Do low interest rates help or hurt?

Low interest rate reduce carrying costs during the initial mortgage term and saves the borrower some amount of money. One concern is the effect of the low interest rate of the purchase price itself, potentially reducing or even reversing the benefit of the initial rate. This post will take a look at a hypothetical condo purchase in Edmonton and the amount saved on interest rates and/or lost due to inflated valuations.

Low interest rate purchase

Consider a 891 sq. ft, 2 bed / 2 bath condo in South Edmonton suburb of Ellerslie. The asking price is $199,000.


With $19,900 down the initial mortgage balance is $179,100. The mortgage is as follows assuming a 5-year fixed rate of 4.10% and 25 year amortization.

2009 Purchase price: $199,000
Down payment: $19,900
Initial balance: $179,100
Rate: 4.1%
Monthly payments: $951.84
2014 Balance: $156,184

Rent for two years and purchase with higher rates

Compare this to waiting for two years and taking out a 5-year fixed at 7.10% at three different prices. One will be a market crash of 30%, one only 10% and another with zero appreciation. In each of these cases there will be some gain on the down payment and some difference between the cost of renting and owning.

If we expect to use this down payment in 2 years its not going to be put at huge risk. Lets go with 3%. After two years the down payment grows to $21,112

Even with these low interest rates there is a small premium to own. First assume this apartment rents for $1200 including utilities. An owner will need to add $270 for condo fees, $50 for power and $120 taxes. So the monthly savings renting is ($952+$270+$50+$120)-$1200 = $192. After two years that adds up to $4,608. So total down payment is $25,720 after two years in each of the wait cases.

Wait case #1: 30% decrease

After a brutal decline the purchase price of an equivalent condo decreases to $139,930. I am comparing the balance after 3 years to have this case line up in time with the one that bought immediately. The mortgage terms are as follows:

2011 Purchase price: $139,930
Down Payment: $25,720
Initial balance: $114,210
Rate: 7.1%
Monthly payments: $807.01
2014 Balance: $108,578

This case shows that low interest rates are not enough to offset a market crash (duh!). Not even close as both monthly payments for the initial term and final mortgage balance after 5 years have elapsed are lower. Amount lost on difference in monthly payments over three years is $5,213 and the difference in mortgage balance is an additional $47,606. Total lost buying with low interest rates before a 30% crash: $52,819.

Wait case #2: 10% decline

The purchase price of an equivalent condo is $179,100 with the following mortgage terms:

2011 Purchase Price: $179,100
Down Payment: $25,720
Initial balance: $153,380
Rate: 7.1%
Monthly payments: $1083.79
2014 Balance: $145,816

In this case the reduction in payments with low interest rates($4,750) is not enough to offset the higher mortgage balance at the end of the term (-$10,368). Total lost buying with low interest rates before a 10% correction:$5,618.

Wait case #3: No appreciation

The purchase price of an equivalent house remains at $199,000 with the following mortgage terms:

2011 Purchase Price: $199,000
Down Payment: $25,720
Initial Balance: $173,280
Rate: 7.1%
Monthly payment: $1224.40
2014 Balance: $164,735

This case shows in absence of any price decline, the amount low interest rates benefit the original purchaser. The amount save on payments due to low interest rates for the three years the mortgage terms overlap is $9,812 and the balance is $8,551 less. Total gained by buying with low interest rates $18,363.

Low interest rates save the buyers money if we assume no, or only a minor market correction once rates increase.

Hit Piece

This post highlights some examples of misinformation from the blogosphere, some going back some time, to show that it is important to be able to verify information... Well actually it's just a hit piece, but those get all the attention so here it is.

Take a look at this blog exchange from Bob Truman's blog from March 2008, archived here. This is not about Bob, but Mike from the comments.

On bears:

There will always be people who say "homes are unaffordable", or make up a vault of excuses not to try to buy one "they will go down... it's better to rent... I didn't buy at the ""right time"" etc".

On getting into the market (in March 2008):

With 40 year mortgages, and 5% down, you CAN get in, work hard, save hard and that home ownership dream is yours. The ney-sayers will say "40 year mortgage, forget it", "5% down? CMHC fees are too much!!". If you start with a 40 year mortgage remember it doesn't mean you have to wait 40 years to pay it off.

Advice to a renter saving up for a down payment:

Tips. I eat noname Mr. Noodles for lunch daily, my wife makes and packs her lunch daily. We go out to eat 2 times a month but spend $20 on a meal for 2 (Entertainment Guide). Walk or transit all we can. Buy gas at discount stations only. Drive an economical car (Aveo). Use energy eff lights, have the heat set lower, etc. It all adds up. :)

Buy vs. rent

(note the below example is very rough, but its a good "general" example)

EG; Take a $350,000 mortgage, 25 year, fixed at 6%. Payed Monthly.

You take 25 years to pay it off. You'd pay $321,800 in just INTEREST. In 25 years, that $400,000 home would be worth, say, $1.5 million. So you net out $778,200 at the end of the day. That's a good investment, honestly. You made $778,200 TAX FREE baby!

Take the same $350,000 mortgage, 25 year, fixed at 6%. BUT payed Weekly and DOUBLE your payments.

You'd pay $89,514 in just INTEREST. In 8 years (you just chopped off 17 years in payments too). Sell your home for $1.5 million in 25 years (you did live mortgage free 17 years of them too).

You made $1,010,485 TAX FREE baby, Oh ya! Sign me up!

The best part is not only did you pay LESS in total buy paying MORE in payments, you also made $232,285 for your dedication AND lived 17 years with NO MORTGAGE payments.

More buy vs rent and price drops:

For me, If I rent the same home I'm in now, it's $4,000 a month (that's what the smaller home goes for next door to me). And some suggest rent for 36 months then buy... that would be $144,000 in rent. That home is worth $800,000 thus that home would have to lose 18% over 3 years and then you'd "break even" with the renter.

