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| The Assessment Monitor - January 2009 |
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| We are all faced with decisions about our property taxes each year and 2009 is shaping up to have more decisions than usual. In Calgary we are engaged in a self initiating system that is, if the taxes are not acceptable the onus is on the tax payer to initiate a complaint and prove the assessment is erroneous. The increasing complexity of the forms and process tend to discourage many. In fact the assessments undergoing complaint are so few in number that the system could be deemed to be correct. The relevance of this lies in the fact that there has been a dramatic reversal in the growth of property values and it is uncertain just yet who in 2009 will be the winners and losers. |
| If we start at the beginning of the cycle it is obvious from this chart that Calgary has been growing and that we have enjoyed a constantly rising number of employed citizens. Many factors are captured in this chart not all of which provide a similar message. |
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| Closer scrutiny shows that employment growth peaked in 2006. Combining the social and economic factors around job growth and employment shows that the average annual wage increase had dropped back from 12% (2006) to 6% (2007). The net effect was that there were more employees available and job security was shrinking as the market constricted. |
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| Looking at the construction activity, the percentage change of investment dollars year to date was slowing by the second quarter of 2007. The cycle of dramatic spending and cautious saving reversed itself before the years' mid point - a full year before the relevant basis of July 1st 2008 for the 2009 property tax year. |
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| Total building permits for both residential and non residential construction were down after a peak in 2007 - down in 2008 by as much as 22%. By this point there could be no doubt that the investment market for the reasons shown had peaked in 2007. Only required action is the recognition of the degree of the downward turn as of the critical date of July 1st 2008. |
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| Alberta's net migration moved into negative territory after 2006 and not surprisingly the apartment vacancy rate rose. A vacancy rate of .7% (2006) doubled to 1.5% (2007) and almost doubled again to 2.9% in 2008. |
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| The cost of owning versus renting an apartment was growing at a disproportionate rate during 2007. Condominiums have traditionally been the easiest to acquire - with the lowest relative price. They are therefore the first to feel the uptick in the market and the ones that often fall the furthest during periods of economic restraint. The result was a compromise in the healthy relationship during the earlier ten years with warning signs becoming obvious by late 2006. |
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| Condo conversions reached a record high in 2007 doubling from an average of approximately 900 units to 1,800. Caution is required in this type of a market for fear the average sale price per apartment is unduly influenced by this unusual behaviour - it clearly was not sustained. A better indicator of the market would be obtained if the price paid for the condo conversion properties were eliminated from the sale price of average apartments or at least weighted in favour of the typical. |
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| Further to the point of the true market value per apartment unit, it is important to ensure that the mix of sales used is indicative of the market, in this case there are over 35% of the rental units in apartment buildings while condo buildings house only 7% of the tenants. |
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| Condo market is growing at the expense of the apartments. This has a downward effect on the rental rates of the apartment stock since the condos tend to be in concrete buildings often with a full parking ratio. Once the vacancy rate turned upward in 2007 lesser quality apartments were under an increased pressure to provide incentives.
Under these circumstances, long term rental properties receive a higher capitalization rate by prudent purchasers. |
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Investors were purchasing apartment buildings because of the stable cash flows. Using a typical assessment of $150,000 these rents would equate to a capitalization rate of ($1,140 x12) / $150,000 = 9.1% |
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| In conclusion, the tell-tale signs of a cyclical Calgary economy can be seen in the post 2006 fact patterns showing that property values, in all likelihood, would be dropping. Over the next few months prudent investors were recognizing the slowdown - at least in the rates of increase. In hindsight the assessor has all the data to chart post peak changes in value and it remains to be seen if the City's estimate of the value-drop will be upheld by the courts. It may be years before the assessment complaints work their way through all levels of appeal. In the meantime one indicator of the change in values, the construction permit total value, was off 22% between 2007 & 2008 suggesting that assessed values could experience that amount of drop and maybe more. It may help to think of values for the 2009 assessment as relating to the values just prior to the peak. If that was the case, last year's assessment notice shows several previous year's assessment values. Otherwise the single best indicator of value is a sale of the subject property in the relevant time and then perhaps an appraisal effective as of July 1st, 2008. |
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