Calgarian Contrarian 2

The New Road to Serfdom

2007-02-23T16:40:00.000-07:00

I have decided to no longer continue maintaining this blog. I would like to thank all of those who have contributed to the discussion over the past year. Last week, we brought a new baby girl into our family. Between that, and more extensive travel for work, I have decided that I don’t have the time necessary to contribute significant amounts of energy to this endeavor.

I will leave you with 2 thoughts:

1. The liquidity bubble is world-wide and still going strong. This has manifested itself in many ways, and caused a rolling housing bubble around the world. It appears the Canadian version of the bubble has now rolled into Saskatchewan.

I guess they are running out of land in Saskatchewan.

2. The long term economic impacts of excessive debt loads will be felt long after the market slows down and the torrent of easy credit dissipates. If you haven’t already read this piece, I suggest you read the whole thing. It was written last year before the US market started to slow, and I feel it is more relevant for us now, as we reach the pinnacle of our mega-boom and the temptation to borrow vast sums of money is huge.

Some quotes:

“Never before have so many Americans gone so deeply into debt so willingly. Housing prices have swollen to the point that we've taken to calling a mortgage–by far the largest debt most of us will ever incur–an "investment." Sure, the thinking goes, $100,000 borrowed today will cost more than $200,000 to pay back over the next thirty years, but land, which they are not making any more of, will appreciate even faster. In the odd logic of the real estate bubble, debt has come to equal wealth.

And not only wealth but freedom–an even stranger paradox.

After all, debt throughout most of history has been little more than a slight variation on slavery. Debtors were medieval peons or Indians bonded to Spanish plantations or the sharecropping children of slaves in the postbellum South. Few Americans today would volunteer for such an arrangement, and therefore would-be lords and barons have been forced to develop more sophisticated enticements.

The solution they found is brilliant, and although it is complex, it can be reduced to a single word–rent. Not the rent that apartment dwellers pay the landlord but economic rent, which is the profit one earns simply by owning something. Economic rent can take the form of licensing fees for the radio spectrum, interest on a savings account, dividends from a stock, or the capital gain from selling a home or vacant lot. The distinguishing characteristic of economic rent is that earning it requires no effort whatsoever. Indeed, the regular rent tenants pay landlords becomes economic rent only after subtracting whatever amount the landlord actually spent to keep the place standing.

Most members of the rentier class are very rich. One might like to join that class.

And so our paradox (seemingly) is resolved. With the real estate boom, the great mass of Americans can take on colossal debt today and realize colossal capital gains—and the concomitant rentier life of leisure—tomorrow. If you have the wherewithal to fill out a mortgage application, then you need never work again. What could be more inviting—or, for that matter, more egalitarian?

That’s the pitch, anyway. The reality is that, although home ownership may be a wise choice for many people, this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage, a lifetime spent working to pay off debt on an asset of rapidly dwindling value.

Most everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst, and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom.”

Globe and Mail: Worries grow as hammers fall silent

2007-02-16T10:32:00.000-07:00

I know that what happens in the United States and the rest of Canada has little to no effect on the Alberta economy. We are not prone to speculative excess like the rest of the world and there is no affordability issue here because most people's incomes have doubled or tripled over the last 2 years allowing Calgary's citizens to pay higher and higher prices for the same homes without increasing debt loads like they have in other parts of Canada or the United States.

Still, it's sometimes amusing to here the blasphemy that comes from other opinions...

Interesting article in today's Globe and Mail.

Some Quotes:

"Construction on new U.S. homes has hit the lowest level in almost a decade, boding ill for the Canadian factories and lumber companies that rely on the industry.

New home and apartment construction plunged a greater-than-expected 14.3 per cent last month, the Commerce Department said Friday. It was the fewest number of new houses since August, 1997.

The report raised questions about whether the plunge represents one bad month, or a more prolonged slump in the housing industry. Canadian exporters fear that a lingering slowdown in their biggest market could still spread to lower consumer spending, leading to a broad weakness in demand.

“This is not good news,” said Jayson Myers, chief economist at the Canadian Manufacturers & Exporters. “The big question is, is it really bottoming out, because the housing market will be a very important factor in driving the overall health of the U.S. economy in the coming year.”

Lumber and building materials companies, which account for about a tenth of Canadian exports, will be most directly affected, he said. But all manufacturers that rely on U.S. demand are at risk, he cautioned.

The lumber sector is already facing hard times. Forestry exports fell 8.6 per cent last year from 2005 levels amid a U.S. slowdown, government figures showed this week.

By region of the country, housing construction fell 28.5 per cent in the West, 15.2 per cent in the Midwest and 11.8 per cent in the South. Construction starts rose 8.9 per cent in the Northeast.

The overall housing decline was much sharper than the 2.6-per-cent drop that analysts had been expecting and raised concerns that the steep slide in housing has yet to run its course.

On Thursday, the National Association of Realtors said that sales of existing homes fell in 40 states in the fourth quarter of last year and home prices dropped in 49 per cent of the metropolitan areas surveyed, the widest price decline in the history of the Realtors' survey.

Many economists are worried that the housing bust, which followed a five-year boom, could be a prolonged one as sellers struggle to reduce record levels of unsold homes."

One thing that is always true is that every single month during the decline, the RE organizations assure us that we have reached the trough and that it will be smooth sailing from here.

USA house prices falling during period of low interest rates, low unemployment, and a growing economy.

2007-02-15T20:45:00.000-07:00

Read this article from CNN Money

Long time readers of this blog will know that it's my position that while current prices need high employment, low interest rates, and low employment to continue, home prices can and do drop due to high prices and a bubble-like investment mania.

Now, due to the housing mania in the United States over the past few years, many markets are experiencing deflation not seen in real terms since the great depression, despite all the factors which should be positive for housing (low interest rates, high employment, expanding economy). Prices just got too high for whole segments of the population to afford, and the markets started to stall, and some are collapsing under the weight of massive debt loads.

I know people will tell me that "it's different here", but I believe that like many formerly hot markets in the US, Calgary has many speculators, increasing personal debt loads, and large portions of the working population that are having trouble affording housing here... and not just poor people.

Some Quotes:

Fourth-quarter report from National Association of Realtors shows largest price drop on record as markets with price declines now outpace those with gains.

The slump in home prices was both deeper and more widespread than ever in the fourth quarter, according to a trade group report Thursday.

Prices slumped 2.7 percent in the fourth quarter compared to the fourth quarter a year earlier, according to the report from the National Association of Realtors (NAR). That's the biggest year-over-year drop on record and follows a 1.0 percent year-over-year decline in the third quarter.

And from Yahoo:

Formerly red-hot areas were among the hardest hit as the five-year housing boom cooled considerably in 2006.

Mark Zandi, chief economist for Moody's Economy.com, predicted that home prices in many parts of the country would continue to be under pressure for the rest of this year as the market works through still large inventories of unsold homes.

He said this process will be made more difficult with banks raising lending standards because of concerns about rising mortgage default rates.

"The price declines we are seeing are extraordinarily broad-based and just symbolize how significant a price correction we are in," Zandi said.

Reader predictions for this hot market

2007-02-13T13:00:00.000-07:00

I think it’s quite clear that the market has heated up considerably since the beginning of the year. Sales levels broke the record for January and looks like it will again for February. Both average and median prices are up significantly, and it even appears that there are bidding wars again for certain properties. This could last another month, or it could last another 6 months, in a repeat of 2006.

What we know from other markets is this, prices can and will rise until the “entry level” homes get priced out of reach of the 1st time home buyer. This is due to the market's need to have an ever increasing number of homebuyers to outpace the new supply that gets added.

My question is this: What do you think is that price level for this city?

Let’s use 2 benchmarks:

A small single family home in a far flung new subdivision. (approx 1200 sq feet)
A small 2 bedroom condo in the inner city (approx 800-900 sq feet)

A second question: Now that its become quite clear that home prices are flat or falling in most of North America, at what price levels do you think that young people will start to decide that it’s not worth it to come here and build a career? Do young people care about house prices when deciding to move to a new city?

Circular Logic: The market is strong so it can’t be a “bubble”

2007-02-10T18:15:00.000-07:00

One of my main reasons for starting this blog, was to point to some fallacies which I had noticed were becoming “common wisdom.” Among these fallacies were of course the notion that “real estate only goes up”, “we’re running out of land” and that price didn’t really matter, because somebody would always come along to pay more…

I’ve noticed that the strong sales numbers of the past few weeks has caused another round of housing perma-bull types to come here and say basically, “it can’t be a bubble, because look how strong the market is and look how much people are willing to pay/borrow.”

To me, it’s circular logic. In any market, the buyers HAVE TO BELIEVE THAT THERE IS NO bubble, in order to buy at high prices. The very nature of a financial or asset bubble requires that the majority of the masses buy at high prices. Therefore, the fact that many people ARE buying at high prices, does not mean that a bubble does not exist, all it means is that if there is a bubble, it hasn’t ended yet.

When both amateurs and professional fund managers bought Nortel at $100 / share, they did not believe it was a bubble or they would not have bought at that price and the price would have been much lower. When people bought real estate in Japan in 1989, they did not believe there was a bubble, or else prices would not have been high and there would have been no bubble. When people bought condos in Miami in 2004 for double what they paid for it 2 years before, they did so believing that the market was justified.

Clearly what the market action over the past month shows, is that the masses in Calgary still believe that prices are justified and going higher. This however, does not mean that sooner or later the high debt loads and rapid housing supply growth will not create a different perception amongst the masses, which would cause the market to turn. Markets are driven by psychology, and mass psychology is not permanent.

Canadian home prices unchanged for first time since 2000

2007-02-08T12:18:00.000-07:00

Read this article from CTV. It is based on only new houses and only looks at month over month chages, so it is basically meaningless. However, I think it's interesting in that public perception can be changed by headlines, if the headlines continue over a long period of time.

I have a theory that once prices basically flatten out for a year or so, panic in the market disappears and people are left doing old-fashioned financial analysis when purchasing an investment, whether it be real estate or anything else. During a boom time, people ignore fundamentals because they can always find someone to buy thier investment for more than they paid. During a period of flat or even down prices, one again needs to look at price/rent ratios, price/income and other factors before jumping into a large purchase.

It's like during the dot-com days, who cared about PE ratios when you could buy Nortel for $60 and sell it for $80 in a few weeks? Analysts would invent reasons why the price should go higher. Did you ever hear about the earning to PhDs employed multiple? That was my favorite retarded multiple being banding around by analysts who couldn't value things based on zero earning. Once the market collapsed, all of a sudden investors pay attention to valuation again.

On another note, more bad news about the US sub-prime mortgage market today. Renegade bloggers have been warning about this for about a year, but most simply dismissed them as chicken littles and losers. Turns out they were on to something. Read this article in today's Bloomberg. Turns out that the banks who originated and bought lots of this mortgage paper are starting to show significant losses. HSBC announced that they have lost over $1,000,000,000 in this space. Expect similar annoucments from others in the future.

They're not making any more land

2007-02-07T08:23:00.000-07:00

Interesting article today in Bloomberg about how real estate pros (the large US homebuilders) got caught up in the frenzy with amateurs in the mad land rush over the past few year. It appears that the conventional wisdom is that real estate prices can only rise.

I know this is from the United States and it's different here, but I thought this is a good read anyway as a potential warning to what could happen once a real estate frenzy subsides.

Read this article.

Some quotes:

Brian Tuttle owns so much land that he paid $3.6 million to get rid of 125 acres ready for development in the middle of Florida's Palm Beach County.

``In 2005, I was a brain surgeon, and in 2006, I was a moron,'' said Tuttle, who walked away from his deposit on the land rather than lose even more money buying it and building homes on it. ``The only good news is that I'm not alone.''

The worst housing slump in 16 years made a lot of smart money vanish. D.R. Horton Inc., Pulte Homes Inc., Lennar Corp., Centex Corp. and Toll Brothers Inc., the five biggest U.S. homebuilders, said plummeting land prices cost them a combined $1.47 billion in the fourth quarter.

Builders paid more for land during the boom because home prices were rising, too. They didn't realize speculators were pumping up demand by buying houses to sell quickly. When prices reached a point where speculators quit buying, homebuilders were forced to abandon so much property they helped create a glut that drove down land prices more than 9 percent last year, according to data compiled by New York-based research firm Real Capital Analytics Inc.

``Homebuilders allowed their own enthusiasm for price increases on houses to affect their decisions on what they would pay for land,'' said Mike Inselmann, president of Metrostudy, a real estate research firm in Houston.
The decline in land values reveals the role short-term buyers played in the housing boom, when the median U.S. home price rose to $276,000 last June from $177,000 in February 2001.

Industry executives, including Toll Brothers Chief Executive Officer Robert Toll, estimated that about a quarter of their houses were bought by people interested only in flipping them -- buying and selling quickly rather than moving in.
`Dried Up'

Louis Genuario Jr., a regional builder in Alexandria, Virginia, said speculators may have made up about 40 percent of housing customers. In some new condominium complexes in suburban Washington, every buyer was a speculator, Genuario said.

``When land came on the market, you competed against national homebuilders who were flush with money and speculators who were jumping into the market and trying to resell it immediately,'' Genuario said. ``The price was high and the supply became limited. Then the market stopped when you couldn't get people to buy because it exceeded their ability to pay. Now we see land that's been on the market for months.''

These days, the speculators are looking foolish, too. In Florida, where they helped inflate land values as much as 10-fold from 2000 to 2005, prices have dropped by as much as 50 percent.

``The land market has dried up,'' said Alex Barron, an analyst at San Francisco-based JMP Securities LLC. ``Most builders are on the sidelines because they expect prices to go down another 30 percent.''

Pent up Demand at These Prices?

2007-02-05T15:47:00.000-07:00

There seems to be a common theme in much of the mainstream press talking about “pent up demand” when explaining why home prices will continue to rise far above historical rates.

There is clearly pent up demand for homes among people who cannot afford the price level in Calgary. There must be lots of people who would qualify for a $200,000 house and would happily buy tomorrow if they could. The problem that I see, is that this type of “pent up” demand cannot continue to drive price increases from current levels. In fact, as price levels rise, a smaller and smaller percentage of the population can afford to add to this “demand”.

We’ve seen other markets where demand should be strong based on traditional fundamentals (low interest rates, low unemployment, strong economy), where housing just got too expensive and the market essentially collapsed (liquidity at first, prices only later).

My question to you is this:

Is there tons of pent up demand in Calgary for a $400,000 + SFH in a far-flung suburb or a $300,000 + condo?

Or, is the pent up demand for housing mostly with people who cannot or will not buy at current price levels?

Sub Prime Mortgages and Re-pricing in the Bond Market

2007-02-02T12:11:00.000-07:00

Last year I read an interesting book called The Tipping Point, by Malcolm Gladwell. Its general thesis is that small changes at certain times can change the world. Some of you may not agree with the thesis, but I thought it was a unique way of describing changes such as how the crime rate in New York dropped in the 1990s, or how certain products reach a “tipping point” where they catapult from years of relative obscurity to mass adoption in a short period of time.

Financial markets also can experience tipping points. The dot-com bust looked like it was correcting in 2000, only to bounce back for a year. The major crash occurred in 2001, as people started selling for tax purposes, which led to panic selling of clearly over-priced assets, which led to a major rout. The Nasdaq index then spent the next couple years dropping from over 4000 to under 1500. The crash was due to the overvalued equities, not the tax-related selling. However, the tax selling provided the trigger, or “tipping point” which led to the entire house of cards crumpling down.

Check out the chart here:

There has been lots of chatter on this site about interest rates and various amateur prophets have declared that interest rates are at the top, and will decline from here. Perhaps this is true.

Many others have argued that mortgage interest rates are currently at historical lows, and are not correctly pricing in the real risk due to 5 straight years of the boom and very low default rates. Most of the new mortgages taken out in the hottest US markets over the past few years were in a category known as sub-prime. This is basically the type of loans that go to people with less than 20% to put down, and also others with less than perfect credit scores. Because of the boom, these mortgages had very few defaults since 2002, and so rates continued to decline as investors in the bonds backed by these mortgages believed that the reduced risk premium would be sustained. In turn, these mortgages also helped prop up demand and prices in hot markets as buyers were able to use these cheap mortgages to increase the amount they could borrow. (In Canada this has not been as large a problem, however over the past year at the margin there has been a move towards interest only and 35 yr mortgages to extend demand).

Interestingly, housing prices basically stopped appreciating in many of the hot markets during 2006 and consequently defaults started to rise. This occurred slowly and first, and now at an accelerating pace. Only now (about 18 months after the peak in the housing market), are we starting to see stress on these investments. Some renegade analysts are even saying that this could be the “tipping point” which will cause defaults to spread from sub-prime to less risky bonds down the mortgage food chain. This, in turn, may lead to widespread increased mortgage rates (regardless of what the Fed does). This is due to mortgage investors beginning to add back risk premium into these products. Even if the problems are contained in the sub-prime segment, this could still cause a major contraction in the housing market as in many places such as California, the majority of new mortgages over the past year were in this category. As the spigot runs dry, a major source of new demand will contract. If you look at how this type of credit contraction has taken place over previous cycles, you could probably say we are still in the 2nd inning of a 9 inning game.

Good article here in the Financial Times that you should read if you are interested in this topic.

Will mortgage rates rise or fall over the next 5 years? I have no idea. What I do know is that those who are making a prediction with absolute certainty do not really understand how interest rates are set or the global bond markets, which effect mortgage rates all over the world. If the MBS market decides that mortgages are more risky in the future, mortgage rates can rise even as central banks decide to lower overnight rates.

Market Resurgence or Dead Cat Bounce?

2007-01-31T14:09:00.000-07:00

Looking at the preliminary data for January, a few things are clear. The housing market has surged back considerably from the weakness in the second half of 2006.

Since October 30, inventories have dropped 45%
Days inventory has dropped from 96 in October to 45 in January
Sales have been very strong (about 19% above Jan 2006 and slightly above January 2005 levels).
Prices are back up to the Oct 2006 level, which was the all time high.

The question remains, is January the start of a new resurgent market, which will propel prices far higher?

