Wednesday, August 13, 2008

Spotlight Edmonton Journal

Today I am just going to make comments on the following article from the Edmonton Journal: Our housing market's correction is not a calamity

EDMONTON - Is the city's housing market going into the tank, as it did in the 1980s? Or is it already showing signs of emerging from its year-long funk?

My guess? With the average price of a single-family detached home in Edmonton down to $379,224 in July -- nearly $38,000 or 9.1 per cent below the July 2007 peak of $417,150 -- the recent downturn is largely history.

Sales volumes are picking up, the bloated inventory of unsold homes is shrinking, new housing starts are down by more than 70 per cent, and current prices better reflect what buyers are willing to pay to live in what has become one of Canada's most consistently prosperous cities.

Regarding the comment about sales picking up and inventory shrinking it is technically true there are stats that can be used to show this. By comparing to sales from last year and to inventory from last month this statement is correct. Here is a chart showing sales and inventory from the Edmonton Real Estate Blog. Personally, I wouldn't make the case that recent trend.s in sales and inventory makes for a bottom

...But let's get a grip. Alberta remains an island of prosperity in an otherwise stormy sea. We've had a correction, not a U.S.-style housing market meltdown. And what a run we've had.

I like how "we've had a correction" refers to the it in the past tense as if we have already past it.

Since January 2002, the average price of a single-detached home in Edmonton has jumped by more than $216,000, or 133 per cent. And that's after taking into account the price declines of the past 12 months. Local condo prices have risen even faster, soaring 157 per cent since early 2002.

Those numbers reflect a sea change in the global economy, and a rise in commodity prices that remains intact, despite the recent correction.

What this article fails to acknowledge is why prices have fallen at all. Decreasing prices without a change in these economic factors demonstrate that something else responsible for the initial run-up. No details were given about what this "something else" would have been because that would mean discussing looser lending standards and speculation; Basically the same things we share, at least to some degree, with the States.
Still, it's easy to see why some naysayers expect the housing market to continue to weaken. Consider this gloomy headline, which recently appeared atop the front page of one national newspaper: "Housing slump stalks Western Canada."

The accompanying story, based on a report from two Toronto-based economists at Merrill Lynch, said house prices in the major cities of Saskatchewan, Alberta and B.C. are overvalued by 10 per cent, and a "sustained downturn" may be at hand.

The Merrill report is here. It says that those cities are overvalued by more than 10%, with Edmonton overvalued by 25%.

Well, here's the thing. That would have been useful advice a year ago. Not so today. As noted, Alberta's real estate markets have already corrected.

While the average price of a single-detached home in Edmonton fell 9.1per cent through July, on a year-over-year basis, comparable homes in Calgary fell nearly 10 per cent, to $456,380.

So when referencing the Merrill report for Edmonton it uses 10% instead of 25% overvalued. Now that prices have dropped 9% it's "all corrected, time for dessert". Well even then the Merrill report attempts to account for the correction which it had modeled Edmonton at 34% overvalued in 2007 which has decreased to 25% in 2008 with price drops included. Note to Edmonton Journal - READ THE REPORT!

The rest of the article I agree with regarding Saskatoon and Vancouver entering into a downturn. They are going to git hit worse than Edmonton going forward. But I didn't read anything convincing in this article that tells me Edmonton is done.


Anonymous said...

funny stuff.

The media likes to say, "there is no bubble", then "appreciation is slowing" and then "correction is over",

They missed the middle part about falling prices. Since they couldn't predict the past, why should we believe their predictions about the future?

Anonymous said...

Yeah, that's a terrible article from Gary Lamphier. Normally he's actually a reporter, rather than a shill.

The best part is that the first half of the article is all about how everything is going to be fine in Edmonton. And then for evidence of that, the second half talks about how bad things are going to be in BC and Sask.

So his logic seems to be that Edmonton is going to be just fine, because BC and Sask are going to be worse?

squidly77 said...

when you start seeing articles like the journal one you pretty much know its over
the author sounded almost panicked
and he definitely sounded desperate
hold out comrades lower prices are dead ahead

Unknown said...

Of course Squids, it's all over for Deadmonton and Calgary...
The typical bungalow in Bustberta went for $100K back in 2000 and in 2007, at the peak that same home went for $450K??? Now it's under $400K.
Guess what? She's going down!
Very soon, squids, all those invaders from Canada will leave Bustberta and go work in oil rich Newfi-land. Soon all you clowns can go back and till that land of yours like the 1890 settlers used to do.. along with a $75K bungalow!!!!!!!!


Radley77 said...

Just thought I'd make a note: the report says that Calgary is overvalued by 15% as compared to Edmonton at 25%. Whether that plays out as stagnant prices as economic fundamentals improve or outright price declines remains to be seen.

Jim_s said...


Name some fundamental economics that need improving?

We already have the highest average income in Canada.
We have the lowest (or close to lowest) unemployment in Canada.
Lending rates are relatively low.

Name what needs improving in AB?

Your bullish remarks reek of a personal agenda. Now that you're in a house, the economy looks good, eh?

Perhaps if you were in a position where you employed people, instead of working for the man, you would see things different. There is more to this economy than the "O/G sector capital spending projections".


Anonymous said...

another 20% to go

makes for a total of 35%
believe in the coming crash yet bearclaw
that 35% will be the first 35%


BearClaw said...


You mean further price declines? I do recognize that improving fundamentals and inflation can reduce overvaluation going forward. I made a similar point in a previous post and because this I do not expect prices to return to pre-boom levels.

I wonder about Calgary being only 15% overvalued. There is already a pretty hefty gap between Edmonton and Calgary, and I would imagine the building costs are similar.

BearClaw said...

I love how everyone is throwing Saskatoon under the bus.

They can now look to Edmonton a larger city with better rents and incomes as a comparison. Edmonton is correcting even with these conditions and Saskatoon is now at least as expensive. Does not bode well.

squidly77 said...

remember those supposed great deal condos for $189,000 you posted youll get a sfh for that this time next year
read the comments under the link i left..i think joe six pack gets it now..panic will now set in phase 3 of manias panics and crashes

Radley77 said...

The Merril Lynch report is the most thorough residential economic report I have read on Canadian real estate.

As a comparison example to the 15% overvaluation from the ML report. Rent for example has climbed in Calgary from $808 in 2004 to $1096 in 2008 for a two bedroom condo. Average condo prices have gone from $171,135 to $276,636. The price to rent ratio in 2004 was 18 compared to 21 in 2008.

I calculate a current 'overvaluation' of 14% based on pre-boom price to rent ratios. This is similar to the ML report overvaluation figure of 15% for Calgary.

However, if you consider other economic fundamentals will continue to improve and rent and household income and inflation continue to grow going forward, then the boom in prices were reflective of the growth potential for revenue (rent).

Radley77 said...
This comment has been removed by the author.
BearClaw said...


Using your numbers I get an overvaluation of 19% not 14%


Mortgage rates were rock-bottom in 2004. As interest rates increase they demand lower price/rent ratios to compensate. Also, 2004 is already after some solid price appreciation and flat rents. It is kind of arbitrary to pick 2004 as a fairly valued year.

I don't dispute that 2004 was a good year to buy a house. Of course it was. But the reason it was a good buy was fundamentals improved going forward not because of it's price/rent ratio.

Jim raises a good point that for fundamentals to eat away at the overvaluation now they have to improve from current oil-boom levels.

Radley77 said...

Sorry, bad calculation on my end, but 19% overvaluation or a 16% decline from 2004 price to rent ratio. If you believe that in 2004, it was a good time to buy and that the price to rent ratio at the time was worth buying, then it's possible that Calgary real estate was undervalued in 2004.

However, if you believe that things like rent, and household income and other metrics will continue to increase, then the current overvaluation is reflective of future growth.

The 16% potential decline will take several years (other troughs have lasted 2-6 years) to unwind, and other economic fundamentals will continue to improve in the meantime.

The currently high price to rent ratio, will likely lead to some value investors selling rental properties, and this will put upward pressure on the rental market. This will continue until there is no arbitragable difference between the rental market and the resale market. I can foresee that the point that value investors quit selling in the resale market will occur within the next year due to high transaction costs and potential for future growth. At which point, Calgary real estate will become a 'hold' rather than a 'sell' and inventory will start to come off the market.

BearClaw said...


