MMIX

Hard to believe we're on the cusp a new decade. I remember ten years ago spending Y2K renting out a cabin retreat out in the mountains with several friends from university, figuring if the world ended as feared we wouldn't find out for a couple days. Ah, the good old days when I had a liver and could drink until it seemed like a good idea to take my turn climbing into a giant culvert and getting pushed down a large rocky hill... and then wake up the next morning in good enough spirits to do it all again.

The future leaders of this fine nation my friends!

Don't laugh, two of those guys that have already been elected to parliament... and I have enough dirt on either to bring them down. Of course there are many that have just as much on me, which is why you will never see me running for any sort of office. I'm just eternally grateful digital technology was still in its infancy, mere hazy memories from the fellow conspirators is too much documentation for my taste... god forbid if we had camera phones and youtube...

Anyway, 2009, what a year huh? Started with economic uncertainty and parliament prorogued... okay, so maybe we haven't made a lot of movement on that front. But we do now have governments running massive deficits, even here in Alberta, record low interest rates, and all signs pointing to a national housing bubble all of our own (though we trend-setters here in the West were already well ahead of the curve on that one!).

Somewhat surprising considering we here in Edmonton (and most of the country for that matter) started the year with the lowest 1st quarter sales tally in at least a decade (and this coming of 4Q '08 which was the worst quarterly tally, period). With the economy as a whole tanking it was no surprise the US Fed pulled out the old Greenspan Put, not surprising because that's been their only response to economic lag in the last twenty years... what did surprise was the extent to which rates were cut, right down to zero. Of course the Bank of Canada followed suit (as if they had a choice), as did most the rest of the developed world.

What's even more troubling is the world seemingly following Japan's lead on how to deal with a collapsing asset bubble... and tried to prop up the banks, bail out the fools holding the junk entirely at the expense of the taxpayer, and keeping the toxic assets in the system... an approach that left Japan bleeding their way to a slow agonizing death.

Rather than, say, follow the Sweden's lead (whom also had economic troubles in the early 90's) who restructured their troubled banks, made those that made bad investments eat their losses and came out the other side with well capitalized banks and an economy that's actually shown signs of life. Of course that sounds way too much like capitalism to ever work in the US (its amazing how quickly those champions of the free market on Wall St. became screaming welfare queens the moment their chickens came home to roost, wasn't it?!).

Any who, that's a story for another day... as the year progressed interest rates hit all time lows, and here in the Great White North it sent the populous into a real estate frenzy. Even in Edmonton, still in the hangover from the bubble that just popped in 2007 houses started moving at a near record clip. The worst 1st Quarter in a decade was followed by the the 3rd best 2Q and 2nd best 3Q ever (FWIW, the 4Q will either be 2nd or 3rd best depending on December, and the year on the whole will be the 3rd best on record, just behind the bubblicious '06 and '07).

Fortunately for us the inventory hangover saved us from much price escalation. Prices today are still roughly what they were in January... the same can't be said for many other markets. Toronto is up over 20%, Vancouver 15%, and even Calgary was up 5-10% despite being on much the same cycle as we are.

Only time will tell how these low interest induced purchases will play out, but with extensive rate hikes expected in the medium term there does remain a possibility with the Canadian mortgage structure that we could cause the same kind of 2/28 meltdown the US had. We could call 'em 5/30's.

And towards the end of the year as the housing bubble took hold in the densely populated (and hotly politically contested) Eastern provinces, it was suddenly getting increasing attention from the media and politicians. First it was Mark Carney trying to work the same magic he had talking down the dollar, trying to talk down real estate... and now we've even got Jim Flaherty threatening to drop the hammer and scale back amortization periods and/or raise downpayment requirements.

If he pulls that out during the spring budget, then interest rate hikes start hitting in the summer that would really slam the breaks on sales and prices... but rest assured we won't see the former without banks, builders, agents, etc screaming bloody murder. They'll yell and stamp their feet protesting intervention and trumpet the free-market... of course this is the same bunch that lobbied long and hard to have the government intervene and strip standards earlier in the decade. The real free market solution would be abolish the CMHC altogether and let the market truly dictate rates and credit worthiness... and the mere notion of that would have those groups shitting bricks, so we know how free market they really are.

Looking back, 2009 was an incredibly eventful year, yet didn't really tell us much. Thus far the governments approach to solving debt problems is more debt, kind of like trying to drink oneself sober I guess. Speaking from experience though, that don't work, but what do I know? It seems 2010 will be a really interesting one on the real estate front too... as will 2011 and likely 2012 for that matter. So stay tuned, it's gonna be a bumpy ride!

Have a safe and happy New Years everyone!

Interprovincial migration goes negative

Hope everyone is doing well after a weekend of merriment, seeing their blood sugars shoot into the exopshere, and perhaps even found their wallets a little lighter should they have partaken in the Boxing Day/Week sales. Hopefully your stomach and liver paced itself though, as New Year is now fast approaching and another round of parties and dinners await.