Do I think Calgary RE will go down 18% in 3 years?? Of course not; but even if I said yes, you would still be no better off renting. You could say "your paying 4.6% interest on your mortgage that would make a difference" yup. But on the flip side, I'd wager the rent will easily go up by 4.6% a year too. ($1000 = $1047 next year).

Response after Radley challenges the assumed appreciation of $400,000 to 1.5 million.

It's about an increase of 5% a year for 27 years. 5% isn't much a year. If your making, say $60,000k a year, and your keeping up with inflation of 5%, then in 27 years, you would be making: $224,000 a year and rent would be: $7,500* a month as well. Although we know that rent increases FASTER than both home appreciation and wages, so expect rent to be $10,000 a month. (*based on $2,000/mo rent today). Wow, think how much a renter would throw away in home equity.

Another anecdotal example supposedly representing the market in March 2008.

Well, there is NO information like up-to-the-date accurate, real-life information on what's happening in the market and I can give you some of that now:

Great News!

WE SOLD OUR HOME! WOOHOO. :) (privately, no realtor)

We got multiple COMPETING offers, and sold $130,000 ABOVE our asking price, NO conditions. Sold in 6 days plus the multiple offers and contracts, total took about 2 weeks. (TBS official tomorrow)

So, yes Virginia, there are not only buyers out there, but also money to buy too.

Now, we are in the Calgary market to buy again.

Mike

I challenged the notion of the overbid being representative of the market in general

Mike L,

On Mike's site the highest above list price any SFH in Calgary so far in March is 4%. Most under is 18%. Its more likely that the overbid was a result of the initial asking price, if it occured at all.

His response:

Yes, it indeed occured (I have no reason or desire to lie) and no my initial asking price wasn't low at all; It was fair market value. In fact, if we only had the inital offer we would have accepted it. As its a private sale it won't show up on the MLS or Bob's stats (although Bob, if I give you the stats can you use them?). It was most definately over 4% list. The important thing was starting at an accurate market price.

Another poster Warren posts up even older information regarding this sale

I'm curious about your anecdotal story. Is this the same house you were selling last year? On August 30, 2007, Mike wrote:

"Our home was listed for 5 months, we went from $999k to $825k. We took it off because at $825k we couldn't find a 3,200sq/ft dev, inner-core, blue blood neighbourhood, 50x120' lot, reno'd, solid home with views for that price. Our issue (doesn't all homes have at least one?) is that we are on 17th ave SW, unfortunately I can't move the street.

Will we relist? Yes. Lower? Yes. I was thinking $775-799k. Everything is indeed coming down so if I loose a little on my sale I'm betting I can pick up a home right now for less too. Works out in the wash."

Unless I am mistaken, in less than a year you went from a $999,000 list price to (according to yourself) an asking price of $675,000. Isn't that a reduction of 32.4%?

So even with a 19.5% overbid, you still sold it for 2% less than than you were asking last summer and 20% less than you were asking a year ago? Is this a different house, am I getting the story confused?

More from Warren:

I was going to write this really long review of all the contradictions Mike has made (which year his house was bought; whether it sold for $807,000 or $835,235; his proud claims of a 19.5% overbid after he slashed the asking price 32.4%, etc, etc).

But then I realized it's a waste of my time. RJ laid out excellent rebuttals point and point again to no use. Mike has no concept of the effect of inflation on asset values, or the opportunity cost of money, or the effect of leverage, or any of a dozen other basic principles of finance. Is this why you mock higher education??

There is a lot more in the thread. So what? This is old news. Who cares? I think it is useful because this same poster is now using similar misleading anecdotal examples or observations to represent the current market as a bear. As before these examples are inaccurate, insincere or some combination of both.

Recently Mike has commented on some sales in the Scarboro area in Calgary on the Alberta Bubble Blog.

Wow, look at this, just came up today:

http://www.realtor.ca/propertyDetails.aspx?prop...

That's a $600k purchase 15 months ago plus new kitchen, flooring, bath and paint, now for sale at $339,900.

Who said RE always went up? And considering Calgary CREB is touting "increasing prices"...right! That's 240k lost there.

I knew the 93 year old who sold that house as they were 2 doors down from my old house.

Mike

Notice how this was taken to represent the market more accurately than CREBs numbers. But he didn't mention the lot subdivision and development which played a role in this sale as DaBull points out.

If you look at the titles, from the Spin II system, they actually bought 2 lots with houses for a total of $632K in Dec 2007. They subdivided into 3 lots. Sold the one to the left for $340K, are currently selling the one to right for $339K and either keeping or selling the new empty lot they created in the middle. Made their money back and either have a lot which didn’t cost them anything or are going to sell it for a tidy profit. Not everyone is a stupid as you think they are.

Another example here

$300,000 loss...

http://www.realtor.ca/propertyDetails.aspx?prop...

Sold for $1m 14 months ago.

Who says Calgary RE is going up?

Mike

...

I've been in the house many times before as I knew the renters in there. Nice house, built in 2001, but built very cheaply and "feels small" for it's size. Has had nothing but problems (plumbing mostly). The developers bought it for the land but looks like they are ditching their holdings.

Horrible to backout on 17th ave from the garage as well.

Just goes to show how easy it is to lose $300,000 on a market that, according to CREB, is going up.

Mike

After pointing out the example it turns out the loss (if it existed) is the result of development and subdivision risk and not representative of the general market.

They were assembling a 3 block stretch of land along 17th Ave SW to build brownstones. I am guessing they ran into land zoning issues that could not be resolved (ie. R1 to R1 or RM-4)

17th Ave is not as busy as 14th street and it's the most trendy street in Calgary IMO.

Also he has been "monitoring" some neighborhoods in Calgary and noticed some inventory spikes. Link.

CM asked on Garth’s site, thought I’d post it here to help others as well:

#55 CM “if you’ve seen this marked increase in listings in any other community?”

