The swinging pendulum

Will an increase in vacancy rates push down housing demand?

Calgary has long had a reputation as a difficult place to rent – a reputation confirmed for much of last year when the city's vacancy rate hovered below one per cent.

Yet market uncertainty brought upon by oil patch woes have painted a much different picture in 2015, with Canada Mortgage and Housing Corp. (CMHC) reporting vacancy rates in the city as high as 3.2 per cent.

While good news for renters, it poses as potential bad news for home sellers, notes ATB Financial chief economist Todd Hirsch.

"We definitely will see some downward pressure on the owned residential market and a higher inventory of new rental properties will contribute to that," he said.

Yet he adds the situation is to be expected, likening the relationship between housing and rental prices to a swinging pendulum.

"Ten years ago in Alberta, there was concern about too many condo conversions, leaving a lack of rental properties," he said. "So that was a case of the pendulum swinging too far in one direction.

Now it's going the other way where we're seeing more rental properties with a negative effect on the ownership market."

Already, housing prices are feeling the effects of the slowing a slowing economy. While the average benchmark prices remained relatively unchanged in August at $461,600, it was widely expected that prices would decline in September.

Conference Board of Canada economist Robin Wiebe believes the current numbers reflect only the start of what may be a more pronounced decline in the overall housing market if oil prices remain low for a prolonged period.

"If the economy continues to slow, there will be less jobs growth and that leads to less demand for housing in general," he said.

In turn, fewer people will come to the city seeking work.

In the short term, this will likely impact the rental market given that migrants often rent prior to buying, said Wiebe. Yet over time this could have a more pronounced dampening impact on the demand for buying homes because those who are renting might stay put given it's less costly and thus more attractive economically than ownership.

In addition, housing prices can be further depressed because renters — anxious about job security – are less inclined to jump into a declining housing market, said Wiebe.

CREB® chief economist Ann-Marie Lurie suggests the relationship is not as pronounced it seems.

"Both markets are really more affected by how much additional supply is available," she said, noting more housing is currently coming online in both markets with more to come.

"So if you're not attracting people here because the economy is struggling, who's going to absorb all this housing that's under construction?"

Lurie agrees with Wiebe, suggesting we've yet to see the full impact on the housing market.

"We're only just starting to see job losses," she said. "But the longer the downturn lasts, the more layoffs there may be and that will definitely weigh more on both markets."