Tuesday, January 26, 2010

I agree with Garth Turner

From Garth Turner's recent post (emphasis mine)

The main point is that real estate here is grossly overvalued and, as I’ve tried to underscore in the last two posts, the folks who don’t understand that are destined to relive the experiences of others. Yes, the market will be lower in a year or two than it is now, but I’m not expecting a 40% decline with foreclosures and abandoned blocks of McMansions. What happened in Vegas will stay in Vegas.

Nonetheless, Canadians will taste the bitter remedy of negative equity which has been forced down the throat of 23 million Americans. Those who bought most recently, at the highest levels, and with extreme leverage, are at greatest risk. The dangers we face have been well articulated here and will logically result in a 15% decline in the national average house price. In Toronto, maybe less. In Calgary and Kelowna, more. In Vancouver, may God be with us.

I think a 15% national decline is likely, especially with the price gains of 2009 considered.

Anyway, I was surprised to see such a mild nationwide correction prediction from Garth. I wonder how some of the blog dogs will react?


BearClaw said...

I don't see how Toronto would fare any better than Calgary however. From the demographia survey Calgary is classified as seriously unaffordable at 4.6 median house price to income ratio while Toronto is severely unaffordable at a 5.2 ratio. Toronto has had more recent house price appreciation while Calgary has been less overheated in 2009.

Radley77 said...

I agree, while I don't study the Toronto market in particular, I think that Garth may be wrong in estimating that Calgary has worse declines than Toronto. What I have found to be a decent rule of thumb for determining corrections is affordability compared to long term trends. Calgary is second most affordable major city in Canada according an RBC report, and is below the long term average. In addition, rent in Calgary for a two bedroom is $1,089 per month, this compares against $1,096 a month whereas there is probably a 10% price premium between Calgary and Toronto. e.g. In Toronto detached bungalows cost $446,000 against $412,000 in Calgary for a detached bungalow. So purely from a value perspective, I think that there is not a huge valuation difference between Toronto and Calgary that would warrant worse real estate performance in Calgary.

Without looking at the numbers in specifics, I think Garth's perspective may be that Calgary had a large runup but does not have the same geographic constraints as Toronto, so by his rationing that it should be susceptible to broader declines (a la Phoenix style meltdown). However, Calgary doesn't have a glut of overbuilding (anymore), nor are there massive foreclosures, so it's not clear to me how Calgary could have rapid price declines due to high levels of supply relative to demand.

Some things he may not be aware of as well, is that Calgary is bordered by the SW T'suu tina reserve which has prevented land from being acquired for a SW ring road. And in the NW of Calgary, near Bearspaw much of the land has been subdivided into small acreage lots and is therefore difficult to acquire large chunks of land for development. There is plenty of land available for development in periphery towns and in the the northeast and southeast, but I think it's important to note that Calgary is partially geographically constrained.

In addition, Calgary has a well developed public transit system with over 200,000 rail users per day, whereas cities like Phoenix which has a similar population base only has 33,000 rail users, and Detroit which has no rail system. Cities like Detroit and Phoenix are more car dependent and therefore when energy prices are high, have lower economic growth.

For a price forecast for myself, it would be hard to forecast -15% this year. To get that point would really take about a year and a half of build up in inventory, and we are trending the wrong way. I also think that over the next 5 years there will be moderate income growth (2%/year). So, even with flat nominal prices, we could see that overvaluation eaten up in other ways or some combination of price declines and income increases.

Potential buyers I think should wrap their heads around a moderate decline. 15% probably is a reasonable number. I think the risk is that the government doesn't take away the stimulus quick enough resulting in higher inflation and higher bond yields, thus pinching out affordability in a few years. Correction 2013?

STEO said...

You guys up there must realtors

BearClaw said...
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BearClaw said...


Good observation! I am a REALTOR working out of Edmonton and Radley sells houses in Calgary. Garth Turner thinks there will be only moderate price declines in Toronto because he has a RE/MAX office based there.

/sarcasm off

Its possible that Garth and I are incorrect, but instead of calling us REALTORS you could tell us how far housing will drop in Canada and why.

BearClaw said...


I disagree with 2% wage increases over the next 5 years. Also, If January sales are as bad as they appear to be right now it indicates a weak spring market which would set the stage for inventory increases leading to price declines during the second half of this year. I do think that if there is a 15% decline it will play over a longer time 2-3 years.

Carioca Canuck said...

Calgary was down 20% in 9 months back in 2008 before our government lost their f-in minds and screwed a generation of taxpayers.

Remember, when you sell, it costs you between 3-10% in the form of a discount from your asking price, plus, if you chose to do so, RE commissions, and obviously your closing costs.....so, add another 5-8% on top of the sales discount......

So, even with a 15% projected drop.....that now becomes a 23 - 33% hit to the bottom line "if you sell out"......

Ouch. That is the real risk exposure......not 15%.

I personally predict the hit to our prices will be at least equivalent to a 1/3 drop here in Calgary.

What bullets has the government got left in their gun to support the RE market ? What can the government AFFORD to do to support the market ?

BearClaw said...


When I say 15% decline I am comparing selling prices at different times. Asking prices at both ends of the deal are irrelevant.

So if someone bought and sold after a 15% decline it is more like a 20% loss. (Neglecting principal paid down and buy vs. rent differences). That additional 5% doesn't say anything about the current market except that real estate should be a long term investment.

BearClaw said...


I am not sure about that 20% decline in 9 months. From median price of SFH its more like 10%. That 10% decline did occur in 9 months but it took some times for inventory to increase to an amount that would lead to that rate of decrease.

