Thursday, July 31, 2008

Millwoods condo follow-up and classic videos

Millwoods condos that were originally for sale as "ridiculous discounts" are still on the market 154,900 and 164,900. Anyone feel they totally missed out when they were bargains in February?

The 1 bedrooms normally range in price from $179,900 to $190,900. The 2 bedrooms range from $204,900 to $227,900.
The developer, for these first 10 units only, is selling them at $150,000 for a 1 bedroom and $160,000 for a 2 bedroom.

See earlier posts here, here and here.

Like a good wine some things get better with age. On that note some classic and entertaining videos:

gets good after the 1:30 mark

Tuesday, July 29, 2008

Edmonton: What has driven the boom?

In many American markets the run up in prices was almost entirely attributed to the total absence of lending standards and speculatively mania.

I think the situation in Alberta is more complex. Speculative mania played a part in the boom for certain, but this combined with inflation and actual economic growth brought the peak housing prices.

Below I took Edmonton prices back in 1999 and tried to apply a rough guess of economic growth contribution and inflation to each year to see where average detached prices would end up in 2007/2008 in the absence of speculative mania. From the EREB archives in 1999 the average detached house sold for $133,442. Now "Justified Appreciation" here is an abstract number of how much economic growth contributed to appreciation assuming all participants were rational. I made an rough guess on this value and added on inflation each year to see where prices would trend. I started at $150,000 at 1999 assuming that prices were irrationally low during this time period. Since I make the case that markets can be irrationally overpriced then I also gave merit to the idea that market can be undervalued as well. These are all rough estimates, but i think it gives some tools of how to look at a market besides "The economy is hot so prices will increase" or "It was a speculative frenzy so prices will crash".

Year SFD Avg Inflation Justified Appr
1999 $150 2% $3 1% $2
2000 $155 2% $3 1% $2
2001 $159 2% $3 2% $3
2002 $166 2% $3 2% $3
2003 $172 2% $3 2% $3
2004 $179 4% $7 5% $9
2005 $195 4% $8 10% $20
2006 $222 4% $9 10% $22
2007 $254 6% $15 10% $25
2008 $294 6% $18 5% $15


In Edmonton the average detached price peaked at $426,000 in July 2007 and was at $381,384 this June. Assuming these wild guesses reflect reality the difference between the price above and actual price would be due to "speculative mania". This would include watching too much flip this house, or that Ty dude from Extreme housing Makeover, lax lending standards from the CMHC and this woman and unrealistic expectation of future appreciation. Breaking apart the components shows a possible breakdown of each contribution to appreciation between 1999-2008. Note that as prices fell and inflation marched onward the speculative mania component has shrunk since the peak.

$87,000 of speculative mania built in to current prices? That would bring detached house to $300,000 to purge the built in excesses. I dunno, my gut says more like $325,000 - I guess I am a timid bear.

This is as close to a forecast I will post. Generally the theme of this blog will be to point out distortion from the real estate industrial complex and the media. I'm not an economist.

Saturday, July 26, 2008

Calgary Market Update

Cheap Post:

Sales price per square foot has decreased in July. For condos and houses the amount paid per square foot has decreased to the lowest point of anytime since Jan 2007. From Mike's stats:

SFH --- July 1-24: $289 ($298) June: $305 ($309)
Condo - July 1-24: $297 ($305) June: $303($309)

Also from Bob Truman's blog Sales continue to improve I would like the point that looking at YOY change only in sales can be confusing.
Single family home sales volume, after being down 34% for the first five months of 2008, showed an 18% drop in June, and July sales are down 12% compared to 2007.
What Bob fails to mention is that some of that difference is attributable to the deteriorating conditions throughout 2007. So while the may have been some seasonal improvement late this spring there is also the fact that we will begin to compare to sales at the beginning of the downturn. See this chart showing how sales in 2007 compared to 2006. Consider also that smaller year over year losses still show year over year losses!

Remember comparing to ridiculous five year averages or ignoring "boom" years when looking at sales this spring? Sorry can't find the links maybe someone can help me out?

Saturday, July 19, 2008

Spotlight: Gregory Klump

From the Calgary Herald: Calgary home sales take 32 per cent slide
Despite the decline in sales for the first six months of this year, "on a month-over-month basis sales have increased in Calgary in the last two months," said Gregory Klump, the real estate association's chief economist
Looking at the data sales have increased in Calgary from Mike's Stats:

Month SFH Condo Total
March - 1418 - 565 - 1983
April - 1363 - 581 - 1944
May - 1368 - 577 - 1945
June - 1439 - 556 - 1995

So one more property sold in May than April. Then forty more in June. How would Gregory Klump, CREA chief economist, interpret this?
But Klump said the trend has been for increasing sales in Calgary on a monthly basis.

