Thursday, November 26, 2009

Survey of Employment, Payroll and Hours

This morning Statcan came out with their latest Survey of Employment, Payroll and Hours (SEPH for short). It's sort of a cousin to the Labour Force Survey (LFS), but doesn't get as much press. Among other things, the LFS has the much heralded unemployment numbers, and it also comes out mere days after the close of the month it measures, whereas the SEPH data comes out almost two months after the fact.

Unlike the LFS which is a survey of the employee, the SEPH is a survey of the employer. It includes a measure of average weekly earnings, and also of the number of people employed by corporate entities.

Particularly of late some have scoffed at the LFS unemployment figures as they believe its skewed by people who lost their jobs and are effectively unemployed, but instead list themselves as self-employed. So, lets do a comparison of the LFS and SEPH job loss numbers to get an idea of how much truth is behind those accusations.

Job losses
Employment in both measures topped out last October, so this is a measure of how many jobs were lost since then (note, this makes no distinction between full-time and part-time, which in the LFS we've seen a large shift from the former to the latter over this period). As we can see, the numbers were fairly close through about February, and the SEPH losses were actually less through January... but since then we've seen a noticable decoupling, and as of September there have been roughly 40,000 more jobs lost in the SEPH then in the LFS.

We know that historically the SEPH and LFS employment figures largely track together (click for chart). This would seem to lend some credence to those questioning the unemployment figures... and just intuitively, massive recessions aren't the best time for a huge influx of people to go into business for themselves.

As an aside, judging from that big jump in LFS losses in October that could spell a pretty big jump due for the SEPH losses for that month, but we won't know that for sure until this time next month.

Average Weekly Earnings
As mentioned earlier, the SEPH also includes a measure of average weekly earnings, so here that is. I also took the liberty of including the inflation adjusted figures for comparisons purposes, cause, well, that's just how I roll!

When adjusted for inflation, we notice that the line was fairly flat up until about 2003/2004 (other then a mysteriously sudden shift up in 1996, a change in methodology perhaps?). Since then we've seen some real growth in earnings, going from about $800, to as high as $975. That's roughly a 22% gain in a relatively short time, and particularly impressive compared to the twenty years leading up to it... conversely though, this is not as explosive of growth as some people have led us to believe.

We also notice that these two have started to track down. Unlike the number of jobs which peaked last October, earnings didn't top out until February ($965 nominal, $973 real). They've been kind of bouncing since, but generally downward since, bottoming out in August at $934 (nominal and real), but rebounding in September up to $959 (nominal and real).

Bearing in mind these numbers are subject to revision for about six months, and will change to a degree. Regardless, earnings wise we're slightly higher then a year ago, roughly 2% higher.

But that's where the problem is at looking purely at the earnings figure is that it makes no mention that while up 2%, there are over 5% fewer people earning it... and beyond that, it makes no mention that the population and labour force have continued growing over, which actually only further compounds the problem.

Estimated Earnings
So, in my infinite boredom wisdom, I frankensteined my own little measure. This is the average weekly earnings multiplied by the payroll employees, then divided by the labour force size from the LFS (and multiplied by 52, to give you an annual figure, as to not be confused with the earlier weekly data).

I think this gives you a better idea of the gravity of the downturn, as it accounts for earnings, employment and the labour force... which when those items are isolated, make it hard to get an idea of the big picture. That said, this measure shouldn't be taken as gospel of anything as some included in the denominator are not included in the numerator, but assuming everything remains proportional (at least in the short term), this is good for comparison purposes.

By this measure (looking at inflation adjusted figures), it shows moderate growth in earnings through 2004, then of accelerated growth through late 2008, and then a sharp drop off... roughly 10% peak-to-trough (7% peak-to-current). We're back to about where we were in early 2007.

So, take it for what it's worth. Hopefully that gave you something to chew on for a Thursday. If you have any questions or comments, fire away.

Tuesday, November 24, 2009

Rent vs. Buy Calculator - v1.0

Yesterday the topic of rent vs. buy calculations came up in a thread, and it reminded me I had done something of one on a spreadsheet a few months ago with the intention of sharing it but forgot all about. So, figured, what the heck, lets throw it out there.

I tried to balance keeping it as easy and intuitive as possible, while still making it highly functional... most others I've seen only as a little too overly simplified. So, you need to have some understanding of personal finance like opportunity cost, but it takes care of much of the messy and confusing stuff like insurance and annuities.

There were a couple practical allowances for opportunity cost and rental income figures, because both of those represent taxable benefits, but as there are an infinite number of rates those could be taxed at, I leave that for you to ignore or calculate for your situation.

For the comparison here I did a quick search and found two comparables, one for rent, and one up for sale. Both two bed, two baths, in the same building and about the same size. Used todays 5-year fixed rate, and filled in some of the other variables, but you can play with those at your own leisure and you can see for yourself how the results change.

Everything after "Calculations" is generated automatically, you just have to fill in the three input sections. I corrected some formula errors that were pointed out, so hopefully it's right now, but please pipe up if you find more, or have any other comments, questions, concerns or suggestions on how to make it better.

Saturday, November 21, 2009

Who's to blame?

Who's to blame?
My opinion on whether there was a housing bubble is well documented, but my thoughts on what caused it have never really been explored in much depth. Thus, today I present my not-humble-what-so-ever take on what the underlying causes of the housing bubble were. So, without further ado, on with the show...

That right fellow babies (channelling my inner Johnny Fever), you and me. Well, perhaps not you and me specifically, more in a general sense, you know what I mean. Ultimately the buck stops with all of us... and it's going too, and in more ways then one when you figure in our role as taxpayers.

We do dumb things, myself included, just ask my dad, he could reel off chapter and verse most of the first 18 years of my life... and probably more then a few of the ones since. We're prone to herd mentality, susceptible to greed, lust, a need for social acceptance, status... not to mention the most terrifying force known to man, the nagging significant other!


Houses are a deeply emotional purchase for most. They're not just shelter, they're "home," they're family, they're status, and they most often the largest purchase we make in our lives, and can take most of your working life to pay for.

So, first and foremost, the consumer must bear the stain of this bubble, and certainly will... we signed the papers, we dug the hole, now we have to climb out of it. There were other factors though, and now we'll discuss some of the usual suspects.

Ah yes, the brand name masquerading as a "profession." They're an easy, and seemingly popular, target for scorn. Which they largely bring it on themselves... but are they responsible for the bubble? Nah.

Beneficiaries of it? Absolutely. Contributed? In some ways, perhaps. But no one had a gun held to anyones head when they were making offers, and I'd hanker to guess that even if the agent told the prospective buyer it was a bad idea, that buyer would just find another agent that would sing the tune they liked.

Bottom line, these guys are in commission sales. So, if you're expecting any message out of their associations/boards/agencies other then "buy", you're only fooling yourself. Those groups only exist to further the interests of their membership, their membership wants transactions. You do the math.

The ethics of these obviously self-interested parties parading themselves as experts is questionable at best. Regardless, the public must take responsibility for their own actions, and consider the source. Think about it, would you expect the CEO of Ford to say anything other than people should buy vehicles? Ultimately it's all marketing, and should be viewed as such. So, while a case could be made for them contributing to the bubble... they had little if anything to do with the underlying causes.

Another group that certainly benefited, but really didn't have anything to do with the causes. These guys are just middle men, they grease the wheels and take their cut. If anything these guys probably behaved themselves the best out of all those discussed in this article.

Bank of Canada
Carney and Co. are another popular target, particularly of late. They've even kicked off the finger pointing, conveniently singling out lenders (convenient because if they point it anywhere else it'd be directly or indirectly at their overlord(s) in parliament). Ultimately though, interest rates are largely determined by the market, and that is well beyond their control.

What influence they do have, is largely ceremonial. For the most part they just follow the United States lead, as to not upset the apple cart and cause undue fluctuations to the exchange rates... which would wreak havoc on that rice paper castle that is this so called "recovery."

And as far as our bubble here in Alberta, we arrived long before the current ultra-low rate environment came around. Sure it added another big season of sales which effectively just dug us a bit deeper, particularly in regards to defaults, but we were plenty deep already... we just have a bit more company now on the domestic front.

We're getting warmer, and typically this is a group that should take heat for situations like this... but they would usually also have some skin in the game. And that is where the true root begins to expose itself.

Historically market forces keep the lender honest. On mortgages they make their money on the margin, they get access to capital at one rate then lend it out at a slightly higher one. In return for this payout, they bear the risk of the borrower defaulting... and as that is typically a timely and costly occurrence, that is why they do such thorough vetting of the borrower to ensure they are credit worthy.

In modern times we've seen a move away from this model though, particularly when it comes to high ratio loans. In Canada, we've seen the establishment of the CMHC. They basically insure all high ratio loans (those with less than 20% downpayments), this takes the risk largely away from the lenders, who can then lend to everyone at the same rate, above which the borrower pays a risk premium indirectly to the CMHC (who is then on the hook for any deficits in the event of default).

This situation presents a moral hazard then to the lender, particularly recently as prices have rocketed up and downpayments have dwindled. They are now still largely in charge of vetting the borrower, but as they now bear no risk for default... thus, it's entirely in their interest to lend as much money as possible, to as many people as possible. As long as the CMHC signs off on the borrower, the lenders have no skin in the game.

They can just sit back, collect their margin with no worry if rates shoot up or the market goes to seed and the borrower defaults, cause the CMHC has them covered. It's something of a licence to print money, and all the lenders know it. That's not to paint lenders as the bad guys though... they're playing by the rules, and exhibiting behaviour entirely predictable given the circumstances.

And that brings us to the CMHC... we're really starting to heat up now. These guys will probably be a real lightning rod for years to come. Though again, they were not so much the generals as they were the soldiers.

Their actions were what really fuelled the bubble here, which is now largely nation wide. It was the stripping of lending standards that turned a hot but sustainable real estate market in Alberta in '05, into a overheated time bomb from '06 on.

They pretty much threw gas on the fire. At the begging of '06 a borrower had to have at least 10% down and had a maximum amortization of 25 years... then it became 30 years... then months later 35 years with 0 down... then finally before year end, 40 year amortizations... and just in case that wasn't enough, you could go as long as ten years without putting a penny towards principle.

The bar was lowered, and lowered and lowered some more, and Albertans came rushing in with cash in hand... well, maybe not so much with cash in hand, but I digress. The floodgates were thrust open to a whole new group of buyers that otherwise would not have qualified, and even for those that would have it made available much larger sums.

Such rapid and extreme lowering of lending standards made the conditions rife for a bubble, and one formed. But ultimately it was not the CMHC that made those directives, they merely did the bidding. You see, the rest of the true blame lies with the...

Federal Government
I can hear the wailing already in ever so Tory blue Alberta, but I'm really not a partisan nor have an axe to grind. If you held a gun to my head and made me pick between the Conservatives, Liberals and NDP... I'd say pull the trigger.

I'm more a moderate libertarian than anything, not to be confused with the assholes of epic proportion that largely make up the ever so prevalent Randian variety (but those with borderline personality disorder need something to read I guess). I'm no more a trusting of big business then of big government, but in the presence of the former I acknowledge a need for the latter. But enough about me.

Can't hang it all on Harper and Co. though, there were moves originated all the way back to Chrétien that helped pave the way, chiefly among them removing the price ceiling. But it was mainly Stevie-boy who blew the doors of the barn with all those moves discussed in the prior section.

Then when the air started to leak out, down came the directive to approve "high-risk" borrowers in greatly increased numbers, which really fuelled the '09 surge. If things had stayed at 10/25, while something of a bubble may still have been possible, it would have been but a small fraction of what became.

To their credit, they apparently saw the error of their ways to a degree, and did away with the 0/40's, now the best you can do is 5/35... but most banks will lend you the 5% anyway, so effectively 0/35.

And of course, they are also a minority government, which means they couldn't have done this without some help (or at least tacit approval from the others). It was a rather shrewd political move by Harper actually... he knows the masses are happy with the illusion of wealth created with rising home prices, and figured that could be enough to get him that precious majority.

Even if the other parties were smart enough to recognize the potential dangers of a housing bubble, telling the populous that they're not as rich as they think would not be greeted warmly. The opposition parties don't want to get blamed for popping the bubble, and for the same reason the Conservatives don't want to apply the brakes.

Thus, we continue our trip down the primrose path blissfully believing "it's different here," even after having ring-side seats to see the United States blaze the trail of libertine indulgence. We just dig ourselves deeper and deeper, until the inevitable...


Wednesday, November 18, 2009


Yesterday the CBA released the September mortgage arrears figures and... cue the broken record... they're up. The Alberta rate now stands at 0.67%, drawing ever closer to our record high (0.69%), up from 0.34% a year earlier and 0.65% in August.

Nationally the rate held at 0.43%, and Manitoba swapped places with Saskatchewan for the lowest rate in the country (0.26% and 0.28% respectively). Alberta continues to widen it's lead at the opposite end of the spectrum, while the Atlantic provinces are next worst at 0.49%. B.C. and Quebec were both up a tick at 0.37% and 0.36% respectively, and finally Ontario held at 0.43%.

Mortgage Arrears - Alberta
In an effort to freshen things up, I did some digging and found some comparable numbers from the US. These are from Fannie Mae and Freddie Mac (I'm sure you've heard those names, they operate something like the CMHC does in Canada for those unfamiliar with them).

These graphs are of their "serious delinquencies," which are those that fall three months or more behind on their mortgages... so, virtually exactly the same as our much discussed "mortgage arrears." They have three different figures respectively, credit enhanced, non-credit enhanced, and total.

Freddie Mac - Serious Delinquencies
Fannie Mae - Serious Delinquencies
Afraid I'm not intimately familiar with exactly where the line is between credit enhanced and non, or how these relates to the CBA figures (I think we can safely assume from the data 'credit enhanced' are likely those with less then stellar credit ratings) ... so for our comparisons between countries I'll include both the total and non-credit enhanced figures and let you interpret the data for yourself.

Mortgage Arrears - US vs Canada
Here we have them all charted together. We can see that traditionally non-credit enhanced US figures are very close to those we enjoy here in Canada and Alberta, while the total figures track about a half point higher (at least until their bubble burst).

While the national numbers are only starting to creep up here in Canada, the Alberta figures are tracking a pattern quite similar to those in the US 18 months earlier. Now, that doesn't mean we'll end up as bad off as they are down south, but it's worth noting the similarities... so it's not out of the question that we could be on the same road. It was also around that time that phrases like "foreclosure epidemic" really started to make the rounds.

Bear in mind, these are national numbers in the US, and foreclosure problems vary greatly amongst regions/states. I'm going to try to find some state numbers for future months... but looking at the magnitude of the change in the US as a whole leaves little doubt that foreclosures have become a national issue.

Mortgage Arrears - US vs Canada
Fannie and Freddie have changed what they've reported periodically, so the best I could piece together for a longer term comparison is their total figures. It's interesting to note here their total delinquency figures were quite close to the Canadian equivalent up until '01-'02. Why and how it's difficult to say, could be anything from a change in lending practises, to a change in methodology.

In any case, what I think we should take away from this is that before we get cocky about how low our level is currently in comparison, remember, it was not even two years ago they were right where we are now... and we've had a ringside seat to witness that slippery slope.