Or, is January a small bounce of what will be a much weaker market (year over year from 2006). Are buyers simply trying to buy before the “spring rally”, which may or may not occur?

There is lots of evidence that could support either theory. What’s your opinion?

100 Bottles of Beer on the Wall.

2007-01-30T14:35:00.000-07:00

For those of you interested in macro-economic trends, it can be very difficult to deciphering the usual garbage spewn out by the financial media. Even a reputable organization like Bloomberg, will have on any given day contradictory articles about events. For example, it is not unusual to read an article in the morning about how there is a shortage of oil and therefore prices should rise, only to read an article 2 hours later about how there is a surplus of oil and therefore prices should fall.

Once in a while I come across really well thought-out pieces that take a step back and try to explain recent financial history. Most people agree that decreasing interest rates over the past 10 years have significantly led to asset inflation across the world, including home prices. This is a great article trying to explain some of the global phenomena that has caused this to happen, and what we could see in the future.

Click here to read.

Some quotes:

“The twin barrels of financial innovation and globalization have significantly complicated the forecasting of asset returns in recent years. Two domestic bubbles in the last decade are testimony to the power of levered money and the recirculation of price insensitive reserves back into U.S. financial markets. While the late 1990s equity bubble had its roots in bonafide technological innovation, peak prices were driven by credit creation fed by globalized repatriation of Asian reserves following its financial crisis in 1997/1998. Similarly, what now appears to be confirmed as a housing bubble, was substantially inflated by nearly $1 trillion of annual reserve flowing back into U.S. Treasury and mortgage markets at subsidized yields, as well as innovative funny money mortgage creation which allowed anyone to buy a house at escalating and insupportable prices. Bond, stock, and real estate trends then, have recently been increasingly at the mercy of relatively price insensitive and levered financial flows as opposed to historical models of value or the growth of the real economy itself. An exorbitant P/E of 25x meant nothing in 1999 as unforeseen flows and investor mania drove them to 35x at the peak in 2001. An unchanged 10-year yield range centered around 4½% mystified the Fed, but not cash rich foreign central bank buyers as short term rates were aggressively raised by 425 basis points from 2003 to mid-2006. This foreign repatriation produced artificially low yields, (perhaps 50-100 basis points confirmed in numerous Federal Reserve staff reports and speeches in recent years) which in turn drove housing values to unsustainable levels as recently as six months ago – the estimated peak in national home prices."

Will high prices affect migration?

2007-01-28T12:29:00.000-07:00

It's good to take a step back at times and think about the long term implications of our current economic boom. There is no question that the boom has attracted an incredible level of migration over the past few years. This has led to a severe shortage in housing and has contributed significantly to the recent run-up in prices in Calgary.

My question is this: Do you think that the high cost of living in Calgary, will start to have a deterrent effect on current and future migration to the city?

One of the incredible consequences of the home price boom in the United States is that areas that recently led the nation for in-migration, all of a sudden started having net outflows of population. This is certainly the case in parts of South Florida and also in areas of California, including San Diego. Businesses in those areas are reporting that the most difficult problem for them in filling jobs is the high cost of housing. Click here for an interesting article about this from San Diego.

"The high cost of housing has become the biggest hurdle for employers to overcome in recruiting new employees, said Michael Schuerman, director of research for the San Diego Regional Economic Development Corp.

In a 2006 survey of local companies, 90 percent of the employers and 100 percent of the employees identified the high cost of housing as their top local business challenge.

As a result, far more people are leaving San Diego County than are moving here."

I have a theory that until about a year ago in Calgary, this was not an issue. People would happily leave other parts of Canada to take advantage of the Alberta economic boom. Over the past 6 months however, I have noticed a distinct change in the attitude of many of the people I have spoken with, both in terms of people already living here, and other that I've spoken to about moving here to fill jobs. I have even now heard of people that have decided to leave Calgary, because their increased earnings here do not make up for the higher cost of living.

A friend of mine, who recently moved back to Toronto, told me that the problem in Calgary, is that there is no affordable housing anywhere. He compared it to Toronto, where while the inner city areas are very pricey, as you get farther outside the city, there are lots of areas where a middle class family can still afford a home that they like. He told me that so much of the economic activity in Toronto is in the suburbs (Mississauga, Vaughan, Richmond Hill...), that lots of people easily live outside the city and can still be close to work. This is just one example, but I'm sure there are others.

What do you think? Will newcomers continue to brush off the higher living costs in order to move here? Or will the migration rate begin to decrease do to this?

Fundamental Values

2007-01-26T23:55:00.000-07:00

What is the fundamental value of a home? How is it measured?

In the stock market, one looks at various ratios of companies to compare them, including price to earnings & price to book. One also looks at discounted cash flow over the life of an asset or company and can derive a "fundamental" value that way. Many times the market price is higher or lower that what you determine to be the "fundamental" value.

Historically, when looking at commercial real estate, one uses a cap rate, which is roughly measure the rate of return based on rents.

In residential housing, it's difficult to determine fundamental value, because a house is part investment and part consumption. To get a general idea of what a house is worth, it is useful to look at price/rent ratios. In other words, for a particular home, how much can it be rented out for? It is sort of like looking at cap rates for residential properties.

One of the arguments world wide about the recent huge increase in home prices, is that they are not justified by fundamentals because rents have not risen as much. Looking back, I don't have accurate rental data for Calgary. I'm not sure if the aggregate data is that meaningful anyway, because there is no "standard" home that is easy to compare. Therefore, it is useful to look at least at anecdotal evidence to see what the current price/rent ratios are in the city.

I know of a few examples personally:

1. A friend of mine rents a condo. Recent sale price $325,000, rental rate $1250 /month. Price/Rent ratio = 260x

2. Co-worker rents an 800 sq foot older apartment for $800 per month. Last sale price was $240,000. Price/Rent Ratio = 300x

3. Friend bought a old house in Inglewood for $370,000. Rents out the place at $1300. Price/Rent Ratio = 285x

What are you seeing in the market? Any examples which show much lower multiples? Much higher?

Home values see annual double-digit rises: Re/Max

2007-01-24T07:51:00.000-07:00

If you want to read about a real estate study to convince you to buy a house at any price, look no further than this article in the CBC. It discusses a study released by ReMax.

Some quotes:

"Conventional wisdom used to be that real estate was a relatively safe, long-term investment that typically appreciates at a rate of five per cent annually," Michael Polzler, regional director of Re/Max Ontario-Atlantic Canada, said Wednesday in a release.

"These statistics clearly tell a different tale. In the top 10 markets, real estate values rose at least eight per cent or more on an annual basis. Even the worst-performing market in the country experienced an increase of close to six per cent annually since 1981."

There is so much flawed logic in this study I don't even know where to begin, even setting aside the obvious the ReMax does the study.

First, they pick the starting point. As with any investment that goes through cycles, timing is everything. Buy at a low point in the cycle and sell at the high point, and you make money.

Second, they only talk about nominal terms, ignoring inflation. This is not a good way to measure returns, because during much of this period inflation was eating up most of the gains.

Third. Since the early 80s, interest rates have gradually come down to the current levels. This has been a huge factor in nominal prices rising. The problem is in looking forward, interest rates cannot drop than much any more, as they are already very low. Mortgage rates dropping from 20% to 5% will be a huge boost to the market, whereas a potential drop from 5% to perhaps 3.5% or 4% is unlikely to spur huge asset appreciation in the future.

Forth, the price of a house is only one outlay. Most Canadians use debt to purchase homes, and therefore the debt servicing costs must be included (along with other costs and benefits) to do a true analysis of rate of return. This study completely ignores this, and assumes a house is like a stock, buy it at one price, and sell at another, without taking into account any of the carrying costs. Any moron in a first year finance course can tell you that you must take into account all cash inflows and outflows over the life of the investment to measure return.

For a typical home buyer the costs include a downpayment, interest payments, principal payments, property taxes, maintenance expenses, utilities, and then transaction costs when buying and selling the home. The benefits include imputed rent (the rent you save by living in your house). Without calculating these, any study attempting to measure rate of return on a real estate investment is simply nonsense, designed to mislead and misinform.

I'm glad the CBC spent some time questioning the study so as not to merely be a mouthpiece to industry propaganda. (sarcasm)

Herald: Calgary, Toronto both 'seriously unaffordable'

2007-01-23T08:59:00.000-07:00

Interesting article in the Herald.

Lots of denial by the local real estate folks. Interesting reaction to the survey.

Some Quotes:

Calgary's skyrocketing housing prices have pushed this city into the same league as Toronto, with both cities described as "seriously unaffordable," in an international survey released Monday.

The third annual international survey of housing affordability conducted by Demographia International said Calgary and Toronto were tied for 14th in Canada while Regina was ranked as the most affordable city in the nation followed by Winnipeg and Quebec City. Edmonton was 10th. Vancouver was at the bottom of the list as the least affordable.

Only a year ago, the survey described the Calgary market as "moderately unaffordable."
Ron Stanners, president of the Calgary Real Estate Board, disagreed with the survey's description of the city's real estate market and said the average family in Calgary can afford to purchase a home -- "not necessarily what they would like but it is there and they may have to accept a little less to get started."

Bank of Canada Blindsided

2007-01-22T15:56:00.000-07:00

This is an interesting article I saw over the weekend about David Dodge, the chief of the Bank of Canada. What I found interesting about it, was that the bank of Canada appears to have been blindsided by the slowdown in the USA and subsequent spread to Eastern Canada.

I guess I’m surprised by this, because when I started this blog in May of 2006, the number one risk that I identified was the a housing bust in the US could lead to a general economic slowdown, which would then spread elsewhere, including Canada.

Our central bank has downgraded it’s economic forecast 3 times during the past few months, but ensures us that the slowdown in the US will be very short-lived and that we should expect a quick economic rebound. We shall see….

Some quotes:

Bank of Canada Governor David Dodge didn't see Canada's steep economic slowdown coming, but he maintains he still made all the right decisions on interest rates.

Mr. Dodge slashed his growth estimate for the fourth quarter of 2006, and notched down his expectations for 2007 yesterday, repeating a pattern that has dogged the central bank for many months. The bank has repeatedly been too optimistic about the U.S. economy and its spillover effects on Canada.

"To me, it just stands as remarkable that the central bank can get the economy as wrong as it has and still maintain the same view on interest rates as it did before," said David Wolf, chief economist at Merrill Lynch Canada Inc.

But Mr. Dodge said yesterday that the revisions are minor, and he had no regrets about any of his interest rate decisions.

"We think that the level of the policy rate is absolutely appropriate at this point in time," he told reporters yesterday after issuing the bank's quarterly outlook.

While on the surface, an economy in a slump normally dictates interest rate cuts, the central bank made it clear yesterday that it is comfortable with keeping rates at their current level of 4.25 per cent indefinitely.

But that's mainly because not only has the Bank of Canada been too optimistic about the growth of the Canadian economy, it has also been too optimistic about the economy's ability to produce efficiently.

CREB: Condos will be king in 2007

2007-01-18T20:40:00.000-07:00

Interesting analysis in today's herald. They claim that demand for single family homes will be down due to high prices and less buyers, but then say that prices will rise. Could one of those much smarter than myself explain to me the logic here? Demand down, supply up ... Prices up?

Some quotes:

The Calgary Real Estate Board, in its annual forecast Wednesday, predicted the average sale price for condos to rise by nine per cent this year and total sales to increase by three per cent. And while single-family home prices will jump by seven per cent, total sales in that market will drop by four per cent, it said.

"I expect there to be more interest in the condo market in 2007 because it continues to be more affordable than the single-family housing market which means that more first-time homebuyers, more families and potentially more seniors will take a closer look at condos as an alternative," said Ron Stanners, CREB president.

The organization said the single-family average sale price will hit $411,948 this year, while the average sale price for condos in 2007 will rise to $284,175. In 2006, the single-family average sale price was $384,998. The condo price was $260,711.

The CREB forecast also has condo and single-family home listings each rising by three per cent this year.

"In 2006, condos represented 27.42 per cent of residential sales," said Stanners. "With single-family prices where they are, we expect condos to become more popular and we expect sales to increase to 30.85 per cent of the residential market."

Lai Sing Louie, senior market analyst for Canada Mortgage and Housing Corp. in Calgary, said the real estate board's forecast of sales in the condo market "jives with our forecast. Overall, condo prices are more affordable than single-detached so demand in that area will be strong,"
said Louie.

"And with that prices should rise. We have a similar understanding that inventory should sort of wind itself through by the second quarter and then prices will probably be moving around then."

CREB: A third of condos and houses on the market in Calgary are vacant

2007-01-17T04:47:00.000-07:00

Thanks to the readers who sent this link from the CBC.

If this data from the CREB is accurate, it leads me to question the notion that there was little to no speculation in the local market.

All along lots of my friends, acquaintances, and co-workers who were speculating in the market ensured me that there was very little speculation in the market.

Some quotes:

At least a third of condos and houses on the market in Calgary are vacant, prompting concern from a real estate agent that sellers aren't being realistic about the price they hope to get for their properties.

"Sellers are having a hard time grasping that we are not in early last year's market," said Kristen McNaughton, a Calgary real estate agent.

"In the fall, we definitely saw a dip, and it cooled down to more of a balanced market and that's what needed to happen."

Housing prices soared 38 per cent in Calgary in 2006, with the average price for a single-family home at $396,870. In 2005, prices went up 18 per cent.

But as a new year begins, the Calgary Real Estate Board said the vacancy rate in listed houses has reached 33 per cent, while in condos it is at 40 per cent.

McNaughton said sellers with vacant properties may have bought in hopes of reselling, or recently moved to newly built homes. The next two weeks will say a lot about the 2007 market, she said, with sellers either pulling their properties off the market to rent them, or lowering their prices.

I personally think that lots of the homes that will come onto the market over the next few months are not pure speculators exactly, but rather buyers who acted like speculators, by purchasing a new home and not selling their old one to take advantage of the perpetually rising market. It is this type of behavior which has caused sudden inventory spikes in other markets as new buyers get gradually priced out of the market and new construction continues to add to the total stock of homes.

Back in Business

2007-01-16T04:39:00.000-07:00

I leave for one month and look what happens. I can’t even trust you guys to keep the oil price up... in the winter!

I must admit that I have been far removed from what is going on in the markets. I had the opportunity to visit the far east, and got to spend some time in China. I purposely did not check the web regularly to try and refresh my thoughts and enjoy my holiday. I came back last yesterday and saw this chart of the Feb Crude contract:

What is going on? Seems that from what I can gather, there is no real shift in the energy markets, except that the sentiment has changed. The winter has been unusually warm, and investors are coming round to the idea that the US housing market downturn is not a 6 month phenomenon to be followed by a resurgent boom, but rather the start of what is likely a multi-year decline, which is likely to have far reaching economic consequences. A slowdown in world economic growth will likely ease the recent tight supply in the oil markets. Hence we are seeing OPEC once again talking about cutting.

I kind of see OPEC as being damned if they do, and damned if they don’t. If they do manage to cut production to reduce the excess supply of crude in the market, they are basically showing the world that there is indeed excess spare capacity, thereby reducing the “fear premium” in the market as any small disruption in supply due to geopolitical events can be met by increasing production. A large part of the story over the past few years was that there was essentially little and shrinking excess oil production capacity in the world, and so any minor disruption (a strike in Nigeria for example) could cause the oil market to soar.

If they don’t cut in the face of slowing demand, then likely global inventories will continue to rise, causing more downward pressure on prices.

My view is by no means universal. The bulls will happily counter that it doesn’t really matter if the US economy slows, because the continued growth in China and India and Brazil will counter that, causing global demand for crude to continue rising.

Maybe.

One interesting thing about my visit to China this winter was the ability to talk to lots of the people living and working there. I was lucky in that during my time in grad school, I had the opportunity to study with many quite well-off mainland Chinese who came to Canada to study. Two of my friends now occupy quite high positions, one in the government and another who works for Lehman Brothers in Hong Kong. What’s interesting to me is that both of these locals were far more scared of slowing Chinese growth than we in the West are. The government publicly admits that that the growth rate is unsustainable. The economy is unhealthily dependent on surging exports, largely to the United States, and is mired in problems like a corrupt banking system that is hiding hundreds of billions in bad loans. They have so much spare capacity in many sectors due to this. For example, many factories have been build that essentially are idle. This continues as corrupt local government officials take bribes to continue the flow of bad loans to inefficient ventures.

Most educated people in China are extremely worried about what a recession would do to their social system, and hundreds of millions of people depend on a quickly growing economy just so they can find low wage employment. In the west, we tend to view China’s growth rate as an unstoppable high speed train. In China, many see it as a train that is out of control, that could easily become derailed.

I don’t have any great insight as to when Chinese growth will hit a snag, all I’m saying is that there is tremendous risk to that growth. This is widely recognized in China, but largely ignored by both analysts and lay people here.

I will have more thoughts on this in the future. I will need a few days to reacclimatize myself to what is going on in the local housing market.

What are your observations about what has been going on in the Calgary housing market?

Shifting Supply Curve and the Illusion of Permanence

2006-12-10T11:39:00.000-07:00

As we head deeper into December, the housing market tends to slow down. Therefore, it is really difficult to get a gauge as to what is happening. Most of the stories in the media seem as meaningless as ever. I find this a good time to sit back and take the time to really think about things from a big picture perspective. The contrarian inside of me is reminding me to continually question my own assumptions. What have I been right about over the past few months? What have I missed? There are lots of naysayers out there, people who like to tell me I’m essentially on crack. Are they seeing something that I’m not?

When I started this blog back in May, we were essentially at the height of the buying frenzy in Calgary. I saw family members, friends, and co-workers acting with absolute hysteria about houses. Some were buying houses sight unseen. Others were agreeing to purchase a pre-construction townhouse, without having a contract for the final price. Most were waiving the usual inspection conditions that you would think are quite necessary when making a large purchase. Many were actively engaged in bidding wars over what were essentially sub-par homes in not very desirable areas.