I follow the true $1m+ communities,

Yes, quite a few like:

Scarboro 10-14 listings, usually 2-4. 500% increase

Eagle Ridge has 4 listings now, they usually only have 1 or 0. A 400% increase.

Bel-aire 4, usually 1 or 2, a 200% increase.

River Park/Elbow Park (south side of river), they have 6, usually 2, 300% increase.

Roxboro, usually 2-3, they have 6. 200% increase.

Mount Royal has 10. Usually 8.

Lakeview Village, 6, usually 3.

Pumphill, 9, usually 4.

Maybe the $1m+ prestige communities are not selling and starters are? Inventory here has never been so high.

Mike F can look into these stats and verify if he likes, I’ve been following these communities closely (almost daily) for 5 years now.

Mike

Mike Fotiou (a different Mike who runs this blog) finds examples of $Million dollar sales that have both made and lost money since October/November

Bob Truman runs some numbers regarding $million dollar sales. Just like in the past market statistics contradict Mike's examples.

The second biggest loser, our buddy Mike(don't get addicted...) maintains inventory is way up in the below listed communities, and that sales MUST be way down, especially for homes over $1 million. Let's look at the facts.

For the six month period Jun 17 - Dec 16, for the communities of Scarboro, Eagle Ridge, Bel Aire, Altadore/River Park, Elbow Park, Roxboro, Mount Royal, Lakeview Village, Pumphill:

	2009	2008	% change
All sales	221	109	+103%
Sales over $1 million	66	41	+61%
New listings	312	376	- 17%
New listings > $1 M	117	154	-24%

.

We can't go back a year to see how many active listings there were, but as you can see, new listings are down, and down substantially for homes over $1 million.

.

I see from the Live Traffic Feed that a person from the United Kingdom logs in periodically, always around 3 a.m. Do you think it could be our friend Mike? Is he still battling his addiction?

Regarding the addiction, Bob is referring to when Mike stated that he doesn't look at his blog because it is "udder crap" then later submitted a comment on it under a different name. I have proof but this post is getting long....

Anyway bull or bear I would not trust anything this guy says.

Klump on interest rates

“Repeating its concern voiced in October, the Bank reiterated the risk that the strong Canadian dollar poses to economic growth,” said CREA Chief Economist Gregory Klump. “They also opened the door to keeping interest rates on hold longer than expected. Low interest rates are likely to continue to fuel home price increases.”

CREA Dec 8, 2009

One thing to note about interest rates is the market impact probably has more to do with the change of rates as opposed to their current level. Keeping rates low will not have the same effect going forward as lowering them. Interest rates do not increase the cost of construction and they only impact the payments during the initial period of the loan. So over the last year we had a reduction in interest rates which helped stoke demand. Another factor contributing to nationwide price appreciation was the change in consumer confidence. Last year when the world was ending it was reflected in falling home values. Now real estate is hot again. This positive change in sentiment will at some point be priced in to the market. Actually, I think the current outlook is too optimistic and going forward it will become more negative.

The current strength of the Canada wide market will not continue much longer (wild guess mid 2010). This is because the contributing factors of increasing consumer confidence and decreasing rates are set to be removed, if not reversed.

Canada wide market
October 2008 $282,583
October 2009 $341,079 +20.7% (weighted average shows 14% increase)

Quote of the day

“If we have 10-per cent-unemployment, that means 90 per cent of people are employed,” he said. “People are re-entering the market – they have the confidence to take advantage of bargain-basement prices. There's been a release of pent-up demand, and that has a long time to play out. Prices have gone as low as they are going to go.”

Gregory Klump
CREA economist
Canada housing rebound sparks fear of a Bubble
Nov 16, 2009

First consider the scenario where headline unemployment is 20% you could make the case that it's not so bad because 80% of people* are employed. Well if you did you would be wrong because that case is called a depression.

*Actually, if using the headline number it would be 80% of people in the labour force and not include discouraged workers. Also employed would include people who are forced to take part-time positions because they are unable to find full-time work. That is why 8.5 or 10% headline unemployment is really bad.

Next, what bargain-basement prices? Nationally, the Canadian housing market has reached new highs so its simply false to imply that buyers are taking advantage of any serious price discount. I would expect a chief economist to know where prices are.

A final point, while I believe some of the increase in sales this year was the result of pent-up demand I disagree it has a long time to play out. The Canadian housing market was experiencing strong sales into 2008, and achieved high home ownership rates. The downturn in sales started the second half of 2008 until spring 2009. So we had at most one year of below demographic sales from which pent up demand could accumulate, I would expect this to be consumed shortly, if it hasn't been already.

Street view

Sheldon and Sara have setup streetview on their Edmonton Real Estate search site. I heard about Google street view awhile and was looking forward to the day I could take a virtual stroll around Edmonton.

Anyway here are some notable places I visited today.

Garner Andrews, a morning DJ of the nearby Sonic radio station always brags to be broadcasting from Edmonton's used hubcap district. Here it is.


View Larger Map

Next is Edmonton's very own giant bat. Some might think I am posting this ironically, but this is not the case. Edmonton is among the greats in the Giants of the Prairies.


View Larger Map

While trying to get a good view of a more conventional landmark I couldn't help but notice this vintage turquoise mystery building.


View Larger Map

Feel free to link to your favorite Edmonton locations in the comments.

The bubble model

The bubble model for home buyers in Alberta goes something like this:

A reckless financial illiterate buying simply for capital appreciation using the loan which allows for the minimum monthly payment.

For example this is from Garth Turners blog about how to tell you are in a housing bubble:

When the number of people taking 35-year amortizations explodes higher. Overall, these loans have doubled as a percentage of all mortgages in two years but that does not tell the true story, since today 5/35 buyers constitute an absolute majority of new originations. Of course, 35-year borrowers pay off virtually no principle for years and years which makes this akin to renting money. No equity means no ability to withstand a market correction.