"It's clear looking at the data that I'm looking at, that in terms of the prices, they've stabilized," he said. "Anyone expecting a continued decline in average price will be surprised and disappointed."

How is it clear Calgary prices have stabilized?!? From Mike's Stats

Month SFH Condo (000s)
March - 420 - 293
April - 420 - 290
May - 419 - 285
June - 408 - 293

Words stabilize, and balance seems to come up frequently now. Remember when the CREB said sales were stable in January? What makes Gregory an expert worthy of a print space? He did not anticipate any price decrease so how can he be so bold now? What did Gregory say April 2007?

"The resale housing market continues to be a story that features the West and the rest," said CREA chief economist Gregory Klump.

"Tight markets make for sizeable price gains, and nowhere is that more true than in Calgary, Edmonton and Saskatoon, where year-over-year increases remain lofty. In keeping with that trend, CREA forecasts that price increases in 2007 and 2008 will be biggest in the Prairie Provinces and British Columbia."

Dear potential home buyers - Mr. Gregory is not your friend.

Tuesday, July 15, 2008

Lies, Damn Lies, and Statistics

Apparently prices in Edmonton in Calgary are stable. This from the Edmonton Journal Article Housing-start decline not a sign of dying market

First, consider overall housing prices in Calgary and Edmonton. In both cities, prices in June are off only slightly from the peak record highs reached last July. They're down 3.6 per cent in Calgary, and 3.8 per cent in Edmonton -- hardly a sign of collapsing prices. In fact, for a full year now, prices in the resale market have been remarkably stable.

Let;s look at Edmonton here. The statistic used is for average price for all properties which dropped from $354,718 to $341,376. However a look at prices by most any other measures would totally invalidate the article.

Some other numbers of price drop July 07 - June 08 from

Realtor Association of Edmonton (Edmonton CMA)

SFH Average $417,150 to $381,384 -8.6%
SFH Median $395,000 to $365,000 -7.6%
Condo Average $271,908 to 262,365 -3.5%
No Condo Median available

From Bob Truman's site (Includes Edmonton, St Albert, Sherwood Park, Spruce Grove, Stony Plain)
SFH Average $442,753 to $399,604 -9.7%
SFH Median $410,000 to $368,000 -10.2%
SFH Price per square foot $321 to $280 -12.8%
Condo Average $275,905 to $261,318 -5.3%
Condo Median $269,000 to $245,900 -8.6%
Condo Price per square foot $285 to $257 -9.2%

Here is a breakdown of Edmonton regions YOY price change. I didn't hav access to July 2007 regional prices.

Edmonton Regional Prices for June 2008 (detached)

2008 2007
NORTHWEST AVERAGE 338135 346172 -2.38%
NORTHWEST MEDIAN 318000 348000 -9.43%
NORTH AVERAGE 356462 405401 -13.73%
NORTH MEDIAN 346250 385000 -11.19%
NORTHEAST AVERAGE 297946 355189 -19.21%
NORTHEAST MEDIAN 295450 343000 -16.09%
CENTRAL AVERAGE 290966 278306 4.35%
CENTRAL MEDIAN 252500 270000 -6.93%
WEST AVERAGE 428566 511958 -19.46%
WEST MEDIAN 402500 430000 -6.83%
SOUTHWEST AVERAGE 457560 566179 -23.74%
SOUTHWEST MEDIAN 419600 515000 -22.74%
SOUTHEAST AVERAGE 356244 431395 -21.10%
SOUTHEAST MEDIAN 339000 399950 -17.98%

ST. ALBERT AVERAGE 449903 514678 -14.40%
ST. ALBERT MEDIAN 424000 478700 -12.90%
SHERWOOD PARK AVERAGE 443069 480363 -8.42%
SHERWOOD PARK MEDIAN 423500 451000 -6.49%
LEDUC AVERAGE 347915 401140 -15.30%
LEDUC MEDIAN 330000 373450 -13.17%
SPRUCE GROVE AVERAGE 377174 418583 -10.98%
SPRUCE GROVE MEDIAN 361324 402500 -11.40%
STONY PLAIN AVERAGE 390452 401990 -2.96%
STONY PLAIN MEDIAN 364500 395000 -8.37%
MORINVILLE AVERAGE 354745 345309 2.66%
MORINVILLE MEDIAN 353000 335000 5.10%
FORT SASKATCHEWAN AVERAGE 371281 381228 -2.68%
FORT SASKATCHEWAN MEDIAN 355000 370000 -4.23%

Remarkably stable.