Being a student of both economics and history, it was fascinating to me to watch this behavior in light of what I was witnessing in the United States, which at the time was the start of a Real Estate meltdown after a long period of “irrational exuberance.” I travel lots to the US and work with many Americans, so I saw a eerie similarity to what people were starting to say in Calgary, and all the BS that I had heard over the previous year from friends and co-workers down in Florida, Arizona, and other spots. “I must buy now or be priced out forever”, “they’re not making any more land”, “Calgary will be the next Toronto/Vancouver…”, just like, “Florida will be the next California”, “California will be the next Europe”, etc. “The old rules don’t apply, historical valuation methods are meaningless”, “Price/Income ratios don’t matter anymore, Price/Rent ratios are irrelevant”, “RE only goes up, so it doesn’t matter what you pay”.

Turns out that every financial mania in history has ended quite badly. By May of 2006, we were only starting to see that occur in many housing markets in the US. When talking to people in Calgary however, I realized that most people here didn’t even know that the US had a housing bonanza over the past few years, never mind that they didn’t know it was at the point of busting. Most people believed that the boom we were experiencing in Calgary was unique, do to all of the unusual local factors at play here.

I started this blog as a way of trying to connect some of the dots that I saw. The main ones being that housing booms were occurring world-wide, enabled at first by a dramatic drop in interest rates and increased ability to borrow, but then continued as a mania developed and people were willing to use greater and greater leverage to buy into this “low risk, high reward investment.” As more and more people piled in, demand outstripped supply, and prices started rising at rates far above historical norms. When people started witnessing this high level of appreciation, speculators started piling in, effectively driving up demand further increasing the gap between supply.

In a market like housing, supply is always much slower to respond than demand, for all of the obvious reasons. It takes time, people, and large financing to build an extra home. But demand for that extra home can increase over-night.

Nobody would participate in a financial mania without a solid story, to help them believe that the prices they were paying were rational, and not a result of temporary conditions. In Calgary, we had the perfect such story, due to the booming energy sector. Since oil prices bottomed after the Asian crisis in the late 1990s, they have been on essentially a 8 year bull run. At first, most analysts thought that the price rise was fundamental but perhaps temporary. When oil hit $35, many analysts said “it might drop, but it won’t go back to 25”. When it hit $40, analysts said, “it might drop, but won’t again go below $30”. When it hit $50, the analysts told us that “it might drop, but won’t again go below $40.” When it hit $70, the analysts told us that there is no way it will drop ever again below $50, and that likely it was going to $100 and beyond.

My question is this, what has changed in the world so much since 2004, when oil was below $40, that has caused the new “floor” to be $50?

For the record, I am not an oil bear. For all of the reasons discussed here and through my own research, I am a believer that over the long run, oil will continue to be an important resource for the world, which will support the energy sector world-wide. However, I also believed this in 2004 and in 1998, when oil prices were much lower. This is why when people tell me that the price can’t go below $50, I really think they are wrong. Why can’t it? 50 is just a nice even number, but that level is meaningless.

I think the reason people give us these artificial levels as “floors”, is because of the perception of permanence. It is difficult for us as human beings to imagine a future that is very different from the present. Think about past situations. When the world was in recession, it felt like the recession would never end. When the world has been booming as it has the last 5 years, it feels like the boom will never end.

Students of economic history will know that at the latter stages of booms, players are willing to take on greater and greater risks, because the last recession has essentially been wiped from memory, and they become convinced that we are now in a new economic era, where it is all high reward and very low/no risk. This unfortunately is a big part of what contributes to business cycles. Near the end of cycles, people take larger and larger risks, while believing that the risks are getting smaller and smaller. How many times have you heard “RE may not appreciate at the same rate as the past few years, but it will at least flatten out and grow slowly; it never or rarely goes down in value.”

The flip side to this is that recessions are generally prolonged by the opposite behavior. People are willing to take less risk that they probably should. It is during these times when asset values tend to drop below long term “fundamental” value. Not only are people willing to borrow less, but banks and other financiers are less willing to lend, due to the recent memory of past losses.

In Calgary, it seems to me that many people have bought into the notion that we are in a new economic era, and that the current boom will last for a very long time. One girl at work told me that it will last for the next 30 years. I asked her why she thought that. She just responded that “that is what everyone is saying.” How’s that for sound economic analysis!

Because the economy is currently so strong in Calgary, people become wedded to the idea that this situation is a permanent one. In the housing market, we’ve seen prices stall since about the summer. Why? From what I can tell, demand remains very robust, but new supply has essentially caught up with it. Housing starts broke that record this year; a record that has stood since the 1970s. Of course developers have responded to high prices and increased building capacity. This has taken time, and was not without it’s headaches, but it has been accomplished.

Some people on this blog have derided some of the “flippers” out there. I actually think that these speculators are good for the long run prospects of the market. In an economic sense, what they have done is transferred some of the risk of new construction from the developers to themselves. This has allowed more houses to be built than otherwise would have had they not been part of the market. Sure, in the short run, it has contributed to the run-up in prices, as demand was larger than it would have been. But over the long term, it is this extra construction that has helped supply levels ramp up, and eventually this will bring the market quicker towards a sustainable equilibrium when builders can produce enough homes per year that are wanted by end-users of all income types.

Every housing markets needs to create homes affordable to all income levels. It is not sustainable that the market is unaffordable to vast segments of our society, including people who work in middle-class professions like teachers, nurses, policemen…
I’ve run into many relatively new Calgarians over the past few months who have told me they are thinking about going back to where they came from, whether it be Toronto, Saskatchewan, or elsewhere. We have a huge labor shortage in the city, but there is no hope of filling the lower end of the job spectrum at this time due to the housing affordability issue. Lots of bulls out there are convinced that everyone in Calgary earns 100K+ and gets huge bonuses and stock options. Sure there are lots of these people, but they are a minority. Many others in the city, had they not bought a home prior to 2006, have essentially been completely priced out of the market (with traditional financing). This is an issue for the long run sustainability of these price levels.

An analogous situation to this is Florida, where for many years the population was growing substantially. Over the past 3-4 years, people started to believe that this was going to continue forever, and that was a major justification for the huge price increases during the RE boom. The problem was that once prices got to such a high level, the migration rate slowed dramatically, and many younger families started leaving the state. This was happening in the background while building was ramping up. For the first time in many years, many school districts started reported drops in enrollment this year in Florida. What happened to all the people that were supposed to continue migrating to Florida justifying ever increasing housing prices? Turns out that high housing prices started to drive people from the State, and prevent others from moving there. I think this is a very real possibility for Calgary. We need people to come here to fill all of the jobs and also to continue to support the housing market, however current housing prices are starting to give many people second thoughts about moving here.

Most “normal” cities have a wide variety of neighborhoods and prices for homes. Usually the far flung suburbs are quite cheap, and allow for people who have good steady jobs to buy a home at a price that’s affordable to them. I think what’s happened in Calgary is that even the “cheap” areas have become extremely expensive. This is likely to be a deterrent for many people moving to the city. This is not New York or London or California. Nobody comes to Calgary for the “culture” or weather. They come to have a good life, good job or business, and have a better standard of living. If that standard of living advantage is reduced or erased by the high cost of living, I am not convinced that the projections of massive in-migration can be accomplished over the near term. There will always be an incentive for the oil executive or petroleum engineer to move here for a very high salary, but the city also needs people to come and be nurses, teachers, and Tim Horton’s workers, and it is these people that will probably choose to stay elsewhere.

Where are we now? Are we at an inflection point in the market? These are the types of questions that I’ve been trying to figure out, and the evidence is largely mixed. I really believe that a lot will depend on the world economy over the next year. When I started talking about the possibility of the US led world recession back in May, most people thought I was smoking something really nice and they wanted some of it. Now people are starting to see that this is a real possibility. Will the next recession be very short lived (aka 2001) or will it be long and protracted, like most in history. What will happen to oil demand and prices during the next recession? I don’t know, but I can tell you I wouldn’t be betting on some magical $50 floor price. The last time I checked, oil was still a commodity, and commodities have historically performed quite poorly during period of slowing or negative economic growth.

I guess in summary what I’m trying to say is that there is lots of risk to the Calgary housing market out there, but most people feel that there is little to no risk. I think 2007 will be an interesting year.

I will be away for a month from Mid December to Mid January in Asia, and will not be adding to the Blog over that period. This is probably fine as there will likely be little market activity to comment on. Everyone have a great Christmas and New Year. Thanks to everyone who has contributed to this Blog over the past 7 months. I know I have learned a lot from you and hopefully you have also learned some things that you’d not thought about before. I will be back online in the second half of January, and hopefully can continue to add value to the debate.

Sooner or later you will pay

2006-12-08T13:30:00.000-07:00

I just saw this article from the Sun from Wednesday. I thought it was different in that it actually questions the conventional wisdom, so I will reprint the whole article here:

"Word on the street is foreclosures are on the rise.

And it begs the question: Are we encouraging people to take on more debt than they can afford?

Gone are the days when you scrimped and saved for a 25% downpayment, then religiously paid off the mortgage over 25 years.

Now it's 0% down mortgages and interest-only payments, with buyers given 40 years to pay it off.

Even Canada Mortgage and Housing Corp. (CMHC) is offering 40-year amortization on interest-only deals, after a number of new private insurers gave Ottawa's crown agency a run for its money.

But it was done in a cloak of secrecy, after Bank of Canada Governor David Dodge grilled CMHC over insuring 35-year mortgages.

There was no public announcement, just a posting on CMHC's website -- after private insurer Genworth Financial made headlines with its 40-year deals.

"To avoid another tongue lashing from the Bank of Canada, CMHC neglected to make this announcement public," complained tax crusader John Williamson, federal director of the Canadian Taxpayers Federation (CTF).

The CTF, through freedom of information, was able to get a copy of a harshly worded letter Dodge sent to CMHC.

It said: "I read with interest and dismay ... that CMHC would offer mortgage insurance for interest-only loans and for amortization of up to 35 years."

Williamson says with two new players coming to town for a total of four private home insurers competing for business, it's time Ottawa sold CMHC, which is sitting on sweet profits of more than $1 billion.

"There is no longer a compelling reason for the federal government to be involved in mortgage insurance," said Williamson, who points out Australia sold its version of CMHC in 1997.

Meanwhile, a new Statistics Canada report shows many Canadians are spending an unusually large proportion of their incomes to keep a roof over their heads.

The golden rule is no more than 30% of a household's pre-tax income should go towards housing costs -- yet in 2004, 1.7 million Canadians spent 30% or more on shelter costs.

A breakdown shows 12% spent 30% to 50%, and 2% spent 50% or more.
Renters, though, were more likely to experience affordability problems.

And now we're seeing signs of a slowdown in our housing market, though Canada won't likely suffer the declines seen in the U.S., according to Century 21 president Don Lawby.
And one of the reasons is Canada is just now getting interest-only mortgages, while the U.S. has had them for years.

"In the U.S., because they can deduct mortgage interest from income tax, people use their homes like an ATM," said Lawby.

"Once you start doing that, you treat your home as a different vehicle than a place to live. It becomes your cash machine.

"So people try to make money off the value of their homes, and that pushes up the value of homes faster."

Sooner or later, the day of reckoning arrives with price corrections in over-baked markets.
With total household debt in Canada approaching the $1 trillion red-alert zone, it's time for reality check.

Scrimp and save, then buy. It's common sense. "

Leverage: Interest Rates and RE appreciation over time

2006-12-06T20:15:00.000-07:00

One thing that has been difficult to comprehend about the recent housing boom is the cavalier nature that many buyers have taken to debt. It almost seems that we have been taught that the more debt you have, the better off you will be, because the bigger asset you will own. This almost seems counter-intuitive, but it is indeed the attitude that many people have. "I bought the most house I could afford", many times actually means, "I bought the most house the bank would lend me."

I spent some time thinking about this tonight. Why are people willing to borrow as much as they possibly can?

The answer is strikingly simple.

In a period of rapid price appreciation, as long as the asset appreciation rate is greater than the interest rate on the mortgage, you win! If your mortgage rate is 6%, but the house is appreciating > 6%, you are better off having more leverage. Not only that, but when the appreciation rate is greater than the mortgage rate, the more expensive your house, the more you win! When people believe that appreciation rates in the future will be greater than mortgage rates, they are willing to borrow vast sums of money to buy a house.

I decided to look back historically at the Calgary RE market to see if this is normal (appreciation > interest rates) or is it an aberration in the current market. With mortgage data from Stats Can in hand ($3 later) and Calgary avg pricing since 1973, I charted the two:

The first graph shows annual house appreciation plotted against the 5 year mortgage rate.

The second graph shows the difference between the appreciation rate and the mortgage rate. If the value is positive, it means appreciation is higher, and it is a good time to leverage up. If the value is negative, it means the interest rate is higher, and leverage will hurt.

It turns out that since 1974, on average mortgage rates have been 1.64% higher than RE appreciation rates, meaning you are better off using large down-payments and paying off your house as fast as you can.

However, there are periods where the appreciation rate trumps the mortgage rates. In Calgary, this most notably occurred in the mid to late 1970s and again since 2004.

To me, these charts show exactly why people have been viewing large mortgages as assets: because during the last 2 years, leverage has been a huge benefit. Leverage will not truly begin to hurt, until the appreciation rate drops below the interest rate as it tends to do over time. This is why during a period of flat house prices, you usually see defaults rise substantially. People who are over-leveraged begin to drown.

This brings me to another question:

Are Calgarians using this unique time of prosperity, no unemployment, and rising wages to reduce debt?
Or
Are they using it as an opportunity to borrow more (as the bank will lend you more as your salary increases)?

Calgary Herald: Housing prices fall with the leaves

2006-12-06T07:49:00.000-07:00

Read this article from today's herald: Not much news in my opinion, lots of Realtorspeak about how now is a great time to buy or sell. I guess for brokers, now is always a great time to buy or sell...

Some quotes:

For only the second time this year, the average resale price of a Calgary home has dropped from the previous month.

And the average price of a single-family home has fallen below the $400,000 mark after being above that level for five straight months.

The Calgary Real Estate Board reported Tuesday the average residential sale price for November was $360,674 -- a 3.58 per cent drop from $374,067 in October.

Residential real estate prices have shown steady and at times impressive increases throughout the year in Calgary. The only other time the average sale price dropped this year was in July ($357,831) compared to June ($367,033).

But despite the slight dip in November, the average residential combined sale price was still 36.4 per cent higher than a year ago when it was $264,432 in November 2005.

The overall average price was down because of a decline in the single-family home market. The average price there dropped to $394,712 from the $413,712 in October.
Kevin Clark, president of the Calgary Real Estate Board, said "prudent buyers" are keeping real estate agents busy "trying to buy while inventories remain strong." "The opportunity does remain strong on both sides of the fence," Clark said. "The buyers are staying in the marketplace, which is . . . what we've encouraged.
"It's in fact almost a little pickup. There was only a small window there in September when it kind of really got a little quiet and it was almost like the end of summer and early fall marketplace.

Since then, sales have remained strong for houses that are "priced and presented well," Clark said.

November combined residential sales totaled 2,313, an increase of nine per cent from last month's sales of 2,122, and a decrease of 11.45 per cent from November 2005 when the sales were 2,612.

The combined sales in November included 1,632 single-family residences, 670 condominiums and 11 mobile homes.

In November of 2005, 1,837 single-family residences, 764 condominiums, and 11 mobile homes were sold.

Lai Sing Louie, senior market analyst for Canada Mortgage and Housing Corporation in Calgary, said the housing market traditionally slows down a bit at this time of year.
"You usually see in price patterns that there's a little easing until the end of the year," Louie said.

"But in terms of the whole market, the market is still very strong. There's a lot of active listings out there. . . .

"We're in a sort of consolidation process right now where you have lots of people sitting on large potential capital gains that if they sell for a little bit less it's not a big issue to them."

Calling a Top

2006-12-05T14:48:00.000-07:00

We’ve had some good (and not so good) debate on this site for a while. Some of the bulls have even argued that they agree that housing is over-valued, but think it will continue to be over-valued for a long period, so it makes sense to buy now and benefit before the “bubble” bursts. The argument usually goes that the bears are simply nit-picking whiners, who don’t know how to make money and are just upset, jealous, or regretful for not buying property before the run-up, and wouldn’t know a good deal if it slapped them in the face. They would rather argue “theories” rather than make a bet to make money in this market.

Fair enough.

My question is: are most of these type of bulls (I’ll call them informed bulls, because at least they understand the risks), going to be smart and/or lucky enough to unload at or close to the top, and not ride investments all the way down to the next trough?

Some would argue that the tops of markets can be identified when all of the good news is priced in, and all of the risk is ignored. It is also the time when the uninformed and unthinking masses pile into an investment because it is a “can’t lose” proposition. My argument all along has been that 2006 looks a whole lot like this scenario in the Calgary residential real estate market.

One thing we’ve learned from other cities, is that unlike stock markets, when real estate markets turn, prices don’t fall immediately, it is the liquidity that dries up, making it very difficult to sell. Only after a period of 12-18 months of an illiquid market do prices begin to drop. Usually they drop slowly over quite a few years in a situation of low liquidity making exiting difficult or painful the entire time, (“I’m not going to give my house away!!”)
When the turn happens, all of the media and “experts” will tell us that it is simply a blip before the market roars back. Will the bulls out there be able to ignore the conventional wisdom of the day and sell, before it gets bad? In many US markets, sellers had a year after the peak (summer 2005) to sell at close to peak values before prices really started to slide. How many did?

US Update: Housing Slowdown Spreads to Manufacturers

2006-12-04T09:05:00.000-07:00

Read this article from the Globe and Mail.

Despite the expected cheerleading from the mainstream financial press in the US (CNBC, Marketwatch…) it appears as though the unavoidable has begun to not be avoided. Despite the media’s assurance last year that there was no housing bubble, the bubble has begun to leak. Despite assurance from the press that the housing slowdown would last only 6 or 9 months before the mega-boom continued, the market is continuing to decline. Despite the economists’ predictions that the slowdown in housing would only be contained to a few coastal markets and would not affect the greater economy, it now is becoming more and more apparent that the housing slowdown is worse than “expected,” and affecting many non-coastal markets as well.