Monday, November 16, 2009

Rental Market Update

The fall CMHC fall report isn't due out until next month, but last week I was leafing through some old Boardwalk financial reports (or whatever the digital equivalent to 'leafing' is, scrolling I guess), and found some info that could be of interest to you all. Unfortunately they seem to change just how and what they include in their reports when it comes to the non-financial statement stuff, but I've been able to scrape together some good data.

For those unfamiliar with them, they are a major player in rental market here in Alberta as well as Saskatchewan, and are expanding into other markets throughout the country. According to their reports, they have just over 20% market share in Edmonton, and just under 15% in Calgary. Anywho, on with the show, lets start with vacancy rates...

Vacancy Rates
Here is a look at Boardwalks internal data on Edmonton and Calgary (currently they have 12,144 units in Edmonton, and 5,227 in Calgary). It's kind of erratic, but we can see that the rate dipped well below their long-term averages in both cities from mid-'05 through the end of '07.

Since then though they've generally been above the averages, particularly in Edmonton, but as of their most recent reporting (3Q-'09) they have returned to the mean. It would be interesting to compare these figures to the CMHC numbers, but that will have to wait. Maybe in a coming week, or maybe when the CMHC report comes out next month.

Boardwalk - Alberta Rents
Now lets add rents to the mix. Unfortunately they've only reported market specific rents going back to about 2006, but beggars can't be choosers I guess. I believe 'Market Rent' is their average advertised rents for new move-in's, while 'Occupied Rent' is the average of exactly what their tenants are paying. The occupied rent would be far more sticky, as leases are grandfathered in, and increases/decreases are phased in over time.

Seems the two figures were very close through the end of '05, then market rent started to take off in a big way and didn't top out until mid-'07... no coincidence, that's the exact same timeline and behaviour the resale market exhibited during that period. Occupied rents continued growing through mid-'08, as the company were phasing in increases on those that previously enjoyed lower lease rents.

Market and occupied rents met again in late-'08, and have both been tracking down since. Just as it rose faster, market rents are falling faster, now down $218 or 17% from peak. Occupied rents conversely down $30, or 2.6% from its peak. So, anyone living in a Boardwalk community might want to drop down to the office and get yourself a little reduction... if you've been a good tenant, you can probably leverage yourself a deal a fair bit better then even advertised.

Boardwalk - Edmonton
Now we'll look at Edmonton and Calgary individually, lets start with the capital. Remembering their long-term average vacancy for Edmonton was 4.56%, we can see during the period where vacancies were below that mark, market rents were rising rather quickly... then when vacancies jumped above it, just as suddenly, rents started dropping. The rents have a pattern very similar to that of Alberta as a whole as we looked at earlier. That's no surprise though as Edmonton accounts for over 60% of their provincial portfolio.

Boardwalk - Calgary
Now onto Cowtown. This graph looks a little different, as it seems Calgary's vacancy rates were lower earlier, and we kind of missed their big decoupling of market and occupied rents. Their market rents kind of plateaued even though vacancies were still well below their long-term average of 4.85%. Perhaps they hit a ceiling, or maybe they could have went higher.

In any case, once the long-term average was broached, rents started to fall... then vacancies fell back below and rents went back up... then vacancies went back up and rents resumed falling. That long-term average might be an important figure in light of such negative correlation with rents, though vacancies have again dropped below that mark and yet rents are still trending down.

It'll be interesting to compare these figures with those in the CMHC release next month, as it seems, at least in the case of Boardwalk, things have stabilized. Vacancies are back in their normal range, but rents are still going down slowly but steadily.

Boardwalk - Cycle
Just wanted to throw this in cause it's an interesting little graphic they like to include in all their reports. This one is from their most recent report, released last Friday. It's quite intuitive when you think about it, and it's interesting to note the position of the markets.

According to their little graph it seems those in Edmonton and Calgary can await a move toward increased incentives, and then rent decreases. Having tracked some of their building rates on their website, it appears consistent, as over the summer rents have been fairly stable, but the advertising of incentives have been much more prominent.

They have sporadically included incentive figures in their reports up until '06, but I hadn't seen it since then, until their most recent report. For what it's worth, in 2Q of '06 they were offering about $15 per unit in incentives... in 3Q of '09 it was now at $145 per unit.

Quite the increase, but it should be noted that in 2Q '06 that was right in the midst of the big run up in rents (at least here in Alberta, which makes up over half of their portfolio)... conversely now we're in a period of higher vacancies and thus they're trying to lure people in, whereas in '06 they were practically beating them off with a stick (get your head out of the gutter!).

I'll do some more digging into their reports and see what I can dig up, but I figured this was a pretty good update for now. Hope your Monday is going well, tak'er easy guys!

Thursday, November 12, 2009

Fixed vs. Variable

This has been a much requested topic, and one I would have touched on sooner but I made the mistake of over-thinking the question initially. It wasn't until BMO came out with a report last month, that I realized it was far simpler an analysis... in fact, incredibly simple.

Now, obviously all the variables cannot be accounted for as we know banks generally lend variable at rates of prime-plus-, or prime-minus-, thus leaves an infinite number of possible combinations... but with a little intuition we know that whatever the rate is relative to prime would merely result in a shift in data. So, you can use your imagination, we'll be doing all the calculations using the average five year rate straight against the prime rate.