I think if fundamentals increase going forward in Alberta it will be due to inflation and not from further improvements in real incomes or employment rates. Alberta is basically at 100%. I know people tend to think of inflation as bad for housing, from rising prices for food and gas but I focus on the devaluation of paper money.

Housing was overvalued in terms of price/rent ratio in 2004 but it was a good buy due to improving fundamentals. A 17.7 price/rent is not exactly cheap. I disagree with choosing December 2004 condo prices as a starting point.

I still don't see why Calgary is less overvalued than Edmonton but I generally agree that whatever this difference is, a portion can be absorbed by improving fundamentals (likely inflation).

The Merrill report is fairly close to what I had guessed for Edmonton earlier being 25% overvalued. I determined that $294,000 was fairly valued (for SFH) but my gut revised this to $325,000 which could account for inflation going forward.

Anonymous said...

edm sfh now $68,000 off there highs
these will be well under $300,000 soon..well under

Anonymous said...

Bubble here, market correction there...Markets have been swinging for the eternity, once the price is higher, then lower and I believe especially realtors should understand that. The difference is, when this situation spreads and damages other connected markets, like banking. I believe this can't happen in Canada in next few years...Vancouver real estate listings has been outpacing sales in last months, but I think there is no need for panic at all. And it may sound strange, but I don't believe in "undervalued" or "overvalued" prices. Price is a matter of deal between buyer and seller. If both of them are willing to accept it, it's market price...

Radley77 said...

I took an average of the 15 year historical averages of 25 random American cities:

Orlando 15
Miami 16
East Bay 32
Tampa 15
Baltimore 13
Fort Lauderdale 16
Palm Beach 18
Las Vegas 19
Sacramento 19
Washington 16
Los Angeles 16
Jacksonville 14
San Diego 22
Long Island 16
Phoenix 14
Charlotte 18
Norfolk 18
Salt Lake City 16
Richmond 17
Orange County 24
Philadelphia 13
Seattle 23
Portland 21
North/Central 14
Inland Empire 19

And the average was 18. The 17.7 price to rent ratio calculated from 2004 in Calgary lies within the average of these cities. 17.7 is not necessarily cheap but is in line within the average historic price to rent ratios of this sample group.

In 2004, oil prices were not high and I am pointing out that the price to rent ratio of Calgary at that time was probably fairly realistic.

I think that the way that Merril Lynch did the report is to look at historic affordability and compare that to current affordability. Which is similar to your methodology.

I think that is why they found Edmonton as more 'overvalued.' Edmonton affordability is 25% more than Edmonton historical affordability. Whereas, Calgary's affordability is 15% more than Calgary's historical affordability.

squidly77 said...

radley..your model is broken and you can throw any data collected since 1999 onto the fire
this housing bubble is unprecedentedly enormous is size
use data pre 1999 and you will get a much better idea for the future
check here

in a normal market prices climb very very slowly
no one knows how low prices will go but in my opinion pre 1999 is a given

"Buyers of Canadian Real Estate who purchased this spring are waking up. They are now feeling the chill of deflation as their hopes for personal wealth creation from the dreamy notion of endless and effortless inflation vanishes. This is not simply a reversal of fortune because if the late come buyer is leveraged, if they have borrowed money, their indebtedness does not shrink as their equity evaporates. Their debt actually grows in relative terms. Sleepless nights are on the rise."

i sincerely hope that you are not to leveraged because there are now a ton of people that owe $500,000 on a house now worth $430,000 and falling
when will they start walking ?
pretty soon id say

BearClaw said...


From the price/rent ratios you are using the national 15-year average is 16.9

Average condo price in 2004 was $166,471. $171,135 was the average price in December 2004. Rent was $806 which leads to a ratio of 17.2

BearClaw said...


A wise blogger tried to determine a fair rental yield for Calgary by comparing to other safer investments and estimated an average condo price of $175,000. From this I calculate a ratio of 13. See the post here.

Anonymous said...

maybe his comment leaver Benjamin Bach sucked him in..radleys behaviour is bizarre and strange

Brent said...

Weekly commentary from my broker at RBC....

Falling gas prices chip at ‘Alberta Advantage'

William Nichols is a third-generation oilman and, these days, a devout pessimist. Yes, unemployment is low, and money continues to pour into Alberta's north. But look a little closer, he says.