Long term interest rates in the US remain at their historical lows (30 year fixed mortgage at 5.61% this morning, down from 5.8% one year ago). The press likes to blame high interest rates for the housing market decline, but I think that is a bunch of BS. The market was a mania, and all mania’s eventually become exhausted.

We are only now starting to get reports that the housing slowdown is spreading to other sectors in the economy. I expect the news to remain overly optimistic in the near term, with every “bad” report followed by an economist prediction that “this is just a blip, a short term phenomenon before the rally continues next year” or something to that effect. We shall see…

November Stats and Trends

2006-12-01T09:09:00.000-07:00

Another month has passed, and I have compiled the stats for November. None of the data is official yet, so there may still be some tweaking around the edges. I also don't have the final sales and listing volume numbers, so I will add those charts when I get them.

The biggest change for November was that inventories began to shrink after 5 straight months of increases. This is partially seasonal, as you can see from the chart below, but the drop was quite rapid, so there must be other explanations as well. Average sale prices dipped 3.6% month over month, which may help explain why sales volume was up. Are sellers slowly becoming more realistic with prices? Are they willing to negotiate? While there has been lots of chopiness in average prices over the past few months, the average prices have been flat since about May, where the average used home sold for 358K.

Clearly lots of listings were taken off the MLS without a sale. Are these listings coming back in the spring? Or are they gone for good?

Click on any of the images below to enlarge:

Financial Media: My Opinion

2006-11-29T09:45:00.000-07:00

I’d like to make a personal commentary on the financial media. It is quite good at telling you what happened last week, but absolutely dreadful at helping you invest for the future.

To any students of this and past housing booms like myself, it is clear that the cycles happen over multiple years. You typically have a multiple year expansion in prices. In the last few of years of the boom, the population and media forget that housing, just like other commodities, goes through cycles. We are fed with a steady chorus from friends, family, and the media as to why “this time it’s different.” During these last couple of years of a multi-year boom, prices rise at an even great rate, as the people that were thinking of buying a home in the next few years, pile in quickly so as to not be “priced out forever.” In addition, it is during these last few years when amateurs pile into housing as an “investment.” During normal times, there is always a sub-set of the market that are investors who make a living in the real estate business. It is near the end of a multi-year expansion that your local bus driver, secretary, and construction worker are getting in the game.

The final years of excessively high price increases inevitably lead to different allocation of resources in an economy. Real estate construction and related businesses (mortgage brokers, furniture stores, home depot) will grow to be a larger and larger share of GDP. A building boom occurs due to demand spiking not just due to end user purchasers, but also due to investors, flippers, and speculators. As long as there are enough people willing to buy at ever increasing prices, and enough banks willing to loan the money, the boom can and does continue.

If history is any guide, during these last years of the boom, 2 things happen which bring about the end of the multi-year price expansion.

1. The excessive capital allocated to housing construction, leads to an oversupply in the marketplace. Because of the staggered nature of construction and long lead times, this takes time, and only becomes apparent 2-3 years after the building boom reaches it’s pinnacle.

2. At the same time, as prices rise higher and higher, there are fewer and fewer first time buyers that are able to purchase or finance an entry level home. This constant supply of new buyers into a marketplace are needed to continually push up prices. In many places, a “starter” condo that used to cost 100K now requires $250K. The pool of eligible buyers naturally shrinks because it requires a higher income or higher savings to purchase exactly the same product. In a market where wages rise by 7% and home prices rise by 40%, you have a whole lot of people that become “priced out.” In order to for the market not to stall, banks need to begin to offer “creative financing” in order so that the same person who was priced out at the new higher price, can still afford to buy, thereby allowing the market a last final gasp. These types of loans have been prevalent in the United States since about 2004, and have recently become a growing percentage of the Canadian mortgage market, with many first time buyers now resorting to 35, 40, and interest only loans. At some price level, even the banks start to refuse riskier and riskier mortgages, and this is what causes the market to run out of steam.

After past multi-year booms that have ended with incredible rates of appreciation, the market entered into prolonged multi-year declines in real prices. At times of low inflation, you see significant nominal price declines (See Calgary 1982; Japan 1990-2005). At times of higher inflation, much of the gains get wiped out through high inflation. Either way, in the past, the downturns have lasted over a few years (1930s, early 1980s, 1990-1995 in California, 15 years in Japan after RE market bust in 1990)

By most measures, the scale and scope of this boom has been far larger and widespread than any in history. This is what brings me to my original point: The media keeps reporting like it is expecting the longest and largest boom in history, to be followed by a 6-12 month quick mild correction before the market booms again. When news comes out to the contrary, the media is “surprised”.

Read this article today in Bloomberg.

"Sales of new homes in the U.S. fell more than forecast in October, dashing expectations that the worst of the housing slump is over.

Purchases declined 3.2 percent to an annual pace of 1.004 million last month from a 1.037 million rate in September that was lower than previously reported, the Commerce Department said today in Washington. The supply of unsold homes at the current sales pace rose to 7 months' worth."

Why are expectations that the worst is over? Whose expectations? Why does the media not ask difficult questions, like “wouldn’t this downturn be at least as long as past downturns and last more than 6 months?”

Herald: Lots of choice means price break for home buyers

2006-11-28T11:39:00.000-07:00

Check out this article in the Herald. No real news, but some of the usual spin to keep me interested.

Some quotes:

"New listings continue to trend higher in British Columbia and Alberta, which is taking some of the steam out of many local housing markets in those provinces, says a report released Tuesday by the Canadian Real Estate Association.

“A more balanced market gives buyers more negotiating power and time to make purchase decisions. This trend is forecast to continue and result in smaller price increases in 2007,” said CREA Chief Economist Gregory Klump."

I wonder if there is a law against real estate spokespeople mentioning the possibility of actual price decreases?

Does weather matter?

2006-11-27T19:47:00.000-07:00

While enjoying the -25 degree weather today on my walk to work this morning, I started to ask myself, "Why do people live in this place?" I started to think about how real estate boosters from other cities used to justify the never ending price increases by explaining that the weather is terrific (i.e. California, Florida, Vancouver...) Even some readers on this site have claimed that Calgary prices are sustainable due to the nice climate...

I'm not saying they're wrong, but days like today remind me that there is probably little correlation between nice climates and cost of living. Some of the best climates of the world have very cheap costs of living (Northern Thailand for example), while some of the crappier climates have high costs of living (see London, England).

Cost of living in general and home prices in particular are much more correlated with the local economy and all the usual factors, supply of land and new housing, demand, interest rates...

Sorry for ranting today, but when it warms up I'm sure I'll be in a better mood! :)

Friday Inventory Update

2006-11-24T09:53:00.000-07:00

Inventories have declined substantially since the end of October. Sales have picked up while listings have fallen quite dramatically. Some of this could be seasonal. Average selling prices have declined slightly, although I don't make too much of month over month price changes, as it takes a few months to confirm a trend.

My best guess is that as the market has calmed down since the summer, lots of the people listing their homes for "wishing prices" have either taken them off the market, or lowered the prices to more realistic levels. These lower prices are helping increase sales, as demand remains incredibly strong and there seems to be no tightening of credit. In fact, anecdotally, credit is loosening, as a mortgage broker friend of mine told me that she is selling lots of 35 and 40 year mortgages now. It's about half of her business.

I believe that the bears out there who have called the top in Calgary have spoken prematurely. We might have reached a top in prices, but demand is proving to be very robust at this point.

Century 21: Housing market crash not in the cards for Canada

2006-11-22T11:46:00.000-07:00

Don't worry be happy. We can be assured that Canada is different from the United States. Century 21 told us so.

Check out this article.

Some quotes:

Canada's hottest housing markets will not suffer the price crashes seen in some U.S. regions, in part because the speculation and high-risk mortgages that fueled the activity south of the border are not rampant in this country.

A survey by realtor Century 21 Canada found the massive price increases seen across Canada over the last five years have slowed in all but a few areas. Meanwhile, the U.S. housing situation is dire. U.S. home prices have dropped drastically in recent months, with popular markets such as Florida, California, Nevada and Arizona experiencing the steepest downturn.

Don Lawby, the president of Century 21 in Canada, says there are economic and financial factors that differentiate the housing markets in the two countries.

“There is more speculation in the U.S. than we have seen in Canada,” Mr. Lawby said. “Lenders in Canada don't have the same lending policy as the U.S. For the first time in history we have interest-only mortgages. In the U.S., they've had them for years.”

Some Canadians are using non-conventional or riskier mortgages — such as interest-only financing — to buy their homes. However, a recent study by CIBC World Markets found that non-conventional mortgages make up about 5 per cent of the Canadian market, a small amount when compared with about 20 per cent in the U.S.

Because Americans can deduct mortgage interest from their income tax, people are using their houses like cash machines, Mr. Lawby said. “Once you start doing that, you treat your home as a different vehicle rather than as a place to live,” he said. “So people try to make money off the value of their homes, and that pushes up the value of homes faster.”

Over the last six months the median price of all existing U.S. homes dropped 11.5 per cent to $200,000 (U.S.) from $223,000, according to the U.S. National Association of Realtors.

The Big Picture - Greenspan's legacy - Easy Money and it's consequences

2006-11-21T16:21:00.000-07:00

From time to time it's important to take a step back to look at things from a global perspective. A central tenant of my argument is that Calgary does not exist in a vacuum. Economic forces locally are driven by what is going on in the rest of the world.

Here is an excellent summary from Bloomberg of the critique that many have about the US Federal Reserves actions in the wake of the dot-com bust. In order to try to limit the economic fallout, the worlds central banks, led by the US Fed, flooded the world with liquidity, turned on the printing presses, and lowered interest rates to levels not seen since the 1960s. Once the economy started rolling again, they kept interest rates very low for a period of about 4 years (interest rates are still extremely low by historical standards).

The effects of this were felt world-wide, with house price inflation unprecedented in it's scope. House prices from Sydney to South Africa inflated at far greater rates than was normal in those economies. At the same time as these very low borrowing rates were available, US and world economic growth picked up substantially, causing a major bull run in all sorts of commodities, from copper to coffee to oil. We in Calgary have experienced the double impact for low interest rates and a surge in the prices of our major export, energy.

Different parts of the world have experienced housing booms and busts, but not all at the same time. Australia's home prices peaked before the US. There economy has largely been saved so far from a major bust due to the high prices of Australia's commodity exports. Parts of the US started to peak in 2005, other parts only peaking now.

Where do we go from here? That is the question most of us are grappling with. If history is any guide, housing cycles tend to last 7-10 years. For example, the boom of the late 80's in California was followed by a bust that lasted between 1990 and 1997. This boom far outpaced the last, with real prices in the US at their highest level ever. A good table which shows this from the New York Times. Click here to see.

The other question is to what extent will the coming housing bust in the US spread to the rest of the economy. At this point, "expert" opinions vary widely. Boosters like the National Association of Realtors argue that the downturn will be short-lived, and that the boom will continue at some point in 2007. Others, like George Soros, believe that a recession is unavoidable due to the massive amounts of debt that will go unpaid as foreclosures across the country rise.

A third question that is relevant to us in Alberta is, if the world economy slows down, what will the effect be on commodity prices in general and energy prices specifically? We have seen a major boom in oil prices over the past years, while the world economy was growing robustly. Should the major economies slow down, will oil prices drop as well? Many on this blog have argued that the era of cheap oil is over, while others have argued that energy prices could retract significantly from current levels.

Perhaps the run-up in it had lots to do with the printing of money. Over the past 5 years, Gold prices have increased from $280 to $620. During the same period, oil prices have risen from $25 to over $60. Here is a graph showing crude oil prices adjusted for inflation since 1947. Is something really different this time? Or will prices adjust back to historical norms?

Some here have argued that Calgary's economy is basically not that tied in with what is happening elsewhere. I am not convinced. I don't pretend to know with certainty what the future is for energy prices, but I can weigh the risks. All financial assets have risk associated with them. Generally speaking, when all/most of the risk is priced into an asset, it is at it's low point. When none of the risk is priced in, it is near it's high point.

In my opinion, many people are buying homes in Calgary with huge leverage. Based on the price action of the past few years, most of these buyers do not believe or recognize that there is downside risk to their "investment," hence most rent/price ratios are out of whack. When people believe there is low risk, they are willing to take bigger bets and make use of more leverage. Bidding wars and panic buyers which characterized much of the market in 2005/2006, are further evidence that prices have been bid up, including "future appreciation" in the the price they were willing to pay. This is why I believe that the local market is fundamentally overvalued, and is due for a significant correction.

The timing and scope of that correction depends on the future economic conditions. Should the local economy remain strong and energy prices high for the next few years, the correction will likely be slow and mild, with homes losing real value to inflation, rather than significant nominal declines. Should the economy slow and energy prices decline, I expect the correction to be much faster, as the market shifts to re-price the risk that the future is not always as good as the past.

Calgary's solar suburbs

2006-11-20T22:50:00.000-07:00

A little break from the Bulls/Bears debate today.

I found this to be an interesting article. A bunch of homes in Okotoks are getting powered (partially) with solar power.

North Americans are generally regarded as energy hogs by the rest of the world. We use more energy per capita than anyone else, and by a huge factor as well.

Up until now, solar power didn't make much economic sense for most of the world. However, with the rising costs of traditional fossil fuel energy sources, perhaps these alternative sources are becoming more economic.

On a global scale, at the margin the world is able to reduce energy consumption through conservation, using smaller cars/homes... In the past, burning oil and gas was so cheap that there wasn't a great incentive to switch. Has this changed permanently?

This has much more to do with the long run sustainability of our carbon based economies, than anything that would shift the market in the near future. Just something to think about.

Globe and Mail: Housing boom fizzles in Calgary

2006-11-17T17:27:00.000-07:00

Thanks to the readers who sent in this link. I've been out of town for a while now, so haven't had as much time to keep up on the news.

Some Quotes:

The sizzle has gone out of Calgary's housing market as rising inventories and cautious buyers have ended the bidding wars and soaring prices that marked the first half of the year.

Price reductions of $40,000 or $50,000 have become common, realtors say, and some top-end buyers have even tried to back out of deals after realizing they may have overpaid by hundreds of thousands of dollars.

It all adds up to a drastic change from this spring, when it was common to get 30 offers for a single property and homes in desirable areas were snapped up as soon as they were listed. The change, also being felt in Vancouver, is happening at a time when the national-home market is treading water and cities such as Toronto and Montreal are seeing only modest price gains.

“Anybody who thought it was going to continue forever was smoking something funny,” said John Riseborough, a 23-year veteran of the industry who owns Re/Max First in Calgary.

The sizzle has gone out of Calgary's housing market as rising inventories and cautious buyers have ended the bidding wars and soaring prices that marked the first half of the year.
Price reductions of $40,000 or $50,000 have become common, realtors say, and some top-end buyers have even tried to back out of deals after realizing they may have overpaid by hundreds of thousands of dollars.

It all adds up to a drastic change from this spring, when it was common to get 30 offers for a single property and homes in desirable areas were snapped up as soon as they were listed. The change, also being felt in Vancouver, is happening at a time when the national-home market is treading water and cities such as Toronto and Montreal are seeing only modest price gains.

“Anybody who thought it was going to continue forever was smoking something funny,” said John Riseborough, a 23-year veteran of the industry who owns Re/Max First in Calgary.

CTV: Housing market expected to cool in 2007

2006-11-16T20:44:00.000-07:00

Read this article from the CTV

"Heading into 2007 we are looking at a modest slowdown in activity," says Richard Corriveau of the CMHC, "weaker housing starts and MLS sales as well. Nonetheless on a historical perspective, these are exceptional results. We'll be looking at the third strongest year for housing starts on record and the second best year for resale activity as well."

These guys are perfect clones from the US NAR (National association of Realtors) from this January. Back then, the NAR was claiming the slowdown was nothing because "it's still the 3rd best sales pace in history", and that the market would bounce back after a brief "soft landing" and continue to appreciate at high rates, so it's important to buy now before you will be priced out forever.

I've come to the conclusion that the media and most economists are only useful in predicting the past, but utterly useless at imagining a future that is different from the present. I guess that's why the censuses survey of major economists failed to predict 6 out of the last 7 recessions, and why few even imagined a housing slowdown in the US before the slowdown was already 6 months old.

Vancouver Sun: Housing bubble burst in U.S. cools B.C. exports

2006-11-15T07:41:00.000-07:00

Read this article in the Vancouver Sun.

It is interesting to see how economic changes in one region start to affect another. While it is usually easy to see a pattern forming, it is very difficult to predict the timing of when changes will occur. Unlike stock markets, general economic trends to not change direction quickly. They are like large ships with tremendous inertia heading one direction, and it takes time before it can slow, turn, and reverse course. Many US housing markets peaked at some point in 2005, but the masses did not really start figuring this out until some point in 2006. Even hearing news about the other markets starting to tank, most local newspapers around the US simply quoted the local RE industry spokesmen who assured them that “this area is different.”

Canadians probably didn’t even know about the US housing boom and subsequent bust until around mid-2006, when the mainstream Canadian media began reporting on it. Keep in mind, these are still very early days. Many regions in the US are only now peaking, and realizing that “it’s not different here.” RE investors are still searching the country for cheaper areas to pile into. In today’s Wall Street Journal, there was an article about the housing boom spreading to Boise, Idaho. That’s right, Boise. Everyone wants to live there I guess. My point is that RE markets are not all peaking at the same time.

What caught me about this article was the way it clearly explained the cause and effect of a slowing US housing market hurting BC exports and therefore the BC economy. But the authors made absolutely no connection to the RE boom in BC and how it mirrored (with about a year lag) the boom in the US west coast. No connection was drawn as to the how inflated BC real estate market may follow the US bust in like manner. I guess it’s different there…

Calgary Herald: City real estate boom hits nearby towns

2006-11-14T08:14:00.000-07:00

Read this article in the Herald.

