Alberta Population Statistics

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

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...

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

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

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

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

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.