Hard to believe we're on the cusp of a new decade, I can still remember ten years ago suddenly feeling very old as infomercials for the first of the 90's collections of music started to air. So, in honour of that memory I dug out a couple old CD's (yeah, CD's, remember those?!) to give this entry a soundtrack. Fuel's 'Sunburn', is playing as we speak for those curious... I must have just about drove my dorm-mates insane blasting 'Shimmer' incessantly as a freshman. Toad the Wet Sprocket's 'Dulcinea' is on deck.

Anyway, enough reminiscing, on with the show. Just before the break Statcan released their latest population figures, which while generally unspectacular it did have one interesting component... Alberta's interprovincial migration went negative in the 3rd quarter of 2009.

That is the first time since Q4 '94 its been negative, and not just that but to a degree not seen since Q3 '88, while the province was still shaking off the previous boom/bust cycle.

Though while certainly notable, this is obviously not anywhere near the exodus witnessed in the 80's bust (at least not yet) as the quarterly losses then were much deeper and lasted for years on end. I wouldn't expect it to reach the same levels because, as we discussed last week the recent boom was just not of the same magnitude of the prior one.

While interprovincial migration went negative, the population itself did still grow (again, in light of another discussion, not surprising). The natural increase (basically birth rate exceeding death rate) alone was greater then the net interprovinvial migration. Beyond that international migration levels remained constant, which is to be expected as we looked at back in April.

This will be another interesting stat to keep an eye on for the next couple years, as it is very much a barometer of the economic health of the province. Interprovincial migration more then the other elements of population can swing wildly as young people flock to where the jobs are. So when interprovincial migration goes negative like it has, it's a sign a lot of young people are leaving the province.

Happy Festivus!

I've got a lot of problems with you people! And now, you're gonna hear about it!

Perhaps you're just getting ready to take off for the holidays, or maybe you've been fortunate enough to already have left work in your wake. In any case, we've got time for one more update and lucky for us this morning the CBA released the October mortgage arrears figures.

As you can see, as of All Hallows Eve the arrears rate in Alberta has matched it's prior all-time high at 0.69% set in February of 1997. Technically it's still a fraction below the prior high water mark (0.00174% to be exact), but it's showing no sign of slowing down. Thus, in all likelihood come the November release we will be setting new record highs.

As it stands now we're up 0.55% from the record low reached in May '07, and this will be the 25th consecutive month of increase. We are up 0.34% year-over-year and 0.02% month-over-month. The rate in Alberta continues to have by far the highest in the nation, with the Atlantic provinces coming in second at 0.50% (up 0.01% MoM, and 0.10% YoY).

Nationally the rate stands at 0.44%, the highest it's been since March of 2002. Up 0.01% from a month earlier, and 0.15% from a year earlier. Ontario was the only province that had a month-over-month decrease (down 0.01%) to 0.42%. Manitoba continues to have the lowest rate in Canada, holding at 0.26% (up 0.06 YoY).

And that about wraps it up (pardon the pun). Now excuse me, I must go dig the pole out of the crawl space and prepare for the Feats of Strength. Hope everyone has a safe and happy holiday.

Easy Come... Easy Go

I was hoping the latest arrears numbers would come out today, but evidently no such luck. So instead I'll do a quick follow up to a question arising from Fridays post... that being did we have a similar influx of twenty somethings during the late 70's/early 80's boom, and if so, what became of them during the subsequent bust?

The answer appears to be, yes we did, and they left. Just like in the last few years we've saw a distinct rise in the number of young people during the boom years relative to the rest of the population, peaking in 1981... and as surely as the economy cooled those same young people left the province just as quickly as they came.

In fact, the first boom in terms of migration was larger then the current one, even in nominal terms, thus vastly so in a proportional sense. From 1975 to 1981 the population grew by roughly 482,000, or 26.7%. Comparatively, from 2002 to 2008, the population grew by 457,000, or 14.6%.

This relationship holds for those of the peaking demographics too, as 23 year old population in 1981 numbered 19,214 or 51.1% larger than they had six years prior (when they were 17)... currently 24 year olds are now the largest group and in the last six years their ranks have swelled by 14,518 or 31.1% over what they were six years prior (when they were 18).

Now, we know after 1981 the population of the province as a whole didn't actually contract, growth just largely ground to a halt for the better part of the decade... the population of those 23 years olds did contract though, as by 1987 there were 4,700 fewer (of the now 29 year olds). There was enough overall in-migration to offset the out-migration of young people, and eventually everything settled back into their pre-boom equilibrium in regards to proportion of population.

So, if the economy remains slow we shouldn't be surprised if we see a lot of young people/young families leave the province in coming years in search of greener pastures... but the population as a whole will likely not shrink as overall migration should offset those losses.