Fixed vs. Prime
Here is a look at how the two have moved over time. Obviously track very similarly, though prime is generally lower (but not always). These are spot rates though, and to get an idea of how the two stack up in practice over time we much take into account how they perform relative to each other over their 5 year terms, and even over the entire life of the mortgage.

Fixed vs. Variable
This is a more useful presentation of the data, comparing the 5-year fixed rate at any given moment against the moving-average of prime over the next five years. You'll notice it is remarkably similar to the graph from the BMO report, that's cause it's the exact same data, except their's only goes back to 1975.

As we can see, in general variable has provided the more beneficial choice the vast majority of the time, as BMO noted, 82% of the time since '75, even higher at 89% going back to '51... and it has exclusively been the better choice since 1987. That is not surprising though, as rates have going down generally since 1981.

The times fixed has been the better option has been during periods immediately proceeding large spikes in interest rates. Beyond that, during periods of generally rising rates (the period up to 1981) even when fixed is the less preferable option, it tracks much closer to how variable performs.

So, as rates have for all intents and purposes hit absolute bottom, such info is worth considering going forward as rates are sure to rise above current levels in the years to come. That goes for whether you're buying, or if your mortgage is coming up for renewal. This may be an ideal time to hedge your bets and go fixed, at least while rates are still near record lows.

Fixed vs. Variable
Here is a bit of a different perspective of the previous data. Any time the line goes into the red area, fixed was the cheaper option... conversely, when it's in the yellow, variable was the cheaper option.

We kind of already discussed this, but this just gives you an idea of the proportional difference in these cases. It went as high as 4.4% into fixeds favour, and as low as 8.8% into variables. Over the presented period, the average was -1.33%, and median of -1.14%, both in favour of variable.

So, on average there is certainly something to be gained by going variable, but it's usually only a 1-1.5% advantage. So in times of uncertainty, such as now, you need to carefully weigh the potential positives and negatives of either route when you make a call like this.

Fixed vs. Variable
This is another take, assuming if a person went fixed or variable at the start, they stayed with it through the remaining renewals for the full life of the mortgage. Here we can see how payment advantages from prior periods can compound over time. This is because at different rates, you also pay off different amounts of principle during any given term (except the final term of course)... basically, the lower the rate, the more principle you will pay off.

So if you make the right choice in one period, it will pay off for the remaining life of the mortgage... conversely if you got the other way, you'll be paying for it for the rest of the mortgages life. This measure is a measure of how much is saved relative to the more costly option.

We can see that over 25 years (five terms) the scale of the advantage is much larger. Going as far as 28% in favour of variable. But again, remember this is over periods when the majority of the life of the mortgage would be while rates on going down.

We're not in that situation today, in all likelihood rates are heading up at least a point or two in coming years, thus, pay particular attention to the data in the 50's and early 60's when in a similar situation. During that period, the results were much more mixed.

The dotted area is of mortgages and/or terms have not year completed, and the further right you go, the younger the mortgage, and thus the more the data will respond to future data. Those plots/figures have not been included in any figures I've discussed, they're just there in case you were interested in such things.

Fixed vs. Variable
Finally I just threw this one in for shits and giggles, this is what they'd look like if we had 30-year fixed rates like they do in the US, rather then our preference for the 5-year terms. This is using the Canadian data as I'm too lazy to look up the US numbers, and from experience their 30-year rates are close, if not often lower then our 5-year rates (no wonder our banks are so profitable huh?!) and prime would be very similar.

We can see here the results are more muted then the prior graph. During periods of increasing rates, fixed performs better, and during ones of lowering rates, variable does. No surprise, that's what intuition would suggest.

I know real estate is still ugly in the states, but you gotta figure in a lot markets prices have returned to their long term trendlines, if not dipped below. That combined with this current interest rate environment, there may never be a better time to buy if you're a potential first-time buyer south of the border. Even if prices slide a bit further, you've locked in at a sweetheart rate, and thus probably still better off.

We north of the border on the other hand, are at the opposite end of the curve, still near the top (or in some cities, right at it) of the bubble. We still have a world of hurt to come before we return to market conditions that are ripe for those looking to enter the market, buying in now is more a debt trap then anything.

Anyway, hope this answered some of your questions about the historical performances of fixed vs. variable rates. But, if you have any more, fire away!

Tuesday, November 10, 2009


So, we've hit the century mark! A big day in a blogs life, much like drinking your first beer, or discovering masturbation... not that I have any particular memories of either of those events, nor will I of this, but it's a milestone none the less.

Whodathunk someone with no particular ability to write, even less influence, and nothing especially interesting to say would fill so many pages?! Well, actually that pretty much describes most bloggers, so maybe I'm not so bad. After a little drifting early on, I like to think I fell into a groove and have carved out a nice little niche for myself in the blogosphere.

It's been about ten months, and a quite eventful ten months... yet it seems nothing has really been solved and the future is just as uncertain now as it was then. My perhaps naive and optimistic hope that we'd just accept that economic pain was coming and try to get it over with quickly proved politically undesirable.

Why flush out all the toxins in one fell swoop and get on with rebuilding, when you can dump money on the problems, make the short-term less worse all the while making the longer-term much more-so?! Really that could be said for our financial mess and the housing situation.

As per housing here, prices and sales plummeted, then prices rallied and sales soared. If you ever doubted the influence of interest rates on the housing market, you'll probably never see another period as good as the last six months to witness the effects of interest rates in a vacuum.

People went out en masse and were suddenly buying houses as a record clip, while incomes certainly weren't improving and prices were in the same range as just a few months earlier when sales were at record lows... all during the biggest recession since The Great Depression. Amazing what interest rates dropping can do, huh?!

Of course that shot my predictions for the year all to hell, but I knew that as soon as rates started getting slashed. I guess I should have took heed of that old economists mantra, "if you give a number, don't give a date... if you give a date, don't give a number". Oh well, doesn't seem economists heed it either.

In any case, my long term stance that we're overpriced remains, and that prices will eventually return to affordability. The trip is just going to be longer, and thanks to another wave of over-leveraged first time buyers that got swept up this summer, more painful.

I guess if there was one group of real winners of the resurgence in my opinion, they were the builders holding excess stock, this gave them one more chance to clear it out. There was a real big glut there and this would have helped flush at least part of it out. Though there still does appear to be apply attached inventory still out there, large portions of entire developments continue to show up occasionally on the multiple listings service.

Not sure anyone else is going benefit much from it in the long run. The problem that got us into the mess was too much debt, and we seemingly doubled down on it in an attempt to re-inflate the bubble. It worked short-term sure, but long term it's just made all the problems that much worse.

Whatever good effect that was experienced on the inventory front, will more than be erased by the resulting increase in defaults that will come. Lending standards have already been stripped, so many of these first timers were those that couldn't even qualify for financing before, thus required the low bar AND incredibly low rates to get in. Now we have a whole new wave of foreclosures waiting to happen, what was likely going to be at least a moderate problem before will very likely become a big problem in the coming years.

Of course interest rates aren't local, and neither was the '09 real estate boom, it was nationwide. In a lot of markets things just went wild... in Toronto for example the average price rose over 23% from January to October ($343,632 to $423,559). Many cities hitting all time highs as irrational exuberance reigned supreme. Misery loves company, now we have even more!

We here in Edmonton are actually sitting about the same as we were in January pricewise, perhaps lucky we had such a large glut of inventory saved us from returning to the multiple-offer/bidding wars that were all so common place during the run-up.

While little solace for those who bought recently when prices inevitably start to fall again, but it could have been worse. Fortunately our major boom had already played out, who knows the heights the may have been reached if we were still in the run-up, rather than two years removed.

The rocketing of real estate prices across the country became so pronounced, as the fall arrived the dreaded "bubble" words started to be bandied about in the major publications. Even some big players in political circles have acknowledged it, and no surprise the onset of finger pointing soon kicked off with Bank of Canada Governor Mark Carney calling out lenders.

As this thing unravels there will be more, lots more. As to who's to blame, we'll leave that for another day as I'm already running long. So buckle up guys and gals, it's gonna be a bumpy ride... and I have a feeling we'll be celebrating many more century marks along the way.

Signing off,

Saturday, November 7, 2009

Ouch.... very ouch

Statcan released the October employment numbers Friday, and they they were fugly. Employment was down right across the country, and Alberta was one of the biggest losers. So, lets dive right in and start with the ever so high profile unemployment rate.

Alberta - Unemployment Rate
Unemployment in Alberta went up to 7.5% in October, up from 7.1% in September. That month-over-month rise wasn't as high as the other prairie provinces, but that is at least partially the result the labour force shrinking by 6,400, as the eligible population evidently continued to grow.

Bear in mind all these numbers have been massaged and modelled to within an inch of uselessness, but they're the best we have. In any case, we can see from the graph we're at a level not seen since the mid-90's, and sharing a trajectory eerily similar to the big recession in the 80's.

Alberta - Full Time Employment Rate
I'm not a big fan of the unemployment rate, as it can be skewed, like by the seemingly arbitrary drop in labour force last month. It also counts part- and full-time jobs equally, which I don't think is necessarily reflective as losing the latter for the sake of the former would typically not be deemed favourable.

Thus I derived my own little measure, dividing the number of those employed full-time, by the total eligible population (basically those 15 years of age and older). By this measure we're sitting at 56%, a drop of about 5% in the last year, and the lowest the rate has been since 2000. Again, this measure also shares a trajectory very similar to that of the 80's recession.

Alberta - Full Time Employment Year-over-year
Now we'll look at the year-over-year change in full-time jobs. In the last 12 months the province has lost just shy of 90,000 full-time positions. This is the deepest drop ever, but remember that the population is significantly larger today then in '83, so proportionally we're not as bad off, yet anyway.

We can also see how good we had it from 2006-to-2008, when full-time jobs were coming on board at a record clip, topping out at about 140,000 at one point. Should have done an average/median for this one, but we'll save something for next month. It's also been requested to compare employment levels to real estate prices, so we may do that then too, or maybe even earlier if the spirit moves me.

Enjoy your weekend guys and gals!

Thursday, November 5, 2009

A hill to die on?

