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!

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!

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.

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.

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!

100

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Signing off,
Kevin
DOCTOR OF BLOGONOMICS®^TM©

Ouch.... very ouch

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

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

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

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

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

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

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

Enjoy your weekend guys and gals!

Leading the nation... at falling behind

The latest mortgage arrears numbers were released today, and once again they are up. Through August the rate sits at 0.65%... getting ever closer to the modern day high of 0.69% from February 1997. As these numbers are two months old now, in all likelihood we're already at or past that mark now, but we won't know for sure until the numbers are officially out... so for now:

Month-over-month the number was up from 0.62% in July, and year-over-year from 0.30% last August. Alberta continues to widen it's lead in regards to highest rate in the nation, as the month-over-month increases too have been the largest in the country.

As we can see, we're also well above the long-term average and showing no sign of slowing... and with the interest rate shock no doubt awaiting those that bought into the market at the recent all-time low rates, we haven't seen anything yet.

Haven't graphed out the national numbers in awhile, so figured it'd be a good time to do that again. