Alberta Real Estate Watch

Thanks for stopping by.

2011-07-08T08:37:00.000-07:00

So after 250 posts, almost 4 years and dozens of page views I'm calling it quits. Our family is about to double in size (twins!) and unpaid market analysis is on the bottom rung of priorities.

Some final thoughts:

While I think some of the bear blogs are overstating the downside risk to the market from factors such as demographics and CMHC underwriting I do believe that growth in mortgage credit and prices will require some level of nominal price declines. This will take time.

Right now the Alberta real estate market is in a sort of limbo. The hangover from the rapid increase in price still lingers with elevated levels of foreclosures and high debt levels. In migration and employment growth are currently positive which are offsetting this right now but global economic risks add uncertainty.

My advice would be wary of advertisers selling mortgage that are engineeringed to look cheaper than rent but aren't. Or hucksters using poor reasoning to pump a boom that isn't happening. On the other hand it is important not mindlessly cheer on those who say the job recovery is fake or that economic armagedon is around the corner. Perhaps this appeal to balance is a little condescending and I should give more credit to the majority of people who are capable of thinking critically (I am an optimist). I wish I could offer a more definitive closing but that just isn't my style.

Thanks to all who stopped by over the years and contributed to the discussion. Best of luck to all.

Calgary Stats June 2011

2011-07-08T08:20:00.000-07:00

Edmonton Stats June 2011

2011-07-08T07:49:00.000-07:00

Sales have dropped somewhat which could be expected for this time of year. Even with this drop the rate has maintained some gains from the dismal levels seen this time last year.

Listings dropped as expected in June.

Seasonally adjusted sales are low historically but they have been worse. This is a range similar to before the boom but above crisis levels.

The relatively low level of listings is having a stabilizing effect on the market.

The sales to new listing ration is slightly above 50%. A rate of 50% indicates a market with stable prices.

Blast from the Past

2011-06-18T08:35:00.000-07:00

At the end of 2009 I had this exchange with Garth where he discussed how the Bank of Canada hiking rates would impact mortgage payments. He thought a 5-year fixed rate would be close to 7% as they move lockstep with the BoC. He had also argued there would be no more discounts available for some reason.

and that by this time a year from now BoC rate will be sitting at almost 1.6%, higher than today by 1.3%. That doesn't sound like a lot, but it puts the lowest VRM at 3.55% – which increases the monthly on a $400,000 loan by $300. A five-year mortgage would like go for close to 7%. Barn door. Horse.

#5 BearClaw on 12.16.09 at 9:47 pm

Garth,

I don’t think 5 year mortgages will be close to 7% with only a 1.3% increase in rates. 5 year mortgages are about 4% right now. An increase of 1.3% will put them at 5.3%.

There is a large spread between variable and fixed because there is some anticipation of rate increases priced in. So fixed rates may be less than 5.3% in this scenario.

Posted rate is 5.49% now at all majors. We are on the way back to 8% money in a few years. Get used to it now. — Garth

#7 BearClaw on 12.16.09 at 9:54 pm

“The first hike will be at least a half, and probably a full load. That could raise VRMs overnight by 1% “or a little more than 44%. Ouch.”

Garth,

For a 25 year amortization it would raise the *total* payment by 12%. The interest portion would increase by 44%.

A 1% increase on a 2.25% rate is 44%. I did not mention payments. — Garth

#10 BearClaw on 12.16.09 at 10:03 pm

"Posted rate is 5.49% now at all majors. We are on the way back to 8% money in a few years. Get used to it now.” -Garth

I think you know the difference between discounted and posted rates. But who cares? That’s not entertaining.

Kiss discounts goodbye as the BoC moves. That’s not entertaining either. — Garth

#11 Siberta on 12.16.09 at 10:16 pm

You ain’t going to win on this site BearClaw, get used to it. You recently purchased to, if I remember correctly.

#12 lgre on 12.16.09 at 10:21 pm

Bearclaw is learning that GT has every angle covered, dont bother trying to come from the back.

The ‘we are different’ theory is getting boring, nothing is different but everything is and will be the same…just wait for it.

18 months later a 5 year mortgage can be found for well under 4%. This is because fixed did not move with variable and discounts from the posted rate still exist. Two points I tried to make. Note how the blog dawgs mindlessly cheer on their leader as opposed to considering moderating arguments.

Canadian Recession and Recovery

2011-06-09T04:45:00.000-07:00

From Stephen Gordon at Worthwhile Canadian Initiative:

The investment recovery was in two stages. In late 2009 and early 2010, expenditures were concentrated in the residential construction sector, but housing has played almost no role in the last four quarters. Happily, fixed business investment - and especially expenditures on machinery and equipment - started picking up just as the housing sector stopped contributing to growth.

See previous posts: here, here and here

Edmonton New Construction Stats May 2011

2011-06-06T08:01:00.000-07:00

There were 2,974 single family homes under construction in Edmonton during April. This is less than half of the amount of construction during the peak (6,528) but up from the low reached during the recession (1,764).

Looking at all types of dwelling under construction shows less of a rebound because the condo glut took longer to work off and new starts having been slower to recover. In fact there remains a surplus of completed and not absorbed units when considering all types of construction other than single family (shown in dark gray).

link

Calgary Sales

2011-06-04T08:10:00.001-07:00

Edmonton Sales

2011-06-04T07:51:00.001-07:00

The story: Sales increased from crisis levels but are still low historically. New listings have been relatively tame and inventory is down year over year.

Population Aging and Housing Demand

2011-05-31T19:32:00.001-07:00

Recently the Stephen Gordon wrote about how immigration cannot fix the aging problem on the Worthwhile Canadian Initiative Blog. The main point was the number of immigrants required is too overwhelming to overcome the enormous gap as shown in the chart below.

Ben at Financial Insights also commented on this analysis as it related to housing:

The current immigration rate is wholly inadequate in eliminating the coming demographic imbalance. While it certainly helps, it will be insufficient in entirely eliminating the headwind on house prices set to be exerted by the aging population.

The post at Worthwhile Canadian Initiative derived the amount of immigration required to avoid population aging. This is far more than the what would be required to maintain a constant level of housing demand. This is an important distinction and is best represented in the chart below from Statistics Canada population projections (Medium growth).

In this projection the pyramid is skewed up, as the baby boomers age, but also increases for the younger age groups, albeit to a lesser degree. The future will certainly have more seniors but the decline in housing demand is fully offset under moderate immigration, fertility and life expectancy assumptions.

See previous post here.

Business Credit Expanision and Economic Recovery in Canada

2011-05-08T10:09:00.000-07:00

Since the recession ended the role of household credit in the recovery has been examined. One narrative that has formed is that this is largely artificial due to an unsustainable rate of household credit expansion.

However, not much attention has been given to role of business credit shown in the chart below.

Consider three different time periods in recent history.

(A) Pre-recession household and business credit were expanding at a rate of 11.8% and 8.6% respectively.

(B) In the aftermath of the financial crisis household credit growth slowed to a rate of 7.4% while business credit expansions stopped entirely with an yearly growth rate of -0.1%.

(C) Recently, household credit growth has eased to 6.5% while business credit recovered to 4.8%.

The financial crisis had a bigger impact on business credit than household credit and since then the gap between the two has narrowed considerably. This could explain some of the continued strength of the Canadian economy after two years of recovery.

Source: Bank of Canada
household credit
business credit

Edmonton Stats April 2011

2011-05-07T06:22:00.001-07:00

The REALTORS Association of Edmonton released their monthly stats here and overall they show weak sales and normal level of new listings.

The preliminary number for sales held steady with 1487 in April compared to an initial report of 1503 in March. Normally, sales are expected to increase this time of year. Preliminary sales are at scorched earth level, which is equivalent to the worst six months of the financial crisis.

Listings are rising at a normal pace for spring.

Seasonally adjusted rate of sales have been low for a year following a bounce after the financial crisis. I assumed the final number for sales will come in about 7% higher than the preliminary figure.

Seasonally adjusted listings have been stable since a spike last spring.

With lower sales and stable listings on a seasonally adjusted basis the sales to new listing ratio fell to 47%. A ratio lower than 50% indicates a market with downward price pressure.

Finally a historical chart of actual sales, listings and inventory.

Alberta Population Report Q4 2010

2011-04-18T20:09:00.000-07:00

The Alberta population report for the Q4 2010 was released last month here.

On a quarterly basis Alberta's population grew by 0.21% in Q4 2010.

7,249 natural growth (births - deaths)
2,510 net interprovincial migration
4,633 net international migration
-6,725 net non-permanent residents (!)

The exodus of non-permanent residents was offset by international and interprovincial immigration.

Edmonton New Construction Update

2011-04-17T15:15:00.000-07:00

The number of single family homes under construction in Edmonton has decreased from 4,116 in July to 3,212 in February. Starts have fallen over 50% YOY while completions increased by 60%.

The amount of units under construction or unabsorbed for all types of residential structures has decreased for 5 consecutive months.

The Canadian Job Recovery is Real

2011-04-13T20:13:00.000-07:00

From Greater Fool

Real estate sales are down, mortgage rules tighter, gas is $1.40 a litre and the latest jobs numbers suck.

more here

And From Financial Insights:

This has been a constant criticism of mine with regards to the ‘rebound’ in employment from the recession lows. It has overwhelmingly been driven by growth in construction jobs, public sector jobs, and part time jobs…..not overly impressive.

The idea that the jobs recovery is somehow fake is something I have covered in previous posts (here and here ). While this recovery has had a disproportionate increase in construction, it has not made up anywhere near the majority of jobs. The other claim regarding public sector and part time jobs is false.

Calagry Stats for March 2011

2011-04-04T13:40:00.001-07:00

Bob Truman updated the Old Criteria stats for March 2011. With this I have once again update the trends new listings and sales adding inventory and price charts as well this month. Seasonally adjusted sales and new listings as well as benchmarks are explained here.

Sales are down year over year but are still above the pace of the financial crisis (shown in red). There are two ways to interpret this YOY drop.

1) In terms of sales the market was doing reasonably well last March and it was only in June and July where they deteriorated. So if we maintain this same rate seasonally adjusted we can expect an increase in yearly sales shortly.

2) Now that there are fewer available buyers due to tighter mortgage rules the rate of sales should decrease faster than normal, resulting in continued year over year sales declines.

April will be a relatively slow month due to a sales vacuum formed by the recent mortgage rule changes. However I believe this will only have a short term impact and sales would then recover. My guess would be somewhere above last year's rate but below that of 2nd half of 2009, shown by the green line.

Listings are following closely the same rate as the 2nd half of 2009, shown in green. The low level of new listings is providing some support to the overall market which would be faring worse otherwise due to the low level of sales.

Inventory is about the same as this time last year, with only 0.6% fewer properties on the market. What is notable however is the difference in the rate of change between the first few months of this year compared to last.

Dec 2009: 5017
Mar 2010: 8524
% increase: 70%

Dec 2010: 6056
Mar 2011: 8477
% increase: 40%

Median prices are down 3.5% from last March.

Sales to new listing ratio is hovering around 50% from low sales and new listings.

Update: The Edmonton Journal ran an article on Don Campbell pumping another boom: “I’ve studied this for 19 years and I have not seen this strong of a perfect storm before.” See previous posts: part 1 and part 2.

Don Campbell - Analyzing the sales pitch (II)

2011-03-26T08:00:00.000-07:00

The last post covered the theme of Don Campbell's recent blog to sell seats at a weekend real estate course. He just had to inform Albertans of a pre-boom buying window before outsiders bought everything up first. The wording was selected carefully to only imply massive price appreciation while being open to interpretation to avoid future scrutiny. He reassured skeptics they could dramatically reduce risk by investing not speculating while still using upcoming price appreciation as a central incentive.

The argument for a return to higher prices was made with the 'Momentum Graph' shown below [emphasis mine].

Here's what you use to predict the real estate market future: The Momentum Graph, which shows exactly the progression of an economy and how it eventually impacts the Real Estate Market.

The Economic Formula to Predict The Future

In a nutshell this graph states the following:

GDP growth >> Job growth >> Population growth >> Increased rental demand (12 months later) >> Increased rents >> Property purchase demand (18 months later) >> and eventually leads to property price increases.

This chart was constructed to be used conveniently with the GDP data from royal bank presented later. Putting the two together the reader can predict ~~exactly the amount of future price increases~~ higher prices (edit). Note how it is referred to as a "formula" to give the false impression it is based on some serious scientific theory.

The Momentum Graph falsely claimed to show "exactly the progression of an economy and how it eventually impacts the Real Estate Market". I will provide some specific examples that contradicts this:

Radley showed that the 2006-2007 price appreciation went over and above any GDP growth here.

Ben at Financial Insights recently compiled a similar chart for the Canadian wide market.

The Edmonton Housing Bust Blog compared local condo prices to rents. In Don's momentum chart it shows that rent increases come first and then lead to higher prices. If this was applicable to the last boom this ratio should have fallen with higher rents initially then increase as prices caught up. Instead prices outpaced rents for the entire boom.

Now consider the Teranet Price Index at 3 points in time after the boom.

1) In mid-2007 there was positive GDP growth, a strong job market, population growth and rent increases. The 'Momentum Graph' would predict future price increases yet they were at their absolute peak.

2) In spring of 2009 GDP was lower after the oil bust and recession, combined with lower population growth and increasing Alberta unemployment. The 'Momentum Graph' doesn't go into reverse for obvious reasons, but if it did it sure wouldn't predict a bounce in prices.

3) In mid 2010 the Alberta economy and job growth have improved yet prices started trending down despite this.

Even if you accept some relation between GDP and house prices it is reckless not to mention that 2006-2007 was an anomaly. Don wants readers to make the connection with the GDP chart and another boom to pump his seminar, while being vague enough to provide future cover. Adding context is not helpful to his financial goals.

