Full Disclosure Finance

By Justin

I am enjoying this format because it provides information on real estate markets not readily available (see Part 1 for the skinny). There is currently no free source out there green-lighting certain areas of Canada or the US. You could join the Real Estate Investment Network to get hot tips about where to buy in Canada, among many other useful things I’m sure, or just use these fundamentals and analyze markets that interest you. If the same analytical approach taken to equities was applied to real estate we would have a wealth of analysis available for the public. They could use it to guide their home purchases and increase the market’s efficiency.

Until something comes along, I’ll be stuck doing my own investigations.

I wanted to do another Canada / US comparison because some people might have thought I cherry picked New Haven to prove a point. Actually, I picked it because it is an area of interest.

I’d like to look at the fundamentals of 2 more cross border markets. I have decided to look at Cambridge, MA and Calgary, AB. Calgary was the hottest market in Canada for a while, but is now cooling off. I’m curious to see how the fundamentals look during this cooling process.

Cambridge, MA is a great area to spend time in. Being home to 2 of the best educational institutions in the world doesn’t hurt. I visit every summer but haven’t the foggiest what the real estate market is like.

Here’s a quick overview of the guiding factors in my analysis.

Take time to look at published information and data from trusted sources when looking to buy in an area. For Canadians, the CMHC, Royal Lepage, and individual city’s sites offer quality stuff.

In addition to getting good data, you also need to know which data is critical for understanding an area’s potential to support a strong real estate market. Taken from pg 39 of Don Campbell’s book Real Estate Investing in Canada, the 12 key fundamentals that affect real estate values are:

Passive Factors (out of your control):

1. Mortgage Interest Rates

2. Increase in Average Incomes

3. Increased In-migration and Demand

4. The Ripple Effect

5. Local, Regional, and Provincial (State) Political Climate

6. Transportation Expansion

7. Areas in Transition

Active Factors (in your control):

8. Creating Highest and Best Use

9. Buy Wholesale, Sell Retail

10. Quality Marketing

11. Renovations and Sweat Equity

12. Speculation

We’ll be looking at the passive factors because they do not depend on a specific property and you have no influence over them. You need to make sure factors out of your control will support your purchase.

Factors 4-7 require a little more digging and insight than the first 3. The ripple effect concerns positive effects on prices in one market after a nearby town or city has experienced a “boom”. Canadians should think of Milton, being the ripple effect of Mississauga and Oakville, which were ripple effects of Toronto at one point.

The political climate concerns the area government’s ability to conceive, support, and implement development initiatives that bring people and capital to it. Some areas clearly excel in this regard. Waterloo Region is consistently viewed as a winner in this department. The City of Brantford, however, usually falls down on the implementation side and would get a lower rating.

Transportation Expansion concerns the construction of new highways that cut commute times to the big cities. Public transit improvements also have a positive effect on property prices, especially when they are within 500m of a new station or line. Vancouver (actually the GVR) is a great example of this. REIN has a great report to give you more details.

Areas in transition are often difficult to define. The word “gentrification” comes to mind. It could be an old rundown urban area that has recently seen more families move in. They buy old houses and either fix them up or tear down and build shiny new ones. This activity encourages restaurants, bars, and grocery stores to move in, bringing more people now that the area has amenities. In short an area in transition is clearly on its way, but not quite there, to becoming a great place to live.

So let’s look at Calgary, AB. It’s the heart of Alberta’s oil kingdom and the oil boom has created a huge growth in employment. The number of people moving there from all over Canada is staggering, so one can understand why property prices went a little nuts. Let’s see what the numbers say:

I was able to get population and income data from the City of Calgary.

The total population increase over this 5 year period was 12.5%. This is almost twice the Canadian average for the same period.

For the City of Cambridge, MA the population trend has been slightly upward at 2.1% growth from 2000-2007.

Advantage: Calgary

Now looking at average income growth for Calgary, we would expect to see the same growth trend.

From 2002-2006, growth has been solid from $73000 to $90700, representing a change of 24% before inflation.

Cambridge, MA doesn’t have a great deal of charts available, so I’ve pieced together the data. Median Household Income growth before inflation from 1999-2007 was 19%. This is very good relative to other cities I have looked at.

Both cities clearly have solid income growth, yet only Calgary has had above average population growth.

Let’s now look at property prices and see if these fundamentals are echoed.

Calgary Median House Prices

As you can see, prices have gone crazy in the past 4 years. Growth in property prices from 2000-2007 was approximately 161%!!! This will be hard to match in any environment and prices have seen a cooling, not a collapse, since their peak in 2007. I’m not sure if the population growth (though above average) and income growth completely justify such an increase, so it will be interesting to watch over the next 2-3 years.

Cambridge, MA has not had close to the same price performance of Calgary (very few places have!). Yahoo Real Estate provides data from 1999-2007 that shows an 85% increase in the median house price. This is a very good performance over an 8 year period but only half as much as Calgary.

Growth has also slowed in the last 18 months and prices are actually showing a slight decrease.

In comparison then, the price performance in both markets has been excellent. Calgary has a substantial advantage on the fundamentals because of the high population growth it has experienced. In income growth, both areas have shown above average performance.

Neither market has seen price decreases of 10-20%, rather it has been a slower cooling after the “boom” which is also a positive sign of the areas as a whole.

And the winner is……Calgary, by a substantial margin because of the population growth figure that will serve to support the real estate market well into the future. Cambridge is simply not growing as fast despite rising incomes and an 85% increase in prices over the last 8 years.

So there you are, a specific analysis of the fundamentals for two real estate markets allowed us to understand their behaviour. Go ahead and apply these fundamentals to other US cities. If the cities have great fundamentals and prices are still dropping it may be a great time to buy. Just be sure to do your homework!