We've Moved!

So… we’ve moved!

We’re now operating solely at edmontonhousingbust.com, moving over from blogspot. I’ve tried to make the transition as painless as possible and mimic the old appearance/navigation. Also should have an automatic redirect sending ya’ll this way. There are still a few kinks to workout, so if you notice something I missed fire me an e-mail or leave a comment and I’ll get on it… but at least from my brief stint troubleshooting we at least appear to be functional (I’m working on updating the backlinks, but it’s slooooow going).

Other than updating your bookmarks, hopefully there isn’t much that should change for you guys. In the weeks and months to come I’ll be playing with some new features that are now available thanks to moving to our own domain. Again, if you have any suggestions in that regard, by all means get in touch with me. So, yeah, that’s about all I have to say… hope you all are having a good weekend!

National bankruptcy rate hits record high

Today the Office of the Superintendent of Bankruptcy Canada released the November insolvency figures. We had touched on this topic a couple months back, but largely focused on Alberta, today we're also going to add the nationwide numbers into the mix. We'll start with Alberta again though and make you wait for the good stuff!

This is the total number of declared bankruptcies in the province in any given year (and since it's only through November 2009, I've done a projection for December). As we can see here depending on just how the December numbers turn out we will either set an new high or come very close, at least in nominal terms. Though since the population has grown since '96/'97, proportionately we're not as bad off, as we'll see in the final graph.

Now we have a look-see at the national numbers, and we can see we are already WAY beyond any previous highs. Even through just eleven months we've already had over 18,000 more bankruptcies than 2008 (which was the previous high water mark), so once the December figures come in we'll likely be in the 25-30K range.

Again though, these are just nominal figures and to get a true idea of the significance of the problem in historical terms we must account for population changes. For our purposes we'll adjust it to a rate of bankruptcies per 1,000 people.

Thus we have this (note: there are actually two of those dotted lines representing averages, they're just so close they appear almost as one).

For Alberta we can see we're obviously much above the rate during the boom years, but still within a range that was normal during most of the period from '94 thru '04. While well above the long-term average, that average seems heavily skewed by the much lower rates from the 70's and 80's, which it would seem are probably not all that relevant nowadays, for whatever reason. So, for now in Alberta at least it seems we're still doing alright on the insolvency front.

The national rate on the other hand has blown way past any prior record highs, and now sits around 3.46 (previous high was 2.85 in '97) including the December projection. Just through November alone the number is already at 3.21, so even if there was a miraculous December and not a single further bankruptcy, we're already well above any prior highs.

Given the economic crisis and recession such spikes in '09 are not unexpected. Going forward we can expect to see comparatively high levels of bankruptcies as even when the economy starts to recover, the jobs lost will not return nearly as fast as they were lost. Beyond that, many consumers have been burning through their savings and/or relying on EI to keep their heads above water, but those eventually run out. So the full effects of the recession have not yet been realized.

We know that bankruptcy rate and arrears/foreclosures are not particularly highly correlated. Regardless, high and rising levels of insolvency is obviously a sign of a weakening consumer base, and thus should have some effect on housing prices. So it really begs the question of how sustainable is a 20% increase in national home values over the very same period unemployment rose in a big way, incomes dropped, and insolvencies hit record highs.

It's really a testament to just how powerful the influence of interest rates have on real estate values. Every other fundamental factor at best held, and for the most part got worse. This last year has been as good a change to observe the effects of interest rates in a vacuum as could ever be practically achieved.

Of course the really scary part is that from here, interest rates have no where to go but up.

Sticker Price

Don't really feel like running a bunch of numbers today, so I thought I'd mix it up and write something of a guide to comparing rentals. Not because I'm an expert by any means, but I have made some errors and learned some lessons over the years... and thus, probably would have found this at least a little helpful. Obvious much of picking a place to live boils down to individual taste/preference, but we're going to focus on the more quantitative elements... and that you often need to look deeper than just the monthly rent.

When comparing rentals from a monetary perspective once you know the monthly charge, the first thing you need to look at are utilities (power, water and gas/heat). Some units will include all three in your rent... others will include none... and yet others, any combination in between. So this can make a big difference beyond just looking at the sticker price.

These can be difficult to account for if you've never had to cover them before. I know in my case while in university both the apartments I had included water and gas, so when I was looking for my last place I really didn't know how much to budget those for as it included none. But over the last couple years I have tracked my payments, and while they obviously fluctuate to varying degrees depending on the season, I found that a good rule of thumb for an average apartment is about $50 a month each.