Don Campbell - Analyzing the sales pitch

2011-03-20T10:54:00.000-07:00

Don Campbell wrote a blog entry last week where he makes the case to sign-up for his training seminars to take advantage of real estate momentum. Read the entire pitch here.

I would love to see you and your guests there – so you discover how long-term sustainable wealth was created in the last two economic jumps and how you can do it this time, while still dramatically reducing risks, and by investing, not speculating. You have an economic dream for yourself and your family – our job is to support you in creating it.

He distances himself from risky speculation but repeatedly implies price appreciation to help sell $587 seats to his training session.

Look at the carefully chosen wording. The phrase 'last two economic jumps' refers to how real estate appreciated during the 90s after the oil bust and the massive price hikes of the boom more recently. Then he writes you can take advantage 'this time' inferring that an 'economic jump' is happening now. Now one could say the phrase 'economic jump' is open to interpretation but I read it as a euphemism for sudden price increases. Consider the blog title.

During The 2007 Boom Days, Investors ASKED For Another Pre-boom Buying Window…

Is It Here, Or Not?

'Pre-boom buying window' means a limited period of time to act before a rapid run-up in prices. In other words enroll in the class and make boatloads of money. It's not speculating however...

This is not speculating – this is true investing. Doors like this open every so often, your job is to step through them.

See the mix of enticing readers through implying a limited opportunity of price appreciation but reassuring them that they can learn how take advantage of the situation in a less risky way by 'investing'.

There is a frantic energy here where Don just happens to stumble upon this information and he just has to share it with Albertans first.

This weekend changed me, it changed me because of the research I was doing, it changed me to the point that I had to write this unscheduled post.

...

In other words, those outside the province ate many an Albertan's cash-flow lunch. It was only after the momentum was at full speed that many did awaken to try and get into the market.

...

Those outside the province are already seeing it, and are jumping in with both feet (just like the last two times). My wish is that Albertans aren't the last to see it again.

...

Yet, those outside Alberta swooped in and got in front and the markets took off.

See the way the story is told here. He's rushing to tell you this information first before outsiders storm in and take the opportunity away. In other words act now. This is very similar to what he had to say in March 2008. link.

International investors are definitely buying. Calgary and Edmonton real estate is hot in Europe and the U.S., more than I've ever seen before in all my years involved in real estate. The top banks in Ireland, for instance, are buying here. They see it as safe, secure and good for the long-term, compared to other options.

He also loosely ties disjoint economic situations and world events to the argument generating a level of reader confusion and anxiety which to capitalize on.

So let me get to the point… as of this weekend I have not seen the Alberta economic fundamentals pointing to this strong of long term momentum in all the years I have been studying them. And this factors into the turmoil that is occurring around the world, the strong Canadian dollar, the huge debt being created in the US, and the potential for a longer term world economic doldrum.

Finally, consider the more concise deconstruction of Don's post by Calgary Realtor Mike Fotiou.

What annoys me with these pitches is:

-the blatant pandering and ego stroking. Those that listen and act on his advice are “savvy” and “sophisticated” investors.
-Limited time. Get in now.
-fear of missing out, appeal to greed “We all remember how things were going in Alberta for the years 2006- 2008″
-feigning objectivity. “I have nothing to gain from this” (except the hundreds of dollars in course and membership dues)

Exactly.

Edmonton Stats Feb 2011

2011-03-12T14:15:00.000-08:00

Edmonton sales are now only slightly higher compared to the rate equivalent to the worst six months of the financial crisis.

Seasonally adjusted sales to new listings ratio fell below 50% again indicating downward pressure on prices.

Calgary Stats Feb 2011

2011-03-12T09:04:00.000-08:00

After a slow start in January sales have picked up in February. Even with this increase they are still below the pace set in the 2nd half of 2009 shown in green in the chart below. It will be interesting to see how much the new mortgage rules will slow sales after March 17. I believe the impact of this change has been overstated because it is a marginal reduction of the size of a mortgage allowed and only effects those who were going to their affordability limit with the maximum amortization. (It is a positive change long term and if you are a buyer rushing to get a 35 year am - don't do it. Get a shorter amortization later when you can afford it.)

New listing have ramped up at the start of 2011. This stat will be important to watch over the next few months. Will we have a higher than normal surge this spring similar to last year?

Seasonally adjusted sales have remain higher compared to late last spring but nowhere near the pace of the boom of 2006-2007.

Seasonally adjusted new listings have increased consistently since reaching a low in October 2010.

So far in 2011 the sales to new listings ration has dropped below 50% due to new listings rising more than sales on a seasonally adjusted basis.

Since December the median price (Old Criteria) has increased from $342,500 to $357,250. I believe that sales mix and seasonal factors contribute to this so to give further insight I hope to add seasonally adjusted price charts shortly. The same goes for total inventory as well which has increased from 6,056 to 7,517.

Credit Expansion Part 2

2011-02-11T05:54:00.000-08:00

Consider the view of mortgage debt as an outside force of nature artificially boosting the entire economy now, only to inflict widespread pain and misery in the future. Let's look at another item of Canadian's balance sheet using a similar methodology. Below is the market value of Trusteed Pension Plan Assets in Canada over the past twenty years. Source: Statscan (table 50).

In this one category alone there is almost one trillion dollars of savings sitting out there waiting to be unleashed! The economy was artificially depressed over the past twenty years as these funds were being accumulated, increasing from $186 billion to $960 billion. This is more than could be accounted for from population and wage growth proving how prudent Canadians have really been!

Clearly it's flawed looking at a single item of Canadians total balance sheet with the perspective that "debt equals future pain and savings equals future prosperity". Mortgages should be thought of as a transaction between a creditor and a debtor, where consumption is shifted between them over time.

I don't want to imply there are no risks, but I think it is more useful to look at the quality of the mortgages as opposed to total outstanding loans.

What is this?

2011-02-04T18:56:00.000-08:00

Household Credit Expansion in Canada

2011-01-30T08:27:00.000-08:00

This post will look at the household credit in Canada and it's contribution to economic activity. The link between the two has been a common theme of blogs such as AmericaCanada and Financial Insights for awhile and is recently becoming mainstream. The idea boils down to this:

Point 1. Credit has been growing at an unsustainable rate
Point 2. This has artificially inflated the entire economy
Point 3. Once credit contracts this artificial activity will disappear

This has been used to explain the difference between Canada and U.S. economic trajectories; Credit is contracting in the U.S. while still expanding in Canada. I do agree that credit growth has been unsustainable but not to the same extent as others. Consider the following from Financial Insights:

Let’s not forget that line of credit growth, particularly HELOCs, have significantly boosted consumer spending. CAAMP data suggests that home equity extraction alone has added 9% to the after tax income of the average family’s budget. When this slows, consumer spending (65% of our economy) slows with it. The new mortgage rules aimed at limiting home equity withdrawals will certainly act as a catalyst to strengthen this trend.

The explanation of this 9% is in a previous post.

Let me reiterate some basic math: If 18% of all households with mortgages (~60% of total) have withdrawn equity in the past 12 months, and the average amount was $46K, that means that when averaged across all households, it would be equal to over $5,400 in additional household spending per household in the past 12 months. Given that the median after tax income of Canadian households was most recently calculated at $63,900, this equity extraction has ‘boosted’ income and spending by an additional 8.5%.

No actual payments are considered in the above calculations. While many are taking withdrawals there are also households with who have made regular or lump sump principal payments over the past year. Some HELOCs may have been taken to pay others down. I think it would have been more suitable to look at aggregate HELOC growth to determine it's impact on consumer spending. I would guess this number is less than the 9% calculated here.

Also, there is some amount of household credit growth which could be sustained. Theoretically, credit could grow at a sustainable 4% with 1% from population growth and 3% from rising wages.

So I agree with point 1 in the model is true but to a lesser degree. What does this mean for the entire economy? Lets consider point 2 that above trend credit growth has boosted the entire economy. Consider a hypothetical couple, John and Jane Smith, and their consumption without credit expansion. They can only use the income to buy goods and services.

Debtor Income: $50,000
Debtor Consumption: $50,000

Since these people are impatient, shallow and reckless with money (like most Canadians are) they take a credit line against their house to "purchase" a new vehicle. They also buy granite counter tops and a Blackberry they otherwise would not have if the funds were unavailable.

Debtor Income: $50,000
HELOC Withdrawl: $50,000
Debtor Consumption: $100,000

Once the bills come due income is diverted away from purchasing goods and services.

Debtor Income: $50,000
HELOC Repayment: $25,000
Debtor Consumption: $25,000

If this happens to the balance sheets of household on masse the implications are clear. From Financial Insights:

I suspect the true state of the economy will become evident as credit demand dwindles and home prices normalize.

This example shows credit expansion as an outside entity artificially boosting economic activity. During the austerity phase debt repayments disappear into this abyss and cause widespread pain. The missing element here is that each loan has both a debtor and a creditor. It is not like debt repayments are sent to an inferno somewhere and disappear from the economy forever. First look at the creditors and debtors consumption before a reckless loan is made.

Creditor Income: $300,000
Debtors Income: $50,000
Creditor Consumption: $300,000
Debtors Consumption: $50,000
Total Consumption: $350,000

With the loan the Smiths spends an amount greater than their income but this is offset by the creditor's increased savings.

Creditor Consumption: $250,000
Debtors Consumption: $100,000
Total Consumption: $350,000

In this case it is theoretically possible that during the repayment phase there is no drop in total demand. Instead consumption is shifted from the debtor to the creditor.

Creditor Consumption: $325,000
Debtors Consumption: $25,000
Total Consumption: $350,000

The Blackberry, the granite counter tops and the new car the Smiths bought are all real. The debt played no part in their actual design, production or distribution. So the economy was not operating at a level higher than it's capacity which has been implied.

While I disagree that the economy was ever above a true state there still are downside risks. If the loans are not sound then this can cause shocks which will reduce activity below capacity. Hence the high unemployment rate in the United States right now. The economy will likely have to adjust from the middle class using debt to finance their lifestyles. So the model would differ somewhat:

Point 1. Household credit has been growing at an unsustainable rate
Point 2. The transition to sustained credit growth could trigger a period of time where economic activity is below capacity

And that's good news! After the economic shock subsides, John and Jane Smith will be given the privilege of toiling well into the future to fund the consumption of their creditors.

Edmonton New Construction Update

2011-01-14T09:14:00.000-08:00

The number of single family homes under construction in Edmonton is declining slowly as starts have decreased. As of the most recently available monthly stats starts have fallen 30% YOY while completions increased by 90%.

When considering all types of residential structures under construction things have been holding steady now for over a year. It is interesting how activity has shifted towards SFH as the condo glut lasted longer after the boom.

link

Edmonton Market Stats December 2010

2011-01-08T08:59:00.000-08:00

Once again the updated sales, listing and seasonally adjusted charts for Edmonton.

Sales remain above the dismal pace of the financial crisis but below the more robust pace set during the 2nd half of 2009.

Listings are following the rate set during the 2nd hald of 2009.

On a seasonally adjusted basis home sales have recovered somewhat from earlier this year.

The spike of listings which contributed to the year over year increase in inventory has settled down.

The seasonally adjusted sales to new listing ratio has increased due to more sales and reduced listings. The rate currently stands at 57%. I would be cautious reading too much into this due to the lower volume in the winter months. However, if this ratio stays at this level into the spring market we may see YOY inventory drops and prices stabilizing. The question is how big of a listings rush will there be this spring?

The last chart shows sales, new listings and inventory over the years.

The median price of single family homes has moved down considerably since spring. Down to $336,500 from $370,000 in May, or almost 10%. These price declines are a combination of real market deterioration and seasonality as I mentioned in June.

The seasonally adjust sales to listing ratio is 42% and has been flat for three months. Expect price drops soon.

I think that some of the price measures are elevated right now due to seasonality and high level of luxury sales (see Edmonton Real Estate Blog for price stats). This works both ways as it shows prices have been rising all year (when they haven't) and will exaggerate the drops during the second half.

It comes as no surprise that the EREB was way too optimistic on their revised prediction of 19,000 sales half way through the year. I was also optimistic guessing 16,576 when the preliminary total right now stands at 16,241.

Calgary Stats December 2010

2011-01-01T09:38:00.000-08:00

Sales decreased last month but not as much as expected.

New Listings fell dramatically as expected this time of the year.

On a seasonally adjusted basis sales have partially recovered when compared to the dismal pace set this spring.

Fewer new listings are coming onto the market now when compared to the rate earlier this year. This will be a key indicator to watch going into next year as the unknown variable is how many will be re-listed and how motivated they are to sell.

The sales to new listing ratio improved on a seasonally adjusted basis as sales held up better than expected.

The last chart shows sales, new listings and inventory over the last 5 years.

Raw data from Bob Truman's site
Explanation of benchmarks

Happy New Year!

Inflation: Believe the Government Numbers.

2010-12-26T17:35:00.000-08:00

This post is another response to the Village Whisperer with respect to recent writings on inflation. My position that the government statistics are reasonable will not go over well with those who would rather feel superior by knowing "truths" that the masses are oblivious to. Oh well.

No doubt driving around to visit friends and family you took time to fill up your gas tank.

If you live in Greater Vancouver, your jolly spirit will have been tempered by gasoline prices which have touched north of $1.20 per litre ($1.22 at some stations).

Whoa!

Gas has gone back to the highs we experienced when oil was at over $140 per barrel, whereas right now oil is at $90 per barrel. What gives?

Even better, government statistics tell us that inflation has fallen to 1.3%.

Uh-huh.

Across Canada average gasoline prices reached $1.39/litre in June 2008 while they are currently $1.10/litre.