Pay no attention to the man behind the curtain
Had another post planned for today, but in light of this emerging story that will no doubt be on the forefront for the next while, I figured lets run with this. So, the shit has kind of hit the fan this past week in MLS land, as the Competition Bureau concluded that the CREA has rules deemed anti-competitive.

While the specific details of the Competition Bureau's findings have not been officially released, there was news of a leaked CREA letter more or less detailing said findings. I've obtained a copy of the original, and you can view it in all it's glory via this link if you're so inclined.

Nothing particularly earth shattering about it, just kind of outlines the Competition Bureau's findings, which the CREA states they disagree with (duh!), the some possible ramifications of the requested changes.

Seems the CREA is leaning towards pursuing a settlement agreement, rather then face a Competition Tribunal... which basically translates to their not liking their odds if they had their day in court, and would rather try to plead it down rather then risk really having their asses handed to them at the tribunal.

But that is just the higher-up's position, the actual decision will be made in December when they're holding something of an emergency meeting where the members will decide on their ultimate strategy... I would think if they thought they had a hope in hell they'd probably fight this one to the death. If their is any hill this cabal would be willing to die on, these issues would be it as this would really draw the curtain back. So, it will be interesting to see what comes out of the meeting next month.

These are the items the Competition Bureau wants changed/removed from CREA policy:

Section Agency
A listing REALTOR® must act as agent for the seller to sell the property and to assist the seller through the entire time of the listing contract.

Section 17.2.1: The listing REALTOR® shall receive and present all offers and counter offers to the seller.

Section 17.2.3: The mere posting of property information in an MLS® system is contrary to CREA’s Rules. A “mere posting” occurs when the listing agreement relieves the listing member of any obligations under the Rules, including the obligation that the listing REALTOR® must remain the agent of the seller throughout the term of the listing contract.

Section 17.2.6: Only the listing REALTOR® name(s) and contact information may appear on The seller’s name or contact information shall not appear on or in the public remarks section of the MLS® system.

Basically it boils down to wrestling much of the control over dealings with the seller, and allowing the seller more options when it comes to what services they want (sort of like going from a table d'hôte system, to an à la carte one).

While none of that seems like particularly egregious requests, agents are resistant because this would effectively shine a light on a region of their dealings that they benefit greatly from a tacit agreement from their ranks to toe the party line and keeping the public in the dark.

Even with the recent emergence of reduced commission brokers, while they may get on MLS, they are still often shunned by regular agents, or potential buyers are scared off those properties by the prospect of paying their agents commission directly out-of-pocket (though, it's effectively coming out of there anyway). The entire process is kind of ambiguous to the general public, whose real estate transactions are few and far between... which is advantageous to agents, as knowledge is power, and the less the public has the better it is for you.

In my opinion, I think the Competition Bureau's requests would actually be beneficial for both the public and agents. As it stands now when taking on clients, agents bear all the risk. The listing agent goes out of pocket for all the listing and marketing, and only gets paid if the property sells. Same goes for the buyers agents, they do all the leg work, and again only gets paid if there is a sale.

If there is no transactions, the agents end up eating all those costs, fiscal and their time/effort. The commissions currently being earned are excessive (IMO), but they are in no way guaranteed... commission sales can be highly compensated, but remains a tough and risky gig.

So, assuming the Competition Bureau gets its way, I think we'll see some very distinct changes to the operations of these outlets. We'll probably see a lot of specialization, some outfits will just get you listed and a lockbox and charge a flat fee (sort of like ComFree does now)... others will offering marketing services, again for a fee upfront. Which for the sellers will transfer all risk and reward onto them.

On the buyers side, we may see commissions stay, or a move toward charging an hourly rate, and/or some hybrid(s) of the two... but I think the payments will eventually be coming directly from the buyers, rather then the current situation. Probably also see even more focus on certain areas/segments of the market.

Ultimately I think these changes will be good, for the consumer and the industry. Services should improve, transparency definitely will, and highly competent agents would probably make just as much and have the added bonus of dealing with others of their ilk, as hopefully the increased competition would weed the bad ones out.

What effect will all this have on prices? Probably not much. Sellers may be a bit more willing to negotiate from their asking price, but in general they'll still be looking to get every penny they can. Just look at ComFree, those listings don't tend to be any cheaper then those on MLS. The benefits would be felt in the processes, not in the prices.

Tuesday, November 3, 2009

October numbers are in....

The October resale numbers were released today, and it was a much different story then we've been hearing about the last few months, and even what happened in Calgary last month. While sales were down noticeably from September (as is normally expected given real estates seasonality), they were still very strong for October... yet prices were down in a big way.

In all categories prices fell, and rather significantly for month-over-month movements. Condo's, single-family-homes and the residential averages were all down about $8,000 from September (3.2%, 2.2% and 2.5% respectively), and the single-family-home median was down $3,900 (1.1%).

An unusual softening given relatively strong sales, but as I've hypothesized in the last few months, this could be further evidence of the return of high levels of speculation. As they typically buy at the low end of the market, that would explain the strong sales and movement of price... or could just be wishful thinking.

Curious that Edmonton and Calgary tend to mirror each other, yet Edmonton had a significant drop while Calgary had increases. Could just be an aberration, or we could see one eventually follow the other.

Inventory and Sales
As previously mentioned, sales were down month-over-month (-9.9%), but strong for this time of year (1,535). Inventory also continued it's typical autumn decline, and now sit at 5,530. Finally absorption rate stayed about the same at 3.6, as sales and inventory fell off at similar clips.

Absorption Rate
As always, here are the hard goods (note, this will be the last month townhomes are included. They make up such a tiny portion of the market and are so frequently lumped in with condos there isn't much point including them, but if so included you can still look them up in the EREB releases):

Sales = 1,530
Since two years ago = +20.3% (+259)
Since one year ago = +22.7% (+284)
Since last month = -9.9% (-169)

Active Listings = 5,530
Since two years ago = -42.3% (-4,047)
Since one year ago = -35.1% (-2,995)
Since last month = -8.3% (-502)

Single Family Homes Median= $346,000
Since peak (May '07) = -13.5% (-$54,000)
Since one year ago = +0.9% (+$3,250)
Since six months ago = +2.7% (+$9,000)
Since last month = -1.1% (-$3,900)

Residential Average = $318,969
Since peak (July '07) = -10.1% (-$35,749)
Since one year ago = +0.4% (+$1,185)
Since six months ago = +2.2% (+$6,842)
Since last month = -2.5% (-$8,266)

Single Family Homes Average = $363,694
Since peak (May '07) = -14.6% (-$62,334)
Since one year ago = +0.1% (+$420)
Since six months ago = +2.9% (+$10,308)
Since last month = -2.2% (-$8,253)

Condo Average = $237,601
Since peak (July '07) = -12.6% (-$34,307)
Since one year ago = +0.0% (+$11)
Since six months ago = +0.7% (+$1,581)
Since last month = -3.2% (-$7,945)

Townhome Average = $299,843
Since peak (Oct '07) = -18.5% (-$68,121)
Since one year ago = -2.4% (-$7,335)
Since six months ago = +3.0% (+$8,775)
Since last month = -0.0% (-$121)

Sunday, November 1, 2009

Bank of Canada Rate

Greeting all, hope you all survived Halloween and are saving up for the next trip to the dentist. During our discussion about exchange rates last week, it was requested I take a look at the Bank of Canada Rate and it's influences, so today we're going to do just that.

Bank of Canada Rate
Here is a look at the historical Bank of Canada rate, going right back to 1935. Seems to chart a pattern much like the mortgage rates we're familiar with, but that's no surprise and we'll touch on that again toward the end.

Of note, we can see that currently it sits at it's lowest point in history. The prior low had been 1.22%, hit for one month, July of 1958. Before that it had an extended run at 1.50% in the mid-to-late 40's, toward the end of WWII and immediately following. The high was August of 1981, when it hit 21.03%, which was the only time it eclipsed 20%.

Bank of Canada Rate / Exchange Rate
Now we'll take a quick look at how the bank rate effected the exchange rate (with the US). There doesn't appear to be much rhyme or reason to the movements, though after the big recession in the early 80's through the turn of the century there does appear like there could be some relationship, but not so much since.

To get a better picture I think we need to include the American equivalent, the Fed Funds Rate, as just looking at the Canadian rate in a vacuum against another currency could be misleading.

Bank of Canada Rate / Fed Funds Rate
So, here is how those two chart out. As I've said here before, we tend to move lockstep with the US, so no big surprise that we share very similar patterns. Over the above period, the Bank of Canada rate averaged to be 0.93% higher, for what that's worth.

Bank of Canada Rate / Fed Funds Rate / Exchange Rate
Now we'll take a look at how the spread between the Bank of Canada Rate and Fed Funds Rate relate to movements in exchange rate... and I really can't say I see much of anything on that front. This shouldn't really be a surprise, as our policy tends to follow theirs very closely and can adjust very quickly in that regard.

So, for the most part it appears that exchange rate movements are more dependant on stimuli other then central bank rates. That's not to say they couldn't be, but because we're tied to the hip to the US, and our economy dependant on exporting to them, maintaining consistent policy (and thus exchange rate) is often viewed as desirable.

Bank of Canada Rate / Exchange Rate
Finally, we'll tie this back in to housing by comparing the Bank of Canada Rate to the average five-year-fixed mortgage rate and prime lending rate (what variable mortgages are tied to).

They seem to be fairly consistent in their behaviours, tracking together with the bank rate the lowest, the prime rate shifted above that, and the five-year-fixed rate another shift above that, with the odd deviation here or there. Noticably, in the mid-50's there appeared to be a larger spread then since, and there was a lot of turmoil during the runaway inflation of the 70's and resulting recession in the 80's, but the pattern largely persists.

Since 1951, the prime rate has averaged to be 1.42% higher than the bank rate... and the five-year-fixed rate 1.34% higher than prime (or 2.76% higher than the bank rate). It's remained in that ballpark over the last 20 year, and 10 year periods as well in case you were curious.

So, hopefully that answered any questions you may have had about the Bank of Canada rate! On tap for later this week will be the October resale stats release, and a long-term look at fixed vs. variable mortgages, and which performed better. Enjoy what's left of your weekend!