I wanted to rip on the article more... but I really don't think anyone takes the Edmonton Journal seriously anyway.

Saturday, July 12, 2008

Ed Jensen on 40-year mortgages

The Canada Mortgage and Housing Corporation, the Crown corporation providing mortgage insurance on behalf of the government, eased the rules in 2006 to encourage homebuying.

That change, Jensen said, had little impact at the time.

"We didn't notice it in the market place," he said.

"So I believe in reverse, I don't think we're going to see a large impact on sales."

Stunning remarks from Ed Jensen appearing in the Calgary Sun's article - Mortgage Rule Change Dismissed. I don't expect Ed Jensen to go Housing Panic on us, but it would be nice to at least recognized basic realities when forming arguments. Don't take it from me, a bitter renter, that the statement is absurd, rather look to the financial industry. There is a broad consensus that these now defunct mortgages were popular among first time borrowers and helped stoke demand in real estate.

Longer payback loan fuels housing market:
"About 60 per cent of first-time buyers are opting for a 40-year mortgage," says Craig Alexander, deputy chief economist at TD Bank.

"If these longer amortization mortgages hadn't been around, the housing market would have cooled down a lot sooner."

There's a "huge adoption" of 40-year mortgages in Toronto, Calgary and Vancouver, where people stretch for affordability, says Catherine Adams, vice-president of home equity financing at Royal Bank of Canada. "I think it's given the housing market a boost and allowed prices to go up further than they would have otherwise."

Mortgages with longer amortizations grew to 37 per cent of new home loans – and 9 per cent of outstanding mortgages.

"That's phenomenal, considering they have been around for only the last two to three years," says association president Jim Murphy.

Stretched buyers fuel boom in housing:
Legions of first-timers are adding years of extra mortgage payments so they can buy a house, or putting little or no money into a down payment, a Re/Max survey revealed yesterday. Nearly two-thirds of buyers in major centres now favour extended amortization periods of up to 40 years, while putting little or no money down was prevalent in 38 per cent of regional markets surveyed across Canada.

"The reason we think the market has been staying hotter much longer than anyone anticipated was because of these newer amortization mortgages," said Craig Alexander at Toronto-Dominion Bank.
Longer amortization mortgages "have had a very profound impact on the Canadian housing market since they were introduced" in 2006, he added.

Dodge warns of inflated housing market
Bank of Canada Governor David Dodge is raising a red flag about housing prices in Canada, saying that increasingly loose lending rules may be helping overheat the country's real estate market.

‘Innovations’ in lending minimize drop in new-home construction

Lofty prices in the country’s hottest markets, particularly Western Canada, would likely take a much bigger bite out of new construction if it weren’t for longer-term mortgage products, said Derek Holt, assistant chief economist at Royal Bank of Canada.

Last year, the federal government extended the maximum amortization period for mortgages from 25 years to up to 40 years.

Consumers have embraced these products, which raise the cost of a mortgage over time but lower the entry hurdle to buying a home because the longer payment period allows for smaller monthly payments.

“It’s my belief we would be 10 to 20 per cent below 200,000 housing starts next year if it wasn’t for the impact of these mortgage innovations,” Mr. Holt said.

Bleak house outlook? Not in Canada

Economist Derek Holt does warn, however, that the increasing popularity of long-duration mortgages to reduce monthly expenses could cause problems later on.

"Alberta, and then Ontario, lead the country on the take-up rates for new mortgage products introduced over the past two years," he said yesterday. "In fact, the 40-year mortgage is now only about 15 months old and already dominating mortgage purchase applications."

Homes in Edmonton, Saskatoon most overvalued

A rise in the number of extended-amortization mortgages, which lengthen the time it takes to repay a home loan to 30, 35 or 40 years from the traditional 25, have bolstered the recent strength of Canada's housing market, Ms. Warren said. These mortgages are stretching affordability for first-time home buyers, but because they are seldom combined with zero-down or interest-only structures, she does not seen them as particularly risky.

“I don't think this is a major risk, though it is supporting the housing boom more and we probably would have seen things level off this year instead of reaching a new peak,” Ms. Warren said.

Canadian housing boom over, says RBC

"The delayed arrival of softer housing markets can be partly attributed to recent mortgage innovation that has seeped into the Canadian market during the last two years," it said, citing higher loan-to-value ratios and longer amortization periods of up to 40 years, which opened the market to a wider range of buyers and prolonged the boom.

The mortgage-market innovations, which make housing more affordable in the short term, also heighten the risk of default in the long term, it said.