I except that the declines in 2010 will be less than 15% in Calgary and Edmonton. Pessimistic case this year would be a 8% decline.

BearClaw said...

Might as well put in a predicition on the record now.

6% declines Calgary in 2010. Teranet house price index.

squidly77 said...

i dont know bear

calgary sales were plunging and prices were down to $413,000 or
-20% last jan

calgary housing was quickly slipping into the abyss until artificially low interest rates pulled them out

they have recovered somewhat since then..but only slightly

edmonton sfh prices are still down 19% from their highs and later this year the last edmonton area mega-project will come to completion

i dont understand what you mean when you state that 15% further drops can be expected for edmonton

totalled up that would equal a 34% price plunge for edmonton and thats a major crash similar but not as drastic as i call for

i expect a further 41% price drop for a total of 60% and then housing will be at least reasonable
(still expensive though)

then again the taxpayer may be forced into subsidizing the housing industry for a longer period than they want

Radley77 said...

Today, Garth made a new post. This time he forecast that the 15% decline would occur by the end of the year. He also goes on to say there will be another 20% to 40% decline from the peak that occurs within the next 5 year horizon.

Yesterday, Garth said that he "did not forecast a housing crash, a la USA."

The November 2009 US Case-Shiller Index prices have fallen 30% on a ten city national index. This compares against Garth Turner's forecast for Canadian house prices to fall 20% to 40% over the next five year horizon.

How is this technically different?

Radley77 said...

As for prediction for house prices, my guess is at the low end -10%, and at the high end about +4% for Old Criteria prices for January 2010 from where they are in January 2009. My best guess, is probably somewhere in between the high and low range at -3% year over year. This is reflective that inventory levels are normal, but the weak economic growth and negative interprovincial migration resulting in higher vacancy rates, plus that demographic demand has already been well satiated due to high sales rates in 2006 and 2007, I expect the following sales rates to be below long term average sales rate. This is also a forecast that is reflective of what the current sales and new listings rate is in January, wherein the sales rate is very low on a seasonally adjusted basis.

squidly77 said...
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squidly77 said...

of course it takes years for real estate to correct as you should well know

the USA has seen a 30% decrease spread over 5 years
phoenix has seen a 59% decrease over 5 years
california has seen a 54% decrease over 5 years
edmonton has seen a 20% decrease over 2 years
calgary has seen a 14% decrease over the same 2 years

give it time..analyzing stats to death serves no purpose..kevin @ the edmontonbust site does that and it will turn you cross eyed, divorced and you may become overly obsessed with housing prices, as he obviously has

just open your eyes

squidly77 said...

so radley, kevin or bob or whatever you call yourself tonight, quit the massaging ok, and quit the masquerade, your all to obvious.

deflections only work on fools
or were you counting on that

squidly77 said...

kevin stopped linking the albertabubble and bearclaws site

actions speak a thousand words

天天夜夜 said...
This comment has been removed by a blog administrator.
Carioca Canuck said...

There are 500,000 people about to run out of EI payments this year......payments that have been helpful in keeping the RE delinquency rate low, and the overall resale markeplace solvent.

When people have to start using their own savings to make payments while unemployed, not the free government handouts, things change fast because that is when the pain and anxiety begins.

Personally, we have been living off my interest income and the wife's salary for the last 18 months.....but as debt free renters we can do that, and still put money away, almost every month in fact.

If I had an extra $3,000 of monthly mortgage debt (the difference between my rent and the cost to buy the place I live in) the condo would be listed for sale, and we'd be freaking out.....because we'd probably also have C/C debt, LOC debt and car payments, etc, just like most other over extended homedebtors do, as well and no savings whatsoever to fall back on.

The Calgary market went down 20% in 9 months back in 2008.........until the government lost their f-in minds and screwed a generation of taxpayers.

I have seen a RE crash first hand back in the early 80's......we're gonna have one here, it is just a matter of when, how, and over what period of time. Call it a crash or call it a meltdown....whatever.

The house of cards called "Canada" cannot sustain itself anymore........

BearClaw said...


Garth now has one of two predictions to point to depending on how things go. Similar to discussing squirrel recipes in March and now telling people they're idiots for missing on the stock market rally.

Just buy his book, you'll understand.

Radley77 said...

I am curious why you decided to resurrect your blog? I have been debating deleting my blog. I don't have the time to research things as much as I would like.

squidly77 said...

I don't have the time to research things as much as I would like.

working two jobs to pay the mortgage must suck a radley !

i have always respected bears comments and blog posts as he has always been steadfast in what he believes in

something your not

BearClaw said...


Back in spring/summer I had other priorites like house hunting, moving, work and enjoying the summer. I didn't think I would have the motiviation to scour the internet and do any reserach. I had a pretty good record of posts at that point and it seemed everyone was negative towards the industry at the time anyway.

I was thinking of a more general economics and political blog, but found myself back lurking and commenting on the same housing sites. I was honestly suprised about the mortgage affordability calculator and impulsively posted it. I now have a different perspective and have occasionally been taking shots at the bears but I still want this blog to have the same theme. I will probably run this blog until the end of the year, which is why i setup the sales/listings charts.

Why would you delete your blog? Just close comments and leave it up while you have your account.

BearClaw said...


Of course Radley has two jobs! One as a Petroleum Engineer and the other at First Place Realty. As you well know he is two different people, yet the same person!

squidly77 said...

As you well know he is two different people, yet the same person!

maybe he has tri-personality !

BearClaw said...


I'm afraid to think of what your insinuating. Radley is using the same account he was with comments on this blog from over two years ago.

I'm done with these accusations but feel free to argue with Radley on topics related to real estate. If you do so in good faith you will find that he is informed and sincere.