Boom, Bust and Echo

We're going to do something a little different today and take a stab at something I've been curious about for a long time, age demographics and the effect of baby boomers. I've also prepared a neat little graph the displays an interesting phenomena resulting from our recent economic boom here in Alberta.

This is something of a time lapse graph to show the progression of the 'wave' of baby boomers. We see the first big spike there on the 1971 plot at 24 years old (as well as the other plots at 5 year intervals), those were the ones born from July 1946-June 1947... whose conceptions appears to be not so coincidentally closely correlated with the end of WWII. I wonder why that would be?!

The wave of boomers subsided a bit after the initial rush, but after a couple years started climbing again and did not crest until about 15 years later. Those would be people that are between 45-50 years old today.

We see in the graph that over time the graph seems to shift lower. This is due to expanding population, and that it largely expanded outside the boomer generation. This is from factors like immigration, the ripple effect of their own offspring, and advances in technology and living conditions allowing people to live longer (median age has risen from 26 in 1971, to 39 today), reduced infant mortality rates (10.9/1000 in 1979, to 5.4/1000 in 2005), etc, etc.

What is also interesting to note is the reduced birth rate that started in the mid-90's and has been very pronounced in the last decade (extreme left of graph, light green and blue lines nearest the bottom). This is probably due to societal shifts towards smaller family. We saw the initial drop off from the boomer generation that was at a certain level... then when they started having kids we saw something of a leveling off again as the echo generation were born... and now echo generation are having their own offspring and we seem to be seeing a second downward shift down and leveling as the generation twice removed from boomers arrive.

Some time in the future I'll do a point discussing the macroeconomic effects of the exodus of baby boomers from the work force and into retirement, or more specifically, their move from being a crucial tax revenue base to increasing health care liabilities. Within that we'll look at the individual provinces and see who should weather storm and who could get crushed by the retirement wave.

A time lapse graph for Alberta using the same time intervals looks very similar to the Canadian one, but I did notice one thing that I wanted to explore further. Upon further inspection and decreasing the intervals it was very noticeable even over just the last decade. This was the influx of young workers during our recent economic boom.

Keeping a close eye on the 20-30 age range we can see a very big bubble form seemingly out of nowhere. It was starting to protrude in '04, then was very noticeable in '06, and is now glaringly obvious in '08. In fact as of '08, 24 and 25 year olds were the largest demographic, even more plentiful then the peak baby boomers.

Now, before someone gets excited and starts pointing to that little bubble as the silver bullet in justifying our little housing bubble... bear in mind that entire bubble above the mean for 20-30 year olds only represents about 30,000 spread out over a province of 3.3 million. So while it looks quite impressive, we're really just dealing with something much closer to a drop in the bucket than a whole new paradigm.

Considering the availability of jobs, this would typically be the age group you'd expect to see a spike in since they're generally far more mobile (not established in careers, or tied down with family). It will be interesting to see this plays out over time, as they're still young and can leave as quickly as they came should they be so inclined.

Some will no doubt set down roots and settle though, and I think we may already be seeing the effects of that on the extreme right of the graph as the birth rate is increasing (unlike the rest of the country where leveled out). Our little economic boom brought a migration boom, and with most of those being young adults we're also starting to see a bit of a baby boom.

Rents Down, Vacancies Up

No surprises coming from the fall Rental Market Report from CMHC, rents are down from a year ago and vacancies are up in a big bad way. So, I guess we'll start with vacancies and work our way to rents.

Here we see a big jump, especially in apartment vacancies over the last 12 months. Apartment vacancies stand at 4.5% (up 2.1% YoY), Row stand at 4.0% (up 0.9% YoY), which results in a market average of 4.4% (up 1.9% YoY).

The biggest jumps have came in 1-bedroom (4.5% vacancy) and 2-bedroom (4.7% vacancy) apartment units, up 2.3% and 2.2% respectively year-over-year. This is notable as combined those two divisions make up over 75% of all rental units in the city.

As we can see the total number of rental units available has continued to drop, down 700 units from last year and over 8,000 from just four years ago. So not only has the number of occupied units shrunk in the last twelve months, but the supply itself has contracted.

Finally we've arrive at rents, and here is a graph for the two most common unit types. Recently the CMHC has started offering a partial spring update (only covers apartments), so I've included those and we can see that the increased vacancy rate has finally started to soften rents.

Back in the spring we noted that even though vacancies were up in a big way from last fall, rents were actually still trending up. Now it seems the effects of high vacancies are starting to show up in rents as they are now starting to noticeably decline, particularly two-bedroom apartments and townhouses.

We explored the counter-intuitive phenomena of rents rising despite recent increases in vacancy rate last month, and explained it as a lagging effect due to the nature of the business. What was also interesting from that post though was the cycle diagram. Which showed that when vacancies start rising that before starting to offer reduced rents, first outfits will start by offering incentives.

I've been watching the offerings fora few buildings online over the couple years, and it it has been interesting to watching them evolve. A year and a half ago there were no incentives to be had, and advertised rents for new move-ins were at a significant premium over the market average.... then about a year ago as vacancy rates started to rise, we saw that premium disappear and move-in's were only asked to pay what established occupants were paying. But there were still no real incentives, and hadn't been for years as vacancy rates were super low.

Then as the year progressed the advertised prices stayed about the same, but we started to see incentives being offered. First things like halving the security deposit, then first month/partial month free... items that really don't cost them anything since the units are sitting empty anyway.

Then come summer they started adding things like televisions, move-in allowances, tickets to sporting events, etc. Now I checked back this morning and their current offering is no rent for December, no security deposit, $500 move in allowance, and/or $100 off per month in rent.

So, they're effectively cutting the rent but trying to avoid lowering their advertised rate. There is several reasons for that, including but not limited to not overtly pissing off established occupants who would find out they're paying more then new ones.. and also when leases come up for renewal they can hope the occupant just rolls over and keeps renting the place sans the incentives at the advertised rate.

For the renters out there you have to be aware your landlord does play these games and you can get yourself a lot better deal if you play them too... especially in high vacancy environments like we have currently. If you're established as a good occupant, they don't want to lose you.

So, you should be able to march down and negotiate yourself a good 15-25% reduction from whatever they're advertising (including incentives) if you haven't already. If they're willing to give any schmuck off the street a deal, you should be able to score yourself a real good one right about now... assuming you're not a point in the ass, in which case you'll probably find yourself shit outta luck.

Debt-to-income

Greetings all, hope you're all finding a way to stay warm! Apparently this weekend Edmonton was the second coldest place on the planet. Alas the Siberians got to keep their claim for coldest. Anyway, we're just going to do a quick one today, as I'm still recovering from having my mind blown by the Dexter finale.

On Monday Statcan released their latest economic accounts data, and in it is an interesting little ratio we're going to discuss today... debt-to-income. Or more specifically, household debt-to-disposable income.

Here we see the data going back to 1990. Seems Canadians have had an increasing appetite for debt the last two decades, and we're now sitting at an all-time high of 145%. Those that have been following this blog know this isn't earth shattering. As we've noted that over the same period the personal savings rate has also plummeted, so a rise in debt is normally part and parcel when that happens.

Beyond just consumer attitudes, such a change is also no doubt rooted in the decline of interest rates over the same time. As interest rates dwindle, as does the incentive to save... conversely, lower rates also allow consumers to carry larger and larger debt loads. Which in combination with stagnant incomes of course equals a rise in debt-to-income measures.

In the latest Bank of Canada 'Financial System Review', they have a nice presentation of our debt-to-income compared to those of the US and UK (Chart 21 - note, the BoC data is through 2009-Q2, my graph earlier was through Q3). I've been trying to locate those foreign data sets too in an effort to recreate that graph, but have come up empty (I'm blaming the Dexter hangover).

There are several conflicting measures of the US numbers out there, so without knowing exactly what data sets Carney & Co. were using I can't vouch for exactly how good those comparison others are... but for our purposes today we'll give them the benefit of the doubt.

We see in that graph that the US and UK ratios top out around 165% (1.65) and 160% (1.60) respectively in late 2007, and since then have witnessed declines of 5% or better... whereas here in Canada even the recession has shown no signs of slowing the trend toward increased debt-loads.

One should also remember though that the peaks of the US and UK figures also coincided with the peaks of their own housing bubbles... whereas our bubble is still building (on a national level anyway) in light of interest rates plummeting. So, there is no telling just how high our ratio might ultimately climb, and we should also keep in mind that housing bubbles are largely regional. Thus, from region to region that ratio could change drastically. Unfortunately I haven't found any data on the provincial or municipal level to share.

In any case, this is another reason we need to keep an eye on interest rates, because if they shoot up it could spell disaster considering our record high debt loads. The last time fixed mortgage rates were as high as 8% for an extended period the average household debt-load was 45% lower then it is today.... not to mention households don't have nearly the level of savings to dip into as they did then either.

Taking on larger and larder debt-loads is one thing while rates are holding or going down as we've largely witnessed the last 28 years... but we've now hit bottom so there is now where to go but up. And with governments running massive deficits, trying to spend their way out of recession, rates aren't just bound to go up a little... they're bound to go up a lot.

Historical Prices and Inflation - Revisited

Nary a week goes by I don't get a couple requests to revisit this post. I wasn't thinking of doing it because prices are pretty much still in the same territory now as it was then, and inflation has been negligible... but my will has finally been broken, so let's just giv'er!

Like last time, we'll start off giving you a look at the historical prices from a nominal perspective. That trajectory it took in 2006 still scares the hell out of me. Wow. Anyway, nominal prices are not that interesting or useful, so lets get on to the good stuff.