So if you were comparing two otherwise equal apartments, one including all utilities for $1,000 a month, against one not including any utilities buy renting for $900... you'd probably end up about $50 a month better off renting the $1,000/month unit, as after utilities you'd be paying about $1,050/month on the other unit.

This is as stated talking about apartments, mine being about 1,000 sqft it's a fairly average two-bedroom size. If one was renting a house though, gas would certainly be more expensive, and increasingly so the larger the place is. Power would also cost you a bit more, and water is really more dependent on how many are living there so it wouldn't really change. If you're renting an entire house though, I doubt there would be many the did include utilities anyway.

I've never rented a basement suite, but looking at the ads online it seems many of them offer a deal where utilities are split along some lines with those living upstairs. As service charges make up a significant portion of monthly utilities, these should save you some money over paying them yourself. Like I said, I don't know from experience, but as a guesstimation I'd say your monthly costs will be about $25-30 per utility.

Some buildings also include items like cable/satellite television and internet access with rents. These you know of have to factor for yourself, as if you don't watch much tv, that obviously wouldn't be worth anything to you. For someone like me though who would take advantage of both tv and internet, that could represent a value added of $100 or so. In some cases you'd have to make sure the packages were to your liking though... just in my case I have a Shaw PVR, which when not connected to Shaw doesn't do a damn thing. And as anyone who has used a PVR can attest, once you start watching tv that way, you cannot go back to the old way. So, you need to find out those things and budget in cost of new equipment, and even that you're losing a degree of control over those elements.

Then of course there are the other tangibles like location, parking, laundry facilities. Those a little harder to quantify, and higher dependent on personal valuations... but they are considerations you should try to account for when making your decision. In my case, when I was younger I lived in a couple places with common laundry rooms, and while they served their purpose I much prefer to have it in-suite.

And finally, with the market being pretty soft we're starting to see significant incentives offered. Just in my complex they've offered all sorts of things, Oilers tickets, televisions, first month free, and now they're just flat out offering $200 off per month (if you don't know why they don't just drop the price, go take a marketing class).

I don't know if I'd call it a strategy, but I can't think of anything better to call it, so here it is. First, figure out what you want in way of size, location and amenities, and find your target properties that share those. Then you compare costs, and remember base cost is only part of the story. You need to know what's included, what's not, and what incentives are offered for each, and allocate costs accordingly.

Once you've done that, you should have a very good idea of what costs come with each property and can make a sound decision based on total cost, rather than just the sticker price.

Circle the Wagons!

Seems the feds wondering aloud about tightening up mortgage lending requirements has predictably got the dander up of those in the real estate/lending industries up. Rapidly they have began circling the wagons, and now we're starting to see the PR counter assault.

The builders, lenders, and brokers wasted no time squealing when the rumours first started to circulate, and today we saw one of the first of their more official responses with CAAMP pumping out a special report to protect the shield and tell the world (and more specifically Jim Flaherty) there is apparently no need for concern and that everything is rosy.

Not sure words can really do justice to the simple gesture of rolling ones eyes as far back in their sockets as humanly possible. It's about as blatantly slanted a 'report' as one is likely to find. One must wonder how many showers it took Will Dunning to feel clean after signing his name to such tripe.

The report could have offered some real insight, but instead resorted to cherry picking data that met their pre-determined narrative... and even at that, it needed to employ some amazingly convenient assumptions just to get that far. Loaded with vague language, and immediately dismissive of anything that would poke holes in their rice paper castle of a hypothesis.

Most glaring was their refusal to discuss the potential effects of fixed rate mortgages going up to a significant degree... instead, conveniently assuming they will go no higher than 5.25%, a level WAY below the long term average, and overly optimistic even in the era of rock bottom rates of the last decade.

Or that the rush of buyers trying to 'take advantage' of the all-time low rates this last year has effectively left us with a made-in-Canada version of the ARM disaster that contributed to the US housing collapse. Rather than lender offered teaser rates, we had record low market rates bound to rise to a significant degree when these loans come up for renewal in five years.

And thanks to nearly half of all first-time-buyers flocking to 30+ year amortizations and other exotic arrangements, come renewal they will have made up minimal equity and will thus bear the full brunt of higher market rates. If that's not scary enough, according to today's report somewhere between 50-60% of the record sales this year (or any year) are made by first time buyers.