Earlier in the year I had the opportunity for work to travel to some smaller communities around Alberta. Olds, Didsbury, Brooks, Leduc... Everywhere I went I commented on how RE was really getting expensive in those towns. Most of the locals would give me the same reply, "You better buy now or you will never afford to live here!"

Herein lies what I think is the largest logical flaw in the entire RE run-up. We are talking about towns with unlimited land to build new housing on. The economies are great right now, and so the bidding wars are driving up the prices. The problem is that in the long run, local economies must support home prices (with possible exceptions being resort towns like Cancun, where only foreigners buy property). It is an impossibility that the majority of a local population can be "priced out" of a market, especially a small town. If most people are priced out, who is going to continue to buy the homes to prop up values?

We saw this in lots of other "frothy" markets like California. The price increases began in the city centres, and then spread like wildfire to the distant communities. If that experience is any guide, it is usually the far-flung communities that crash first, due to the availability of land to construct, and also due to the relatively less desirable location, from a commuting standpoint.

Will Alberta follow the same pattern? We shall see...

Calling a Top Too Early?

2006-11-12T14:35:00.000-07:00

The last few years has seen an incredible bull market in Real Estate worldwide. Many would argue that during the final fazes of this market, prices reached irrational and unsustainable levels, driven in large part by market psychology and mania like behavior of the masses.

One of the features of an irrationally exuberant market, is that it it virtually impossible to rationally predict when it will end. The dot-com era is one example. Many identified the market as a “bubble” as early as 1998, and perhaps saw a top in the market during one of a few major corrections, which occurred in 1998 and 1999, before the true market top in 2001, which is when the tech market finally got knocked down for the count. The boom was so long and so profound, that even many of the bears that had called the bubble earlier, were is serious doubt as to whether they were right, as all of the evidence seemed to prove them wrong. The question is, should one believe one’s mind or one’s eyes?

The housing market has similarly been virtually impossible to see the top, until much after it is over. In the US, the housing boom raged virtually uninterrupted since 1998, with a brief year long interlude in 2001/2002. Many saw a top in 03-04, only to be shocked as the market surged to ever dizzying heights. By most estimates, the top of many US markets came at some point during 2005, while other continued to surge well into 2006 (Seattle, Albuquerque for example). Only about a year after the top of those markets that peaked in 2005 (Miami, Phoenix), can we be fairly certain that we are now at the beginning of a bear market.

This brings me to where we are in the local market of Calgary. Since about June, inventories have been surging and sales slowing, which would indicate that the market peaked in Calgary at some point in the Spring of 2006. Over the past month, however, some trends have shifted again. Inventories are again declining. This is not only due to reduced listings, but also to increased sales levels. Days inventory have started to decline quite significantly since the End of October, which is not usual for this time of year.

Click to enlarge:

This could mean one of 2 things.

1. It is possible that the market is still in bull mode, with the last 5 months merely being an orderly correction before the next major decrease in inventories and then run-up in prices.

2. What we are seeing is a “dead cat bounce”, where the last remaining “greater fools” rush in to buy before they are priced out forever. If this is the case, then you can expect a few months of strong sales, followed by severe weakness.

I honestly can say I’m not sure where we are in this cycle. Both the data and anecdotal evidence is mixed, which bullish evidence regaining strength at this time. What do you think?

Calgary Herald: Housing boom cools: Construction slows 20% in October

2006-11-09T07:09:00.000-07:00

Read this article in the Herald.

In my opinion this headline is misleading, because the big drop was in multi-family starts, which has more to do with timing than anything. The numbers will always spike month to month do to the nature of construction.

Some quotes:

Calgary's new-housing boom took a breather in October with a streak of nine consecutive record months of single-detached construction coming to an end.

But the number of single-detached homes currently under construction in Calgary is still at a record level with 6,509 homes in various stages of construction as of the end of October.

In statistics released Wednesday by Canada Mortgage and Housing Corporation, total housing starts in the Calgary Census Metropolitan Area dropped by 20.4 per cent in October from October 2005 with the decline experienced both in multi-family construction and in single-family dwellings.

Multi-family construction plunged by 50.1 per cent from a year ago -- 210 units in October compared to 421 in October 2005. Single-family construction declined by 5.7 per cent from last year -- 801 units in October compared to 849 in October 2005.

But year-to-date activity shows total housing starts at 14,050 -- a 20.7 per cent increase from the same time last year. Single-family construction is up 24 per cent year-to-date (9,105 units compared with 7,342 in 2005) and multi-family construction is up 15 per cent year-to-date (4,945 units compared with 4,300 in 2005).

Calgary Herald: Housing boom cools: Construction slows 20% in October

2006-11-09T07:03:00.000-07:00

Globe and Mail: Housing starts shrug off U.S. slowdown

2006-11-08T20:01:00.000-07:00

Read this article in the Globe and Mail. There's an incredible amount of "it's different here" commentary for one article. These reporters should read the US reports on the housing market from a year ago. Incredibly similar. Lot's of "soft landing" and "it's different here" comments.

Some Quotes:

The pace of new-home construction rebounded from September's dismal showing last month, a pickup one strategist said is proof the Canadian housing market is not going to mirror the U.S. deterioration.

The Canada Mortgage and Housing Corp. said Wednesday that the seasonally-adjusted annual rate of housing starts rose to 223,200 units from 209,000 units in September. The monthly gains were driven by a 23 per cent jump in multi-unit starts.

“The rise in housing starts in October reflects a rebound in the volatile multiple starts segment, which registered a two-year low in September,” said Bob Dugan, CMHC's chief economist.
Single starts, the bellwether component of the new home market, fell to their second lowest level of the year.

Although CMHC said it still expects residential construction will slow down between now and the end of 2007, October's data suggests Canada's market is in for a soft landing.

On a regional basis, Quebec led the October gains, with a 28.2 per cent rise in new urban home construction, followed by a 10 per cent rise in British Columbia and a 9.7 per cent rise in Ontario. Meanwhile, housing starts in Atlantic Canada and the Prairies fell 15.7 per cent and 6.4 per cent, respectively.

The pace of new home construction is moderating amid slowing U.S. growth, waning affordability across much of the country and growing inventories of unsold homes, Mr. Melek said. “Even so, the Canadian housing sector still remains in good shape — especially compared with U.S. markets — benefiting from a still healthy labour market and relatively low interest rates.”

The soft, gradual decline of the Canadian housing market is in stark contrast to the situation in the U.S., which has fallen into a deep slump.

Don't ignore U.S. slowdown: experts (From CanWest)

2006-11-07T09:52:00.000-07:00

Click here to read the article.

Some Quotes:

Don’t underestimate the impact here of the bursting of the U.S. housing bubble and the ensuing slowdown of that giant economy, a senior Canadian government economist warned exporters Monday. “Economic bubbles burst so quickly that the effect is hard to predict,” Export Development Canada chief economist Stephen Poloz said in releasing the federal trade promotion agency’s latest economic forecast. “The world economy is more resilient today than in the past, and is better able to weather weaker conditions but it would be a mistake to underestimate the potential impact of the recent slowing.”

“Slower U.S. growth has clearly caused Canadian GDP growth to fall short of expectations ... ,” Dodge said. “But it’s important to think of this as a mild, and likely very short-lived, cyclical slowdown for Canada.” However, Dodge also cautioned the major risk to the Canadian economy is that the U.S. economic slump and its impact here is greater than the bank is now anticipating.

“The U.S. economy is at the centre of weaker global performance,” it said. “The fallout from the burst U.S. housing market bubble is spreading rapidly to other economies.” The acceleration of globalization in the past decade has increased the speed at which the slowdown in the U.S. is spreading to other economies, it noted. Here, the impact is already being felt, it said.

Have inventories peaked?

2006-11-07T07:53:00.000-07:00

Click to enlarge:

After reaching a high of about 6800 in late October, the inventories has come down slightly to around the 6500 level. There is normally a slowdown in both listings and sales by November and December.

Have inventories peaked? Or is this just the usual seasonal slowdown, which will reverse in the new year?

Funny Listings

2006-11-04T09:48:00.000-07:00

I'm in the mood for some humor this weekend. Thankfully, in a changing RE market, there is lots of funny listings on the MLS which would have been unheard of 6 months ago. While people were telling me back in May "I have to buy it now or else I'll never be able to afford a place" as they were bidding 20K above listing price, I always wondered how they forgot so easily that markets are not usually like that.

Here are a small sample of some interesting listings that I came across that leads me to believe that the days of frantic multiple offers for sub-par properties are a thing of the past. Please feel free to add to them if you come across some.

While reading some of these, I keep thinking about how many people told me that there were not that many speculators in the Calgary market, and that's a reason why we are different...

MLS®: C3228140

SELLER IS MOTIVATED, MUST SELL! With the best price per square foot in the building, this brand new one bedroom plus den condo has a modern open design with wonderful floor to ceiling windows, providing natural lighting throughout. It also boasts a glasse d deck with a sunny south view, 6 appliances & breakfast bar, a 4 piece bathroom with a very nice vessel sink, in suite laundry & storage, titled underground parking, party room & roof top garden amenities. Walking distance to downtown, transit, Stampede grounds, & 17th Ave. Move in right away! Great for a first time buyer or investor; could even be used as office space.

MLS®: C3231482

Attn Buyers: PRICE REDUCED BY $15,000 ON OCT. 23, 2006!!! Wow!!!

MLS®: C3233995

"NEW PRICING" October 27th WOW! What an opportunity to get into this "NEW" complex. Not only is it new but it is a TOP FLOOR END UNIT with over $7000 in upgrades. ...
Realtor is owner. *SELLER MOTIVATED*

MLS®: C3232297

***PRICE REDUCED***IMMACULATE 2 BEDROOM / 2 BATHROOM CONDO IN SOUGHT AFTER EVERGREEN.***
This property presents great opportunity for first time home buyers or investors. Don't miss this one!!! PRICED TO SELL!!

MLS®: C3234221

Price reduced $15,000. This owner wants it SOLD. A great way to own a new home without the wait or condo fees. This wonder 2 story home is very new.
This home is very new and at this low price you will need to act quickly to take advantage. Act today and move before winter arrives.

MLS®: C3229167

APPRAISED AT $535,000 OCT.17, LIST PRICE $36,000 BELOW! ...
YOU HAVE TO SEE THIS HOME TO BELIEVE IT! CALL NOW! Seller is Licensed Real Estate Agent in the Province of Alberta.

Buy now or be screwed next spring!

2006-11-03T07:34:00.000-07:00

This article from the Calgary Herald

Some quotes:

People looking to purchase a resale house in Calgary can breathe a sigh of relief as homebuyers now have more product to choose from and that situation is slowing down the frenzied pace of activity the real estate market was experiencing just a few short months ago.

Data released by the Calgary Real Estate Board on Thursday showed that October combined residential sales totalled 2,122, a decrease of 2.66 per cent from last month's sales of 2,180 and a decrease of 17.69 per cent from October 2005 when the sales were 2,578.

Kevin Clark, president of the Calgary Real Estate Board, said the numbers are unfolding in a very orderly fashion based on the year so far.

"We're seeing the listing inventory look as though it's beginning to top out . . . Sales have continued to be pretty stable in terms of the time of year. Inventories are up and . . . the listed prices have been definitely adjusting to the marketplace," said Clark.

"Buyers have a welcome window of opportunity with this considerable increase of inventory. Sellers must be competitive to sell before Christmas and buyers may lose out by waiting until spring."

Lai Sing Louie, senior market analyst for the Prairies and the Territories for Canada Mortgage and Housing Corporation in Calgary, said the agency expects prices in Calgary resale homes to level off.

"We had that jump in price (earlier in the year) and basically the market is holding there," he said.

"If someone bought a house anytime in the recent past they're not going to sell it for any cheaper than they paid for it.

"With all the supply out there, you can't ask something that's so high hoping somebody will buy it, because there's so much choice out there now. Prices won't accelerate if there's a lot of supply because you can buy a little bit cheaper if you just look around. There's none of that sort of auctioning and bidding up."

October Stats

2006-11-01T21:11:00.000-07:00

October numbers are final from the CREB. I have updated some charts below. Click on any to enlarge.

Some observations about October:

The market remains quite strong. Over 2000 sold. Average price highest ever.
Inventories continued to increase, although at a slower pace than previous months. This is probably due to seasonal factors as listings tend to decline after the summer and drop until after Christmas
While average prices remained elevated, readers began to see isolated instances of falling prices in certain areas / condos.
Day's inventory has reached the average level of 1999 after a year of extremely low inventory levels.

Attack on Income Trusts?

2006-11-01T07:31:00.000-07:00

Yesterday (after the markets had closed), the federal government announced moves to force income trusts to pay tax, like other corporations. Existing trusts will begin to pay tax in 4 years.

Trusts that have not yet been formed, will be taxed sooner. The specifics (ie tax rate) were not disclosed, so there is much anxiety in the market. Historically, trusts have largely been confined to steady cash flow businesses like REITs and oil producers. Because of the tax free status, many other companies have converted to trusts, many of which do not really have the cash flow profile that are suitable for the structure. Telus and Bell were the latest large companies to announce conversion, and that seems to have prompted action by the Federal Government.

How do you think this will effect investment in the oil and gas sector in the long run?

Remember that corporate taxes are supposed to be coming down for regular corporations so that should be a benefit, although it is unlikely to offset the negative implications fully.

Read about it here in the Calgary Herald, here in the Globe and Mail, and here in Bloomberg.

Let’s Get Micro

2006-10-31T08:58:00.000-07:00

We’ve spent lots of time discussing the entire housing market and the Alberta economy. I though it might be interesting to shift our attention to smaller subsets of the market. For today, let’s look into the downtown/beltline condo market.

There are a whole ton of residential condo projects either being completed, constructed, or planned.

Here is a list of projects that are currently at some stage of development:
(info from this site)

Under construction:

Churchill Estates
Five West II
Princeton II
Arriva I
Castello
LeBeau
Nova
Stella
Vantage Pointe
Vetro
Genco Place
Skytower

Approved (on some construction has recently began)

Anthem I
Anthem II
Anthem III
Anthem IV
Oscar
Riverfront Pointe I
Riverfront Pointe II
Riverfront Pointe III
Riverfront Pointe IV
Arriva 42
Arriva III
Colours of Battistella
Grand haras
Keynote II
Keynote III
Midtown Towers I
Midtown Towers II
Montana
Union Square I
Union Square II
Xenex

Proposed

City Centre I
CPA Lands
Princeton III
Eau Claire I
Eau Claire II
Centuria on the Park
Eden I
Eden II
Grand Royal
Kai Morensen I
Kai Mortensen II
Lausanne
Mission Crossing
Mode
Montreux
M-Tech II
National Condos
Nuera I
Nuera II
Providence Kensington
Renoir Suites
Sienna

Most larger cities have a downtown that has a mix of residence types: High end luxury, mid-priced condos, and rental buildings. In my opinion, it is this mix which adds to the vibrancy of a downtown. Downtown Toronto has a mix of renters, students, artisans, rich older people, and young professionals.

From what I can tell, most if not all of the new residential development close to the core is divided between expensive luxury apartments, and expensive small apartments. Who is the demographic that buys these properties?

My best guess is:

1. Young professionals (generally without kids)
2. Rich older people (kids have moved out)
3. Rich parents who help their young professional kids buy a condo.
4. Investors who want to rent it out.
5. Speculators hoping to flip to one of the first 4 categories.

The market has proven that there is more than enough buyers for the current stock of inner-city condos. The question is will there be enough end users for all of the upcoming expensive residential projects?

Canadian Media beginning to examine possible effects of US housing slowdown

2006-10-29T20:44:00.000-07:00

Read this report from the Globe and Mail.

Up until a few months ago, the Canadian media largely ignored the impending US housing market implosion. I suppose this is understandable, as housing markets move slowly, unlike stock markets, so they don't provide "exciting" news.

A couple of months ago, the Canadian press began reporting on the US housing market slowdown, but made quick mention that this will have little if any effect on the Canadian economy.

Now, Canadian reports tend to mention that the US housing slowdown will likely effect the US economy, which could have an effect north of the border. Most of the commentary simply says that it's the Ontario economy that stands to lose the most, and sometimes also mention the punishment that the lumber industry is taking in Quebec (and perhaps BC).

The mainstream press seems to basically be a good predictor of the past. I guess it's better late than never, and they are slowly coming around.

My guess is that unless an industry is already effected, the media will make almost no mention that is COULD be effected. Stay tuned.

Friday Update

2006-10-27T13:01:00.000-06:00

Thanks for another great week of debate and discussion. Here are the updated graphs for the inventory and days inventory. Inventories have risen slightly over the past week. Days inventory is now above 100.

I, along with some of you, have been perplexed by the CREB data recently. There have been days where it is updated and then other times it seems to make little sense. Because of this, I dug a little bit deeper into what was recorded over the past week. Here are the numbers:

New listings: 700
Solds: 437
Actives to Pending (net): 281.
(This is net due to the fact that 55 homes that were shown as Pending reverted back to active status)
Active to Cancelled/Withdrawn: 293

Taken together, these numbers can explain why the difference simply between new listings and solds do not flow directly into inventory changes.

Meanwhile, it appears that the housing market in the US is declining at an faster rate, causing US GPD to start to suffer. Read this article in the New York Times. The financial press in the US ignored this problem until about 4 months ago. The real question now is to what extent does the declining housing market, a huge driver of growth over the past 5 years, spread to other parts of the economy like consumer spending, which makes up around 70% of US GDP. It could start to get ugly over the next few quarters.

Over the weekend, post any local market observations here.

Have a good weekend everyone.

US: It's possible for housing price declines during strong economy

2006-10-26T13:57:00.000-06:00

Lots of bulls out there argue that there won't be a significant price correction in housing provided the economy remains strong.

What we've seen from many markets in the United States, is that housing sales can collapse despite a strong economy. Read this article from Marketwatch. The latest stats show that median new homes sale prices dropped 9.7% on average in the US. In previously hot markets like Phoenix and Florida, it was much more than that.

In fact, many are now arguing that it is the housing market slowdown that is slowing down the economy and not vice versa. Prices can fall because supply exceeds demand, even in a strong economy. Supply can exceed demand due to a rapid increase in prices. The way these inventory spikes get resolved is either supply slows, demand surges even higher, or prices fall.