Home prices are sliding (nearly 8 per cent in Calgary during July, according to the latest data). New-home construction has slowed down so much in Alberta's largest city that some of Mr. Nichols' friends in the trades have moved back to Regina and Saskatoon for better-paying work. For someone who makes his living in oil and gas, the more depressing statistics are those on drilling activity: They show the number of active rigs in Alberta still far below where it was a couple of years ago.

“Everybody says oil sands drives our economy, and to some extent it's true,” says Mr. Nichols, a consultant in Calgary to oil and gas companies and to people who invest in them. “The problem is most of us don't want to go to Fort McMurray. Most of us have gone once, and we don't want to go back. There is nothing nice about that place.”

Is Alberta in the early stages of a bust? Well some cracks are beginning to show, especially in parts of the province far from the Athabasca boom. The stress comes from several places, though Mr. Nichols – and many others – wouldn't mind putting the blame in a bow-wrapped package and laying it at the feet of one man: Premier Ed Stelmach.

Perhaps the biggest misconception about Alberta, other than the Toronto conceit that it's a homogenous province of pickup-driving yahoos, is that it's an oil economy. It's not (at least, not yet). It's still about natural gas. The oil sands hog the headlines, and the amount of money being spent to develop them – $14.3-billion in 2006 – is enormous. But the Alberta energy industry spent almost twice as much on conventional wells, and the vast majority of that $27-billion went to finding and exploiting gas deposits. In a typical year, Alberta drills three to four times as many new gas wells as oil wells.

This reliance on gas extends to government finance. In fiscal 2007, the province's take from gas royalties was $6-billion, versus $1.4-billion for conventional oil and $2.4-billion from the oil sands. The numbers will shift as the big oil sands projects increase their production, but it will be years before royalties from oil sands become the most important source of energy revenue. Gas is still the golden goose.

When oil and gas prices both spiked earlier this year, Mr. Stelmach's government seemed to have won the hydrocarbon lottery yet again. An economist from CIBC World Markets predicted in June the province's surplus would grow to nearly $12-billion. What on earth could they spend it on? The debt is repaid and Alberta's government, though painted in Conservative colours, plans to spend 41 per cent more this year, per capita, than Ontario's does. The Stelmach government's most recent budget jacked up spending by 10 per cent.

So what reason is there to be pessimistic? Forget the slow drift of oil prices. The bottom has fallen out of natural gas. U.S.-dollar-based gas futures are down 40 per cent since the first week of July. The AECO spot price, a key measure of Alberta gas prices, is around $7.50 per 1,000 cubic feet. If it stays in that range, billions will melt away from that projected fat surplus.

That's not a disaster, but there's another thing. Mr. Stelmach, controversially, announced last fall he'll increase royalties. Virtually everyone, including top industry executives, knew that the oil sands were getting a sweet deal from the province and had to pay more. That made sense. But the government messed with royalties on conventional production, too. When gas jumped to $12 per 1,000 cubic feet soon thereafter, it made the industry look like whiners for opposing the move. But at $7.50, it's a different story; it simply won't make economic sense to drill many higher-risk deep wells in Alberta.

Royalties aren't the only reason that Saskatchewan and British Columbia are now raking in more money for exploration rights than Alberta. “The money was going to go there, irrespective of this royalty change,” says Menal Patel, an oil and gas analyst at National Bank Financial, because of the resource potential of the Montney and Horn River plays in B.C., and Saskatchewan's Bakken oil play. Still, it doesn't help. Mr. Stelmach continues to tinker with his royalty plans in advance of 2009, when they're due to come into effect. But having been elected on being tough on Big Oil, he can't back off too far. And he's got a bloated budget to pay for. It could be a long time before any politician will be able to brag about “the Alberta Advantage” again.

Brent said...
This comment has been removed by the author.
Radley77 said...

I have learned some more since then, and housing as an asset creates two revenue streams:

1) Rental yield
2) Asset appreciation

Whereas bonds, GIC's and savings accounts create only one revenue stream: that of it's dividend yield.

So in one year if you held a GIC you would have been paid 4.65%. If you had real estate, you would be paid the rental yield 3.15% plus real estate appreciation which in general has been an 3% per year. This adds up to 6.15% which would in general be more than the return of the safer asset class.

Unknown said...