Alrighty then, here is the inflation adjusted graph (all figures are in today's dollars). Obviously there are two periods that jump out at us, the big bubble there in the late 70's/early 80's, and the big spike from '06 on.

You've likely noted the presence of a series of dotted lines, now we'll touch on those. Starting with the top one, which shows us the peak of the prior bubble and how long it took for prices to return to that level. We had the price top out at ~$232,000 in August 1979... a level it would not again reach until March of 2006. A period of twenty-six years and seven months for the mathematically challenged.

The yellowish line is a (exponential) trend line/best-fit line. It shows that from 1962-to-present we've had roughly 1.6% annual appreciation. It theorized that our residential average should be closer to the $220,000-225,000 range currently. Thus the market is close to $100,000 over-valued at the moment relative to the long-term trend. At the peak of the market the spread was close to $150,000.

Finally I also included something of a price support line. These are used as a way of estimating the absolute bottom of a market, thus when prices near the price support line users start buying. That's not even to say prices must reach that level (or couldn't drop further for that matter), merely that if they do, it's considered a trigger to buy as the price had overshot the mean.

For the price support line going back to 1962 it figures in an annual appreciation of about 2.0%. Which is actually steeper then the trend line, but started much lower. I'm not a big fan of these... that said, if prices ever do again approach it's curve I would probably be VERY bullish too by then as the residential average would be below $200,000, so I guess they can't be so bad.

I'd likely be one of the few that are bullish, as we'd be well into the "despair" phase of the bubble model. Such is the plight of herd mentality... just as it can feed a bubble, it was destroy it, and then some.

Me personally, I don't think I'd even start looking until the average returns to around $250,000... and probably not think about letting the cheque book see the light of day until it was around $230,000. Of course this is all dependent on interest rates, if they stay at current levels for years on end obviously prices would settle higher... conversely if rates went much above 7% I'd expect prices to settle lower.

But that's just me and my take of where the fundamentals point, and as Keynes said, the market can stay irrational longer than you can stay solvent... though just because it can doesn't mean will, and after witnessing the clusterfuck his minions have delivered us to currently, I'll take my chances.

Big in Japan II: Electric Boogaloo

Greetings brothers from other mothers. Today we're going to do a big of a supplement/appendix to Saturday's post on Japan... this time around we'll do some comparing and contrasting of their HPI with ours, as well as the Case-Shiller index from the States.

Here they are charted out without any adjustments. Kind of a mess, we have different index points, some peaking before the index point, others after, yadda yadda yadda, I'm really tired today it's a mess. So, lets do some adjustments and see how it looks then.

Alright, since we're obviously concerned with "bubbles", lets find the respective peaks and count back six years. Why six years, well, it would have been ten, but the Canadian data doesn't go back that far, nor does the U.S. Composite 20... so basically I went back as far as the shortest data set allowed.

We can see by far the biggest bubble was in the Japanese major city index, followed by the U.S. composite 10, then U.S. composite 20, the Canadian composite 6, and then finally the Japanese nationwide. Interesting to note that Japan bookends the high and low ends. Also since their asset bubble was back in '91 they have the long tail.

So, as far as the Canadian figure goes our bubble is bigger then Japan's (as a whole), but well below the U.S. bubble. It is worth noting the Canadian cities peaking has been a little more spaced out then our American counterparts, and in light of the recent national flurry we're in all likelihood going to set a new peak as the fall numbers become available... so the Canadian curve would thus need to be reset in that event.

In any case, it's unlikely the Canadian peak will get anywhere near the U.S. figures... unless we just go completely off the rails for another year or more (particularly Toronto). After the last eight months though, never say never, but it would take a whole lot to pull us up to that level.

These are the respective decline from peak figures. Again, Japan's extends far beyond everyone else. Interestingly, we can see the two U.S. composites have declined at eerily similar patterns despite having varied peaks as we noted in the prior graph.

We can also see that the current ultra-low interest rate environment has not just spurred prices in Canada, but also the U.S. as their curves too have suddenly made a stark move up. Difference being that south of the border they're still down 30% from peak even after this upswing... whereas in Canada we were still early in our decline, thus much of those losses have been erased and we're now approaching a new high (which would reset this graph).

National numbers only do you so much good as real estate is more a local creature and can vary widely from region to region. So lets take a look at some city numbers. As I mentioned in the prior article, I have been unable to obtain any city specific numbers for Japan, but we'll compare some major cities in North America to what happened to the Japan major city composite. At least that will give us a general idea.

For Canada I picked Calgary, Vancouver and Toronto as they are our most hotly discussed real estate markets. To make them easier to pick out, I made them the dashed lines. For the U.S. I selected Miami, Phoenix and Seattle. Miami having the biggest bubble (as per Case-Shiller), Phoenix was about 7th out of the 20 but much discussed, and Seattle was about in the middle of the pack.