From this mortgage market report 53% of new purchases are for amortizations 25 years or less. 29% are for 35 years or greater.

Another snippet from Garth's same post.

Some observers, bless their good hearts and large stones, had the courage to warn recent buyers with mortgages in the 2-3% range they could be in deep financial trouble before too long. But you know that. The reasons why have been beaten to death on this blog already.

To be fair in this case he didn't say that 2-3% variable rate mortgages are the norm. But going back to the mortgage report 5-year fixed mortgages are the most popular.

-73% of mortgages held by 18-34 year olds have terms greater than 4 years.
-71% of mortgages held by 18-34 year olds have fixed rates, 9% combination

Of new mortgages within the last 12 months shorter terms do appear more popular, but not the majority. 56% have terms greater than 4 years.

Of course there are a significant number of mortgages over 30 years at a variable rate and these will most likely cause some amount of turbulence during the next leg down. The model that typical Canadian buyers have been recklessly overbidding $300,000 for a shacks in downtown Toronto or Vancouver using a 35 year VRM makes for good entertainment but does not reflect reality.

American and Canadian House Prices

Metro Area	Median
Saginaw-Saginaw Township North	$61,400
Youngstown-Warren-Boardman	$70,700
Lansing-E.Lansing	$86,600
Toledo	$88,300
South Bend-Mishawaka	$88,500
Decatur	$88,500
Canton-Massillon	$89,300
El Paso	$94,500
Grand Rapids	$97,100
Cape Coral-Fort Myers	$98,000
Ft. Wayne	$102,500
Ocala	$102,700
Erie	$102,800
Akron	$107,200
Rockford	$108,700
Palm Bay-Melbourne-Titusville	$109,500
Topeka	$111,100
Dayton	$111,600
Springfield	$113,800
Binghamton	$114,200
Springfield	$114,400
Davenport-Moline-Rock Island	$115,600
Cleveland-Elyria-Mentor	$115,800
Waterloo/Cedar Falls	$118,200
Buffalo-Niagara Falls	$119,700
Indianapolis	$120,200
Wichita	$120,400
Florence	$121,300
Rochester	$121,500
Cumberland	$122,100
Amarillo	$122,500
Appleton	$123,500
Chattanooga	$124,100
Pittsburgh	$124,600
Syracuse	$125,200
Peoria	$125,200
Gary-Hammond	$126,600
Deltona-Daytona Beach-Ormond Beach	$126,700
Spartanburg	$127,200
Mobile	$128,300
Memphis	$129,300
Atlanta-Sandy Springs-Marietta	$129,400
Greensboro-High Point	$131,700
Cincinnati-Middletown	$131,700
Charleston-North Charleston	$132,000
Tulsa	$132,100
Little Rock-N. Little Rock	$132,500
Elmira	$132,800
Beaumont-Port Arthur	$133,600
Kankakee-Bradley	$133,600
Lincoln	$133,600
Montgomery	$134,200
Green Bay	$135,300
Louisville	$135,600
Saint Louis	$136,400
Sioux Falls	$137,200
Tampa-St.Petersburg-Clearwater	$137,400
Omaha	$137,600
Corpus Christi	$137,800
Gulfport-Biloxi	$138,000
Las Vegas-Paradise	$138,500
Champaign-Urbana	$140,600
Jackson	$141,200
Knoxville	$142,000
Fargo	$142,100
Columbus	$142,600
Phoenix-Mesa-Scottsdale	$142,700
Columbia	$144,000
Oklahoma City	$144,100
Lexington-Fayette	$145,000
Jacksonville	$145,700
Cedar Rapids	$145,700
Tallahassee	$145,900
Greenville	$145,900
Kansas City	$146,200
Columbia	$148,800
Dallas-Fort Worth-Arlington	$150,500
Pensacola-Ferry Pass-Brent	$151,700
Hagerstown-Martinsburg	$151,900
Shreveport-Bossier City	$152,300
Glens Falls	$152,400
San Antonio	$152,800
Birmingham-Hoover	$153,300
Boise City-Nampa	$154,700
Reading	$156,400
Des Moines	$156,600
Bismarck	$157,200
Bloomington-Normal	$157,200
Orlando	$157,900
Yakima	$158,400
Houston-Baytown-Sugar Land	$160,600
NY: Newark-Union	$164,300
Baton Rouge	$166,900
Riverside-San Bernardino-Ontario	$168,100
Gainesville	$171,800
Kennewick-Richland-Pasco	$172,200
Tucson	$174,000
Spokane	$177,600
Salem	$180,400
Albuquerque	$183,500
Durham	$184,300
Minneapolis-St. Paul-Bloomington	$184,800
Sarasota-Bradenton-Venice	$185,200
Farmington	$186,500
Sacramento--Arden-Arcade--Roseville	$186,600
Austin-Round Rock	$189,100
Reno-Sparks	$192,200
Charleston	$195,100
Colordo Springs	$195,100
Albany-Schenectady-Troy	$195,400
Springfield	$195,400
Milwaukee-Waukesha-West Allis	$199,500
Charlotte-Gastonia-Concord	$199,600
Dover	$200,000
Pittsfield	$200,500
Portland-South Portland-Biddeford	$202,800
Eugene-Springfield	$206,600
Kingston	$206,600
Raleigh-Cary	$207,900
Chicago-Naperville-Joliet	$210,100
Virginia Beach-Norfolk-Newport News	$215,000
Miami-Fort Lauderdale-Miami Beach	$217,000
Norwich-New London	$217,100
Madison	$217,900
Salt Lake City	$218,900
Atlantic City	$223,000
Worcester	$224,100
Philadelphia-Camden-Wilmington	$227,500
Denver-Aurora	$229,100
Providence-New Bedford-Fall River	$229,700
Allentown-Bethlehem-Easton	$230,500
Hartford-West Hartford-East Hartford	$237,500
Manchester-Nashua	$237,600
NY: Nassau-Suffolk	$241,300
Portland-Vancouver-Beaverton	$244,500
Baltimore-Towson	$261,100
Trenton-Ewing	$291,200
Barnstable Town	$319,700
Seattle-Tacoma-Bellevue	$321,500
Washington-Arlington-Alexandria	$324,700
Edmonton Area	$328,043
New Orleans-Metairie-Kenner	$343,800
Los Angeles-Long Beach-Santa Ana	$345,600
Boston-Cambridge-Quincy	$348,000
Boulder	$358,300
San Diego-Carlsbad-San Marcos	$378,100
New York-Northern New Jersey-Long Island	$384,900
New York-Wayne-White Plains	$385,400
Calgary City	$388,721
Nashville-Davidson--Murfreesboro	$389,100
Bridgeport-Stamford-Norwalk	$398,200
New Haven-Milford	$449,700
Anaheim-Santa Ana	$498,800
San Francisco-Oakland-Fremont	$538,100
San Jose-Sunnyvale-Santa Clara	$566,000
Fort McMurray (avg)	$600,970
Greater Vancouver (benchmark)	$710,892
Kalamazoo-Portage	N/A
NY: Edison	N/A
Richmond	N/A
Danville	N/A
Detroit-Warren-Livonia	N/A
Honolulu	N/A

Canadian dollar @ 0.9481 November 12, 2009
Sources
http://www.rebgv.org/
http://money.cnn.com/2009/11/10/real_estate/latest_home_prices/index.htm
http://www.ereb.com/REALTORSAssociationOfEdmonton.html
http://www.creb.com/
http://www.woodbuffalo.net/AboutCostHouse.html

Edmonton New Construction

The past two years residential construction in Edmonton has been in decline as the result of some overbuilding during the boom and from weaker demand since then. The glut of housing under construction has been mostly absorbed and going forward will contribute less to overall supply. Single family starts slowed rapidly after the market peak in the spring of 2007 and since then the amount under construction has fallen substantially. Single family houses under construction have decreased from the peak of 6528 in August 2007 to 1764 in April 2009. This has bounced back recently to 2216 in September 2009 as starts have picked up again.

The chart below shows the amount under construction from all types of residential housing. While single family homes have bottomed, apartment condos (shown in orange) continue to decline. I added inventory which has been completed but not absorbed in gray. This does not make up a terribly significant portion, but it is interesting to note that SFH spec homes have been cleared while condos have accumulated.
In general the number of completions should be roughly in line with the number of starts only delayed. We have seen completions exceed starts for quite some time resulting in a decrease in the amount under construction. Right now the 12 month moving average for starts for all residential is 403 while still 795 for completions.
I expect completions to decline going forward contributing less to overall supply.

Buy vs Rent

The following comparison will illustrate how the low interest rates are reducing payments enough to compete with the rental market. Under more reasonable financing terms mortgage costs are not terribly out of line with the rental market. With more creative financing it is easy to see why sales are currently strong.

First consider this 1716 sqft house in South Edmonton for $374,900

Looking on craigslist for rentals in Edmonton I found the following.

The 1680 sqft house is the closest match. The advertised price is $1500 but after a few months the price increases to $1700.

1680 Square Foot Beautiful house in Edmonton's most popular newly developed community called Ellerslie crossing. The house location is seconds walk from ETS bus stop and kids school buses. Close to all amenities. Its next to South Edmonton Common, Anthony Henday, Calgary Trail and Whitemud. The lake is visible from the bonus room....Starting rent of $1500.00 will increase by $50 on December ($1550), January ($1600), February ($1650) and will get fixed at $1700.00 from March, 2010 onwards.

Comparing full asking price and rent results in a ratio of 220. That is fairly high even though it is from one of the more reasonable priced houses on the MLS (there was only one rental to choose from in the neighboorhood).

Looking at the price vs. rent things are a little closer.

Assuming full asking price, 10% down, 2% CMHC premium, 4% 5-year fixed rate and 25 year am.
$1814/month. $674 of which is principal.

There is a premium here, especially when taxes and maintenance are included. However, after 5 years the balance will be $300,255.

A buyer under these terms will end up paying a moderate premium and pay down some of the principal over 5 years. Meh. Not terribly exciting.

However if a buyer chooses a more risky mortgage a more interesting comparison appears.

Full asking price, 10% down, 2.4% CMHC premium, 2.25% variable and 35-year amortization.
$1192/month. $543 is principal (the first month, at least)

So for $1192/month + taxes + maintenance a buyer can move out of an apartment into a house and become a homeowner. The problem of course is not considering the interest costs for the entire duration of the loan and the effect of this stimulus on the asset price itself. Is this a bubble? Are current buyers the greater fools by recklessly overpaying for houses due to blind faith in future appreciation? Not entirely. Buyers may be incorrectly assessing the risk of future financing costs and not accounting for the asset inflation caused by low rates. This is a more subtle mispricing as opposed to a bubble and due to this I expect a less dramatic unwinding.

The type of financing above is an artificial boost to the housing market. What about the rental market? Low interest rates and creative loans reduce demand for rentals as the monthly payments attract people towards becoming homeowners. While rents have been falling partially due to the weak economy, I think another reason is from these financing terms. If/when these financing terms become less attractive the rental market may gain strength.

But its Halloween so we have to consider we may be in a deflationary depression where everything is toast.

Policy advice for Mr. Carney

Dear Mr. Carney,

Today you made the following statements regarding the Canadian housing market:

"We expect prudence from lenders," he said. "We expect, and we have confidence in, prudence from Canadians. We remind people that borrowing is for the period you are going to borrow, not just for the moment you take out the loan."

That is a concise statement and echoes what many people have been saying for some time. However this appears to be a case of CYA so in 2011 you can say "hey, look! I told people to be prudent", while still allowing the heightened demand for housing contribute to precious green shoots.