But of course such talk doesn't further their agenda, even if it was in the long-term interest of the market (and their own members) to tighten lending... that would cause short-term pain to the mortgage brokers out there, and CAAMP can't have that. But why should they be different than anyone else whose sight can't seem to extend past the end of the current quarter.

Here comes the BOOM!

Today we're going to take another look at demographics, and more specifically the pending wave of baby boomers into retirement. We touched on this last month, but just in regards to Alberta. Today we'll do all the provinces and territories and see how they all stack up heading into the unknown.

The dotted line is the national average... so ones position relative to that line tells us how much better or worse off they are then the average province. We'll start out east with the Atlantic provinces.

We can see they all chart fairly similar patterns. Typically below average levels of twenty somethings (likely having moved elsewhere looking for work), and conversely above average levels of fifty-somethings. This would suggest they're probably going to get hit harder than most when the boomers start retiring en masse.

Now we'll look at Ontario, Quebec and the various territories. I probably should have broke these up as the territories figures are more or less their own animal(s), but alas I wanted to cram them all into three graphs.

Ontario is the red line, and Quebec the blue, we'll start with those two. Being by far the largest province it's no surprise Ontario plots a line very close to the national average... and when it comes to boomers they'll actually fare slightly better than average. Quebec also charts close to the national average, but a little above average once you get past 45 year olds, so they'll feel the effects a little worse than Ontario.

Like I mentioned the three territories are their own animals. The Yukon appears to have the pattern most similar to the rest of the country, but has a very big spike of boomers. Relatively speaking both the NWT and Nunavut have very young populations, and see a very big drop off once they hit 50 and 40 respectively.

Finally we'll look at the western provinces. We see a few interesting trends here. As we discussed last month, Alberta has seen a big influx of twenty-somethings during the economic boom, thus we can see a noticeably higher proportion of twenty- and thirty-somethings... which also causes a downward shift in the proportion of older people. But as we discussed in a follow up, those that moved here can be a fickle bunch, and can leave as quickly as they came.

Saskatchewan is another interesting case, where their levels of 30-50 year olds are noticeably low. One would suspect this is likely a result of the flip-side of the effect Alberta experienced, that being Saskatchewan having relative economic difficulties for much of the prior two decades and thus a fair number of their young people left and didn't return. Of course Saskatchewan's economic situation has took a real turn for the better in the last couple years, so it'll be interesting to see how they chart in the future.

Now British Columbia, which while it has a reputation for attracting retirees, they seem to track remarkably like the national average. Of the Western provinces they appear like they'll be hit hardest by the boomer exodus from the work force, but only slightly worse than the national average. And finally Manitoba, who don't seem to go right up the middle of their Western cousins on the demographic front.

And this is a graph of the median age of the respective provinces. Whether it adds anything to this article I don't know, but I prepared it, so here it is. We note the larger the wave of baby boomers present in the earlier graph, the higher the median age is. The Atlantic provinces are the oldest, followed by Quebec and B.C. whom we noted were both above the national average line when it came to boomers.

Then you Ontario and the western provinces below the national median age by varying degrees, Alberta coming in the lowest. Yukon is mixed in with the western provinces, but NWT, and Nunavut in particular, are drastically lower. Alberta has again been affected by the resent influx of young people looking for work, so if they start leaving we'll soon find ourselves back in the range Saskatchewan and Manitoba are in currently (and Saskatchewan may actually shift lower depending on how their economy weathers the financial storm).

In any case, it will be interesting to see how the exodus of baby boomers plays out. The governments have enjoyed a steadily increasing population base of working age people for over fifty years... and that's not just going to start to slow, but eventually it's going to begin to shrink (in about 10 years). That these are also generally the biggest earners, and thus biggest tax payers, only adds to the discrepancy.

We're going to see a significant reduction in tax revenue at the very same time demand for services will be increasing in a big way. Thus we're on the cusp of a new paradigm, and one that is very different than what we've become accustom too.

The Perfect Storm

Greetings all! We're going to do something a little different today, and that's very interesting... or at least I think it's interesting. I'm going to take a look at the changes the CMHC made, how it affected lending and even touch on why what happened here wasn't all that different than what happened in the US. I was meaning to get this done a bit faster, but turns out it's a little more time consuming than I thought it would be, 'tis complicated stuff.

