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Alberta Residential Construction setting New Record Highs in 2015

07/08/2015 06:28 EDT | Updated 07/08/2016 05:59 EDT
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<a href="http://www.twitter.com/ecstaticist/" rel="nofollow">www.twitter.com/ecstaticist/</a> &lt;-- I tweet when I post on flickr. <a href="http://flickr.com/photos/ecstaticist/3619129336/sizes/l/">view larger...</a> | <a href="http://flickr.com/photos/ecstaticist/3619129336/sizes/o/">original</a> | <a href="http://www.flickr.com/photos/ecstaticist/sets/72157594498297839/">My top 100</a> Shot from a landing Westjet aircraft, this view from the suburbs toward downtown Calgary gives you a sense of the flatness of the Canadian prairies.

The economic climate in Alberta changed in 2015 - but it doesn't look like that's reflected in the new housing market. In fact, Alberta housing continues to be built at record levels.

Typically, during tough times, the housing industry takes a major hit. Volatility and uncertainty are disliked by both buyers - who are hesitant to make the biggest purchase of their lives in a risky market - and financial institutions, who narrow their lending criteria to only the most creditworthy borrowers and most lucrative real estate deals. The last time the Alberta economy took a serious hit - during the economic crisis of 2008 and 2009 - the credit markets dried up fast. Just 3,009 new housing units started construction in the Calgary and Edmonton metros combined during the first five months of 2009, the lowest level of activity since 1991.

When the price of oil plummeted late last year, the gloomy forecasters pointed to 2009's starts activity as a harbinger of things to come in 2015. They thought an old pattern would repeat itself: a negative outlook on the market leads to less new housing demand, which spooks lenders. Cautious construction financiers lend fewer dollars for redevelopment projects, which leads to fewer construction starts, which leads to more layoffs. These unemployed workers don't buy housing, and demand falls. A vicious cycle.

However, this downward cycle has not begun thus far in 2015, and it appears that bankers might be the reason. Starts are a lagging indicator, often a reflection of sales activity in the previous year, especially for condominium apartments. The commitment to finance some of the housing starts from early this year would have been made prior to the decline in the energy markets in 2014, but nowhere near all of them. And there has been a lot of them. The 13,016 housing starts in Alberta's two metro areas this year are up 12 per cent in comparison to the first five months of 2014, and were 333 per cent greater than the same period in 2009. In fact, the combined starts in Calgary and Edmonton through May are the highest total in over 25 years!

It's true that many of the low-rise homes starting construction this year were sold prior to the oil-related market shift, but it still demonstrates that construction lenders remain confident that these buyers will close on their purchases. Sales were near record highs for pre-construction high-rise condominiums in Alberta last year, so most high-rise construction financiers should be content with their exposure. Lenders ensure that their loan is self-liquidating, meaning the closing of the sold units would cover their loan amount in the event that no more sales are made before completion.

However, lenders may not have such protection in the rental market. Despite a larger equity requirement from the builder, commitments for re-finance (or a permanent loan) on a finished rental apartment are often contingent on a 'stabilized' building, meaning the builder needs to rent most of the suites to ensure a construction lender can be paid out. Therefore during uncertain economic times with less population growth and employment loss, this may become a much riskier proposition for construction lenders.

Apparently, the schedule 1 banks, trust companies, and credit unions are confident in underlying housing demand in Calgary and Edmonton, as construction started on 1,569 rental apartment and townhouse units from January to May this year in those two metro areas, a 139% increase over 2014 and 1534% increase over 2009! One can speculate that lenders are finding less risk in financing the rental markets at this time.

Based on where the smart money is being allocated, a quick recovery in Alberta's top markets, and strong demand for newly built housing in 2016 and 2017 must be the predominant perspective. Perhaps you should consider buying now while the market is flat, as I believe it is only a matter of time before the smart money outlook becomes the consensus outlook.