We see here the Miami curve is actually quite close to the Japanese major market composite. Down a little, we see Calgary close to Phoenix, with Vancouver not far behind. Down a little more we have Seattle, then finally Toronto's curve looking downright flat compared to the others.

Unfortunately for us in Edmonton we aren't included in the Canadian HPI. But if we want to get an idea of where we might be on this scale lets start by comparing Calgary resale stats from this period with their HPI... indexing Calgary's various resale averages/medians using the same method (index point six years prior to peak) we find peaks in the 225-to-240 range. Knowing their HPI topped out at 226, seems we're right in the range, near the low end.

Now looking at Edmonton's resale averages/medians, we come out with peaks in the 260-to-280 range... the low end of which would put us right up at the top with Miami. The same relationship between resale and HPI holds for both Vancouver and Toronto as well. So, take that for what it's worth, but it would suggest that the bubble we experienced in Edmonton could very well be right up there with the worst in the United States.

Finally here is the decline from peak for all the cities (the Japanese one is cut off in this and the prior graph, but the full plot is available in the earlier graphs). Pretty serious stuff in Phoenix and Miami, with 54.5% and 48.5% respective declines from peak. Even Seattle which had a much more moderate bubble has fallen over 20%, well beyond the classification for a "bust."

We can certainly see the effects of the interest rate plunge on both sides of the border (except it seems in Seattle). Even in the U.S. markets where residential real estate had been written off for dead prices have jumped significantly in recent month. It'll be interesting to see how the next couple years play out, as rates stay low for now and what will happen when rates start jumping. But only time will tell.

Big in Japan

As the economic mess continues to unfold, there is no lack of bewilderment about what's going to happen and when. There are people calling for everything from runaway inflation to runaway deflation... all the while no one is anymore sure what is coming next year, then they are about tomorrow.

In our little niche of the blogosphere here we discussing housing bubble here in Alberta, and through much of Canada for that matter, those bullish on the market all have their theories as to why they feel prices are sustainable. The arguments largely focus on either inflation jacking up incomes, or interest rates staying at their current record lows for years on end. Some even cite a combination of the two, apparently blissfully unaware that they are mutually exclusive

In the case of the low interest rates scenario, they point to Japan as an example. So, today we're going to take a look at just what happened in Japan. Then in subsequent days we'll do some further comparisons with what happened in Japan, to what happened in the US, to what's happening here. Even so, brace yourself, it's gonna be a big'uns.

First up, interest rates. The best I could find was their prime rate, which is as good as any, so we'll use that. Also, just for reference purposes, I included the prime rate we Canucks have witnessed. We can that their interest rates have been lower than ours going right back to the late 70's. But what we really want to focus on is the period from the mid 90's through now, as it was in the mid 90's that the Bank of Japan intentionally started to set their rate VERY low (in an effort to attract the carry trade).

Japan first dipped below the 3% mark in July of '95, and after a couple years bouncing around the mark, they haven't eclipsed it again since May of '97. Over this period the Canadian prime rate have been averaging in the 5-6% range, while in Japan it's been more like 2%... coincidently, a range that we now find ourselves currently.

We're not really here to discuss what the future holds for interest rates (though it seems the current consensus is that they'll eventually go up, but for now they will remain for at least another six months). The question we're looking at is in the even these rates stay long term, will that alone support a real estate bubble? Beyond that, what kind of effects would it have on the greater economy?

In this regard, Japan is actually a great case study. You see, in the early 90's Japan was right at the acme of their own massive asset bubble... of which real estate was right at the forefront.

This is a look at the National Wooden House Market Value Index, quite a mouthful. It's index point (=100) is 2000, which is actually the same as the Case-Shiller index in the U.S.... but in the case of Japan, by then their bubble was in their rear-view mirror. Regardless, we'll get into all that business sometime next week, for today we're focusing on Japan.

Here we can see a very distinct bubble pattern, particularly in their index of the six major cities (Tokyo, Yokohama, Nagoya, Kyoto, Osaka, and Kobe). They don't break them down into individual cities, or at least I couldn't find any data on individual cities, but I have a hunch that's probably got more to do with my non-existent understanding of the Japanese language then anything.

At their peak in 1991, the national mark was 126.1, and major cities mark was 223.4. As of their most recent publishing in September the national index was 68.8, and 6-major-cities index stood at 79.3. Which would equal a national 45% decline from peak, and 65% for the major-cities.

This also goes to show that even with ultra-low interest rates, it's done nothing to stop the decline... they may have slowed it, but that's all. Prices are back to where they were in the early 80's. Other then a little bounce in the major-cities recently, that has largely since dissipated, it's been a very smooth trip down. So yeah, ouch, very ouch. But believe it or not, that's a mere tickle compared to what happened in commercial real estate.