Statistics Canada reported inflation for November indicate a yearly increase of 2% with core inflation, which excludes more volatile components, increasing by 1.4%. The report is transparent in that it breaks apart the individual components. For instance gasoline prices increased by 7.2% while clothing and footwear has decreased by 3.2%. I'm sure with recent gas prices they will accurately report another increase for December. In other words no conspiracy.

Bloomberg reports beef prices increased 6.2% above last November, with steak prices up 5.4% and ground beef prices up 7.4%. Pork is up 12.9%. Poultry prices (including turkey) up 3.2%.

Egg prices increased 4.7%. Dairy 3.8%. Cheese 5.4%. Ice cream and related product prices 32.1%.

Cereal and bakery product prices are down 0.3%, but rapidly rising wheat futures mean prices can only be held in check for so long.

Meanwhile coffee, sugar, and wheat are up over 35%.

From the highlighted items in the blog post it would appear the Bloomberg report contradicts the reports of low inflation. However, by reading the article it is apparent the opposite is true. With inflation statistics aggregate results are more important than cherry picked outliers. Also a closer look at the data suggests yearly volatility for specific categories. For instance dairy has increased by 3.8% but only after a decline of 6.4% the previous year. While it is true there has been increases in the selected items above overall food prices have increased very little.

In 2010, the Consumer Price Index (CPI) for all food is projected to increase 0.5 to 1.5 percent--the lowest annual food inflation rate since 1992. Food-at-home (grocery store) prices are also forecast to increase 0.5 to 1.5 percent, while food- away-from-home (restaurant) prices are forecast to increase 1 to 2 percent.

The blog entry continues with McDonalds, Walmart and China:

That's why businesses like McDonalds are already letting consumers know they plan on raising prices next year. As noted by the Wall Street Journal:
"Timing and executing price increases can be tricky as McDonald's and other companies are caught between paying more for key materials such as meat and wheat, and keeping prices low to attract price-sensitive customers in a still-weak economy."

McDonalds is raising prices for the first time in over a year. There was hints of cost push inflation with commodity prices "soaring" by 2-3% per year. However, the evidence also suggests demand pull inflation with earnings up 10% and strong sales.

Even that bastion of low prices, Wallmart, has been forced to hike prices. Inflation is raging in China and their costs are soaring. Wallmart simply cannot procur products at the same low wholesale costs.

The reference to Walmart is a survey for a single store for a single month. In China inflation is due to domestic credit expansion combined with their currency not being allowed to appreciate vs. the U.S. dollar.

Take another look at those price changes above. Which statistic do you believe... inflation at 1% or inflation at 7%?

"Four legs good. Two legs better." Couldn't have said it better myself, George.

I think the Animal Farm reference is more suitable to how those in power exploit the tea-party subjects through misinformation. This could be simply to enrich themselves or to gain political power as Paul Krugman explains out in a recent article.

So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.

Since the political will of any government action is evaporating, and household debt deleveraging is not complete (or even started in Canada), I think it is likely inflation will remain below the target level of 2% in 2011.

A side note to this difference of opinion regarding inflation is interesting. After an interest rate shock subsides, inflation would support real estate prices due to higher costs of labour, materials and land relative to a devalued currency. In contrast deflation is negative for real estate in terms of nominal prices as everything depreciates. In the milder case of inflation in the 1% range, the possibility that overvaluation will be absorbed by stagnant nominal prices as real prices fall becomes unlikely.

Alberta Population Report Q3 2010

2010-12-26T11:19:00.000-08:00

The Alberta population report for the Q3 2010 was released last week here.

On a quarterly basis Alberta's population grew by 0.38% in Q3 2010.

8,267 natural growth (births - deaths)
1,155 net interprovincial migration
6,361 net international migration
-1,643 net non-permanent residents

While the Alberta population growth remains positive and higher than the Canadian average it is much slower than the boom year of 2006 due to lower inter provincial migration. International immigration and a higher natural increase has offset this somewhat. This is evident when comparing recent figures with those in 2006.

On a quarterly basis Alberta's population grew by 1.12% in Q3 2006.

6,400 natural growth (births - deaths)
16,729 net interprovincial migration
4,775 net international migration
2,795 net non permanent residence

Subtlety from the Edmonton Sun

2010-12-05T08:48:00.000-08:00

I had to take this screen capture from the Edmonton Sun. Looks like a mortgage broker is writing articles for them. The main theme appears to be a blind assumption of property appreciation.

Things they forgot to mention:
-Interest rate risk
-Risks associated with being a landlord
-Risk of asset depreciation combined with leverage

I'm not against people buying houses, and/or investing in real estate but this article reads like a cheesy infomercial.

Edmonton Stats November 2010

2010-12-05T08:30:00.000-08:00

Calgary Stats November 2010

2010-12-02T20:53:00.001-08:00

Sales were little changed in November compared to the previous month where normally a drop would be expected.

After a spike earlier this year new listings have more closely tracked the rate equivalent to the 2nd half of 2009.

See the sales surge? Looking at a seasonally adjusted chart it's more like a modest bounce from depressed levels. Not a distressed market but not quite a robust one either.

Seasonally adjusted new listings have been holding roughly the same level as the 2nd half of 2009.

The sales to new listing ratio is stuck around 50%. This has improved from earlier this year due to lower listings and a higher seasonally adjusted sales rate.

The last chart shows sales, new listings and inventory over the last 5 years.

Raw data from Bob Truman's site
Explanation of benchmarks

Garth Turner Makes up Numbers

2010-11-30T20:39:00.000-08:00

From It doesn't love us back:

(90% of new mortgages are for 35 years)

The CAAMP survey indicates this is more like 30%.

From Cowtown moment:

Exacerbating things was a recession which knocked oil prices down, increased unemployment everywhere (it’s now a chilling 10% in the GTA) and actually led to a decrease in Calgary’s population last year.

Calgary's population increased by 6,060 last year. There was a natural increase of 10,214 combined with a net migration out of 4,154.

Toronto's unemployment rate is 9.2%.

See Mike Fotiou's comment
See previous related posts here and here

Only 910 variable payments

2010-11-20T15:37:00.000-08:00

This has got to win an award for advertising the most ridiculous payment option for a new home.

Payments as low as $430.50. There is detail in the fine print and it's not too hard to get there:

Bi-weekly payments
35 year amortization
10% down not factoring in CMHC fees
And 2.5% variable rate mortgage

It's a good thing I'm not in advertising because I would probably use different wording.

After a $28,990 deposit and CMHC fees the initial payment may be as low as $430.50. The remaining nine hundred and nine payments will vary depending on the prime rate. (not including condo fees, taxes and utilities)

It is hard to grasp 910 payments so I made the illustration below. Every row represents a year of amortization between 2011 and 2045 and there are 26 payments in each. Of all these payments only the first is of the specified amount while the rest are unknown.

...or another way of looking at it

1 Jan 1, 2011 $430.50
2 Jan 15, 2011 ?
3 Jan 29, 2011 ?
4 Feb 12, 2011 ?
5 Feb 26, 2011 ?
6 Mar 12, 2011 ?
7 Mar 26, 2011 ?
8 Apr 9, 2011 ?
9 Apr 23, 2011 ?
10 May 7, 2011 ?
11 May 21, 2011 ?
12 Jun 4, 2011 ?
13 Jun 18, 2011 ?
14 Jul 2, 2011 ?
15 Jul 16, 2011 ?
16 Jul 30, 2011 ?
17 Aug 13, 2011 ?
18 Aug 27, 2011 ?
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20 Sep 24, 2011 ?
21 Oct 8, 2011 ?
22 Oct 22, 2011 ?
23 Nov 5, 2011 ?
24 Nov 19, 2011 ?
25 Dec 3, 2011 ?
26 Dec 17, 2011 ?
27 Dec 31, 2011 ?
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181 Nov 25, 2017 ?
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184 Jan 6, 2018 ?
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209 Dec 22, 2018 ?
210 Jan 5, 2019 ?
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236 Jan 4, 2020 ?
237 Jan 18, 2020 ?
238 Feb 1, 2020 ?
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367 Jan 11, 2025 ?
368 Jan 25, 2025 ?
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370 Feb 22, 2025 ?
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430 Jun 12, 2027 ?
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445 Jan 8, 2028 ?
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471 Jan 6, 2029 ?
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734 Feb 5, 2039 ?
735 Feb 19, 2039 ?
736 Mar 5, 2039 ?
737 Mar 19, 2039 ?
738 Apr 2, 2039 ?
739 Apr 16, 2039 ?
740 Apr 30, 2039 ?
741 May 14, 2039 ?
742 May 28, 2039 ?
743 Jun 11, 2039 ?
744 Jun 25, 2039 ?
745 Jul 9, 2039 ?
746 Jul 23, 2039 ?
747 Aug 6, 2039 ?
748 Aug 20, 2039 ?
749 Sep 3, 2039 ?
750 Sep 17, 2039 ?
751 Oct 1, 2039 ?
752 Oct 15, 2039 ?
753 Oct 29, 2039 ?
754 Nov 12, 2039 ?
755 Nov 26, 2039 ?
756 Dec 10, 2039 ?
757 Dec 24, 2039 ?
758 Jan 7, 2040 ?
759 Jan 21, 2040 ?
760 Feb 4, 2040 ?
761 Feb 18, 2040 ?
762 Mar 3, 2040 ?
763 Mar 17, 2040 ?
764 Mar 31, 2040 ?
765 Apr 14, 2040 ?
766 Apr 28, 2040 ?
767 May 12, 2040 ?
768 May 26, 2040 ?
769 Jun 9, 2040 ?
770 Jun 23, 2040 ?
771 Jul 7, 2040 ?
772 Jul 21, 2040 ?
773 Aug 4, 2040 ?
774 Aug 18, 2040 ?
775 Sep 1, 2040 ?
776 Sep 15, 2040 ?
777 Sep 29, 2040 ?
778 Oct 13, 2040 ?
779 Oct 27, 2040 ?
780 Nov 10, 2040 ?
781 Nov 24, 2040 ?
782 Dec 8, 2040 ?
783 Dec 22, 2040 ?
784 Jan 5, 2041 ?
785 Jan 19, 2041 ?
786 Feb 2, 2041 ?
787 Feb 16, 2041 ?
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789 Mar 16, 2041 ?
790 Mar 30, 2041 ?
791 Apr 13, 2041 ?
792 Apr 27, 2041 ?
793 May 11, 2041 ?
794 May 25, 2041 ?
795 Jun 8, 2041 ?
796 Jun 22, 2041 ?
797 Jul 6, 2041 ?
798 Jul 20, 2041 ?
799 Aug 3, 2041 ?
800 Aug 17, 2041 ?
801 Aug 31, 2041 ?
802 Sep 14, 2041 ?
803 Sep 28, 2041 ?
804 Oct 12, 2041 ?
805 Oct 26, 2041 ?
806 Nov 9, 2041 ?
807 Nov 23, 2041 ?
808 Dec 7, 2041 ?
809 Dec 21, 2041 ?
810 Jan 4, 2042 ?
811 Jan 18, 2042 ?
812 Feb 1, 2042 ?
813 Feb 15, 2042 ?
814 Mar 1, 2042 ?
815 Mar 15, 2042 ?
816 Mar 29, 2042 ?
817 Apr 12, 2042 ?
818 Apr 26, 2042 ?
819 May 10, 2042 ?
820 May 24, 2042 ?
821 Jun 7, 2042 ?
822 Jun 21, 2042 ?
823 Jul 5, 2042 ?
824 Jul 19, 2042 ?
825 Aug 2, 2042 ?
826 Aug 16, 2042 ?
827 Aug 30, 2042 ?
828 Sep 13, 2042 ?
829 Sep 27, 2042 ?
830 Oct 11, 2042 ?
831 Oct 25, 2042 ?
832 Nov 8, 2042 ?
833 Nov 22, 2042 ?
834 Dec 6, 2042 ?
835 Dec 20, 2042 ?
836 Jan 3, 2043 ?
837 Jan 17, 2043 ?
838 Jan 31, 2043 ?
839 Feb 14, 2043 ?
840 Feb 28, 2043 ?
841 Mar 14, 2043 ?
842 Mar 28, 2043 ?
843 Apr 11, 2043 ?
844 Apr 25, 2043 ?
845 May 9, 2043 ?
846 May 23, 2043 ?
847 Jun 6, 2043 ?
848 Jun 20, 2043 ?
849 Jul 4, 2043 ?
850 Jul 18, 2043 ?
851 Aug 1, 2043 ?
852 Aug 15, 2043 ?
853 Aug 29, 2043 ?
854 Sep 12, 2043 ?
855 Sep 26, 2043 ?
856 Oct 10, 2043 ?
857 Oct 24, 2043 ?
858 Nov 7, 2043 ?
859 Nov 21, 2043 ?
860 Dec 5, 2043 ?
861 Dec 19, 2043 ?
862 Jan 2, 2044 ?
863 Jan 16, 2044 ?
864 Jan 30, 2044 ?
865 Feb 13, 2044 ?
866 Feb 27, 2044 ?
867 Mar 12, 2044 ?
868 Mar 26, 2044 ?
869 Apr 9, 2044 ?
870 Apr 23, 2044 ?
871 May 7, 2044 ?
872 May 21, 2044 ?
873 Jun 4, 2044 ?
874 Jun 18, 2044 ?
875 Jul 2, 2044 ?
876 Jul 16, 2044 ?
877 Jul 30, 2044 ?
878 Aug 13, 2044 ?
879 Aug 27, 2044 ?
880 Sep 10, 2044 ?
881 Sep 24, 2044 ?
882 Oct 8, 2044 ?
883 Oct 22, 2044 ?
884 Nov 5, 2044 ?
885 Nov 19, 2044 ?
886 Dec 3, 2044 ?
887 Dec 17, 2044 ?
888 Dec 31, 2044 ?
889 Jan 14, 2045 ?
890 Jan 28, 2045 ?
891 Feb 11, 2045 ?
892 Feb 25, 2045 ?
893 Mar 11, 2045 ?
894 Mar 25, 2045 ?
895 Apr 8, 2045 ?
896 Apr 22, 2045 ?
897 May 6, 2045 ?
898 May 20, 2045 ?
899 Jun 3, 2045 ?
900 Jun 17, 2045 ?
901 Jul 1, 2045 ?
902 Jul 15, 2045 ?
903 Jul 29, 2045 ?
904 Aug 12, 2045 ?
905 Aug 26, 2045 ?
906 Sep 9, 2045 ?
907 Sep 23, 2045 ?
908 Oct 7, 2045 ?
909 Oct 21, 2045 ?
910 Nov 4, 2045 ?