You don't need to remind borrowers of anything. All that needs to be done is for CMHC to require qualifying income to be set for more normal interest rates. If CMHC ensured that borrowers could handle more normal rates that would limit the downside if/when rates increase. For example it would be more reasonable if CMHC required a qualifying rate of 6% to insure these mortgages.

Obviously people are qualifying and depending on super low interest rates. This has been going on for awhile. Consider the quote from the July 2nd article First time buyer like low rates:

What really helped? The 2.75-percent interest rate they were offered. It ultimately allowed them to move from a $1,800-a-month apartment into their own home.

“But we don’t have a lot of [wiggle] room,” Morettie said. “We can go up to four percent, but then we’re done.”

Ouch.

craigslist rental sample

The price to rent ratio remains elevated in Calgary and Edmonton. I suspect this is due to an irrational negative attitude toward renting in Alberta and very low interest rates. However, I do think that some part of the price difference between Alberta and the US is a real difference between the cost to rent (and build). Its simply more expensive to rent in Calgary and Edmonton than Phoenix and because of this prices should be comparatively higher.

Consider this selection of craigslist rental ads for $1250.

Edmonton

$1250 / 2br - Apartment For Rent at RentersOnline.com

Two -2- Bedroom, apartment condo , approx 900 sq ft with a nice sized west facing balcony in a 3 yr old west end elevatored building is available immediately. The suite comes complete with fridge, stove, dishwasher, washer and dryer.

The suite also features underground parking.

The unit is on the top floor so there will be no noise from above.

Heat and Water are included in the rent.

The master suite has a walk in closet and full 4 pce bathroom. The second bedroom has a large closet with sliding mirror doors. The second bathroom is next to the second bedroom and is a full 4 pce bathroom and also houses the upright washer and dryer.

The suite also has a full storage room and linen/storage closet.

The kitchen, with ample counter and cupboard space, is open onto the living/dining room and comes with an island.

The suite is located in an area that is close to schools, YMCA, parks, shopping, dining,transit , just south of the Whitemud and just west of 170 st.

Lease duration is negotiable but preference is given to a 1 yr lease.

Calgary

$1250 / 2br - Stylish 2 Bedroom Upper Suite in Killarney (Killarney / Inner City)

Beautiful and bright 2 bedroom upper suite in the desirable inner-city community of Killarney. Minutes from Downtown, Marda Loop and Mount Royal College. Located on a quiet tree lined street conveniently nestled just several blocks from 26th Avenue and 17th Avenue transit corridors. Close to Westbrook and Westhills shopping centres; Killarney pool; parks, and University of Calgary with easy access to Crowchild Trail and Glenmore Trail.

Crisp, clean, open concept suite with laminate and tile flooring and a brand new renovated bathroom. Features a private balcony, high ceilings and in-suite laundry. Street parking (a two car insulated garage is also available).

No smoking or pets. Please call for more information and to schedule a showing of this beautiful suite!

Phoenix (Mesa)

$1250 / 3br - 2Ba-Single Story-2160 SqFt-3 Car Garage-Inc Gardener (Mesa)

This is a Spacious near new 2160 SqFt 3br 2ba single story home. 3 car garage with electric garage door opener. Beautiful earthtone carpet, and tile through out. Large master bedroom with sitting area and a hugh walk-in closet, garden tub, and separate shower. Raised vanities, ceiling fans, separate laundry room and Faux wood binds throughout. Upgraded kitchen cabinets, gas range and microwave. Grass landscape in rear with rock landscape in front all irrigated by electric timer. 1 mile South of 60 Freeway close to schools and shopping. More pics and floor plan on request.

• cats are OK - purrr
• dogs are OK - wooof

Right question. Wrong answer.

I'm back, and it only makes sense to start with a post about a mortgage calculator after a six month break. Remember the buy vs rent calculator? Well this is similar except the scary thing is I don't think it's broken.

Mike from the Albert Bubble blog commented on this mortgage calculator from President's Choice Financial.

How much can I afford?

I was shocked at the vast sums of money one could qualify for based on a 35 year amortization and a 2.25% VRM. Consider 3 cases:

Case 1

Individual
Income: $66,000
Down: $20,000
Debt payments: $0
Taxes: $2200
Heating: $75

Pre-qualified for a $391,970 mortgage! It was limited *not* by the income, but by requiring a 5% down payment.

Case 2

Couple
Income: $120,000
Down: $80,000
Debt payments: $100/month credit card
Taxes: $4000
Heating: $180

Pre-qualified for a $711,371 mortgage! The reason one can get qualified for so much money is it uses a rate of 3.64%.

Case 3

Professional Couple
Income: $170,000
Down: $80,000
Debt payments: $100/month credit card +
Debt payments: $300/month auto loan
Taxes: $4000
Heating: $180


Pre-qualified for a $ 1,058,721.73 mortgage!




Right question. Wrong answer.
3x income is probably a more reasonable measure and allows for more normal interest rates and some discretionary income.

Notice a Pattern?

The REALTORS Association reports on several statistics in their report and draw comparisons from either the previous month or the previous year. Below I made the opposite comparison they chose to make in the report [in red].

Edmonton, April 2, 2009: The average* price of single family homes in the Edmonton area has hovered around the $350,000 mark for the first quarter of this year [Average price of a single family home in 2008 increased from 379,567 to 387,632 January to March], reported the REALTORS® Association of Edmonton. At the beginning of January the average price for a SFD was $351,870. The price varied slightly and at the end of March the average SFD price was $349,716, up 0.7% from the previous month [decrease of 9.8% YOY]. Condo prices were a little more volatile but popped up 1.6% in March to $230,469, after a 5% drop in February. The average price of a duplex/rowhouse was $276,776.