Before we start, I compiled this little graph as something of an all-in-one backgrounder for this post. The contents are nothing that hasn't been discussed ad nauseam already on this blog. This is just so you can consult for reference. So here that is.

This is all concerning Edmonton. We have median household incomes, median single-family-home prices and average 5-year fixed rate mortgage interest rate. Incomes and home prices are inflation adjusted, and are in 2007 dollars. Why 2007? Well, that's what the data set came in for incomes, and to compile the final graph I could not adjust it... and frankly it's close enough to today's dollars, All figures in this post are in 2007 dollars.

Enough of that, on to the good stuff. This is a graph documenting the changes in CMHC lending standards, and it's effect on how much money a person could qualify for. These percentages hold true whether you make $1/year or $1,000,000/year, so income level have no effect on this measure.

We set our base effect (0%) as the maximum amount one could qualify for going into 2006 when amortizations were limited to 25 years. We're using 6% as a steady interest rate through the entire period. We know in reality they float, but for theoretical and practical purposes we'll use 6%, and as we could see in the first graph interest rates were generally right around 6% from '03 through early '09 (and are likely to return there once the "emergency rates" expire).

For example a person, lets call him Dave, is making $60,000 a year, could qualify for about $250,000 in financing assuming he has no debts in January of 2006 or any time early. Just for example purposes, and to use a nice round number.

In March '06 we saw the first mandated change, and that was extending amortizations to 30 years. That change allows Dave to qualify for ~7.5% or ~$18,500 more than he did before. They also dropped the need for a 5% downpayment, unfortunately the effects of that can't really be quantified. We'll discuss it's grander effects a bit later, but for our purposes here we just kind of ignore it.

So we jump ahead a few months to June. Here Harper and Co. really open the flood gates. Sure they again extend amortizations another 5 years, now to 35... but the real coup de gras was insuring interest-only mortgages. That one blew the doors right off.

Here I split the line just so we can see the effects of the amortization extensions (green line), as other wise they would be lost in the effect of interest-only payments. The move to 35 year ams would have allowed Dave to borrow another ~5.5% above and beyond. So he could now borrow 13% or $32,500 more than he could five months earlier.

We follow that green line a little further, and in November the feds started insuring 40 year amortizations. That allows Dave to borrow another 4.1% (notice the diminishing returns on the 5 year extensions?), and that's 17.1% more than he could borrow less than a year prior. For a guy making $60,000/year, that's another $42,750 in financing he could qualify for. No small increase.

Of course that's nothing compared to what the interest-only option offers. That route offered 28.9% more financing (or about $72,000 for Dave). Now we consider that this financing wasn't just available to Dave, but to everyone in Canada.

We recall that real estate in Edmonton (and Alberta as a whole) was pretty hot in '05. It was the talk of the town, everything was selling and the economy was cooking... then we hit '06 the feds take an axe to lending standards, and over the first six months all these hormonal consumers find themselves with greatly increasing levels of available financing.

Now go back to the first graph, and notice that is right when real estate prices start going vertical. It's not a coincidence. Real estate was on hot, but a controlled burn and sustainable... but all this suddenly available financing just threw gas on it... and at this point it just became a perfect storm.

Obviously when available financing increases in a big way... so does the pool of potential buyers. I apologize that you need to use your imagination a little with this graph. The incomes breakdowns are only available on an annual basis, so gains made over the year really cannot be represented other than those jumps. Really we're only focusing on 2006 though, the rest are just there for reference sake.

This is a graph of the percentage of households that can qualify for $200,000 of financing at 6% interest (again, assuming no other debts). Up until '05 it was steadily around 57% of households as incomes were stable. Then in '06, incomes jumped an impressive 8.5% ($4800) YoY... this yield a 3.8% improvement in households that qualify. It's important to note that relationship. If we follow the blue line further (it's conditions are held constant with 25yr ams) we could see another 4.2% ($2600) YoY improvement in incomes in '07, yielding a 3% improvement in qualifications.

Now we compare that to the effects changes in lending standards had on qualifications. Extending amortizations to 30 years increased qualifications by about 2.6%... 35 years was another 2.4%... and finally 40 years was another 1.5%. So if amortizations were merely lengthened from 25 year to 40 years it would have increased qualifying households by 6.5% in total. In Edmonton that represents about 32,000 households, which is by itself a VERY big one year increase in potential demand.

But again, like the prior measure, it was the interest-only option that blew the doors off. That option rocketed up the qualifying population to 74.4%, an increase of 14.1% over what it was just five months prior, and representing an influx of roughly 69,000 households that wouldn't have otherwise qualified for that much financing.