Canadian Demographics and Housing

2010-11-14T18:14:00.000-08:00

In the past I have covered some topics on housing in more depth to show a more complex and less dire reality than what some others are portraying.

One example is where I showed Garth Turner's model of a typical Canadian home buyer as exaggerated.

Another where I point out some inaccuracy regarding the systematic risk of the CMHC. (here and here)

In this post I will look at demographics and housing with this chart from the Alberta Bubble Blog as a starting point.

The conclusion is pretty clear. An aging population will lead to lower economic activity and lower demand for housing. There are a couple of details to indicate a less severe impact than implied in this graphic.

First, look at how top heavy the age distribution of the chart. It's because lower birth rates as compared to the baby boom.

But there is more to the story. At the peak in 1960 there were 479,000 births while this chart shows 540,000 people at the peak age range of 45 (in 2006). Immigration has had a role to play here otherwise this age group would have decreased. Consider the components of population growth in this chart from Statistics Canada.

Since immigration has made up a portion of population growth the pyramid will be skewed upwards. The portion of immigrants among the newborns only includes those who come to Canada within that year. In contrast those age 30 include immigrants who have come to Canada over the last 30 years at different ages.

The lower numbers represented among 0-15 age group compared to 16-30 years has more do do with immigration than declining birth rates. That is why I disagree with observation "D" in the chart "2011 to 2026 will witness a sharp decrease in the 20 - 35 year old cohort". Statistics Canada recently projected this age range will increase from 7.16 million in 2011 to 7.27 million in 2026. This was using their medium growth assumptions which I found to be totally reasonable.

I also disagree that demographics will necessarily result in an absolute drop in aggregate demand (housing or otherwise). It is true boomers represent the largest demographic and they are currently in their years of peak demand. This may be offset by a population that is still growing due to longer life expectancies, slightly higher birth rates and immigration.

One graphic used on the chart is the shift in housing demand over the next 15 years. It shows boomers will go from living alone in a 1800 sq ft single family home to assisted living space of 500 sq ft 15 years later. This definitely does not represent the group as a whole. For an alternative example consider 50 year old boomer parents with children in their late teens. They may have a house which is too big for them in 20-30 years when they require assisted living but their children will have formed households of their own long before then.

What else is not mentioned, but included in statistics Canada's current projections is an increase in the birth rate. Over the past year there were 381,000 births in Canada, compared to 338,000 in 2006. Surprisingly, this is only 20% fewer in absolute terms as the peak of the baby boom.

Finally, being this is an Albertan blog and all, I have to point out that it's different here. Note the higher proportion of younger people and mini baby-boom.

A look across Canada

2010-11-11T09:52:00.000-08:00

This post will look at that price range in some of different markets (Edmonton, Calgary, Vancouver and Toronto). The properties picked have the following criteria:

Asking price around $330,000
Detached single family home
Not an obvious teardown w/ indoor photos
Close to downtown

This was done to avoid comparing a bigger and newer house in a distance suburb of one city to a central teardown in another. Due to the "central single family" criteria these are small places with land being a significant portion of the price. Click on the image for the Google street view.

Edmonton

$324,900
1034sqft, 1950s bungalow
basement suite
3.7km from downtown

Country living in Westmount! 1035 sqft bungalow with double detached garage backing a park is ready for you to call home! 3 generous sized bedrooms up, and your master has a walk in closet, which is rare in a home of this age! Beautiful character has been preserved with coved ceilings, original hardwood floors throughout the main floor, and brand new lino in the kitchen. Downstairs is a fully developed in-law suite with two bedrooms, and a spacious open kitchen into the living area. Basement has a 4 piece bath, with shared laundry area, a furnace that's about 5 years old, and a newer hot water tank. The back yard is very private with large trees, and 6 ft privacy fence. Enjoy quiet fall evenings in the yard around the fire pit. Out your backyard is an off leash dog park to add to your private retreat in the city!

Calgary

$339,900
954 sqft house with finished basement
older house (1911)
3.1 km from downtown

Completely renovated home with a total of 3 bedrooms. Upper floor with huge living room with high ceilings and lots of character! Re done kitchen with stainless steel appliances. Good sized master bedroom and den or dining room. Basement is fully finished with 2 bedrooms, family room and completely renovated 4pc bathroom. Huge yard with single detached garage with electrical and gas hook ups. New furnace and hot water tank. ~Drive by ******* Ave NW~

"Vancouver"

$329,000
1415 sqft* no basement
Actually located in Surrey (24 km to downtown)

Over 1400 sqft. 3 bdrm rancher with loft on a big fully fenced 8000sqft lot. This home has had many upgrades: vinyl siding, newer roof, flooring, hot water tank, decking & more. Large South facing backyard. Close to all amenities, school, shopping, transportation. All measurements approx buyer to verify.

Toronto

$334,900
9.2km from downtown

** Well Maintained 2-Bedroom Bungalow In Demand Location ** Hardwood And Ceramic Floors ** Home Rewired 2009 ** 100 Amp Breakers ** New Cac And Furnace 2009 ** Some New Windows ** New Front Door**Updated Roof ** Wrought Iron Fence At Front ** Updated Bath ** Well Kept Home! ****** EXTRAS **** ** Fridge ** Stove ** New Washer ** New Dryer ** Microwave ** All Window Coverings ** All Light Fixtures ** New Furance And Cac **

Garth on Jobs

2010-11-06T10:28:00.000-07:00

But, this just states the obvious. The latest job numbers are terrible (3,000 new positions in the entire country, and a whack of those are ‘self-employment’).

Nov 5, 2010

Note that he omitted the gain of 47,000 full-time jobs offset by a loss of 44,000 part-time ones. Also he references that self employment makes up these new positions contrary to the report indicating 24,000 fewer self-employed positions.

While in this report Garth focuses on the headline number, in other cases he has selected different components which implying a deteriorating job market. However over this time period all of these components have been trending positive.

And today's jobs report shows the economy's still a dangerous thing, especially in Ontario. But, whadda I know?

July 9 , 2009

Hard to see how all this can happen when in a single month 53,000 people stopped looking for jobs, 45,000 more lost their jobs, and 35,000 made up jobs. Yet even with the official job loss number of just 45,000, we were in economic free fall compared to the States.

Aug 9, 2009

Last month Canadian employers terminated 139,000 full-time jobs, and created 130,000 part-time positions. So, those gains everybody was crowing about some weeks ago are pretty much gone, at least for now. And losing 139,000 steady jobs is a big deal – equivalent to the US shedding 1.3 million in a month, which would be a national disaster. Thank goodness some temporary or reduced-hours work was created.

Aug 8, 2010

A more serious analysis would consider all the different factors - not only the ones that portray a negative environment. Another thing to be cautious of in this report is monthly spikes that do not reflect underlying trends.

There has been a legitimate job recovery in Canada since July 2009, although it has not been robust enough to bring the unemployment rate to pre-recession levels. Total employment has fully recovered and wages have increased. The problem is this has been largely offset by a growing labour force.

Edmonton New Construction Sept 2010

2010-11-04T20:58:00.000-07:00

The number of single family homes under construction in Edmonton has leveled off after over a year of increasing steadily. In April 2009 there were only 1,764 homes were under construction, this increased to 4,116 this July and as of September was 4,078.

When factoring in all types of construction it is clear that single family homes have been more popular recently. The glut of completed and unabsorbed condos* remains high but is down somewhat year over year from 1,224 to 946. *Actually dark grey in the chart below is everything except single family homes, which are mostly condos

link

Edmonton Market Update

2010-11-02T17:18:00.000-07:00

The REALTORS Association of Edmonton posted stats for October today.

Housing sales fell as expected in October. Right now the rate of sales is very slightly above the scorched earth benchmark, a rate equivalent to the worst six months of the financial crisis.

New listings fell faster than normal in October. They are slightly below an equivalent rate of the 2nd half of 2009, which was fairly low.

The sales to new listing ratio is 54% seasonally adjusted.

The last chart is a look at sales, new listings and inventory over the last few years. Another thing to note is that single family homes recorded their first year over year price drop since August 2009.

Here a few things to watch out for soon:

U.S. Midterm election results (tonight and tomorrow)
Quantitative Easing Round 2 (tomorrow)
Labour force survey (Friday)

Calgary Market Update

2010-11-01T19:04:00.000-07:00

"Old Criteria" numbers have been posted by Bob Truman today for Calgary.

Sales fell as expected this month. They have maintained a level slightly above scorched earth after rebounding this summer. Sales are still pretty bad, but they could be (and have been) worse.

Listings dropped slightly faster than what would be expected and are now below the seasonally adjusted constant rate of the 2nd half of 2009.

Seasonally adjusted sales are at fairly low levels but have broke through the six month moving average on the upside. I am not a fan of technical indicators so all this tells me is that so far the sales slowdown has been slightly less brutal than during the worst six months of the financial crisis.

New listings are down considerably after spiking earlier this year.

The seasonally adjusted sales to new listing ratio broke 50% in October. While a 50% indicator has been shown to be the transition point between falling and rising prices I should add a few points of caution to this.

1. Prices have seemed to lag this indicator somewhat with rising prices earlier this year even with a sub 50% ratio. So some amount of price declines are probably still baked in.

2. This improvement has been more due to the drop of new listings as sales have remained fairly weak. Some are skeptical of using new listings as a market indicator. The main criticism (I think) is that the number includes original listings and re-listings so its hard to judge how much new supply is added. I think if someone re-lists it measures difficulty and/or motivation to sell and an original listing measures new supply. Either way the higher the number the weaker the market will be assuming a constant sales rate.

3. Even if the ratio was an accurate gauge of where prices were will go this is one month of 50%. So unless there is further improvement this only indicates potential stability.

And finally a look at sales, new listings and inventory over the years.

Perspective

2010-10-30T06:51:00.000-07:00

In-migration increases labour supply and lowers wages
Out migration reduces housing demand

Inflation forces consumers to spend more money on necessities
Deflation increases real debt burdens

Higher rates are unaffordable
Lower rates are unsustainable

Higher housing starts will result in oversupply
Low housing starts will crush the economy

High consumer sentiment implies mass delusion
Low consumer sentiment implies a weak economy

High inventory results in plenty of choice
Low inventory results in higher prices

Inflation increases the price of tangible assets
Deflation leads to lower rates

Higher rates reflect an improved economy
Lower rates improve affordability

Higher housing starts contributes to economic growth
Low housing starts leads to shortages

Higher prices reflect strong demand
Lower prices result in buying opportunities

Updates: See transcript of Don Campbell's recent interview at VREAA. One way to be disingenuous is to look at the facts and pick one of the arguments above in a knee jerk fashion to support your own perspective. Don Campbell does one better by using the one way price model - Where supportive data justifies increasing prices and negative data will only lead to a "plateau".

Radley pointed out that average weekly earning increased by over 7% in Alberta. That's huge. The monthly number tends to fluctuate so this is probably overstated. Year to date average weekly earnings are up 4%. link

Lenders Behaving Badly

2010-10-23T09:44:00.000-07:00

Something to consider about fixed rate loans. Penalties.

The fact they exist isn't what is troubling. It is a problem when the penalty is arbitrary and unnecessarily complicated. The Globe and Mail discusses how lenders select an unrelated interest rate (the posted rate) when doing interest rate differential calculations, which end up favoring the lender.

....
Here comes the evil part.

At many big banks, they don’t use your existing 4.75-per-cent rate. What they do is take the posted rate at the time you took out your mortgage. This is a rate that has no relevance to you, as you never paid it. In fact, it likely isn’t listed anywhere on your mortgage contract. Remember the ridiculously high mortgage rate we talked about at the beginning of this article? Now you see what it can be used for.
....
Because of this sleight of hand, you would now owe the bank an additional $12,000!

The federal government was going to announce some regulation regarding mortgage penalties but has failed to do so. Reducing onerous mortgage penalties will reduce future foreclosures at the margin, which in addition to consumer protection should be the goal of regulation - not controlling asset prices.

The Canadian Mortgage Trends blog recently wrote about some lesser know potential costs of borrowing. I don't have comment for each individual item, but when compiled into a list it seems the industry benefits themselves through technicalities and obfuscation.