“With price stability, low interest rates, spring weather and pent-up demand; it appears that REALTORS® are starting to get busy again,” said Charlie Ponde, president of the REALTORS® Association of Edmonton. “Our offices are reporting an increase in buyer interest. Sales in March were up 28% from the previous month.” [down 11.4% YOY]

Residential sales through the Multiple Listing Service® in March totalled 1,380 units. Total MLS® sales (including commercial and rural sales) were 1,513 units. This is a 30% increase over the previous month. [down 11.5% YOY] Total residential sales for the first quarter were 3,185 units and total MLS® sales were 3,471 with a YTD value of $1.1 billion.

There were 2,891 residential listings in March (down 31.7% from last March) [up 9.0% from February] resulting in a month end inventory of 7,476 residential properties (down from 9,464 in March 2008) [up from 7076 in February]. The sales-to-listing ratio was 48% and average days-on-market was 56 days (down five from February) [up 5 over last March].

“The market is once again operating in a normal fashion with typical seasonal fluctuations,” said Ponde. “REALTORS® are prepared with daily statistics and market knowledge to help clients understand the market fluctuations and advise them on pricing and marketing strategies that help buy and sell homes and commercial properties.”

REALTORS® (who are all members of the REALTORS® Association of Edmonton) have just completed their annual membership renewal. Some members choose renewal time to withdraw or retire from the industry so membership numbers dip slightly at the end of March. So far the renewals are typical and the Association expects that the more stable market will encourage most REALTORS® to remain in the industry.

Dare to Compare

A few things happened since I last compared to US home prices.

1. Canadian dollar went down considerably making Canadian real estate less expensive (to Americans). Last time I did this there was no need to convert currencies.
   
2. Many US cities experienced brutal declines. Note that American cities are from Q4 2008, Calgary and Edmonton are from February 2009.
   
3. Alberta prices fell but less than many U.S. cities when looking at local currency.
4. Some US cities literally fell off the charts. For instance Detroit, where average price $13,638. I am sure sales mix has an impact on this number, possibly why it was not included on CNN.
   

US prices from CNN
Edmonton prices from EREB
Calgary Prices from Mike Fotiou
Fort McMurray Prices
Currency converter