In US markets what we saw after the price peaks in the summer of 2005 was about a year of falling demand while prices remained about flat (causing sharply rising inventories). After that first year, we are now seeing prices start to come down. All of this is happening in one of the strongest periods of US economic growth: Low unemployment, high corporate profits, low interest rates, and a surging stock market.

The pattern of peaking prices, following by slowing demand, followed by rising inventories for about a year or two, followed by price declines has occurred again and again, in different cities at different time periods. Not all cities are at the same point in the cycle. One thing is common though; the cities with the greatest appreciation over the past 4 years are now experiencing the sharpest declines.

My view is that over the next 25 years, Alberta will have a strong growing economy due to the massive energy investment. But I don't think this will make the RE market immune from its historical cyclical nature, nor will the level of energy investments be constant over time.
It will cycle along with energy prices, even as it grows over the long term.

Fort Mac, Edmonton, Calgary, and the rest of the world

2006-10-25T16:30:00.000-06:00

Sorry about the lack of posts guys. I’ve just spent that past couple days in Edmonton and Fort McMurray. Got to look at some pretty big projects going on. Spent some time thinking about the Alberta economy and housing.

Here are some of my random thoughts:

The projects going on up north are absolutely massive in scale. Until you go see it it’s really hard to imagine. Most of the jobs relating to this are in Edmonton and Fort Mac. There are jobs in Calgary, but mostly of the white collar variety, (banking, engineers, lawyers). Not sure what the ratio is, but I’ll bet for every job in Calgary related to the oil sands, there are many more in Edmonton and Fort Mac. Anyone know the stats?

These projects are bloody expensive, and fall at the top end of the global supply stack of oil. Basically this means that in today’s high priced oil environment, they get lots of funding and have no problem raising capital. However if the oil price drops back to historical norms, these new projects will be the first ones in the world oil supply chain to get funding pulled. The worker situation is absolutely desperate, and projects are continually getting delayed and face increasing costs. The projects that are already completed and are producing have a much lower cost base, and will continue to produce in a downturn; it’s the new projects that are much less certain.

No shortage of land in Alberta, anywhere. Flying in to Edmonton, you can see farmland as far as the eye can see. You can build lots up and lots out. What there is a shortage of is labor. The industry has not been able to build homes fast enough to meet the surging demand. I view this as a short term phenomenon in Calgary and Edmonton because ones supply ramps up, there is no physical barrier to additional building (see: Vancouver)

Debt. Just because people make lots of money does not mean they are smart with money. In Fort McMurray stories abound about the 25 year olds making over 100K per year and blowing it all on leased trucks, booze, gambling, and drugs. One manager told me he likes it because he knows that these guys will always come back to work after their holidays, because they need the money. I know there are people who are using the windfall to save and pay down debt, but I know a whole lot who are using the opportunity to increase debt levels (banks will loan you a multiple of your income, so the more you earn, the more you can borrow.)

Looking again through listings in Calgary today, many players in the market seem genuinely confused. List prices are all over the map, with similar properties listing for wide ranges. The CREB has been less than stellar over the past few days updated the average prices and inventories, so I’m not too sure what the situation is. I have access to the realtor data and it shows that over the past 7 days there have been 759 new listings, 490 solds, and 714 price reductions.

Where are prices most overvalued?

2006-10-23T16:03:00.000-06:00

Some readers have argued that the inner-city has gone up the most, and therefore is the most overvalued. Others disagree, and say that the far-flung suburbs have the most irrational prices, with no barrier to new housing being built, and no real advantage in terms of location.

What do you think?

On another note, one can start to see some negative trends showing up in the sales prices. One of the downtown apartments I've been tracking is the "Chocolate" building on 1st St SW. On July 24th, a 838 sq foot unit sold for $344,900. On October 20, an identical unit sold for $305,000. So in 3 short months, the market value has dropped by $39,900 or 11.6%.

This is just one example of someone over-paying at the peak. I think the psycology in the market in the first half of the year drove people to pay way too much. The gold rush mentality caused the market to over-shoot, and now we are beginning to see a correction.

Friday Update

2006-10-20T10:04:00.000-06:00

Thanks to everyone for another great week of debate and discussion.

Here is the latest inventory update. Inventories increased by only about 120 over last week, which is strange, because according to the realtor database, there were 811 new listings and 439 sales over the past week. I'm not too sure how the methodology works, but potentially many people withdrew their listings this week unsold.

Click to enlarge:

One of the debates that surfaces from time to time is the inner-city vs. suburb pricing. One reader noted that s/he understands why inner city properties are so expensive, but can't understand the huge prices for cookie cutter boxes out in the new suburbs. Others think that any downturn will effect different parts of the city differently. What are your thoughts?

Why are average prices rising in a "cooling" market?

2006-10-19T09:04:00.000-06:00

Some people have asked me, “If the market is cooling, how come the average price is rising?”

Good question. The answer is simple: the level of sales at the lower end of the market has declined more than at the top end.

Here is a numerical example. It compares a hot market, followed by a cooler market. In the hot market, there are 9 sales with an average and median price of $400,000. In the cooler market, those same homes sell for $10,000 less each, but there are only 7 sales.

As you can see, in this example even though each house drops the sales price by $10,000, the average and median price both rise.

Confusing article in today's Herald

2006-10-18T18:24:00.000-06:00

Earlier this year, one of the most quoted real estate "experts" in California, Gary Watts, told the press that a 15-18% increase in Orange County, California prices for 2006 was "in the bag." Problem was, the supply situation was increasing rapidly and demand was stalling, so he provided little to no explanation for why prices would rise, it's just that they always did...

So I read this in today's Herald:

"The RE/MAX Housing Market Outlook 2007, released Wednesday morning, said percentage increase for average prices in 2007 will have Calgary and Edmonton at the top of the list with housing values rising 10 per cent to $385,000 and $265,900 respectively. "

So after predicting a 10% price increase, the ReMax goes on to give absolutely no evidence as to why this should be. In fact, they give evidence as to why the price shouldn't go up.

"The report said home buyers across the country will breathe a sigh of relief next year because of a nationwide influx of new listings which is expected to slow down the rate of price appreciation in major Canadian centres."

"Sales in Calgary are forecast to drop by eight per cent to 30,000 units in 2007."

Why doesn't the Herald ask critical questions?

Calgary Herald: Listings soften housing market

2006-10-17T08:25:00.000-06:00

Check out this article in today's Calgary Herald.

I love how they interview the real estate agent folks who remind us again and again how this is a "soft landing", and prices are "moderating" and prices are "reducing the amount of appreciation."

At this point, they are still telling us that there is approximately 0% chance of a downturn in prices... Interesting, because in my building, a unit sold for $329K 2 months ago. Currently 2 identical units are for sale for $309K, and they haven't had a bite in over a month. I'm not a professor in mathematics, but to me that seems like at least a 20K (6.1%) reduction in price. If you put 5% down at $329K your equity has disappeared if you had to sell today. This is not the "slower appreciation" that the newspaper is telling me. Many of the condos that I've been looking at have seen similar stories.

In my mind, this is merely the start of a cyclical downturn, and not the end.

Funny things in a changing market

2006-10-16T20:51:00.000-06:00

One of the things that got frustrating for some buyers over the past year, was that no matter what type of home you went shopping for, you felt like you were getting screwed. Perhaps some of you were even engaged in "bidding wars" for crappy homes. Maybe you were interested in buying a house, but the seller refused your offer if you insisted on a home inspection.

Well, one of the things that has changed is the relative lack of listings in the city. Over the past few months, there has been a large increase in inventories. But many of the homes for sale remain priced in fantasy land... for example you may have seen a house sold 4 months ago for 350K, that is now listing for 499K. The house could have been sitting now for sale for over 2 months with no offers, but the seller refusing to realize the hyper market of last spring is no longer with us, and perhaps a 40% increase in the last 4 months does not make sense in today's market.

A few readers have pointed out some interesting changes that they have observed in the recent market. I would like to hear more.

Here is an example of what I would term a "unique" listing:

MLS®: C3234530
The first line in the listing is:
"** NOTE: Price drop $1,000 per day ** How is that for buyers market motivation? "

Now.. this house is probably priced 100K-200K over recent market comps.

I predict the sales tactics will start to get quite interesting. What we've seen in other cities is that as the previously hot market slows, sellers, builders, and agents start resorting to "different" tactics to sell homes, other than dropping prices.

What are some of your predictions as to what we'll see next? It's good to be creative here, so let me hear what you can come up with.

Ottawa eyes privatization of CMHC

2006-10-16T07:07:00.000-06:00

Read this article from the Globe and Mail.

The Feds may be looking to sell off the CMHC. I think it's a very good idea. If a private company wants to make risky loans, or insure risky loans, that is fine. The government should not be doing this. It distorts the economy by lenders pouring too much money into loans that won't be paid back in a downturn. Why should the tax payer guarantee these loans?

According to the article, this is not going to happen any time soon (due to minority government), so just something to think about...

Friday Update

2006-10-13T09:41:00.000-06:00

Thanks for another great week of debate and discussion.

This week, the inventory situation continued it ascent. It has reached the highest level since October of 2004. The days inventory is also increasing steadily, reaching historical norms for this time of year.

Click on the pictures to enlarge:

The interesting thing to me is that period of increasing inventories coincides with the timing of the rest of the west coast. Vancouver has seen a noticeable slowing, as had Victoria, as had the Seattle area since the summer.

Lots of critics continue to tell me that Calgary is essentially an island unto itself, and is unaffected by what's going on elsewhere. I think the housing boom has been world wide, and the cycle has been incredibly similar in different parts of the world and in Canada. Each city has its own economic drivers, but the psychology of the buyers ("buy now or be priced out forever") has been remarkably similar over the past few years.

Sales patterns over time

2006-10-12T15:55:00.000-06:00

I have been collecting the sales data since August to see if there are changing patterns which can be detected over time. Usually I get the data from a realtor friend of mine every two weeks, so I can analyze the data by two week blocks. Now that I have a few data points, some trends seem to be emerging.

1. As the inventories grow, the average days on the market for sold homes has grown as well, but not as fast. This tells me that while more and more people are listing thier homes, most are priced unrealistically in today's market. The homes that are priced well, are still sold quickly.

2. Fewer and fewer homes are sold at or above list prices. This is a subtle shift, but you can see the trend emerging.

Click on either picture to enlarge:

Calgary Herald: Building continues at 'blistering pace'

2006-10-11T08:04:00.000-06:00

The one thing I love about capitalism is watching a market develop. In the housing market it's even more fun, because I get to see it unfold in slow motion. I think 'public' housing is dumb, because the best solution to high prices is ... high prices.

Over the past 2 years, we've seen a surge in demand, then a sharp drop in inventories, then a major rise in prices to balance the market. From there we've seen builders ramp up, slowly at first, but then ever more quickly. Once the building industry could build homes as fast as the market wanted them, we've seen a rise in inventories, followed by a slowing in price growth, and now what looks to be flat prices for a number of months. It's like watching an economic cycle before your very eyes.

Well, what comes next in the economic cycle? Is this just a lull before demand surges again causing another round of pricing increases? Is it the permanently high plateau, where supply and demand will remain harmoniously in balance? Or is it the tipping point, where supply continues to surge ahead, and demand stalls or perhaps even declines slightly, causing a glut of homes for sale, which will eventually cause prices to come down?

Read this article in today's herald about new supply in Calgary.

Calgary Sun: House starts down 40%

2006-10-10T15:53:00.000-06:00

This article from the Calgary Sun.

Housing starts in the Calgary area last month were down almost 40% from a year ago, according to the Canada Mortgage and Housing Corporation.

The drop, another sign the city's residential realty market is cooling off, was mainly the result of a sharp decline in multi-family construction.

Multiple housing starts plunged 78.5% from 856 in September 2005 to 184 last month, negating the 5% gain posted in the single-family market.

"New multi-family construction can be volatile from month to month and that is what we just experienced," said Lai Sing Louie, the CMHC's senior market analyst for Calgary.

There were 854 single-detached units started last month, a new record for September, and it was only the third time new construction in that category has exceeded the 800-unit level.
But the number of overall starts in the city was off 37.8% year-over-year.

Despite the drop in multi-family construction last month, year-to-date housing starts climbed to 13,039, a 25.7% increase over the first nine months of 2005.

Nationally, housing starts fell in September to their lowest level since August 2005, but TD economist Sebastien Lavoie called the dip "no big deal."

"What is more important to notice is that the recent trend in starts is consistent with our scenario of a soft landing," said Lavoie.

"The Canadian new housing market is not cooling off like in the United States."

In the third quarter, housing starts across the country were down 6.6% year-over-year, but in the U.S. they declined 20%, he said.

"The softer downtrend on this side of the border is explained in part by lower mortgage rates, stronger job creation and better financial help among households," said Lavoie.

"Also, Canada has an additional card in its hands that the U.S. does not have, Alberta."
Starts in the province were up 21% in the third quarter from a year ago.

But even without Alberta's contribution, the rest of the country would have experienced a drop of 7.3%, "a fraction of the decline in the United States," said Lavoie.

As well, three other provinces - Prince Edward Island, Nova Scotia and New Brunswick - posted growth in housing starts during the third quarter.

"In the U.S., starts are down in every region," added Lavoie.

What is going on in your neighborhood?

2006-10-10T07:50:00.000-06:00

Sometimes it is useful to take a step back from the macro situation, to focus in on what is happening on a street by street and neighborhood by neighborhood basis. This is the stuff that the city-wide statistics miss, but having a good handle on it, is a great leading indicator to what the statistics will eventually show.

What are you seeing in your neighborhood?
Have the specuvestors stopped buying?
What is going on with listing and sale prices on an apples to apples basis?
What do you hear about the market from relative, co-workers, and friends?

Calgary Herald: The market is night and day from last spring

2006-10-08T09:35:00.000-06:00

This article appeared in today's Herald. It is an excellent summery of Today's market. If I didn't know any better, I would say that the journalist for this article is my twin sister. Not really much new for readers of this blog, but I think it is a good, honest assessment of the state of the market. Perhaps the REJ is correct and I can no longer call myself the Contrarian, as the mainstream press seems to have picked up most of my talking points.

Some quotes:

Just a few short months ago, Calgary's residential real estate market was described in the following terms -- red-hot, scorching, sizzling, frenzied, chaotic. The picture was of a marketplace on overdrive. Prices soared. Multiple offers on homes. Houses sold virtually in a flash. Sellers received offers on homes for more than the list price.

It was a crazy phenomenon a few months back that garnered attention across the country.

But today's residential resale housing market has changed quite dramatically. It's like night and day compared to the spring.

The sense of urgency to make a decision on buying a new home has vanished.

"A lot of the buyers are really taking their time. They see the market slowing and they're thinking if they wait another month the prices are still going to come down."

"With that and the influx of homes that we have on the market, of course, that pushes the prices down a little bit," says Wells.

During the market's peak a few months back, there were 124 homes sold on average each day compared to the current 78 sales per day.

Today, 24 per cent of the sales occurred in the first two weeks, 24 per cent occurred in the second two weeks, and 52 per cent occurred after 28 days. Earlier this year at the market's peak, 65 per cent of the sales took place in the first two weeks.

Also at its peak, the average list price versus the average selling price was over 100 per cent, "quite an unprecedented situation," says Clark. Now that ratio is at 98 per cent.

"The next six months, the last quarter of 2006 and the first quarter of 2007 will be determined by the inventory levels. It is the inventory and only the inventory that we're watching."

Richard Corriveau, regional economist for the Prairies and the Territories for Canada Mortgage and Housing Corp. in Calgary, says today's Calgary real estate market compared to six months ago is "night and day -- a totally different marketplace. Things change very rapidly in Calgary and the resale market isn't an exception to that rule."

He says about three months ago, the local market saw the first year-over-year decline in sales in over two years and with that the market saw a $10,000 decline in average price.

"That was the turning point in the marketplace," says Corriveau. "And with that, a lot of people became concerned about whether price pressures would be in a downward direction. And I think a lot of people who were postponing listing their properties -- whether they be people upgrading to a new home . . . or speculators -- they saw some concern once prices dropped that $10,000, and without risking further price collapse, they all listed their properties at the same time."

He says another key defining factor is active listings, and they have increased almost three times from what they were in June and almost four times what they were earlier in the year."

Local market observations

2006-10-06T10:04:00.000-06:00

Thanks for another great week of debate and discussion. This week was made interesting by the mainstream media getting quite negative on Calgary in general. Probably too negative in my opinion, as our economy remains incredibly strong (much stronger than the rest of Canada anyway).

The Real Estate market is continuing to show signs of exhaustion; with the increased inventories slowly helping to ease much of the panic buying that was happening a few short months ago.

What are you seeing in the market? Any local observations?

Happy Thanksgiving Weekend!

Official CREB data for September

2006-10-05T11:45:00.000-06:00

I've gove over the official September data from the CREB. The most interesting shift in my mind was the monthly change in listings and sales. They are quite a bit steeper than the seasonal norm. No other real surprises for readers of this blog.

Click on any of the images to enlarge:

Calgary Herald: Buyers get break as home market cools

2006-10-05T07:24:00.000-06:00

This article from the Calgary Herald:

"Calgary's resale housing market, which was boiling earlier this year, has simmered down with decreased sales, increased listings and stabilized prices in September.

Kevin Clark, president of the Calgary Real Estate Board, said conditions in the third quarter of this year "seem to be offering some reprieve for buyers in some areas and in some price ranges."

Clark made sure to create the sense of urgency amongst buyers:

With inventory increasing, Clark said, "We have, for the time being, left the booming market far behind."

But he said buyers "would probably be wise not to become too cavalier about this temporary situation, because they may once again pay more next year."

I figure as the head sales guy, it makes sense that he wants to create a sense of urgency, that is simply sales 101. And he did hedge it by saying "may," so compared to his counterparts in much of the world, his was a pretty realistic assessment.