Restrictions on breaking your mortgage before the term is up
Restrictions on breaking your mortgage for the first 3 years
A penalty surcharge of 1% for mortgages broken within the first 12 or 36 months
“Reinvestment fees” (on top of mortgage penalties)
Interest rate differential (IRD) penalties based on an onerous bond yield calculation
IRD penalties on variable-rate mortgages (usually IRD penalties apply to fixed mortgages)
IRD penalties based on a costly posted vs. discounted rate formula
Inability to port unless the purchase and sale take place on the exact same day (which can be hard to arrange)
A poor conversion rate guarantee
No refinances during the first year
No free switches (for transfer-eligible mortgages)
Amortization limits of 25 years
Minimum amortizations of 15-18 years
Restrictions on converting from a variable rate to a fixed rate for the first six months
No ability to break your “open” HELOC without a penalty
No pre-payments within 30 days of discharge
Inability to port across provincial lines
High administrative fees when porting
100% clawback of cash-back if the mortgage is broken before maturity
Requirement for a full banking relationship with the lender
No lump-sum pre-payment privileges
No annual payment increase allowance
Pre-payments restricted to one specific day a year (instead of any payment date)

A lot of the fees are related to breaking the mortgage, which can occur simply by selling the house. With this in mind some thing that can mitigate these risks.

Borrow below your limit which reduces the chance of a forced sale during financial stress.

Keep amortization periods as short as possible to avoid dealing with these fees for 25-40 years!

Only buy if you seriously plan to stay in the house for awhile (5+ years)

Avoid gimmick mortgages like the so-called "cash back"

Edmonton Market Update

2010-10-08T14:07:00.000-07:00

Here are the charts once again. This time I'd like to know what the dozen or so readers out there have to say about them. One point - I estimated sales in some of these charts based on preliminary numbers.

Have a great weekend.

Calgary Market Update

2010-10-01T05:45:00.001-07:00

For the last couple of months sales have been fairly steady. This has resulted in a shift away from the "scorched earth" benchmark as sales are expected to fall this time of year.

New listings are tracking closer to the rate of the 2nd half of 2009 after spiking dramatically earlier this year.

Seasonally adjusted home sales bottomed in June and have increased since then. Even with this increase sales are low by historical standards.
Seasonally adjusted new listings remain well below the rush of earlier this year or in 2007/2008 as people are more reluctant to sell in a tough market.

The seasonally adjusted sales to new listings ratio increased again last month but remains slightly below 50%.

Although new listings have declined inventory is moving more slowly. The level of inventory combined with still historically low sales means that prices must be competitive to sell.

Alberta Population Report

2010-09-29T18:33:00.000-07:00

The Alberta population report for the Q2 2001 was released today here.

On a quarterly basis Alberta's population grew by 0.5%.

8,436 natural growth (births - deaths)
2,820 net interprovincial migration
8,035 net international migration
-753 net non-permanent residents

An Alternative View

2010-09-25T09:54:00.000-07:00

I read an interesting post from "Whispers from the Edge of the Rainforest" where the author constructs a straw man case for real estate in Canada and responds in an opposite but similarly exaggerated way. This post will address some of the inaccuracies in the bear case and doing so will present a more serious and nuanced view.

Here is the straw man:

'Real Estate never goes down, you can't ever go wrong buying and our solid Canadian banking system won't facilitate any sort of collapse here.'

This is an example of how the average Canadian views real estate. I don't think anyone believes real estate never goes down or that it is a can't lose investment. Maybe it's different in Vancouver but in Alberta it's been three years since peak prices. The author counters with events that happened or risks present that apparently most Canadians don't have a clue about.

Nor do many realize that Canadian Banks were bailed out by receiving $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP) in 2008 - Canada's version of TARP - whereby the CMHC purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets.

The Insured Mortgage Purchase Program was part of Canada's Action Plan after the financial crisis. The program ended in March of 2010 as a result of improved credit conditions. It is important to point out that this was a transaction and not a direct cash subsidy. These mortgages were already insured by CMHC so the move was a liquidity measure as opposed to a gift.

No one seems to be aware that the Bank of Canada then gave our Canadian Banks an additional $45 billion in temporary liquidity facilities or that the Canada Pension Plan, through the purchase of $4 billion in mortgages prior to the IMPP program, raised the total government bailout to $114 billion.

As part of their mandate the Bank of Canada successfully acted as a lender of last resort during the financial crisis. Now that the crisis is over their balance sheet is back to normal with zero financial loss (see green in the chart below).

As for the Canadian Pension Plan, why wouldn't they purchase insured fixed income assets? This also highlights that CPP is accumulating assets in preparation for retiring baby boomers. That's comforting.

And what about the CMHC being ordered by the Federal Government to approve as many high risk borrowers as possible to prop up the housing market (with entry level buyers) and keep credit flowing?
In 2008 some 42% of all high risk applications were approved, a 33% increase over 2007.
Between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% - possibly the smallest amount of change in post WWII history - which was the only way we managed to keep credit flowing in our country while it dried up in the USA.
Canadians are oblivious.

I have noticed that information regarding the CMHC starts with no source and gets recycled through blogs to Wikipedia and back to blogs. For instance the claim that CMHC was ordered to approve as many high risk loans as possible is unsubstantiated.

The reason that loans on Canadian books increased so little is the Insured Mortgage Purchase Plant discussed earlier and securitization.

They can't see how this all impacted the debt orgy. Aren't aware of how CMHC's obligation has grown from $100 Billion in 2006 to $776 Billion in 2010.

The amount of CMHC insured loans has grown from $291 billion in 2006 to a forecast $519 billion in 2010. A 78% increase is substantial and unsustainable but it is an entirely different magnitude of the almost 700% increase claimed here.

Last year the Conservative Government, after our nation spent 10 years digging ourselves out of a $45 Billion deficit with onerous taxes like the GST and years of cutbacks in government services, replunged us back into hock with a record breaking $50 Billion deficit.

Before the recession hit the GST and corporate taxes were lowered and a child tax credit was introduced. They have been no spending cuts in recent history. The high deficit was partially cyclical due to lower tax revenues during the recession, higher unemployment benefits and a temporary stimulus. Some of these temporary effects are fading and the federal deficit in July was $500 million, down from $5.8 billion the year before. I'm not saying the Conservatives are awesome financial stewards but that doesn't mean we have to be demagogues.

If CMHC is forced to pay out on a mere 10% of that guaranteed $776 Billion, that amount would more that double that historic $50 Billion debt.

Note the math error and the incorrect figure for outstanding insured mortgages. In addition to this assuming a 10% payout is far too pessimistic as I explained in this post. Remember, CMHC provides insurance in case of default and has the house as collateral in such an event. So in a crisis the total payout would equal the formula below.

(Amount insured) * (Per cent default) * (Average Per cent Loss After Liquidation)

In one scenerio I estimated: about a $6.25 billion dollar loss.

They are wilfully blinded to the ads all around them whereby someone with no money can go out and, courtesy of bank initiatives like this one that offers them 7% back, can get their 5% downpayment covered and actually get PAID 2% of the mortgage value to make that purchase.

Nothing down and get PAID to buy a house!!!

True, the cash back loan is pretty reckless and indefensible. One point to consider is the incremental risk here compared to a 5% down mortgage falls on the bank and is not CMHC insured. So the bank makes a free market decision based on the credit worthiness of the borrower to take on the additional 7% risk in order to increase market share.

When I spoke to two tourists from Minnesota in August, they asked what the interest rate was on a 30 year mortgage here. When they found out virtually no Canadians have long term mortgages... that the vast majority have 5 year terms or less that reset at whatever the going interest rate is... they recoiled in shock. They instantly recognizing that all Canadian mortgages are set up exactly like American subprime mortgages: 2-5 year low teaser rates that reset higher once the teaser term is over.

But the average Canadian is oblivious.

Are variable rate and fixed term mortgages a risk in Canada if they reset at higher rates? Yes. However there are some important differences between these loans and the teaser rates offered in the states during the housing bubble. The Canadian 5-year fixed is based on the bond market and will vary depending on expectations on inflation and growth. These loans are amortized so principal is paid back during the initial term, even if it is at a lower rate. In the U.S. loans were made below prevailing market conditions and reset to levels higher than standard fixed rates. Some of these loans had a artificially low payment options where the mortgage balance increased each month. This created a time bomb effect independent of the bond market or falling home prices.

The conclusion is not entirely clear. It is undeniable that house prices are currently falling in Canada, but it does not appear this will cause a national emergency. In some ways it truly is different here (snark).

Median Family Incomes Increase but Housing Remains Expensive

2010-09-18T09:37:00.000-07:00

On Thursday, Stats Can released income figures for 2008 here.

Even compared to the highest incomes in Canada house prices in Alberta remain elevated.

According to Mike Fotiou for the first 17 days of September the median price of a single family home is at $390,000. This level is 4.26 times the median family income.

Whats does this buy? On Mike's site you can view daily sales prices and on Sept 17th there was one house which sold for exactly $390,000. A 1808 sqft 2 story home in Panorama Hills.

In Edmonton the median price for a single family home dropped to $350,000 in August. This is almost 4 times the median family income of $88,190. This 1600 sqft Ormsby home listed at $361,000 could theoretically sell for $350,000 given a typical discount (no sales prices are available).

For comparison the ratio in the US appears to be about 3.5 from this post but may have declined since then.

Homes in Alberta are pricey compared to local incomes but not overwhelmingly so. Considering how low interest rates are factors besides affordability are probably driving the current decline, such as lagging employment and saturated demand.

Weekend Post

2010-09-10T06:29:00.000-07:00

Some thoughts on key events and reports of the last couple days:

Bank of Canada Raises Rates

These rates hikes were mostly symbolic to continue the narrative that "Canada rulz" as opposed to meeting inflation targets. Given these recent hikes, current low level of inflation, unwinding fiscal stimulus and weakening housing market I think the BoC will be under their 2% mandate for awhile.

inflation table

RBC Affordability

Carrying costs in Calgary appear reasonable in RBC's housing affordability report. It is important to note this report looks at monthly payments so the 5-year fixed rate being at historic lows masks absolute price level. However, local affordability is benefiting from a more modest price bounce compared to other centers and continued wage growth.

Although the report downplays the risk of a crash it's not exactly a strong reassurance.

While we agree that housing prices are currently historically elevated, we do not believe that any major slump will necessarily ensue.

Canada Mortgage Trends, report

Labour Market Survey

Another mixed report. While employment increased by 36,000 the unemployment rate also increased as more people entered the workforce.

Good news: Full time up 80,000, part time down 44,000.

Bad news: Private sector employment down 40,000 while public sector up 58,000 and self employment up 18,000.

Statistical glitch - Last month there was a reported loss of 65,000 in educational services while this month there was a gain of 68,000.

Statscan report

Edmonton New Construction Update(again)

More single family homes being built in the face of a weak resale market. A glut is forming in this segment as an increasing level of construction will not be easily absorbed.

Edmonton Real Estate Blog - report

Edmonton New Construction Update: July 2010

2010-09-06T11:13:00.000-07:00

Single family homes under construction in Edmonton continues to increase as a delayed response to the recovery between mid-2009 and earlier this year. The result of this will be a higher supply of single family homes going into a downturn. While the level of construction is still below that of the boom it could be a concern given the condition of the resale market and continued (relative) weakness in migration and employment.

The level of condos under construction remains low as it took longer to shake off the glut from the boom. That's probably a good thing. However, the number of condos completed and not absorbed remains high.

I expect single family starts to ~~fall off a cliff~~ decrease substantially later this year as resale becomes more competitive due to falling prices. Also people are going to be reluctant to build if it means unloading a property in this market.

Market Update for Edmonton

2010-09-04T08:00:00.000-07:00

Preliminary sales are closely following the scorched earth benchmark after falling significantly from last year's levels.

Listings are back to normal after spiking this spring.

The seasonally adjusted sales to new listing ratio climbed to 51% from the decrease in new listings. This has not been enough to reverse the current trend of falling prices as inventory remains high, sales remain terrible and sentiment has turned.

Market update for Calgary

2010-09-04T07:44:00.000-07:00

Sales fell following a seasonal pattern in August and have been in "scorched earth" territory all summer. This is equivalent to the rate during the worst six months of the financial crisis. Last year sales were following the same pattern of slowing in the 2nd half but at a much healthier level shown by the green benchmark in the graph below.

Listings have returned to the same rate as the 2nd half of 2009. Seasonally adjusted sales have remained steady after falling significantly from last year's levels.

Listings are down considerably and this could be from a reluctance by sellers to accept current market conditions. Another factor could be that the rush of new listings was an echo of some of the overhang from 2007/2008 and acted as a temporary boost. This may have eased but it will remain as inventory until absorbed.

Sales to new listing ratio improved due to slightly higher sales on a seasonally adjusted basis and fewer new listings. Nothing significant enough to turn around the current trend of falling prices.

The Most Obscure Stat Award

2010-08-28T09:24:00.000-07:00

This article in the Calgary Herald is just bizarre - "Condos on the market for less time"

The number of condominiums listed for sale on the Calgary Real Estate Board's MLS system during July totalled 890, down from 918 for the same month last year.
But on a year-to-date basis, the 7,967 new listings this year are nearly 22 per cent higher than for the same seven-month period in 2009.
On average, though, people are taking less time to make the buying decision. This year, the average length of stay on the market is 44 days compared to 53 a year ago.
Overall, the condo segment of the 2010 edition of the resale market is seeing lower sales, higher listings, and slightly - prices.

After reviewing the data the main story is that condos are not on the market as long? Really? Even with sales down 44% and inventory up 55% from the same time last year? Remember DOM only applies to properties that have sold and does not include the amount of time if it has been unsuccessfully listed in the past.

The figure mentioned in the article is the year to date days on market. Looking only at the month of July this number increased to 51 from 50 the same time last year.

Real estate downturn hits the economy

2010-08-21T13:46:00.001-07:00

The strong economic recovery highlighted in this post has stalled. I assumed a reversal in housing activity to slow down the entire economy but still remain in positive growth. That is now being tested with negative results showing up in some key reports.

Leading indicators (July 2010)

The composite leading index slowed to a 0.4% increase in July, after a gain of 0.7% in June. Most of the slowdown originated in the household sector, where three components fell. None of the seven other components decreased.