Looks very similar, but note the scaling... this mofo topped out at almost 520 in the major centres! The national decline from peak is currently sitting at 74%, and the major cities at 85%. That's approaching Tulip Mania types numbers.

Now lets take a look at why high inflation and low interest rates are mutually exclusive. Other then just intuitively, as if inflation is high, generally everything is earning a high return and thus to attract money even low risk investments like bonds would need to offer higher returns, and as we all know, higher returns on bonds = higher interest rates. Conversely, if inflation is low, nothing is really offering a return, thus interest rates can be very low.

In the graph above we can see how inflation and interest rates have played out in Japan. Here we note that as interest rates plummeted, inflation flat-lined. ¥1,000 will pretty much buy you just as much today as it would in 1992.

Now lets compare the Japanese situation to ours here in Canada, where inflation has been more typical. Here, to buy the same amount of stuff $1,000 would get you in 1992, would cost you roughly $1375 today. That's basically how inflation works, over time the purchasing power of a dollar erodes , in the case presented by 38% over the last 17 years... whereas the Japanese experience has effectively been 0% inflation, purchasing power is exactly the same today was it was in '92.

Therein lies the rub of a sustained period of low interest rates... there is no inflation, everything tends to stagnate. Including as we see in the above graph, incomes. Here we can see in nominal terms that Canadian incomes have steadily increased all along, whereas in Japan where they grew through the early 90's, but since incomes have actually declined slightly since they changed monetary policy.

I'm typically a stickler for using medians rather than averages for items such as incomes, but I could only find averages for Japan. Thus, I figured I'd better use them for Canada just to be consistent. So, in case you were wondering, that's why.

Here is the same data, only adjusted for inflation. We note the Canadian incomes have been much more flat historically once inflation is considered. What's more interesting is the Japanese numbers, who had a rise, plateau, and then slide.

From the 90's on we'd expect to see that pattern as we know inflation has been effectively non-existent, and thus it should replicate the pattern from the nominal graph. That we expected, but what's compelling is seeing the very noticeable gains in real incomes between 1970 and 1991. In 1970 the average family in Japan was making roughly ¥4.26M... by 1991 they were making over ¥6.86M.

It warrants repeating, these are in inflation adjusted dollars, not just nominal, that's a 61% improvement in incomes over and above increases in the cost of living. That's very significant, and with that kind of improved purchasing power you could see why there would be for the potential of a real estate bubble. Compare that to Canada, where we're currently at our highest point in history, but even that is only up about 17% over the last 30 years.

Did this graph just for kicks, it's inflation adjusted earnings for both nations again, but this time converted into Canadian dollars (historical exchange rate). Shows the power of exchange rate fluctuations, as we know nominally in Japan incomes really haven't changed significantly in the last 20 years.. but in Canadian dollars they've been up and down, anywhere from $54,000 to $97,000. Interesting? Perhaps. Useful? Not so much.

And this mercifully brings us to our final graph for today (I told you it was going to be a big'uns, and just be thankful I condensed or eliminated a bunch more). This is various indexes available from the Japanese statistics bureau, except the income index, which I devised from the data we discussed earlier (all index points have been set to 2000 for comparative purposes).

The two that jump out first are obviously the residential real estate ones, the rest are much more gentle. The others are income, inflation and rental indexes. Income and inflation again we discussed earlier, so we'll just take a sec and talk about the rental index (yellow line).

We can see it's been very smooth over time, and has been virtually flat since '97. As we know from experience here, rents are stickier then real estate prices, as such move much slower. It's interesting that there really didn't seem to be any short term surge at all when the bubble occurred, nor did it dip as prices declined. Seems rents just found a long term equilibrium and eventually settled into it. Even as inflation halted, rents continued to rise through much of the 90's, then finally levelled off. Even since then as real estate prices have continued to slide, rental prices have remained stagnant.

Anyway, I just wanted to include that graph to display the interplay of all the factors and give you an idea of the overall picture of what happened. I think I've covered all the bases I wanted to touch on today, so I'll try to wrap this up. What we should take away from this is that when the fundamentals get way out of whack, there is no easy way out. Even manipulating interest rates long term in the wake of an asset bubble, has done nothing to keep asset prices from declining.

Japans spend and borrow response to the aftermath of their asset bubble has done nothing to prop up those assets, but has left the nation crippled with debt, and on the brink of economic collapse. Now in the wake of asset bubbles bursting world wide, much of the developed world is now copying the very policies that got the Japanese in trouble. One can only hope that they truly are only going to be temporary, because as we've seen, they're not only ineffective, they're destructive.

November numbers are in..

The November resale data was released today, and again this month we're seeing some interesting movements on the price front. After a rather big drop last month, the single-family-homes rebounded a bit, and that the held the residential average... but condo's continued to drop, hard.

