Sunday, December 6, 2009

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.


Radley77 said...

Good commentary! It's hard to know what he meant when he is referring to Canada wide market.

However, when you recognize that unemployment levels are significantly higher in the 15-24 year old demogaphic, then that may be the pool of buyers that he may be referring to that when they enter the market they will cause a rise in the sales to new listings ratio and push prices higher.

In the period from 2005 to 2008, employment in Calgary increased from 600,000 to 700,000 . This illustrates that during this period (14% growth in employemnt in 3 years) that there was very robust growth in employment. Also, during this period there was robust demand for housing, and prices went higher.

I believe that housing demand and sales in the resale market is a function of employment. So as people enter employment, they push up the demand for housing. If employment levels are falling, as was the case in Q1 2009, then it will cause the sales levels to drop.

I think the thing he might be neglecting is that vacancy rates in Alberta are relatively high (6.7% availability rates).

So I wouldn't say that something like we have reached a bargain basement in house prices until vacancy rates are lower.

The other thing that I thing strongly needs to improve is capitalization rates for investors.

Carioca Canuck said...

Houses have never been bargain basement priced for at least 2 decades.

Artifical stimulus (low rates) has brought forward future demand.

Once low rates disappear we will see a price drop, demand wither and guess what........