Markets in the West, which have risen the furthest above their underlying values, are the most at risk of an increase in defaults as a result of recent mortgage innovations, the report's author, RBC economist Amy Goldbloom, said in an interview.

Credit squeeze hits 40-year mortgages
Feisal Panjwani, a senior mortgage consultant with Invis in Cloverdale estimates that 85 to 90 per cent of his first-time buyers have chosen the 40-year option.
"That zero-down program has been quite popular," Panjwani said.

Thursday, July 10, 2008

Marketing Synergy

The city of Edmonton teaming up with Rohit, Landmark and the Edmonton Journal to build and market townhouses for stretched wage earners in a program called First Place Edmonton. The prices aren't terribly cheap at $266,710 for a two bedroom townhouse in Millwoods. The land is valued by the city at $30,000-35,000 so Rohit could end up with $235,000 to build the structure of a two bedroom 906sqft townhouse with no garage and an unfenced yard. In the same area of Millwoods some townhouse prices appears to be competitive to these values. For Example:

This townhouse is fairly close to the development in Greenview. It is built in 1989 but unlike the City of Edmonton/Rohit townhouse it has an attached garage and a third bathroom. It has quite a bit more space (1345 vs 906 sqft) for a similar asking price of $274,900. The appliances, finishing and exterior appear to be fairly good from the photos.

This 1995 duplex with attached garage is close to the Canyon Ridge development at $279,000 is a few thousand more than the townhouse but has a back yard and more space.

The Edmonton Journal appears to be helping advertise these units for Rohit and Landmark developers in the article titled "First-time buyers catch a break in housing deal"

Under the new program announced Tuesday, 85 townhouses in the Greenview and Canon Ridge communities will be sold at a cut rate to qualified first-time home buyers.
The lottery is a nice touch as it is a well known marketing strategy used by developers.

In order to buy one of the 85 townhouses, applicants must enter a city-run lottery. There are strict guidelines on who can enter the lottery. Potential buyers must have a combined family income of $69,000 to $88,000 per year.

The qualifying metrics are outdated as they use the now defunct 40-year mortgage. From the First Place Edmonton site:

* Must be first-time home buyers in Canada
* Must be Canadian citizens or have permanent resident status
* Must be able to obtain qualify and have pre-approved financing (based on 5 % down payment, 40 year mortgage amortization, 32% gross debt service ratio and 42% total debt service ratio)
* Must be employed and have a combined income between $69,000 and $88,000, see your financial lending institution for more details.
* Must have a net personal worth less than $15,000, excluding a primary vehicle, locked-in or group RRSP and the 5% down payment required for the condominium unit.
* Applicants must agree to be full time occupants and residents of the condominium unit for the first five years.

Since this program was initiated 40 year mortgages have been discontinued by the Government of Canada because they pose too great of a risk to the financial system. It is interesting to note that the City of Edmonton suggested these mortgages to help Rohit and Landmark developers sell houses.

I just don't see how these deals are remarkable. Other examples of townhomes can be found throughout Edmonton. A 2004 townhouse in less central but more "faux-posh" Summerside is listed for $288,000. This listing has more space, a double garage and has been on the market for some time so the market price may differ from list.

Just north of Ellerslie Road there are a glut of townhouses in this price range and lower lingering on the market. This is very apparent when using the website with map search!

Monday, July 7, 2008

Fairy Tales

The first tale is that of "stabilizing prices" as described in the Calgary Herald article Calgary home sales continue decline, prices hold steady

Calgary's residential real estate market in the first half of this year has been marked by declining sales, increasing listings and stabilizing average sale prices compared with a year ago.

Stabilizing is present tense and indicates that prices are continuing to stabilize. Taking a year-to-date average of prices 2008 is comparable to 2007:

And the average sale price in both markets is close to a year ago - up by 0.20 per cent for single-family homes ($472,163) and down by 0.76 per cent for condos ($312,460), according to statistics released by the Calgary Real Estate Board on Wednesday.
However looking closer look at the trend prices are decreasing compared to a year ago not stabilizing. From CREB stats

YOY Average price change:
Jan: SFH +5.18% condo +8.33%
Jun: SFH -4.65% condo -2.55%

Note that median prices, prices are down over 7% YOY. Remember when the median was supposed to be the stat of choice?

Another tale is the notion of things picking up in the fall from Ed Jensen.

In a news release, CREB president Ed Jensen said the sales numbers "reflect that more buyers are finding a home that fits their family's needs. As we move into the summer months, it's an excellent time for buyers to capitalize on the wide selection of homes, rather than waiting for the fall when things start to pick up again."