Metro Area	State	Median home price ▲	% change YOY
Tulsa	OK	N/A	N/A
Nashville-Davidson-...	TN	N/A	N/A
Kalamazoo-Portage	MI	N/A	N/A
Detroit-Warren-Livonia	MI	N/A	N/A
Danville	IL	N/A	N/A
Saginaw	MI	$43,900	-41.4%
Youngstown-Warren-B...	OH-PA	$61,700	-0.2%
Toledo	OH	$75,600	-27.3%
Decatur	IL	$79,300	5.9%
Lansing-E.Lansing	MI	$80,000	-27.0%
Canton-Massillon	OH	$80,400	-18.0%
Grand Rapids	MI	$80,500	-35.2%
South Bend-Mishawaka	IN	$80,800	-6.4%
Elmira	NY	$80,900	-0.4%
Akron	OH	$86,100	-21.1%
Dayton	OH	$87,800	-17.6%
Cleveland-Elyria-Mentor	OH	$88,300	-25.5%
Ft. Wayne	IN	$88,600	-2.5%
Erie	PA	$95,200	-3.4%
Springfield	IL	$96,700	-11.0%
Cumberland	MD-WV	$96,900	-16.9%
Davenport-Moline-R...	IA-IL	$98,400	-3.6%
Memphis	TN-MS-AR	$100,200	-19.4%
Indianapolis	IN	$100,200	-12.1%
Topeka	KS	$104,800	-6.7%
Waterloo/Cedar Falls	IA	$105,200	-8.8%
Binghamton	NY	$105,800	-3.7%
Buffalo-Niagara Falls	NY	$106,200	0.8%
Pittsburgh	PA	$109,100	-6.7%
Cape Coral-Fort Myers	FL	$110,900	-50.8%
Rockford	IL	$111,500	-1.5%
Rochester	NY	$112,500	-6.9%
Saint Louis	MO-IL	$113,700	-14.8%
Syracuse	NY	$114,100	-9.7%
Gary-Hammond	IN	$115,100	-7.6%
Cincinnati-Middletown	OH-KY-IN	$116,000	-12.4%
Springfield	MO	$117,100	-3.0%
Peoria	IL	$117,200	-1.1%
Wichita	KS	$118,200	3.9%
Florence	SC	$119,100	1.9%
Spartanburg	SC	$120,800	-0.8%
Ocala	FL	$121,700	-21.5%
Amarillo	TX	$122,600	2.0%
Palm Bay-Melbourne-Titusville	FL	$123,600	-18.3%
Chattanooga	TN-GA	$123,800	1.8%
Louisville	KY-IN	$124,000	-6.8%
Oklahoma City	OK	$124,200	-7.9%
Charleston	WV	$124,800	1.5%
Mobile	AL	$125,000	-9.0%
Little Rock-N. Little Rock	AR	$125,200	-1.8%
Kankakee-Bradley	IL	$125,600	1.0%
Montgomery	AL	$126,300	-11.9%
Columbus	OH	$126,500	-7.8%
Jackson	MS	$126,600	4.7%
Appleton	WI	$127,600	-2.5%
Atlanta-Sandy Springs...	GA	$129,200	-21.4%
Gulfport-Biloxi	MS	$129,500	-13.9%
Omaha	NE-IA	$129,700	-4.4%
Kansas City	MO-KS	$131,000	-11.6%
Champaign-Urbana	IL	$132,000	-8.1%
Beaumont-Port Arthur	TX	$132,600	16.7%
Lincoln	NE	$133,100	-3.6%
Corpus Christi	TX	$134,000	-2.8%
Greensboro-High Point	NC	$135,400	-10.2%
Birmingham-Hoover	AL	$135,400	-13.3%
Cedar Rapids	IA	$136,900	1.5%
Dallas-Fort Worth-Arlington	TX	$138,000	-4.8%
Columbia	MO	$138,100	-4.2%
Lexington-Fayette	KY	$138,200	-3.3%
Shreveport-Bossier City	LA	$139,200	2.8%
Columbia	SC	$139,200	-3.9%
Fargo	ND-MN	$140,100	-1.1%
El Paso	TX	$140,700	5.3%
Knoxville	TN	$141,700	-8.6%
Houston-Baytown-Sug...	TX	$142,100	-5.5%
Sioux Falls	SD	$142,400	Unch
San Antonio	TX	$143,400	-5.5%
Deltona-Daytona Beach-Or...	FL	$143,600	-20.7%
Yakima	WA	$145,900	-14.4%
Green Bay	WI	$146,600	-1.5%
Greenville	SC	$146,900	-5.5%
Glens Falls	NY	$147,600	-9.9%
Des Moines	IA	$149,700	-1.9%
Tallahassee	FL	$150,100	-17.0%
Tampa-St.Petersburg-Clearwater	FL	$151,500	-24.9%
Pensacola-Ferry Pass-Brent	FL	$151,700	-3.0%
New Orleans-Metairie-Kenner	LA	$154,900	-2.1%
Reading	PA	$155,100	1.0%
Phoenix-Mesa-Scottsdale	AZ	$155,900	-35.5%
Baton Rouge	LA	$156,400	-7.8%
Bloomington-Normal	IL	$159,300	9.6%
Jacksonville	FL	$160,700	-9.5%
Bismarck	ND	$164,300	6.0%
Durham	NC	$165,600	-7.0%
Kennewick-Richland-Pasco	WA	$165,900	-3.8%
Boise City-Nampa	ID	$168,800	-14.7%
Hagerstown-Martinsburg	MD-WV	$171,400	-10.8%
Gainesville	FL	$174,000	-11.5%
Orlando	FL	$175,200	-27.1%
Sarasota-Bradenton-Venice	FL	$178,100	-35.0%
Las Vegas-Paradise	NV	$181,700	-33.6%
Albuquerque	NM	$183,700	-6.2%
Austin-Round Rock	TX	$184,800	-0.1%
Farmington	NM	$185,000	-0.8%
Tucson	AZ	$185,900	-21.2%
Spokane	WA	$185,900	-4.2%
Charlotte-Gastonia-Concord	NC-SC	$186,300	-9.0%
Springfield	MA	$186,400	-9.7%
Colordo Springs	CO	$187,000	-11.2%
Sacramento--Arden-Arc...	CA	$187,900	-36.9%
Minneapolis-St. Paul-Bl...	MN-WI	$188,600	-13.2%
Albany-Schenectady-Troy	NY	$193,100	-3.6%
Charleston-North Charleston	SC	$193,800	-5.2%
Milwaukee-Wauk...	WI	$194,900	-11.2%
Salem	OR	$198,000	-14.4%
Richmond	VA	$199,400	-11.7%
Denver-Aurora	CO	$200,800	-12.7%
Riverside-San Bernardino-Ontario	CA	$201,300	-40.8%
Pittsfield	MA	$206,000	1.7%
Philadelphia-Camden-Wilmin...	PA-NJ-DE-MD	$212,500	-6.3%
Dover	DE	$212,500	6.5%
Eugene-Springfield	OR	$212,800	-10.4%
Portland-South Portland-Bi...	ME	$214,500	-11.4%
Worcester	MA	$217,000	-16.2%
Chicago-Naperville-Joliet	IL	$217,800	-16.6%
Virginia Beach-Norfolk-Newport News	VA-NC	$222,000	-5.9%
Norwich-New London	CT	$223,100	-11.6%
Kingston	NY	$224,000	-9.0%
Providence-New Bedford-...	RI-MA	$224,500	-17.8%
Salt Lake City	UT	$225,400	-1.6%
Madison	WI	$227,000	-0.3%
Atlantic City	NJ	$229,100	-17.8%
Raleigh-Cary	NC	$230,900	-2.0%
Reno-Sparks	NV	$231,200	-23.3%
Hartford-W/E	CT	$233,700	-9.4%
Miami-Fort Lauderdale	FL	$234,200	-32.3%
Allentown-Bethlehem-Easton	PA-NJ	$238,000	-3.4%
Manchester-Nashua	NH	$238,600	N/A
New Haven-Milford	CT	$240,400	-10.6%
Trenton-Ewing	NJ	$247,800	-19.2%
Baltimore-Towson	MD	$260,100	-5.5%
Portland-Vancouver-Beaverton	OR-WA	$264,500	-9.0%
Edmonton	AB	$270,178 (335KCAD)	-9.4%
Washington-Arlington-Alex...	DC-VA-MD-WV	$295,100	-26.2%
Boulder	CO	$324,400	-12.6%
Calgary	AB	$302,438 (375KCAD)	-12.4%
Barnstable Town	MA	$325,300	-14.9%
Seattle-Tacoma-Bellevue	WA	$325,900	-13.7%
San Diego-Carlsbad-San Marcos	CA	$332,800	-36.4%
Boston-Cambridge-Quincy	MA-NH**	$335,700	-11.8%
NY: Edison	NJ	$343,600	-7.2%
Los Angeles-Long Beach-Santa Ana	CA	$354,300	-31.4%
NY: Newark-Union	NJ-PA	$373,600	-14.3%
Bridgeport-Stamford-Norwalk	CT	$379,700	-17.5%
NY: Nassau-Suffolk	NY	$381,300	-17.4%
NY-Northern NJ-Long Island	NY-NJ-PA	$390,400	-14.6%
NY-Wayne-White Plains	NY-NJ	$458,600	-11.7%
Anaheim-Santa Ana	CA	$464,800	-30.8%
San Francisco-Oakland-Fremont	CA	$487,100	-37.4%
San Jose-Sunnyvale-Santa Clara	CA	$525,000	-37.7%
Fort McMurray (avg)	AB	$553,342 ($656KCAD)	3.6%
Honolulu	HI	$610,000	-2.4%