Obviously that figures is theoretical, as credit scores would disqualify several, most already own, some aren't looking, etc etc. So, you can just throw out that 69,000 figure. But assuming standard distribution the percentages should be fairly accurate over what had previously been available... in fact, if anything they're understated.

You see, typically the required downpayment would be a limiting factor to buying. So, even if one could qualify for sufficient financing to purchase, they still needed to have a downpayment and this kept many potential first time buyers from buying... but one of the first lending requirements stripped was effectively removing the need for downpayments by allowing them to be borrowed. This not only further opened the door, but opened it to much riskier borrowers, ones without a established savings and those without skin in the game.

Obviously that effect can't be easily quantified, but it was just one more control eliminated that allowed the housing market to bubble out of control. People no longer needed to plan or save to earn the right to buy... they could just pop down to the bank, piggyback a couple loans and have themselves a house. Hell, they didn't even have to be able to cover closing costs.

That's why those that argue that the mere absence of widespread "subprime" loans means we're not in a bubble like the US is missing the forest for the trees. Look at their overall effect... they allowed people to a) borrow more money than they would otherwise have, and b) allowed more people to borrow money. So maybe we didn't have as many "subprime" loans... instead we just kept lowering the bar for prime until it had the same effect.

They had an influx of new demand, and with it an expanding pool of available financing (of which lowering interest rates only further expanded)... that will heat up real estate markets, and then it just becomes a vicious cycle and feeds itself until all fundamentals have been so far bypassed the only thing supporting the market is it's own momentum... and when that runs out, Wile E. Coyote meets gravity.

That's not to say the effect of these new loans, or "innovations" should be ignored, their entrance into the market will certainly an increase in prices and new equilibrium... the problem is they also often cause overheating of the market and drastic overshooting of the that new equilibrium (remember these innovations also come with increased risk).

For example, in Edmonton prior to the boom typically 60% of households could finance and amount equal to the median home value in the, city and that number was steady for many years... at the peak even using the most exotic financing arrangements, only 39% could. If you limited to the loosest of what is offered today after the feds tightened standards that would drop to 36%. A very big shift, and unsustainable.

Today with "emergency" interest rates and prices having fallen from the peak and figuring in continued income growth the median home can currently be financed by about 50% of households. Better than it was, but still a ways to go before getting back to 60%... and interest rates shoot up much (even back to historical norms) it would take a great big bite out of that improvement (not to mention if amortizations get shortened to 30 years or tighten up downpayment rules).

The exact causes here may have varied between nations in name, but the effects were all the same. One must focus on the big picture and not tiny details. The lending bar was lowered... the amount of available credit exploded... demand explodes... supply is pinched short term... prices start rising... and the bubble becomes self feeding. Then add to that our human behavioural economics... mob mentality, speculation, irrational exuberance, etc, and it's a lethal brew.

About the only thing that actually is different here is we don't have to worry about our entire financial system collapsing as a result of the housing bubble popping... you see, the taxpayers have been on the hook for this one all along. Lucky us!

December numbers are in...

The EREB released the December resale numbers for Edmonton today. We're continuing to see the expected seasonal trends for sales and inventory, both typically dive off a cliff in December... prices largely held, except condos where they took a BIG bounce after two months of sharp falls.

With condos apparently decoupling in October and November and seeing rather large month over month declines while the rest of the market held, you had to figure either they'd bounce back up or SFH's would shortly start to follow the same trend... and we got the former, to the tune of a rather massive 5.4%. This is actually fairly normal behavior after sharp drops (>2% MoM), they'll often bounce back to their prior level or close too it. Given the holding of prices in the SFH category, and even the appreciation of prices in Calgary the condo price dive did seem to have all the marks of an abberation.

It's been an interest year, as a year ago prices were nearing their bottom before interest rates took a big dive in the spring and really spurred the Canadian real estate market. So year-over-year we're starting to see rather a decent appreciation, while over the last six months prices have merely held. Now we're left with a waiting game to see what happens with interest rates... when will they jump, and more importantly, how high.

Like I mentioned, as is usual for December inventory and sales take a big dive. Seems a large percentage of listings expire at year year, thus we typically see a big wave of delistings the last week of December... then several get relisted immediately in the new year, while others trickle in through winter and spring.