Fall with winter are typically the slowest seasons for sales. So its totally mystifying to predict thing starting to pick up then. See the chart below from CREB which i roughly highlighted September to December.

This clearly demonstrates that Ed Jensen is creating a false sense of urgency to promote sales instead of presenting information in a useful way.

Another gem is from this article Calgary resale market seen as turning corner. Calgary resale market seen as turning corner.

"The inventory could normalize very quickly," says Jensen. "There are several double listings out there -- people who have listed both their existing home and their new home -- and if one sells, they would pull the other one off the market."

First there are no numbers available to what extent this is taking place and how this differs from historic norms. Even if this is correct it is not all positive for the market. Generally people with two homes are more motivated. They would be motivated enough to ignore their preference of moving into the new home to increase their chance of selling by listing both. I would argue that in some cases this could be considered speculation. For example boomers that instead of downsizing now have two full-sized homes.

There is another good read regarding the Calgary Herald, Ed Jensen and fairy tales posted on the Calgary Bubble Blog

From Edmonton Marc Perras from the EREB is also creating a sense of urgency:

“Some buyers seem to think that further discounts are possible and are delaying their buying decision unnecessarily. The market finds its own level and has varied within a three percent range over the last six months. REALTORS® have buyers who are staring down the sellers but sometime soon someone will have to blink.”

This is another tall tale which implies that Edmonton in a lull as buyers wait down sellers. This is not a new idea and has been argued before. From Carolyn Pratt, EREB President 2007 EREB Archives.

“Buyers have a large selection of homes to choose from and they are taking more time to make a
Aug 7, 2007

Panicked home buyers were forced to make decisions quickly from a severely limited selection of houses and condos. At the end of the third quarter of 2007 buyers are more relaxed as they contemplate slightly lower prices and three times the choice of a year ago.
Oct 3, 2007

“Buyers, on the other hand, took their time selecting a property to purchase in the
hopes that prices would drop further.”
Nov 5, 2007

I have not seen once the argument that lower sales are the result of higher prices. You know ECON 101 stuff. This absence demonstrates a bias which is not surprising but should still be acknowledged. There is also a theme which is similar to Ed Jensen`s comments that buyers should be buying now. I don`t seem to recall this type of urgency in the normal market before the boom. This is trying to bring back the boom mentality of buying early to avoid escalating prices. However buyers should note that this time period was an anomaly and buying a home should be carefully considered in a normal market.

Thursday, July 3, 2008

Price Hiccup

This article is using familiar talking points to make the case that it's different here in Canada.

For example, one widely followed U.S. measure, the Case-Shiller index of average prices in 20 large cities, is now down 15 per cent from a year ago. Some cities, like Miami and Las Vegas, are down as much as 27 per cent.

It's true that a few Canadian cities are showing much smaller price declines - Edmonton down by 4.9 per cent in the past year, Calgary down 2.4 per cent and Windsor down 5.5 per cent - but only in Windsor does this reflect economic distress. In Alberta, the price reversals look more like a hiccup after huge runups.

The author put the hiccup label after referring to an economist that noted Canada's price trends are similar to the US with a time lag. The author clearly did not look at price trends as 'hiccup' can only be identified after a recovery has occurred. There is a difference between wanting a recovery and seeing one in trends.

There was little if any such lending in Canada, where banks are much more conservative, and only minor signs of speculative buying.

I tend to agree that Canadian lending was 'less brutal' than that in the US. But 40-year and 5% or less down mortgages are very common in Canada. Consider the possibility that 'less brutal' may not be the same thing as good.
Alexander believes that the surge of sellers just reflects the fact that as homeowners saw prices reach higher levels than they'd ever expected, any who had been thinking of selling - perhaps because of impending retirement - decided to grab the money right away. And of course, as price gains weakened, more sellers had the same motivation.

But there are very few distress sales in Canada and voluntary sellers usually refuse to sell at much of a loss. And since banks aren't auctioning off large numbers of foreclosed homes, there's no reason to believe that any meltdown is coming.

This is totally using the same logic as the 'hiccup' interpretation earlier. A warm and fuzzy explanation for a national sales plunge which in the states was followed by a meltdown. While I expect that Canada is in better shape than the US (except Vancouver) there are a lot of shades between "US style meltdown" and the "soft landing" proposed in this article. Just because Canada may not experience the exact same catastrophe does not mean everything will be A-OK.

More on monthly numbers in a few days. For those following Bob Truman's comments, just look back on this blog and see how he cheered 'Days on Market' without mentioning seasonality and now is getting all hot and heavy with the June sales. These sales happened but look at the CREB charts to put it into perspective.