Condo's were down another 2.5% in November, and this after a they dropped 3.2% the month before. As we've discussed here ad nauseam, condo's are by the far weakest sector because how severely overbuilt they are (in regards to supply)... but even so, an almost 6% drop in two months is massive, especially when the rest of the market is more-or-less holding. Thus don't be too surprised if there is a bounce in condo prices in the near future.

Unless SFH's suddenly start falling quickly too, I'd expect condos to at least hold if not rebound a bit in the short term. In the long term I still expect condo prices to fall WAY below where they are today, I just find this recent decoupling odd, and likely an aberration given the current interest rate environment. But who knows, Edmonton has thus far been the forerunner of the Alberta (and now, national) boom-bust cycle, so maybe it's the beginning of the next chapter.

Sales are starting to slow and inventories dropping, as typically happens this time of year. They both typically bottom out in December (we see mass delistings the last week of December), then being to ramp up as winter progresses.

Which brings us to absorption rate, which jumped about half a point to 4.14 in November. As we can see from the graph we're in more of a normal range for this time of year, but I would be wary as we're coming off another extended period of high sales.

In times like that, people tend to hold off from listing for whatever reason (and record low interest rates certainly wouldn't be rushing them either). Then when the market turns they rush them to market and you end up with a flood of inventory, as we witnessed just two years ago. The double whammy of a cooling market and rising interest rates could very well lead to another explosion of listings, so be aware.

Finally, and as always, here are the hard numbers:

Sales = 1,261
Since two years ago = +3.1% (+38)
Since one year ago = +41.5% (+370)
Since last month = -17.9% (-274)

Active Listings = 5,226
Since two years ago = -39.7% (-3,441)
Since one year ago = -34.8% (-2,789)
Since last month = -5.5% (-304)

Single Family Homes Median= $350,000
Since peak (May '07) = -12.5% (-$50,000)
Since one year ago = +3.9% (+$13,000)
Since six months ago = +2.2% (+$7,500)
Since last month = +1.2% (+$4,000)

Residential Average = $318,482
Since peak (July '07) = -10.2% (-$36,236)
Since one year ago = -0.0% (-106)
Since six months ago = -2.4% (-$7,850)
Since last month = -0.2% (-$487)

Single Family Homes Average = $368,018
Since peak (May '07) = -13.6% (-$58,010)
Since one year ago = +1.5% (+$5,261)
Since six months ago = +0.1% (+$346)
Since last month = +1.2% (-$4,324)

Condo Average = $231,684
Since peak (July '07) = -14.8% (-$40,224)
Since one year ago = +0.1% (+$153)
Since six months ago = -5.3% (-$13,050)
Since last month = -2.5% (-$5,917)

Personal Saving Rates

Greetings all, let me be the first to welcome you to December! Most of the country has likely recovered by now from the Grand National Drunk and all the football type festivities... except maybe in Saskatchewan, where they are probably still drinking to forget, as images of orange flags and the words "Too Many Men" join images of Tony Gabriel in forever haunting the wheaties!

13th man indeed! Mua ha ha... schadenfreud is such sweet splendor!

Figured I'd knock out a quick and dirty entry tonight. Cause, well, what can I say, I like my bloggin' like I like my ladies. Yeah, alright, that was low hanging... but what do you want? It's late and I'm tired. Anyway, enough of that, lets get down to business and take a quick look at personal saving rates.

Statcan released their latest GDP and economic accounts data today, or I guess technically yesterday. Regardless, GDP gets most of the press, but one of the figures that also gets some attention is the personal saving rate.

We've heard a lot about how Canadians are more prudent, ipso facto, better savers then our neighbours to the south, so I also dug up some numbers from the U.S. Department of Commerce/Bureau of Economic Analysis and thought I'd do a comparison between our fine nations.

From a quick look at the graph it would seem that distinction was very much valid from the mid-70's to the mid-90's, but not so much since. In fact, for the last twelve years or so, we've been eerily similar... bouncing around the 3% mark on average, hovering around all time lows.

The Canadian rate had never dipped below 5% until 1997, but since 1999 our times above it have been few and far between. The U.S. being in much the same boat. Seems that as interest rates have been steadily declining, people have been increasing their spending on both sides of the 49th. Conversely, in the period of rising interest rates (up to 1982) people saved more and more as rates climbed in Canada, while in the U.S. they kind of plateaued around 10%.

What's it all mean? It's hard to say exactly. But before we feel too cavalier about our position in the financial world, we should realize as far as that goes we're just resting on our laurels and in fact have left ourselves just as exposed to potential credit problems as they have in the United States... particularly the younger generation(s).

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.

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.

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.

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.

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.

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...

Consumer
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!

*Shudder*

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.

Realtors
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.

Brokers
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.

Banks/Lenders
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.

CMHC
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...

Up

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%.

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.

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.

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.

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.

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...

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.

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.

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.

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.

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!

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.

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.

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.

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.

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.

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!