Sales also typically are at their bottom in December, and I think we could fairly safely reason that is due to the extended holiday period and everything that comes with that. Relative to past years, December '09's sales were fairly strong, high end of average.

And here we have the absorption rate. It continues to settle back towards the normal range. This will be very interesting to follow once rates start going up. That will of course soften sales, but I also suspect we could see another explosion of listings somewhere along the way when market sentiment swings. Perhaps not to the level seen in '08, but approaching that territory.

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

Sales = 948
Since two years ago = +10.6% (+91)
Since one year ago = +55.9% (+340)
Since last month = -24.8% (-313)

Active Listings = 4,037
Since two years ago = -43.1% (-3,057)
Since one year ago = -36.1% (-2,279)
Since last month = -22.8% (-1,189)

Single Family Homes Median= $351,350
Since peak (May '07) = -12.2% (-$48,650)
Since one year ago = +6.5% (+$21,350)
Since six months ago = +0.5% (+$1,850)
Since last month = +0.4% (+$1,350)

Residential Average = $319,201
Since peak (July '07) = -10.0% (-$35,517)
Since one year ago = +2.6% (+$8,227)
Since six months ago = -2.8% (-$9,098)
Since last month = +0.2% (+$719)

Single Family Homes Average = $366,761
Since peak (May '07) = -13.9% (-$59,267)
Since one year ago = +4.2% (+$14,891)
Since six months ago = -0.8% (-$3,098)
Since last month = -0.3% (-$1,257)

Condo Average = $244,174
Since peak (July '07) = -10.2% (-$27,734)
Since one year ago = +4.2% (+$9,888)
Since six months ago = -1.2% (-$2,897)
Since last month = +5.4% (-$12,490)

Bailout Nation

Welcome back! We're just going to do a quick post tonight, cause the December resale numbers should be out in the next two days and I have a neat little analysis on tap for later in the week. Hope everyone has recovered from all the merriment and revelry of the holidays. Things were good in the EHB household... though I do suspect that some of Santa's elves broke in here and systematically shrunk all my pants in the last week or so. Not that I have any proof, but that's the only explanation I can think of for them to suddenly be more snug than usual.

As I've gotten older I've noticed that my list of people I need to buy for keeps growing, all the while my list of things I want keeps getting shorter. This year it was just a couple books, couple movies.. but chiefly Megan Fox complete with a pool full of chocolate pudding. Admittedly there may have been some practical limitations on that last one, and judging from the dirty look the girlfriend flashed me after giving her the list, possible some issues above and beyond those.

Regardless, the good sport that she is, she came through with the books. I was particularly excited about the Barry Ritholtz tome about the financial crisis, 'Bailout Nation'. Those who have explored my "recommended reading" blogroll would have noticed the link to his blog 'The Big Picture'... and my tweets are also continually directing people to his entries. Anyone who likes this blog would surely enjoy his. Tons of stats, analysis, macroeconomic discussion, clever, practical, and a vastly better writer than yours truly.

I could hardly put the book down, tore threw it about a day and a half. It was fascinating, and a great play-by-play for all the who's, what's, where's, when's and why's of the financial crisis. A big part of that being the housing bubble in the U.S., which he discusses at length.

Which while we find ourselves in a different boat here in Canada insofar as the impact a housing bust would have on our financial sector (the taxpayers are already on the hook here should boom go bust... whereas in the U.S. it was the instrument holders holding the bag, at least initially before the government bailed them out to a large extent), the housing sector itself appear very much in the same boat. Prices suddenly and severely got out of line with everyone from income and market rents right up to GDP (speaking of which there is a fascinating look at the housing booms effect on GDP growth, something I'm going to try to replicate for Canada).

If you find yourself wandering through a bookstore and have a few minutes, I suggest picking up a copy (it would be in the finance and/or investing section) and read through Chapter 21 - The Virtues of Foreclosure. It's only ten pages, and at least two of those are graphs, so it's not heavy reading. You'll notice he hits many of the same points I've been hammering on here, only far more eloquently and succinctly. In fact, I'll probably be stealing and paraphrasing much of it in the future.

In conclusion, it's a great and very informative read for any of your arm-chair economists out there, or just anyone interested in finance. Like I said, it's an easy read, he's got a very pragmatic viewpoint, writes in a conversational style and the chapters are relatively short so you just fly through it. And no I'm not getting paid for all this gushing, I just think that for anyone that enjoys my blog here it's something should read and would enjoy.

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)