Don Campbell - Analyzing the sales pitch

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

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

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

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?

Household Credit Expansion in Canada

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

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