It's an interesting comparison, because when markets started to slow last year in parts of the US, the local Realtor spokesmen would generally say it was simply a lull before the next round of massive price increases so everyone should jump in and buy before they were priced out forever. It took about a year from the peak before you started hearing different types of assessments.

In Calgary, we are still probably within a couple of months of the frenzied buying peak (June 2006), so it's normal that market participants are confused as to the future direction. Whenever a market shifts from a long running trend, it is very difficult to determine if this is a true shift or simply a consolidation before the old trend continues.

My bet is that we are at the end of the 10 year bull market and 2 year super-bull market because supply growth has finally caught up to population growth and most of the upside to the Calgary economy is already priced into the housing market.

I will try to put the graphs together with the official September data later today or tomorrow.

A look to the West

2006-10-04T11:27:00.000-06:00

The Vancouver Sun released an article declaring the end of the “seller’s market” in the lower mainland. While the tone of the newspaper was considerably more bearish than it has been in the recent past, it made sure to add all the usual caveats that the city’s market had essentially reached a permanently high plateau, and that while prices might decline slightly, they will not decline very much.

“Somerville said real estate markets pass through a balanced period when they are rising from depression to overheated, and will also hit balance, or "equilibrium" on their way back.

"Since [the market] has been very overheated, it's quite reasonable to go back to balance," Somerville added.

"Nobody's saying [the market] will continue at the pace it has been forever," Rishel added.

"There are always going to be peaks and valleys. But we don't anticipate the valleys will be very deep and hopefully the peaks won't be as high."

Oil Prices

2006-10-03T13:47:00.000-06:00

There’s been a good discussion over the past few days about the future of oil prices. I generally try to keep the postings related specifically to the housing market, but because such a large proportion of the Alberta economy depends on a robust resource sector, I think it is useful to debate this issue and explore the assumptions people make regarding the future of prices.

What I gather from many of the comments here, is that most people fall into two general camps.

1. The “Peak Oil” camp.

Here you can read a summary of the peak oil theory from wikipedia.

http://en.wikipedia.org/wiki/Peak_oil

The basic theory is that at some point, the world will peak in conventional crude production and that it will start to decline, while rising economic growth will cause oil demand to continue to grow.

That ‘peak oil’ will occur is not really the debate. The debate is WHEN will it occur. Some have argued that it already has occurred.

The other debate is what will be the consequences. Some argue that declining crude production will result in technological shifts and conservation and alternative energy uses that will continue to power the world’s economies. Others argue that it will cause a massive economic catastrophe, and plunge the world into a major depression.

If you believe that the world’s production has already peaked, then you likely are very bullish oil.
One of the leading proponents of this view is Matthew R. Simmons, who advises the Bush Administration on energy policy and wrote Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

2. The ‘other’ camp.

These people generally argue that “peak oil” proponents are alarmist in that there is still lots of time left before the world as a whole reaches it’s peak production point. Underinvestment during the oil bust of the 1980s and 1990s means that there may be many untapped oil deposits, which in the future can be added to reserves. In fact, the past few years of high prices have incentives the world to re-invest in exploration and production, which over time will yield higher reserves.

I guess you could say that I personally fall in between the 2 camps. In the long term, I’m sure that oil will become more and more scarce, and this should over time push up prices as demand grows.

However, I’m not convinced that this is a linear process. The world economy has grown at an incredible rate over the past 5 years, with both the developed and developing world expanding quickly. This has led to a surge in demand of oil and other commodities, resulting in the bull run that we have seen. We do not know how the demand will react to a slowdown in economic growth. Economic growth is cyclical which means that the recent high growth will eventually be followed by slower growth or perhaps negative growth (recession). There are signs that world growth is slowing already, with the largest economy and consumer of energy (the United States), showing significant strains. In the short to medium run, I would expect the rapid expansion of energy demand from the past few years to ease.

What does that mean for price levels? I don’t know for sure. My feeling is that prices won’t drop much lower unless the economy slows down much more. If a recession does come, I think there is significant downside risk for oil prices in the short to medium run. Over the longer run (more that 5-10 years), I am quite bullish, as a weaker world economy will eventually become stronger, and when high growth rates resume, world demand will squeeze supply once again.

I also think that if the economy weakens, some of the geo-political risk will no longer be as significant, because there will be spare capacity again. Right now, there is little spare capacity, so if any of the risks to the major producers comes to fruition, there is little slack in the supply chain.

I know there are lots of differing (and sometimes heated) views on this topic, so please try to keep the conversation civil. :)

September is Over; Sales down, prices rise, inventories continue rise

2006-10-01T15:05:00.000-06:00

Here are some early graphs of the data from September. Average sale price was just over $370,000. Median sale price was $332,000. Total Sales were around 2300, but it will take a few more days before I get some definitive numbers. Inventories climbed steadily also in September to bring them back to 'normal' levels after the crazy drop in the last year. They currently sit at the highest level in 16 months after a period of incredible lows.

Click on any of the graphs to enlarge:

Some negative press

2006-09-30T09:10:00.000-06:00

Thanks for another great week of comments and debate. I apologize as over the last week my work and family has been taking tons of time, so my posts have not been as regular.

A few readers commented about how I didn't post this article yesterday from the Calgary Sun. “We not only concur that growth in the Alberta economy has passed its peak in the current cycle, but that the risks of a hard landing have been rising.”

The reason I didn't is that the article merely talks about a similar report that I mentioned in another post, while referencing a different article from the Globe and Mail. The Sun tends to have more sensational headlines "Boom Could Bust!".

What is interesting is that all of the media euphoria over the recent economic boom has started to give way to more negative reporting.

This article appeared in Today's Herald. "Oilsands party hits a bump."

"It was a year ago this week that oil bulled through the $60 US a barrel barrier.
What followed were 10 months of unbridled euphoria as oil prices, fuelled by international global tensions and the fallout from natural disasters like hurricane Katrina, soared to a modern day high of $78.40 in mid-July.

Since then, however, it's been mostly downhill. At least that's how it feels.
Not only have oil prices plunged precipitously, falling back to the $60 range this week in the most dramatic price drop in 15 years before rallying slightly, but it appears public and investor confidence is wavering right along with falling prices.

The implosion of the North American natural gas market, where prices have plummeted to 45-month lows, hasn't helped matters either.

Indeed even the best minds in the industry are struggling to explain why their natural gas forecasts -- including one that saw a Calgary energy trader lose an estimated $3 billion of his mutual fund's dollars in a few weeks -- have been so far off the mark.

It comes as no surprise then, that in spite of the record profits shown by many industry stalwarts throughout the first nine months of the year, an air of uncertainty, if not discomfort, appears to be settling in on the oilpatch heading into the last quarter of 2006."

I continue to believe that in general, the mainstream press is usually 6 months late in talking about economic trends. This economy is still very hot, but of course there are many negative things associated with that (shortage of labor, lack of affordable housing, inflation). The media has begun to focus on the negative things even though they are not new.

I have no idea if the media reports can change the mood of a population, but I would guess that they can certainly influence it. So much of the housing demand comes from consumer confidence. As long as the population felt that nothing could go wrong, they were willing to borrow greater and greater sums of cash to buy homes and other big ticket items.

Is the mood changing? What do you think?

Globe and Mail: Recession stalking Central Canada

2006-09-29T06:45:00.000-06:00

An interesting article in the Globe and Mail regarding the prospects for growth over the next few years. It predicts that the whole country's economy will slow down, but with a recession coming to Ontario and Quebec, and just a slowdown in the West, but no recession.

Lots of covering their asses in the report however, with lots of caveats about the "risks of a hard landing have been rising", quickly followed by "probably coast to 3% growth per year." I for one, would like to see these bank economists stick their necks out and make a call without all the hedging. But maybe that is just me...

Some quotes:

The Ontario economy has nearly stalled and, with the U.S. slowdown breathing down its neck, Canada's biggest province could possibly fall into recession, a new forecast from economists at Toronto-Dominion Bank warns.

“There is a chance of recession in Ontario. We have some numbers that are getting close to the line,” said Derek Burleton, co-author of the bank's latest provincial forecast.
Ontario has already been struggling for a couple of years as a high Canadian dollar and rising energy costs have undermined its key manufacturing sector. However, the slowdown on the manufacturing side of the economy has largely been offset by a pickup on the services side, driven by strong consumers and a healthy job market.

But that delicate balance is being upset by the U.S. slowdown, which is only just beginning to be felt in Central Canada, he said. “Jobs will be the next shoe to drop.”

Even the western provinces will feel a pinch from the global economic slowdown, economists say — although the divide between Alberta and the rest of the country will continue for a couple of years. “As the headwinds begin to blow from the south, the respectable overall growth trends in Canada are masking an increasingly skewed regional picture,” TD says.

“We not only concur that growth in the Alberta economy has passed its peak in the current cycle, but that the risks of a hard landing have been rising.”

The most probable scenario, however, is that the Alberta economy will be able to avoid the boom-bust cycle of the past, and coast gradually to growth rates of about 3 per cent a year, down from the 6.8 per cent expected this year. Prices for oil, gas and other commodities are sliding, the TD forecast says, and some capital spending plans will likely be delayed or cancelled.

Asking Price Distribution

2006-09-28T14:48:00.000-06:00

One of the readers asked about the asking prices in Calgary. Are they above the sales prices? Is that why inventories are building?

I managed to get the realtor data from Sep 27. This is just a snapshot in time, but I think it is illustrating. I divided up the listings by price levels... 200K-250K, 250K-300K... to see what the distribution looks like.

Here it is:

Click on picture to enlarge:

The average asking price was $475K, a full 100K over what the average sale price was during the past month. Same is true for the median.

The other obvious observation is the weight of high priced homes. The bulk of homes are priced between 250-550. While there is a large number priced higher than this, there is almost nothing priced lower. The distribution is skewed. This is not news to anyone looking for a house, it just is interesting to see the graphical representation of it. One may expect that in a flat market, you see just as many lower priced homes as higher priced ones. In a rapidly rising market like we have seen, all the stuff at the bottom disappears... I am interested to see how this distribution changes over time.

Calgary Herald: Calgary housing prices up a sizzling 50 per cent

2006-09-28T11:45:00.000-06:00

An interesting article in the Herald.

While it gave the statistics for the 3rd quarter prices, it spun the news of the slowing market in a way I haven't read before, at least locally:

"The report says the burgeoning economy, low unemployment rates and low inventory levels remained the leading factors that pressured Calgary's house prices upwards.

However, regardless of the soaring prices that characterized the market even during the typically slower summer season it is expected that the market's activity will temper for the remainder of the year. Ted Zaharko, broker/owner of Royal LePage Foothills, said the city's housing market continued to perform at an unprecedented level over the past eight months.

However, we are now beginning to see a shift in the purchasing price, said Zaharko. We are seeing that buyers have become reluctant to get involved in the frenzy that has typified the city's market up until now.

The Royal LePage report said no economic factors are contributing to the slowing of activity within the Calgary market but the slight slowdown has been the result of frustrated buyers and sellers who are no longer willing to participate in the market's chaos and escalating prices.

But the report said the market in Calgary will remain in the seller's favour throughout the rest of the year. As demand for new homes has leveled off, the slight reprieve has also affected builders in Calgary, allowing them to set more realistic timelines to complete new developments, helping to return the market to a more normal pace, said the report.

I'm not too sure I agree that sellers are "no longer willing to participate," as listings seem to be growing at quite a healthy clip.

I agree with the argument that Calgary will remain in the seller's favour for the rest of the year. Provided that inventories (and day's inventory) stay at or below their historical norms there is little pressure on sellers to reduce prices. Currently, prices are getting reduced, but only from ridiculously high asking prices. Anything priced within comparable comps to the past 5 months is getting snapped up quite quickly.

Calgary Herald: Calgary housing prices up a sizzling 50 per cent

2006-09-28T11:42:00.000-06:00

An interesting article in the Herald.

While it gave the statistics for the 3rd quarter prices, it spun the news of the slowing market in a way I haven't read before, at least locally:

"The report says the burgeoning economy, low unemployment rates and low inventory levels remained the leading factors that pressured Calgary's house prices upwards.

I'm not too sure I agree that sellers are "no longer willing to participate," as listings seem to be growing at quite a healthy clip.

Inventory Update

2006-09-26T13:00:00.000-06:00

Official CREB inventories rose over 6000 this morning. One reader of this site mentioned that he heard on the radio last night that it was the “highest inventories ever” in Calgary, which of course is not true.

I have the inventory data since 1999. Since that year, the highest recorded inventory (end of month) was in June 2004, where 8577 listings were unsold. The highest in September was in 2003, where 8457 listings were unsold.

While the speed of growing inventories since June this year has been incredible, we are still quite far away from breaking any records in terms of absolute levels.

Are the financial markets confused?

2006-09-26T12:31:00.000-06:00

It has been a very interesting week regarding the financial markets. Over the past week, you can find multiple stories and evidence that the economy is in great shape. You can also find many stories and evidence that the economy is on the verge of a great fall, and North America is slipping into a recession.

Watching the dynamic between the energy markets and the stock market is also very interesting. The crude market has sold off significantly over the past month, due largely to evidence of a slowing US economy. However the US stock market has continued its accent; the sentiment seems to be that lower energy prices will help the economy continue to grow. If the economy continues to grow rapidly, one would expect oil prices to rise. It’s like the old chicken and egg situation. In this case, which is the chicken, and which is the egg???

Here are some interesting stories:

Falling gasoline prices fueled a larger-than-forecast rebound in confidence among U.S. consumers, the Conference Board reported today.

Stock and Bond Funds Both Love That Cheaper Oil

Lower oil, gas prices hitting Canadian drilling companies

Crude futures turn higher to trade near $62

My personal view is that as long as the world economy is growing quickly, oil prices will stay high. If the economy falters and goes into recession, there is a good chance of a precipitous decline in oil prices. These headlines are confusing because I think at this point in the business cycle, most analysts and investors do not have a good handle on what direction the economy is turning. There is lots of bullish and bearish evidence, without a clear consensus of causes and effects.

I expect the choppiness in the oil market to continue for at least a few months until a new trend in which direction the economy is headed is more firmly established.

US housing data starts to turn negative

2006-09-25T16:12:00.000-06:00

Sorry for the late post today, too busy with other stuff...

Not much news out of Canada today specific to the housing market. The US numbers came out however and they show that August had the first national drop in the median sale price in 11 years.

Here is a good summary from Bloomberg.

"Prices of existing homes in the U.S. fell last month for the first time in 11 years as sales declined to the lowest level since early 2004.
The median price of a previously owned home dropped 1.7 percent in August from the same month last year, the National Association of Realtors said today in Washington. Purchases dropped 0.5 percent to an annual rate of 6.3 million.

Sellers may have to keep lowering prices after the supply of homes on the market jumped to the highest in more than 13 years. Falling prices will make it harder for consumers to tap the equity in their homes, a major source of cash in recent years. That may pose a risk to their spending, which makes up 70 percent of the economy.

"There is worse news in the pipeline,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. ``With inventory still rising, there is no chance of any short-term relief. Prices and volumes have a long way to fall yet.''

My continued worry is that the economic fallout from the US will spill into Canada, both in terms of decreased exports, as well as falling commodity prices as industrial and consumer demand weakens.

Nuclear Power for Alberta?

2006-09-23T09:10:00.000-06:00

Slightly off topic today, but hey, it's the weekend. An interesting read in today's Herald about the possibility of a nuclear power plant up north to help power the oil sands. I imagine that even if they started permitting today, it would be at least 10 years before we got the 1st megawatt out of the plant.

I'm personally in favor of nuclear power. What do you guys think?

Friday Update

2006-09-22T08:52:00.000-06:00

Thanks for another great week. Lots of fierce debate between the various factions; even some personal insults thrown my way, appreciated as always. :)

A couple interesting articles in the Herald today.

The first talks about the souring property values and the effect of property taxes in the coming year.

The second talks about how certain planned oilsands projects are in jeopardy because of souring costs and weakening oil prices. Projects that were thought to be break even at $30 oil are now closer to break even at $50. Most of the oil executives are still quite bullish over the longer term for oil prices, but are getting very concerned about the huge cost increases to make the projects viable.

An update on the inventory situation. It continues to grow at a healthy clip. Inventories are now the highest they've been in 16 months, but still below the 7-year average.

Click to enlarge:

Have a great weekend

Globe and Mail: U.S. real estate crash could cause global ripples

2006-09-21T14:55:00.000-06:00

An interesting article here about Robert Shiller's warnings in today's Report on Business section.

Schiller is a Yale economist who is famous for his book "Irrational Exuberance" which predicted the collapse of the dot-com bubble, when many "experts" were arguing that we were in a new economic paradigm and that the old fundamentals of valuation were no longer relevant.

He has argued about a possible real estate bubble in the US since about 2004, when home prices were exploding there, with no end in sight. He just gave a speech in Vancouver and this article summarizes some of the things he said.

Some quotes:

"The United States real estate market has entered a period of "unprecedented volatility," and banks, insurance providers, and government housing agencies should brace for global ripple effects, Yale economist and author Robert Shiller told a conference yesterday.

"There is a serious risk of worldwide recession coming up in the next couple of years because of the turning of the real estate market," said Mr. Shiller, speaking at the annual congress of the International Union for Housing Finance (IUHF) in Vancouver.

Real estate price swings used to be local phenomena, he added, restricted to cities or regions. Now, such movements can affect entire countries and, in the case of the U.S., where the value of residential real estate held by households and non-profit organizations was an estimated $21.6-trillion at the end of 2005, influence the economies of other nations. While he mentioned no other countries by name, Canada is the largest U.S. trading partner.

At the moment, a common real estate story nearly worldwide is that of the neighbour who sold their house for well above asking price, generating 'can you believe it?' shakes of the head and a comforting impression that prices can only continue their steady climb, Mr. Shiller said.

"If the new story is that 'our neighbour thought his house would sell for $1-million but he couldn't sell it for $600,000,' then that would be a big hit to confidence," he said.

Lower confidence translates into lower demand for home furnishings, construction materials and, in the worst case, interest rate cuts meant to stimulate demand but which have little effect as consumers sit on their wallets, he added.