Jobs (July 2010)

The number of workers in the education sector was down by 65,000 in July. The large drop in educational services in July was spread across several occupation groups, including educational assistants, teachers and administrators in primary and secondary schools as well as custodial staff.

In July, employment decreased in finance, insurance, real estate and leasing (-30,000), bringing employment in this industry back to its July 2009 level.

(I expect next months report to be better because the loss of 65,000 educational jobs is unlikely to be repeated)

GDP (May 2010)

Sales of existing homes fell significantly in several parts of the country in May, resulting in an 11.3% decrease in the output of real estate agents and brokers. This marked the fifth consecutive monthly decline in this industry.

The question is whether this is leading to a double dip recession or just a slowing in the rate of growth.

Why have subprime at all?

2010-08-16T19:22:00.000-07:00

This troubleshooter video shows the dangers of subprime mortgages in Canada. A couple bought at the peak of the market in Wetaskawin with a 0 down 40 year mortgage from Wells Fargo. They are no longer operating in Canada and the uninsured mortgage was difficult to renew with other lenders.

One thing that caught my attention is that they were offered a mortgage for 10.75% by another lender at renewal. That's almost triple a discount 5 year rate! Is there any value in a loan like that? These loans exist for new borrowers as well, like this couple's original purchase, and they typically have these higher rates. One aspect of these loans is the longer amortizations which I covered in a previous post.

But it's not just longer amortizations. These predatory subprime lenders charge a significant premium on interest rates. With higher interest rates less money goes towards principal repayment, even with constant amortization. Consider the charts below which illustrates mortgage balance outstanding over time at various interest rates amortized over 25 years.

Looking at the first five years shows the pace of principal reduction over the initial term. With a 3.75% rate the $300,000 balance is reduced over $40,000 while at 10.75% it is reduced by less than $17,000. So not only are subprime borrowers paying an extreme amount in monthly payments, the higher rates makes it impossible to tackle the balance. With the buy to rent calculations so marginal even with low rates what is the benefit of homeowership under these conditions?

Answer: None. It's a trap.

Edmonton July Stats: Sales remain slow

2010-08-05T05:43:00.001-07:00

Preliminary numbers showed a drop in sales as expected for this time of year. However that leaves us about the same as June where sales were terrible. I added the final numbers to the chart as well.

Seasonally adjusted sales are at a similar rate as the worst six months of the financial crisis. I estimated July sales to be 1378, or 6.5% higher than the preliminary number.

New listings fell as in July and inventory declined from 9,406 to 8,892. This can be expected but the decrease was more pronounced than usual for the month.

Sales to new listings ratio remains low but improved slightly due to the decrease in listings. The market conditions are beginning to show up in price with the SFH median falling to $360,000, down $10,000 from May.

False Certainty

2010-08-02T07:05:00.000-07:00

This condo ad represents a low in marketing with a self-serving view on future appreciation. (emphasis mine).

When our prices return to 2007 levels (and the rebound is just starting)- your equity appreciation should be at least $25,000! This gain on your principal residence will be tax free.

It is troubling because the choice of words implies a certainty which has no basis. Not only is there a false certainty it also wrongly describes the current market as the 2009 rebound ended 8 months ago.

Calgary Stats: Sales Remain at "Scorched Earth", Listings Fall

2010-08-02T05:47:00.000-07:00

While the market has been struggling all year it is now reflected in mainstream market sentiment. This is due to price drops showing up, terrible year over year sales comparisons and high inventory.

Sales fell as expected in July and remain close to the "Scorched Earth" benchmark. A rate similar to the worst six months of the financial crisis.

Listings fell dramatically in July and are now down 8% YOY.

The sales to new listings ratio recovered somewhat with the large drop in new listings. Unless sales rate improves the reduced number of new listings will only slow down the pace of price decreases as the ratio remains below 50%.

Raw data from Bob Truman's Old Criteria page.
Initial explanation of seasonally adjusted data and benchmarks and seasonally adjusted sales to new listing ratio.

Busted in B.C.

2010-07-31T07:10:00.000-07:00

A blog was uncovered at House Hunt Victoria that used statistical magic to indicate a seller's market was developing in Victoria. A Victoria Realtor calculated months of inventory* to be 3.5 in July even though it was a over 7.5 months in June. Not likely. It appears he uses a smaller set of data for inventory while adjusting a larger set of data for sales. House Hunt Victoria explains what is wrong with this figure:

It's really hard to follow because he's all over the place, but essentially yes; he's narrowed the current active listings down to a subset of SFH in certain municipalities and then used the market-wide sales data averaged over the first 6 months of the year, lumped pending and completed sales together to further confuse the data and then done the math to come up with 3.5 MOI but called it MSI (a term that also seems to come out of no where).

But I will be the first to admit I could be wrong in my interpretations somewhere as it is very difficult to follow his explanation/calculations because they are all over the place. I'd love it if he would clarify, but he seems to be too busy having his best year ever in 2010 to respond appropriately.

Anyway the Realtor posted and later deleted comments on HHV's blog. His incorrect post remains.

Well done HHV.

*Months of Inventory is the time required to sell total inventory at the monthly sales rate

Calgary Census 2010

2010-07-22T19:05:00.000-07:00

In the last post Radley commented on the low population growth in Calgary from the 2010 census.

Calgary’s population grew from 1,065,455 in April 2009 to 1,071,515 in April 2010. This represents an increase of 0.57%. This is the lowest percentage of growth experienced since 1984 when the city experienced an overall loss in population.

That's quite surprising considering the entire province had a rate of increase three times higher at 1.60%. See Alberta population report report for Q1 2010 I covered in this post.

The census has yearly statistics on the number of residential dwellings and population from which we can calculate a ratio to measure the amount of supply.

This chart shows population, total dwellings and the ratio of people per dwelling. This ratio was 2.54 in 1999 and fell sharply to 2.43 in 2004. The economy was doing well during this period letting Gen-Xers establish households. In addition to this there was low interest rates and the start of a housing optimism after many years of stagnation. I was surprised it was fairly steady throughout the boom years (2005-2007). During this time there was a lot of construction but also a lot of population growth.

This chart shows the change of population, and number of new dwellings each year. It looks like there was some reduction of supply in 2009 as population increased while construction dropped substantially. This reversed in 2010 as slow population growth lead to more supply on a relative basis.

Update:

Housing Analysis uncovered a Bank of Canada report on housing supply. It was full of incomprehensible formulas but had this comment on supply across the provinces:

Using aggregate data for Canada, our model suggests that the housing stock was overbuilt at the end of 2008 by 2 per cent. This gap is likely to close slowly by the end of 2018, given the projections of the key variables in the model. Provincial models indicate that there was likely overbuilding by the end of 2008 in Saskatchewan, New Brunswick, British Columbia, Ontario, and Quebec. On the other hand, the level of housing stock in Nova Scotia, Manitoba, and (surprisingly) Alberta fell back below what was consistent with fundamentals, after having risen above the level a couple of years earlier.

I wouldn't be as bold to say supply is below trend but it is difficult to make the case there is a large construction glut in Alberta. Having said that weakness in the housing market could persistent if migration remains low (or negative).

19,000 sales? Unlikely.

2010-07-17T08:45:00.000-07:00

From the June 2010 Realtors Association of Edmonton market report

“It has been quiet on the news front but very busy in REALTORS® offices as they list client’s properties for sale, book showings for buyers and attend open houses. This has not resulted in immediate sales, however, and, in anticipation that this slowdown will continue through the year, we have reduced our 2010 sales forecast by 2,000 units from 21,000 to just 19,000.”
...
“External influences pulled sales activity into the first four months of the year which reduced the demand in May and June. Overall there were 680 less residential sales in the first half of the year as compared to 2009,” said Westergard.

They have reduced their forecast to 19,000 based on how close we are to last year's sales. However last year started off in the middle of the financial crisis and sales continually increased from very low levels. 2010 has been the opposite of this. To show how unlikely this is see the level of sales that would be required for the rest of the year in the trend below (at a constant seasonally adjusted rate). Sales have to make an immediate and abrupt jump this month to a much higher rate and maintain that level going forward.

Looking at the trend I guess the year end total will be closer to 16,500 assuming a minor recovery in sales (shown below).

Another trip to the unicorn ranch

2010-07-09T09:28:00.000-07:00

Come to the unicorn ranch and enjoy some refreshing Kool-Aid.

Good news! The 2009-10 Alberta deficit initially projected to be $4.7billion, later projected to be $6.9 billion, ended up being "only" $1billion. The deficit is more than offset by a $2 billion gain in heritage fund.
Note: there is still a hefty shortfall projected for this year

Have a great weekend.

Edmonton Market Statistics June 2010

2010-07-07T18:53:00.000-07:00

The REALTORS Association of Edmonton released statistics for June and describe the market as "normal".

Instead of being normal sales were slightly worse than "scorched earth", a benchmark rate equivalent to the worst six months of the financial crisis.

Listings appear to have peaked early this year but remain somewhat high.

There are only 4 months in recent history which are as bad or worse in terms of seasonally adjusted sales - Nov 2008 to Jan 2009, when the world was falling apart and Sept 2007, following an insane boom.
Seasonally adjusted it is clear listings have eased up. Despite this inventory increased last month and remains very high. (9,406 active residential listings vs. 6,785 last year and 11,006 at the peak in May 2008)

Sales to new listing ratio was 41% seasonally adjusted. When this ratio dropped below 50% right after the end of the boom in 2007 and during the financial crisis there were corresponding price declines and this time is no different.

Initial explanation of seasonally adjusted data and benchmarks and seasonally adjusted sales to new listing ratio.

Edmonton New Construction Update: May 2010

2010-07-03T09:30:00.000-07:00

It's been three months since I have posted on the new construction situation in Edmonton. Since then single family home construction has increased and starts have remained high.

Single family home under construction peaked at 6,528 in August 2007 before falling to 1,764 April 2009 and finally rebounding to 3,760. It looks like the weakness in resale market has not yet had an impact on new homes. I expect to see price declines on existing resale inventory to lead a shift away from new homes as they become less competitive.

Total construction has been slower than single family alone. This is because condos took longer to recover with units under construction bottoming at 2,142 this March and have rebounded to 2,759 in May. While there is less oversupply going into this downturn compared to 2007 (10,314 vs. 17,781 in the chart above), weaker interprovincial migration and declining resale market will have a negative impact on new construction going forward.

Calgary Real Estate Statistics: June 2010

2010-07-02T18:56:00.001-07:00

Sales are at "scorched earth" levels which is the same rate as during the worst six months of the financial crisis.

Listings are fairly high but down from the rate of March and April.

Seasonally adjusted sales to new listing ratio is 35%. A ratio of below 50% typically results in falling prices.

Raw data from Bob Truman's Old Criteria page.
Initial explanation of seasonally adjusted data and benchmarks and seasonally adjusted sales to new listing ratio.

Alberta Population Statistics

2010-06-28T20:56:00.000-07:00

Alberta population statistics were released today for the first quarter by Alberta finance here. Interprovincial migration was slightly positive for the quarter following two quarters of net loss to other provinces (mostly B.C.). The inflow from the rest of Canada is still down considerably from the boom and international migration remains strongly positive.

Natural population growth is relatively high compared to other provinces and resulted in a total population increase of 12,987. CMHC's Housing Now reports there were 5,651 starts during this same period. Without going into more detail it is difficult to judge whether this is out of line. It seems high with only 2.29 people per start. However it neglects housing that has been replaced and these starts include smaller multi-family dwellings. There does not appear to be rampant overbuilding but I would guess there will be a slowdown in construction due to weaker prices and migration.

Just a blip

2010-06-19T08:49:00.000-07:00

Diane Scott, president of the Calgary Real Estate Board, called the May MLS data "just a blip."
"We still expect a steady market for the balance of the year," she said.

Calgary Home Sales take May hit
Monthly data viewed as 'just a blip'
June 17th, 2010

Increase that 'blip' to 5 months because sales have been weak since January. This is what I had to say about sales several months ago:

Calgary stats for January have been posted by Bob Truman and it is clear they have deteriorated on a seasonally adjusted basis. Normally we could expect a 27% increase from December to January, but instead sales were flat. They have moved closer to a rate equivalent to the six months of the financial crisis labeled scorched earth on the chart below.

Even Gregory Klump is less delusional about the sales slowdown.

Greg Klump, chief economist with CREA, said the combination of changes to mortgage regulations in April and rising mortgage rates pulled forward a number of sales into April that would have otherwise taken place at a later date.
"From the standpoint of afford-ability, we see sales activity softening going forward because of marginally higher interest rates as well the strength of activity in the first half of this year will be at the expense of sales activity in the second half of this year," said Klump.

From Mike Fotious site June sales look really bad yet again, as in another month of "scorched earth". Make that sales blip six months and counting.

Some thoughts from the unicorn ranch...

2010-06-05T12:15:00.000-07:00

Housing is starting to drop nationwide in Canada and there are serious financial events that will have consequences for some time. I do question whether we are entering a double-dip recession imminently and this "unicorn ranch" post is a tongue in cheek way of presenting a little optimism. Let's shake things up.

CMHC: no upcoming national catastrophe

First consider this editorial on the CMHC, stressing the crown corporations risk to Canada.

The 20 per cent hit that CMHC could take would be more like 25 to 30 per cent. There are significant expenses in disposing of repossessed property — taxes, utilities, insurance, real estate commissions, legal fees, and so on. I would estimate that CMHC (which, in effect, is the federal government) could wind up $125 billion in the red.

This would blast an enormous hole in our government's finances. Canada would be put into the same category as the other prolific spenders. Which is where we should be. We are merely postponing the inevitable.

