions’ at the top of mind.
Insurability Clause To Be Increasingly Important
Because the human memory is short, this shift will really only be felt over the next 12 months or so. However, insurance company’s memory is much longer and will have an effect on insurance rates and companies that will cover properties in the flood zones. That is why it is going to be increasingly important to add the clause to your Purchase and Sale Contract; “Subject to Buyer Confirming Acceptable Insurability of Property.” Many buyer leave insurance discussions until close to closing, and from now on they need to be asking this question at the beginning of the purchasing process.
New Migrants to Calgary
For the next 6 – 12 months, new migrants to the city and surrounding towns will have the sight of the floods etched in their brains. This experience will push many of them to ‘higher-ground’ purchases, increasing the demand further for these areas. Following this period, you will also see ‘relocation specialists’ reminding professionals being moved in by their companies about focusing on higher ground as part of their due diligence. This, or a similar map, will begin to play a role in housing market decisions:
The bottom line is this: the results of this flood will play a role in the housing numbers for at least 12 months in all cities and towns affected by it and will skew the market health readings. Strategic investors will understand this and not get too excited when numbers show extra strong in higher ground areas, or too distraught if numbers come in ‘off trend.’
#2 Rental Market
The Calgary and region rental vacancy rate, already near zero, will hit absolute zero and affordable housing options will quickly disappear. This is due to the combination of current demand from new residents coming into the region for economic reasons, combined with the temporary rental demand from insurance backed home-owners who need a place to live during their renovations/repairs on their homes PLUS displaced current renters. In fact, there just won’t be enough local rentals available to fit demand.
This will drive ‘street’ rents up quickly as suites turn-over, but it will also limit the turnover of current tenants who will choose to stay in their current rental longer as choice of movement will be severely restricted. Sadly, it will also spur increased number of stories of ‘landlords taking advantage of tenants.’ Many of these new renters probably haven’t rented for years if not decades and their requirements and expectation of quality may differ from the current renter cohort; landlords need to be aware of this.
Secondary Suite Debate Comes To The Front of The Line
This increased demand and reduced supply should re-start the whole ‘secondary suite’ discussion in the City of Calgary. It will be an impetus to getting that program approved and implemented more quickly in order to help provide the required affordable rental options for the city. Let us hope that, during this time of increased demand, that City inspectors are a little more empathetic towards the needs of the renters instead of forcing them out of temporary suites.
There will be a massive influx of building permit requests presented to the city planning and permit departments due to the large number of repair and renovation projects required after the flood waters recede. The responsible home-owner and renovation expert will require proper permits to ensure future sale value. This will also lead to an increased demand on the city building inspectors to get work inspected and approved. Staffing and streamlining of processes are going to be required at the city to ensure that home-owners and renters get back to their homes as quickly as possible.
IMPORTANT NOTE: For future purchasers, it will be extremely important to ensure that proper permitting and inspections were done on properties you purchase in the coming years. Because of the high demand and requirement of expediency during this time, some of the work MAY not be completed as well as you would like it to be. So PLEASE ensure that you get confirmation of any repair/reno work done before you remove conditions.
#3 Retail Sales
Retail Sales in the area will begin to start spiking over the coming months as insurance backed home-owners and renters replace their lost goods. Although retail sales are a much more accurate indicator of consumer confidence than are the oft quoted ‘confidence surveys’ (see this analysis report here), during these coming months they should not be used for this purpose as the retail sales/automotive sales/renovation sales numbers will be skewed much higher due to the replacement (not consumption) of goods.
Retailers, renovators and building supplies providers must be made aware that social media is a powerful tool and if you are even remotely thinking of ‘taking advantage’ of this situation you will be named and shamed by those you take advantage of.
#4 Renewed Focus on Insurance Coverage
This natural disaster will hopefully put a new focus on the importance of proper home insurance, for both property owners as well as renters. And although a direct flood as we have seen here is not often covered in policies, many assumed that it was. In fact many who do have insurance really don’t understand what is covered and what is not. This flood will really bring to the forefront that no two policies are alike and price should never be the only determining factor for insurance choice.
As the waters recede and the repairs begin, we encourage all homeowners and renters to review their policies in detail… even if you weren’t affected by this round of flooding. Find out what is real in your coverage (without assuming) so you can make informed decision on whether to keep coverage the same or find something more comprehensive or competitive.
For instance, right now there will be landlords who will not be collecting rent for a number of months as their suites will be uninhabitable. With some insurance you can get ‘rental replacement’ coverage meaning the insurance company pays you equivalent rent; with many policies this does not exist. With some policies you are only covered for a 30 day vacancy, while others this is extended for months. Some have sewer back-up coverage, while many do not. These are just a few of the important differences that will become very apparent in the coming weeks.
Oh yes, disasters like this don’t go unnoticed, so please be prepared for the following potentialities:
a. Overall Insurance Premiums to increase to cover the costs of this disaster
b. YOUR insurance premiums to increase if you are making a large claim
c. Potential of some insurance companies no longer wishing to provide coverage in flood-potential zones (or if they do, making the premiums very expensive).
#5 Traffic & Transit
Transit has come to play such a major role in Calgary (and will continue to). However, the flood damage to the tracks will be causing large increases in certain auto-traffic corridors. This commuting difficulty could lead to some areas (even in higher ground areas) having a slowdown in the number of units purchased. This will provide a long-term thinking-investor an opportunity as demand slows in some of these key transit oriented areas.
Luckily (if there are any silver linings at all), this flood occurred after the school year was over. Imagine the traffic chaos if it had occurred during the middle of the school year, with families displaced to all corners of the city yet students having to commute back to their schools every morning. Calgary’s already infamous traffic would have been a nightmare every day.\
When the ‘flood’ headlines die down, and attention is once again brought back to pipelines, protests and politics – the skewed numbers will remain. It will be especially important from now on to ensure that that you actually do complete that extra level of diligence as you buy, no matter what city you are in across this great country of ours.
That extra 10% effort will make all of the difference, whether it is in deciding where to buy, or what insurance to get, or what tenants to rent to. Knowledge is King and diligence is Queen. Together they can make your portfolio Royal – without them you can be left standing outside knocking on the door of the ‘financial castle.’
Cover photo source: www.thestar.com