"That's [U.S. States Federal Reserve Board chairman] Ben Bernanke's worst fear -- that you cut interest rates to zero and hit a liquidity trap," Mr. Shiller said, adding that is a possibility, not a prediction.

National Post: Home sweet pricey home

2006-09-21T09:33:00.000-06:00

An interesting article in the National Post.

Some interesting quotes:

If you're in a community that's done well, stay put and borrow against your equity for other real estate investments, advises Mr. Clark in Calgary.

"Borrowing against equity is the strategy that Carolyn Hind has decided on. "I'm not prepared to sell where I am," says Ms. Hind, who owns a condo in Windsor Park, a convenient area close to Calgary's city centre."

"I could get $130,000 more than I bought it for five years ago, but where would I go?"
Ms. Hind and her boyfriend, Peter Donahoe, bought a 500-square-foot condo this year in the downtown Connaught area as a renovation project. "It was a calculated risk," she says. "We wanted to see if we could do it. The conditions were so favourable that we just jumped in."
The couple added their own sweat equity after work -- she's an ESL instructor and he's a flooring contractor -- by gutting the kitchen and bathroom and redecorating. They sold it less than three months later for 30% more. In August, they bought again, this time a three- bedroom townhouse in the older Bowness area."

I found this section interesting for a couple of reasons.

First, many people tell me there are very few "investors" in Calgary real estate, as they are investing in Calgary real estate.

Second, one thing we saw from the hot market in parts of the US, is that people that made money flipping RE during the major boom, continued to pile the profits into more property, rather than take money off the table. Many of them have gotten creamed when the market turned, in many cases wiping out the previous gains from 2 or 3 succesful flips.

I'm sure there is lots of smart money that has invested earlier in this cycle and taken money off the table, but I would bet there's also lots of people currently piling into the market for "investments", even as evidence grows that the previous price gains are unlikely to continue.

A couple of broader economic stories

2006-09-20T09:03:00.000-06:00

Without much interesting news on the local housing front, it is interesting to note some broad themes in the general economic picture that are getting some press in the media.

1. Amaranth, Eight Years After LTCM, Shows Lapse in Risk Control. This is an interesting story because the main trader in this case is a Calgarian, who unfortunately for him and his investors made a large bet on natural gas last month that went against him to the tune of over $3.5 billion. This report from Bloomberg.

2. US housing starts tumble to 3 year low. This report from the Globe and Mail. Some economists in the US are beginning to use the R word when talking about where the US economy is heading.

3. S&P hits 5 year high. This note from CNBC. This to me is interesting. The economy is softening rapidly, and the stock market is rising to record levels. The market remains obsessed with the Fed, which is expected to hold interest rates steady today. It seems to be ignoring the reason the Fed is not going to raise rates, which is the softening economy.

4. Crude oil prices hold below $61 after weekly supply report. This report from marketwatch.

Interesting times...

Inflation in Calgary continues to soar

2006-09-19T08:42:00.000-06:00

Stats Canada released the latest inflation numbers by city, with Calgary, not surprisingly, having the largest inflation rate in the country at 5%. By comparison, inflation in Edmonton was 3.5%, Toronto was 1.3%, and Vancouver was 2.1%.

I predict that the inflation rate in Calgary will decline over the last part of 2006 and start of 2007, as much of the inflationary pressure looks set to ease. Largely because of new office building starts to come online in 2007, and more housing units are being completed. Natural gas, our biggest export, has declined in value tremendously over the past few months. Should natgas prices stay between $5-$8, I think that will also reduce some of the inflationary pressure we saw last year when gas hit $14 after Katrina.

This is just my prediction, and lots of things could change which would throw it way off. What do you think?

The Big Picture

2006-09-17T23:20:00.000-06:00

I think it's important from time to time to take a step back, and look at the big picture. While it's easy for us to get caught up in the day to day market changes, I think it's useful to look at things over a longer time line.

Here is a graph of real home prices in Calgary from 1973 to today. All prices are adjusted for inflation, and presented in 2006 dollars.

Click on image to enlarge:

What's clear to me from going over and thinking about the past eras of the RE market in Calgary, is that we do not exist in a vacuum. The past trends can all be explained by what is happening in the world at the time. Were oil prices rising or falling? Was the US economy expanding or contracting?

With the exception of the 1970s oil boom, our real estate market tracked fairly closely what was going on in the US real estate market. growing slowly in the mid-80s, growing quickly in the late 80s, peak around 1989-1991. Soft market through much of the 1990s until the end of the decade, where prices started to rise again.

Since 1997, there was a period where real prices because to rise again, with a pause in 2001 (due to tech crash and 9/11), then a continuing rise. This boom eventually exploded into gigantic YoY gains since 2004 (since 2005 in Calgary).

What do you think are the major world events/situations that will drive the market over the next few years?

Calgary Herald: Home prices start to cool

2006-09-16T09:20:00.000-06:00

Check out this article from Saturday's Herald.

Some quotes:

"There are more signs Calgary's once red-hot residential resale market is slowing down.
More than a third (34 per cent) of single-detached homes, about 3,000 properties, on the market have reduced their list price by an average of $26,000, according to Calgary Real Estate Board data obtained by the Herald.

Kevin Clark, president of the Calgary Real Estate Board, said the data is very significant.
"It tells me there's a fairly significant portion of the detached home marketplace that was pricing themselves out of the market," said Clark.

"If you were a seller today and you had to sell because you're taking possession of a new house, you need to be very careful with your pricing to be successful."

In August, new listings in the single-family market shot up to 3,123 -- 33.63 per cent higher than the 2,337 a year ago. New listings in the condo market were 1,131 compared to 953 last year, representing an 18.68 per cent increase.

Craig Alexander, vice-president and deputy chief economist of TD Bank Financial Group, said the astronomical price gains in Calgary this year are not going to be sustained indefinitely.
"When you say something isn't going to be sustainable, it's sort of like 'Well how much are prices going to correct?' " said Alexander. "There's no reason to believe that they are going to correct. One of the inherent problems we have when we look at home prices is that nobody can ever see a housing bubble until it's already burst. By definition, a bubble means something irrational has been going on.

"I don't think what's been happening in the housing market has been irrational. What we've seen in Calgary is textbook economics. We've had very, very strong demand growth created by rapid income gains, attractive interest rates and migration of people coming in looking for work. An unbelievably low unemployment. And, combined with that, the fact that there hasn't been enough properties on the market to actually meet demand.

"Demand's gone up. Supply hasn't kept pace. Prices have gone up dramatically. I think the market is going to come into better balance. And if I look at the data I can see it already happening. Listings are way up. Home construction remains really strong and sales have been slowing down."

Interesting article in that the CREB head, Kevin Clark, was very honest about the current market. I have to give him credit because he is one of the few, from what I have seen around North America.

The herald mentioned that the price run-up is unsustainable but of course added the obligatory "soft landing" thesis from TD of the "permanently high plateau" as what the final outcome would be. In my opinion, it is one of the potential outcomes, but not necessarily the most likely. That depends on numerous other factors which we do not know yet.

By the way, this "permanently high plateau" thesis until about 2 months ago was still heavily peddled by all major media outlets and most economists in the United States. Whenever the word "bubble" was brought up, the media went to interview the rep from the National Association of Realtors to explain how the price run up would slow down, and then homes would continue to appreciate at their historical rate forever. This was the conventional wisdom until this summer, about 1 year after the peak on many US markets.

Origin of the permanently high plateau thesis
"Stocks have reached what looks like a permanently high plateau."—Irving Fisher, Professor of Economics, Yale University, 1929.

I have a theory that many of the people currently paying 1.5-2 times what a property was selling for 3 years ago are only doing so because they think they will be "priced out forever." My theory is that once prices stop rising (or even decline a little) for about 12 months, the sense of urgency will disappear from buyers, and you will not see huge demand for overpriced, marginal properties. At some point, buyers will start again to look at 'value' and location when purchasing a home, and not be rushed into making a rash decision. Whether that will eventually constitute a major or minor correction in prices really depends on the state of the economy at the time. I personally have very clear memories of "normal" economies in Calgary (until 2004). Should energy prices fall or construction supply catch up with demand or both, I don't believe that current prices are sustainable.

What are you seeing in the market?

2006-09-15T09:26:00.000-06:00

Thanks for another great week of debate guys. This week ends with some trends becoming further entrenched. Inventories are rising:

Click to enlarge:

Still lots of sales. By my estimation, we are on pace for about 2200 sales in September. The market is still quite hot, and prices remain very high.

On a different but related note, oil and gas prices have been falling, with oil this morning hitting the lowest level of the year, and natural gas prices falling to the lowest level in 2 years. Is this a temporary lull before the next step up, or is it the beginning of the end of the cyclical energy boom of the past few years?

What are you seeing in the market?
Make some predictions if you like, and have a great weekend.

Natural Gas Drops Below $5 for First Time in Almost Two Years

2006-09-14T10:32:00.000-06:00

This report from Bloomberg

It is generally a consensus that the health of the Calgary economy depends largely on high energy prices. While most people follow the oil prices religiously, they tend to forget that the majority of export wealth in Alberta is actually derived from natural gas.

Because of high North American storage levels and a generally mild summer and hurricane season, gas prices have dropped to the lowest level in 2 years. This could simply be temporary, as a harsh winter would surely prop up prices again, but it could be a longer term dip as well.

I don't have the answer for what will happen, but I assume if prices stay low, it would have a significant dampening effect on some of the excesses in the current economy. Energy prices have historically been cyclical, and I'm not sure if the downside risk to the current economic boom has been factored in by some over-leveraged home buyers.

Thoughts?

Low introductory mortgage rates? Surely not in Canada...

2006-09-13T15:15:00.000-06:00

Came across this strange ad today. This type of thing has become popular for home builders in the US. The builder buys down the initial mortgage payments, so that the buyer has "lower" than market interest rates for a few years initially, after which they must secure financing at market rates.

In effect, this is a hidden price cut, because the builder must pay part of the interest for the buyer.

I assume this type of marketing works for a buyer that is extremely stretched and it really helps them if the initial monthly payments are lower. (The builder also has an incentive to not "actually" lower the price, because it keeps comps up for future sales)

Lots of people have told me that this type of thing was prevalent in the USA, but not here. I guess it is now coming here.

I don't understand why a builder would do this if they had a massive waiting list for all their homes at current prices. Makes me kind of skeptical as to what the market is actually currently willing to bear.

What do you think?

New house prices soar 56%: Calgary Herald

2006-09-13T07:40:00.000-06:00

Here is an article describing completed new home prices for the month of July.

"the average absorbed price of a new home in Calgary in August was $362,893, which reflects the price of homes completed that month and the actual sale price several months ago."

"Statistics Canada said the house-only component of the price in Calgary increased by 61 per cent year-over-year and that includes material and labour costs, overhead and profit. The land-only component was up 42.3 per cent year-over-year."

Also interesting to note, the rest of the prairies also saw significant price increases year over year: "Winnipeg had a 9.7 per cent increase in the past year followed by Saskatoon (9.5 per cent) and Regina (9.3 per cent)."

Anyone know why prices are rising so fast in Winnipeg and Saskatoon?

Housing starts set to break nearly 30 year old record

2006-09-11T16:28:00.000-06:00

Lots of people have told me there is no new supply in Calgary and they are not building any more land.

Our builders are miracle workers. They will likely break the Calgary record for new home starts this year, a record that has lasted since 1978, the last year that Calgary ran out of land.

This from CFCN:

"The Canada Mortgage and Housing says Calgary is on pace to break a nearly 30 year old housing record.
The annual total housing record has stood since 1978 at 15,382 new homes in one year.
So far this year 12 thousand units have been started and that is up 38 per cent from 2005.
Last month alone the CMHC says construction started on 1560 housing units up 52 per cent from last year.
Officials expect Calgary to finish the year with 16,500 new homes.
The CMHC says the record level of building can be attributed to high levels of single detached and multi family construction.
The city of Calgary says in August builders applied for 186 million dollars in residential permits."

Days Inventory: Returning to normal?

2006-09-11T14:07:00.000-06:00

I’ve been looking at the sales date for the past month. Between Aug 10 and Sep 10 (32 days) there were a total of 1959 sales, which breaks down to 61.22 per day. Because of the recent jump in inventories to over 5250 this weekend, the ‘days inventory’ measure has spiked to 85.9

Looking at historical levels, it appears that this is well within the normal range for September, albeit still below the historical average of 101 since 1999.

I’ve created a chart of the historical Days Inventory since 1999, and broken it down by month. This helps you see the current trend, and also what the seasonal trend was over the past 7 years. I know it helps me understand the market when I can compare where the level is now vs. the level in September of a previous year.

It is also interesting to note that days inventory has been at an all time low since April, 2005, but is now within striking distance of “normal” for this time of year. Another interesting statistic from this chart is that Days inventory typically rises from the summer to September, but then stays constant the rest of the year (with a bump around Christmas because few people buy homes in December). We shall see if this year is similar to the past years.

Click on images to enlarge:

Prediction: US housing collapse effect on stock market

2006-09-10T23:10:00.000-06:00

For those of you interested in the broader effects of the US housing market, there is an interesting column today from Bill Fleckenstein on CNBC. He runs a hedge fund out of Seattle, and was one of the first commentators to call the housing market a giant "ATM" back in 2004. I have been incredibly impressed with his predictions about the housing market, stock market, and Fed moves since then. In general his predictions have been about 80% right; not bad.

If you want to read his latest take on the current financial environment, read the article here.

I know I have readers on this site who think that the US housing market, stock market, and general economy have little effect on what goes on in our local economy. I disagree. All economies are interrelated. In fact, one could easily argue that the economy in Calgary has much more to do with the economy in the United States than it does with the other regions of Canada. Trade runs north to south, and the energy trade is no exception.

I think if you want to be wise and forward looking about the Calgary economy, you had better pay attention to our largest customer. Lots of evidence suggests that our biggest customer may be beginning to have severe economic problems going forward.

Local Observations

2006-09-10T17:58:00.000-06:00

What are you guys seeing in the market?

I've seen a couple of interesting things. First is relating to the level of speculation in the market. Lots of the bulls I've spoken to who are speculating in the market tell me there's really not that much speculation in Calgary. I think there is, but I have no idea what the extent of it is. I know that in some of the apartment buildings I have been looking at downtown (Chocolate and Sasso), lots of the units of newly completed buildings are for sale and have never been lived in.

Also, today I saw a real estate agent talking to potential buyers of condo that I was visiting a friend in. She was telling the buyer to wave the inspection or else "they would never be able to buy a place in this city. And don't worry, nothing is ever wrong with these types of building anyway." I certainly hope she was representing the seller and not the buyer in this case. Could you imagine hiring a "professional" to represent you and them giving you this type of advice

I don't know about you, but if I was going to plop 350K down on a small apartment, I would want to conduct a little due diligence.

I find statistics are mostly backwards looking indicators, and that is why I like to hear anecdotal evidence from the ground troops, who in this case are you.

What are you seeing?

They're not building any more land, but they are building a lot more houses.

2006-09-08T09:24:00.000-06:00

This report from the Calgary Sun.

"July was a record-smashing month for building permits in Alberta, as the spike in housing activity across the province offset a drop in the non-residential sector. "

"According to Statistics Canada, the value of housing permits in Alberta hit a new high of $753 million in July, eclipsing the previous record of $744 million established last February"

The one thing I love about capitalism is that markets that are out of whack in the short term, give incentives for imbalances to be fixed. The surge in demand over the past year has caused a surge in prices. This in turn is causing a surge in new supply. Housing demand can grow very quickly, but housing supply takes a lot more time to build. Hence you get imbalances in the short to medium term where prices will have sharp changes.

Meanwhile, on the used home front, supply is also increasing. Yesterday the CREB is reporting unsold inventories over 5000 for the first time since July 2005.

Click on image to enlarge:

More Realtor numbers

2006-09-07T09:03:00.000-06:00

Here are some more realtor numbers. It shows the activity over the past 14 days, along with the previous 14 days. Interesting data in that it shows sale prices vs list prices. I have just started getting this from a realtor friend last month, so I expect over time some trends might begin to develop. For now it is just interesting to see what % of sales go over list, and under list prices.

Also, it's interesting to note that the days on market for sold homes was only 26, whereas the days inventory is over 50 days. This tells me that homes priced well are selling very very quickly in this market.

Official number for August

2006-09-07T08:22:00.000-06:00

This article from the Calgary Herald describes the statistics.

Nothing new here for readers of this blog. August was up from July, avg price $365,732 just slightly below the peak from June. This is a 51% increase from last August.

I have been following the sales over the past week and my guess is that for September, the average will be slightly above June and set another record.

My guess is that we are probably within one year of the peak of the cycle. Inventories have been rising towards more normal levels and much more supply is coming on. The builders have been doing an incredible job ramping up production (in terms of quantity, not necessarily quality). I still think prices will be choppy and could still rise somewhat.

One interesting thing we saw in the States is that in the year after the frenzy ends, median and average sale prices continue to rise, while number of sales drops. This is because there tends to be more homes sold at the top of the market relative to the bottom at the end of a frenzy. I wonder it we will see that phenomenon here?

The New Road to Serfdom

2006-09-06T17:13:00.000-06:00

Thanks to Long Time Calgarian who sent this in.

If anyone wants a brilliantly simple, yet concise explanation as to the housing bubble's causes and probable effects, you need to read this article

It was published in Harpers Magazine in May 2006.

Toronto Star: U.S. housing boom goes pop (Is Canada next?)

2006-09-06T09:22:00.000-06:00

An excellent article from the Toronto Star. I suggest you read it.

It talks mostly about the US market, but then has a good segment on how it relates to Canada.

The article mentions how housing related costs in Calgary are only 18% of household income and therefore very affordable. I've mentioned before that this is a bad measure of current affordable, because it includes all of the people that bought homes before the recent run-up. Buying a home in today's market, will cost the "median" worker far more than 18% of income. Therefore it is not a usable measure if trying to judge whether or not current prices are sustainable, cheap, or expensive, relative to current and future fundamentals.