Not a chance. Even in a pessimistic scenario where a drop in housing values and spike in foreclosures puts CMHC underwater it would not approach the order of magnitude claimed. The problem with the $125 billion figure is it assumes that CMHC will cover all losses in housing in its entire portfolio.

$500billion * 25% = $125 billion

However, CMHC only pays out when there is a foreclosure and even in a nationwide drop of that magnitude it will only be a fraction of total insured mortgages. In Canada arrears are at 0.44%; it is true this number is low due to a robust market where selling is an option for the distressed. In Alberta there has already been a fairly substantial decline in home prices combined with a deterioration in the employment picture. With these factors in play the arrears rate peaked at 0.75% (for now).

For the benefit of the doubt let's assume a more brutal nationwide housing decline where the arrears rate increases drastically to 5% for insured mortgages and all of these arrears go into foreclosure. In addition to this also assume CMHC eats all the losses. I believe this is overly pessimistic in terms of level of foreclosure and the CMHC would inevitability deny some claims, like recent fraud uncovered in Calgary where BMO took the losses. Using these assumptions anyway the losses for CMHC would be:

$500billion * 25% *5% = $6.25 billion

The article claimed the CMHC had $9 billion in equity, but perhaps in this case the government may have to intervene depending on how liquid that equity was at the time. So instead of a fiscal emergency for Canada its more like the cost of a G20 summit or a gun registry. Funny, I have seen this pop up in discussion forums but the factual inaccuracies were never addressed.

Strong GDP growth during first quarter

Just in case anyone missed it recent GDP numbers indicated a strong rate of economic expansion.

Expressed at an annualized rate, real GDP grew 6.1% in the first quarter after advancing 4.9% in the fourth quarter of 2009. This compared with a 3.0% first quarter rate of increase in the US economy.

It has been argued that a unnaturally strong housing market is solely responsible for this. In my opinion, housing played a role, but the recovery has been too strong and broad based in Canada to have that be the only factor.

Jobs

Stats Canada released employment figures for May. Summary: employment increase. Full time up, part time down. Private sector up, self employed down. Although it is important to keep in mind this is only a single month, it was blockbuster nonetheless.

Following large gains in April, employment rose by 25,000 in May, the fifth consecutive monthly increase. The unemployment rate was unchanged at 8.1%. Since the start of the upward trend in July 2009, employment has risen by 1.8% or 310,000.
Full-time employment increased by 67,000 in May, partly offset by losses of 43,000 in part time. Since July 2009, virtually all employment gains have been in full time.

The number of private sector employees increased by 43,000 in May, while there were 28,000 fewer self-employed workers. Since July 2009, the number of employees in the private sector has risen by 2.8%, with most of the gains in recent months. Since July 2009, the public sector has increased by 2.2%, while self-employment has fallen by 2.3%.

So to the dozens of readers who frequent this blog, did you enjoy your field trip to the unicorn ranch today?

Edmonton Statistics May 2010

2010-06-03T17:30:00.000-07:00

The REALTORS Association of Edmonton released statistics for May and describe the market as "relaxed".

Listings are down from last month but remain at elevated levels. It appears they have hit a top early this year below the benchmark level of "stampede", equivalent to the flood of listings experienced in 2007.

Sales are now at the "scorched earth" benchmark which is the same rate seasonally adjusted during the worst six months of the financial crisis. Although I expected sales to be slow, I am surprised how bad they really were in May. The story is shifting from a flood of listings to the dismal sales pace.

The seasonally adjust sales to listing ratio is 42% and has been flat for three months. Expect price drops soon.

I think that some of the price measures are elevated right now due to seasonality and high level of luxury sales (see Edmonton Real Estate Blog for price stats). This works both ways as it shows prices have been rising all year (when they haven't) and will exaggerate the drops during the second half. Too bad Edmonton doesn't have a sales pair measure like Calgary does in the Teranet index.

Initial explanation of seasonally adjusted data and benchmarks and seasonally adjusted sales to new listing ratio.

Calgary Statistics May 2010

2010-06-01T19:26:00.001-07:00

Listings dropped compared to April but still remain at elevated levels.

Home sales should peak in late spring but that is not the case this year. Instead, they peaked in March and have declined for two consecutive months.

The gap between sales and listings is similar to 2008, when prices were trending down.

Seasonally adjusted listings declined sharply but remain high.

Seasonally adjusted sales have been deteriorating since the end of 2009.

The seasonally adjusted sales to new listings ratio remained unchanged at 42%. The gray line is a rate of 50%, and a drop below this has typically meant falling prices. Since prices measures tend to rise in spring and drop in the fall, I would guess fairly quick declines to show up in the monthly stats and in newspaper headlines this summer.

Raw data from Bob Truman's Old Criteria page.
Initial explanation of seasonally adjusted data and benchmarks and seasonally adjusted sales to new listing ratio.

Relax

2010-05-29T12:20:00.000-07:00

Gregory Klump, chief economist of the Canadian Real Estate Association, is telling Canadians to relax when it comes to housing. Read the report found on Mike Fotiou's blog and then watch this video.

So just relax, OK?

The report argues the diversion in home prices versus income is part of a normal housing cycle that will unwind with stagnate prices and rising income. The chart used to back up this premise shows these variables over time. Initially, I was surprised the gap between them appeared small enough to support this theory.

It turns out that the income statistic used here hides the difference between these two variables over time and conveniently implies a less severe downturn. Between 1980 and 2005 the index for income increases from roughly 55 to 225. An increase of over 4 times is definitely not typical over this 25 year period characterized by flat real wages.

I suspect the data used here is wages and salary and supplement labour income from statscan which matches what is charted above (between Q1 1997 and 2009). This is total income of a growing labour force and therefore will increase faster than individual incomes over time.

A reasonable source would be full-time, full year median earnings because it represents typical earnings over time, not aggregate earnings. Total labour income also hides the fact that virtually all wage growth over 25 years has been from top earners. Median income has barely changed in real terms for 25 years, moving from from $41,348 in 1980 to $41,401 in 2005. I converted to nominal using CPI tables from statscan.

full time, full year median earnings (nominal)
1980 $17,003
1990 $29,878
2000 $36,058
2005 $41,401

After this adjustment median income between 1980 and 2005 increased 2.4 times, much less than the 4.2 times of total labour income. I have added this series to CREA's chart to illustrate the difference below.

What is astounding here is even after selecting this convenient data for the study he has the nerve to criticize others who have looked into this relationship.

Warnings of a U.S.-style home price correction in Canada are unfounded. Such warnings are typically based on a limited analysis of the historical relationship between national average home prices and income which ignores Canadian housing market cycle dynamics.

It doesn't matter how sophisticated your analysis is when your data sources are distorted!

Easy money for Canadian Lenders

2010-05-23T10:14:00.000-07:00

This post will take a look at some ways banks and lenders are taking in some easy money in Canada.

1. The 5-year fixed corral

Right now there is a fairly hefty premium built into 5-year fixed mortgages and with the new qualifying rules it is the only option available to marginal buyers. If buyers choose a variable mortgage or a short fixed term they have to qualify for the posted 5-year rate. This rate now appears to be arbitrarily high compared to 5-year government bonds and this will move buyers towards fixed mortgages.

Even the spread on the discount rates appears elevated. Lenders are moving marginal buyers into fixed rate mortgages and collecting wider margins for it.

See the chart below to compare the fixed 5-year mortgage to the 5-year government bond. Before the financial crisis (2000-2006) the posted mortgage averaged 2.42% higher than the benchmark bond. The premium has been above 3% for about a month.

Read the article from Canadian Mortgage Trends about this situation.

It makes one curious about the logic that went into the final decision. Is there a real threat of sustained 4.35%+ higher rates? Or did the powers that be set the bar overly high to herd people into 5-year fixed mortgages—which just happen to be more profitable?

Maybe the latter is just too cynical a thought…

My opinion is that the restrictions to variable mortgages is a good thing and should be applied to discount 5-year fixed mortgages to avoid this problem.

2. Prime rate premium remains elevated well after financial crisis subsides.

Must be nice to collect an additional 0.25% off indebted Canadians, which the banks are doing since the prime rate remains inflated long after the financial crisis faded away. Normally the prime rate tracked the Bank of Canada's overnight target rate with a 1.75% premium. However back in 2008 they decided to withhold part of the central bank's rate cut. See article: Canadian consumers shortchanged on rate cut.

"Continuing market turmoil has steadily driven up the cost of borrowing for financial institutions. This makes it challenging to match the Bank of Canada rate cut at this time,"

Tim Hockey, president and chief executive of Toronto-Dominion Bank, said.

The prime rate remains 2% above the overnight rate even now the crisis is over (from the bank's perspective). See article: TD TD Bank blows away analyst estimates as Q1 profit soars to $1.3 billion

TORONTO - Toronto-Dominion Bank (TSX:TD) continued a string of big-profit announcements from Canada's largest banks Thursday, posting first-quarter results that handily blew away analyst estimates for both earnings and revenue.

The bank's net income rose to $1.3 billion in the quarter, essentially doubling the $653 million it earned a year earlier, helped by record earnings from its domestic banking operations.

It joined CIBC (TSX:CM) and Bank of Montreal (TSX:BMO) in beating Bay Street estimates, with only Royal Bank (TSX:RY) falling slightly short of expectations even as it posted a $1.5-billion profit.

To illustrate this additional 0.25% premium see the chart below with the BOC rate, prime rate and difference between them. There were the occasional spikes resulting from a small delay to move the prime rate, but this is the first sustained difference going back 10 years.

3. The renewal trap.

Canadian mortgages are typically renewed every 5 years or less. With the recent mortgage changes to decrease amortization from 40 to 35 years, require 5% down and qualify on 5-year posted rate (not to mention future price decreases) there will be borrowers who fail to qualify at renewal. Since a change in lender requires requalification while renewal does not, borrowers have no choice but to renew at the rate given to them. Good deal for lenders who can set price arbitrarily. Another unintended consequence of loose lending. Again, from Canadian Mortgage Trends:

The kicker is that you can’t change lenders at renewal without requalifying. Therefore, if you don’t have 20% equity at maturity you could be stuck in another 5-year fixed mortgage (possibly at your existing lender’s “rack rate”). If you instead want to switch to a variable or 1-4 year fixed term, your debt ratios will have to fit under the much stricter government guidelines at that time.

Payment Engineering

2010-05-08T09:32:00.001-07:00

When buying a home one should keep focused on the actual price as opposed to the payments. This is especially true today with all the ways the they can be made to appear lower in advertisements. Consider this builder ad I found in the "Homes" section of the Edmonton Journal.

$611 bi-weekly? In the example below I will start with a fairly normal mortgage and work towards this engineered payments of $611. This will highlight how much impact different choices can have on the appearance of financing costs.

The listed price is $383,800. With a 10% down payment, 2% of that would go to CMHC fees and the total mortgage amount would be $353,096. Assume a 25 year amortization, 10% down and a 5 year fixed rate of 4.5% the mortgage payments would be $1,954.30/month

This does not include property taxes typically rolled into the mortgage payment. I would not expect a builder to include this but it is useful to note among other things when comparing to rent. These payments are for the first 5 years only, the remaining 20 will be paid back at a different rate. For example if interest rates are 7% during the last 20 years of the mortgage the monthly payments for that time period would be $2,384.91.

How do we get to $611?

1. Bi-weekly payments

Bi-weekly is a clever way of showing payments because initially people think of it as pretty much two payments a month. However on average throughout the year it is actually 2.17 payments per month. $1954.30/month works out to $977.15 semi-monthly and $901.99 bi-weekly.

2. 35-year amortization

Bi-weekly payments are reduced from $901.99 to $767.06 when the amortization is increased by 10 years. No free lunch here as in the end the longer amortization costs a lot more in total interest.

3. Downpayment

This example started with a 10% down payment but this ad used a 20% down, or $76,760. A buyer enticed by low bi-weekly payments over 35-years probably would not be putting down that much which is why I picked 10% for this example. Using a 20% downpayment reduced the payment to $667.01.

4. Interest rate

There was no mention of the interest rate but clearly they are using less than 4.5%. With a 3.84% rate instead I arrive at payments of $611. This rate is now only available with a shorter term, probably 3 years, which neglects the remaining 32 years of financing at unknown (higher) rates.

All the above serve to reduce the payment shown but each carries some risk or cost. No matter how the debt repayment is structured buyers are on the hook for the purchase price.

Update: This ad has been updated with payments of $599. They must have lowered the interest rate used in their calculations.

Edmonton stats - listings remain high

2010-05-04T18:48:00.001-07:00

New listings in Edmonton are coming on the market at a substantially higher rate than the 2nd half of 2009. Clearly many of these sellers will be unsuccessful and the market will be forced to find a new equilibrium. The question is on the path to equilibrium will there be a self reinforcing negative cycle and how long it will last. Listings will tell this story during the second half of this year.

Sales were off to a slow start this year and are now following a seasonal trend albeit at a lower level than the last half of 2009.

The seasonally adjusted sales to new listing ratio remains below 50% from which we can expect price decreases.

Looking back at historical figures listings are similar those that lead to peak inventory levels of 2007 and 2008 while sales are relatively low.

Calgary Stats and the Edmonton Journal is misleading again

2010-05-02T06:00:00.001-07:00

Bob Truman updated Old Criteria stats for Calgary so it's time to look at seasonally adjusted data to guage where we are at.

Listings stayed at the same level both in both raw and seasonally adjusted terms after big jumps in February and March. At this level of listings inventory is still accumulating rapidly, reaching 10,078 in April. This is double the low of 5,018 in December and up from 8,688 this time last year.

Sales decreased slightly while normally we should expect to see a slight increase from March to April. Sales have maintained their position above the dismal pace set during the financial crisis, labeled scorched earth, but still below the bounce we saw in the second half of 2009. From this I expect YOY declines in sales to widen going into the second half of this year.

Seasonally adjusted there was a slight deterioration in the market compared to March, with the sales to new listing ratio dropping to 42%. This is the sixth consecutive month of falling sales/list ratio. A ratio under 50% leads to falling prices.

On another note - Here is an article I missed last week from the Edmonton Journal: Yes, there's a housing bubble in Canada -- but only in three cities

Kevin at the Edmonton Housing Bust Blog does a good job discrediting the article. Read it. The article argues that the relatively slow price appreciation in Alberta last year indicates a healthy market. However, it neglects the rapid price appreciation that occurred during the boom.

In addition to that I noticed that the Edmonton Journal makes a faulty comparison to U.S. bubble cities in terms of affordability.

When U.S. house prices got to their most extreme levels during the U.S. housing bubble, the ratio of average household income levels to average local house prices got to 10 times or more in overheated markets like Los Angeles and Phoenix.

Wrong. While Los Angeles did exceed 10, other ground zero housing bubble cities such as Phoenix were not even close. The 3rd annual Demographia affordability survey shows that in 2006 some of the cities which have seen spectacular collapses had price to income multiples well under 10.

2006
Los Angeles-Orange County 11.4
Las Vegas 6.5
Fort Myers, Florida 5.3 (see video)
Phoenix 5.1

2009
Los Angeles-Orange County 5.7
Phoenix 2.6
Las Vegas 2.4
Fort Myers, Florida 1.9

2009 (Canada)
Vancouver 9.3
Toronto 5.2
Calgary 4.6
Edmonton 4.1

Just because Alberta is below some of it's Canadian counterparts does not mean the market is healthy. The Edmonton Journal states that affordability levels are "reasonable" in Alberta even though the demographia survey labels the market as "seriously unaffordable" using the price to income measure.

Upward-sloping supply curve

2010-04-18T09:48:00.000-07:00

Listings have been running higher because the price sellers think they can get is inflated. In addition to low interest rates the market improved in 2009 because sellers understood that they needed fairly substantial discounts off peak price and buyers could find better value (relatively).

It no surprise that listings have increased as asking prices have. Consider a benchmark house I have previously covered. Approximately 1700 sqft 2-story house with double attached garage and bonus room in a newer south east Edmonton community of Ellerslie. In October 2009 I did a comparison of one that was priced at $374,900. I noted that the price to rent ratio was high at 220, but with the financing available at the time the buy vs. rent was closer.

Now the least expensive house that matches the same criteria is this $410,900 1701sqft two story. In this environment people are coming out of the woodwork to sell.

There are other similar houses asking more. Asking prices in general will need to fall to move the inventory that is accumulating.

Edmonton New Construction Update

2010-04-08T20:32:00.000-07:00

It has been awhile since I've posted about the new construction situation in Edmonton. The most important change has been the increase in single family homes under construction. The resale market for single family homes has recovered more after the "great financial crisis" than condos and this has spilled over into new construction market.

At the peak of August 2007 there were 6,528 single family homes under construction in Edmonton. Exactly two years later that surplus was reduced to 1,986 and has since rebounded to 3,169. SFH starts have jumped significantly (shown in blue) but have not reached the level of the boom.

The next chart shows all types of construction including housing that has been completed but not absorbed by the market. With these factors considered the recent bounce in new detached homes has been offset by the continued decline in condo construction.

At the peak in February 2008 there were 7,730 condos under construction in Edmonton (orange). The last month available, February 2010, this has been reduced to 2,220. Over the past two years the glut of condos constructed during the boom has mostly been completed and absorbed. There remains an elevated number of condos not absorbed but that has reversed slightly as completions slowed (dark gray).

There are several changes coming to the market soon; however, the relatively low level of construction compared to the boom may limit the severity of the next downturn.

Edmonton listings up more than sales

2010-04-07T05:49:00.000-07:00

Similar to Calgary. Listings accelerating faster than sales resulting in a seasonally adjusted sales/listing ratio of 42%. Prices were strong (I believe this is partly due to seasonal patterns and monthly noise) but supply and demand indicates an environment of falling prices.

Calgary: Even more listings

2010-04-01T22:35:00.001-07:00

Sales in Calgary improved in March but are still below the pace set in the 2nd half of 2009.

Listings this month moved up closer to "stampede" - a rate equivalent to the first half of 2008.

The seasonally adjusted sales/listing ratio fell to 43%. The increase in listings was more significant than those in sales.

This should lead to an environment of falling prices but instead they were quite strong in March. I think the correlation between this ratio and prices will re-emerge shortly.

The fifth consecutive month of falling seasonally adjusted sales/listing ratio clearly indicates the market has weakened from the 2009 bounce. It will be interesting to see how new listings change when prices begin to fall. Will sellers be less motivated to sell into a weaker market similar to 2009 or will they continue to rush to the exists like they did in the first half of 2008?

CMHC denies a mortgage - Super star agent! and more...

2010-03-26T06:00:00.000-07:00

CMHC Denies a Mortgage

The builders of London at Heritage Station condos are suing buyers who won't or can't complete due to a drop in condo values. In one case a buyer with 5% down had financing denied by CMHC and now needs to come up with $84,000 more to close. From the Calgary Herald.

In 2007, Dany Cote put down $20,000 on a condo at London at Heritage Station. He also signed a presale contract to buy the property for $420,000.

Cote was pre-approved for the money and Canada Mortgage and Housing Corporation (CMHC) agreed to insure the loan.

But in the two-and-a-half years Cote had to wait for the condo to be built, the economy and the real estate market tumbled.

According to a recent appraisal, Cote's condo is only worth $335,000 and the CMHC will only insure a loan of up to $313,000.

"Typically, when a property is approved for CMHC insurance, CMHC does tend to honour that agreement during that period. However, there are times when an application is reassessed," says Richard Cho, a spokesperson for CMHC.

...
On Tuesday, the builder sued Cote for breach of contract seeking both the $20,000 deposit and the difference between the presale contract price and the condo's current market value.

I feel bad for this guy because there is no way he can live up to his end of the agreement while the developers are trying to extract as much money as legally possible from him regardless. But I'm mostly surprised that CMHC denied a mortgage.

_______________________________________________________________

Super Star Agent

From The Edmonton Sun:

Real estate spiking upward

The “tipping point” in Edmonton real estate prices may just have arrived.

A friend in the home inspection business says multiple offers within days of listing are suddenly happening.

Re/Max’s Terry Paranych, just named the fourth-most-successful Re/Max realtor in the world at the company’s annual convention, says he’s coming off his most successful February sales in 18 years.

The Edmonton Real Estate "turnaround" happened last summer after the financial crisis and appears to have eased considerably. This report is anecdotal evidence from a super star agent and does not reflect recent market trends. Here is what the same reporter wrote in August 2007 (see previous post):

Even with huge slowdowns, at least half those projects will happen. The bitumen upgraders in Strathcona and Sturgeon counties are just starting. Nine proposed upgraders are listed on that website.
....
House prices will go nowhere but up.

___________________________________________________________

And More...

on Mike(Authentic). see previous post.

We have a slew of oil stocks, purchased in March 2009 (the low of the market) that have made very little returns. We made the same in a high interest savings account without risk vs the market (to date).
March 24, 2010

I just can’t seem to “get into” the market even reading Money Road. I want to as I feel like “I’m missing out” with just collecting a very secure 0.8% bank account interest that I could be collecting 3-5% easily. Preferred shares, corp bonds, safe stuff. But it feels like the risk the market will go down again isn’t worth the rewards.
Feb 22, 2010

I’m all in 1yr GICs Cash, no RE, no gold and no stocks. Just waiting on the sidelines in a safe, very liquidable position.
March 19, 2009

More on February sales

2010-03-19T05:44:00.001-07:00

In the Edmonton Journal there was an article discussing the sales increase in February.

Alberta house sales buck national slide
Resales up 1.6 per cent provincially, versus 1.5-per-cent decline Canada-wide

The reference here is to seasonally adjusted gain from January to February. As I pointed out in this previous post the sharp slowdown in January on a seasonally adjusted basis contributed to elevated February comparison. Even with this increase factored in home sales in Calgary and Edmonton are still relatively slow.

It appears for March the rate of sales will still be low historically. From Mike Fotiou's stats the first 17 days of March had 705 SFH and 308 condo sales. Extrapolating this to the end of the month gives an estimated 1285 SFH and 561 condo sales. This will be above the rate of sales during the financial crisis but below 2008 and well below boom years.

Bob Truman has also commented on sales for the beginning of March. SFH sales are below the 9 year average, while listings are above.

Stats to Obsess Over

For the period Mar 1 - 12, 2010:

SFH

Sales
New listings
2010
517
1318
2009
396
931
Historic Avg(9 yrs)
595
1008

2010 compared to historic avg
-13%
+31%

The Edmonton Real Estate Blog reported some dismal sales and listings numbers last week (emphasis mine). They should report this weeks numbers today on their blog.

Here is our update on the Edmonton real estate market. (Previous week's numbers are in brackets). For the past 7 days:

New listings: 580 (541, 477, 420)
# Sales: 220 (264, 255, 231)
Ratio: 38% (49%, 53%, 55%)
# Price changes: 189 (194, 159, 152)
# Expired/Off Market Listings: 91 (196, 66, 78)
Net loss/gain in listings this week: 269 (81, 156, 111)
Active listings for single family homes: 1947 (1794, 1731, 1641)
Active listings for condos: 1559 (1440, 1391, 1366)

Perspective

2010-03-14T12:24:00.000-07:00

Consider the Calgary Herald Article "Housing Bubble Talk dismissed by board". In the article they cite some numbers which imply market strength.

A strong February market could mark the beginning of what could be a return to a more traditionally active spring market.

Last month, the board reported 1,035 detached, single-family homes changed hands within the resale housing market in Calgary's city limits -- an increase of 36 per cent compared to January.
There was also a 43-per-cent jump in the number of resale condos sold.

February is described as a strong month because of an increase of sales, even though this increase follows a normal historical pattern.

Contrary to this pattern, January actually decreased from December, therefore an increase from these levels is not surprising.

This is why I believe it is important to look at seasonally adjusted data to clearly see market trends. I would describe sales in February as "fairly weak" but not as terrible as the rate of sales during the financial crisis.

Although the number of new listings moved up by nearly five per cent last month, the two-month total for January to February is still down nearly four per cent compared to the same period last year.

Here they are compare listings to the previous year. My take is that listings are increasing at a faster rate this year than last.

SFH Listings Jan-Feb (CREB)
2009: 2068-2057
2010: 1822-2154

"The market is tightening and we are seeing a moderate rise in the number of competing offers, but Calgary's market remains in a healthy, stable position," says Scott. The average price of detached homes hit $458,254 in February, an increase of four per cent from the previous month and up 10 per cent from a year ago.
On the condo side, the average selling price was nearly unchanged from January at $282,880 -- and up five per cent compared to last year.
"There is a spring in the step of Calgary homebuyers as we get ready for the spring market," says Scott.
The market has gone from "fragile to fervent" in 12 months, she says -- adding she foresees strong activity in the spring as consumers continue to take advantage of low mortgage rates and overall afford-ability prior to expected rate hikes in the second half of this year.

The market went from fragile to fervent and has now moved back down according the seasonally adjusted sales/listing ratio.

A few things the article failed to mention about the increase of sales due to higher rates. If people are buying earlier than they would have otherwise to beat rate increases then one would expect a similar decrease in sales afterwards. There was no mention of the temprary nature of these low interest rates (standard term of 5 years) and their effect on asset valuations.

Borrowers will need to qualify for 5-year posted rate

2010-03-06T11:56:00.000-08:00

From Canadian Mortgage Trends

For all variable-rate mortgages and fixed terms under five years, the new qualifying interest rate will be the greater of:
the chartered bank 5-year posted rate (5.39% today), and
the contract rate.

The posted qualifying rate will be published by the Bank of Canada each Monday at approximately 12:01am Eastern Time. Here’s the link: Posted Mortgage Rate (Look for series V121764.)

Previously when the Finance department tightened mortgage rules for CMHC loans, I thought they would be limited because of how low discount 5-year rates were. Now that it is the posted rate I think it will be successful limiting the amount of risk*** borrowers are capable of taking past April 19th. There is a concern of what impact this will have to the overall market but If the recent market strength was solely due to people stretching into 3% mortgages than a downturn was inevitable anyway.

***I misunderstood this rule - it actually only applies to those taking out terms under 5-year fixed. So the chance of rate shock occurring in 5 years to those stretching into the discount rate still exists. See previous post. At least this forces marginal buyers into 5-year terms.

Edmonton February Stats

2010-03-02T20:39:00.000-08:00

The REALTORS Association of Edmonton released the February stats today. The trend is similar to that of Calgary I covered in the previous post. The pace of sales has declined from the 2nd half of 2009 (green line) and listings increased slightly.

The seasonally adjusted sales to listing is at 50%, about the same as last month (unadjusted is 47%).

The chart of the raw historical data shows this year has been a little slow on the sales side.

Thats all I have to say for Edmonton numbers.... Here are some other items that caught my attention recently.

Statscan reported GDP grew at an annualized pace of 5% in the 4th quarter of 2009. Some of those gains are due to government stimulus and investment in residential structures but nonetheless growth in December relatively broad based.

I am not sure if this is the case in Canada but in the US a large component of the increase was transitory. Calculated risk estimates that GDP growth would be 1.9% absent one time boosts that occur after the end of a recession of replenishing inventories.

BMO is offering a 5-year fixed rate of 3.75%, which is fairly competitive for a big bank. (source Canada Mortgage Trends)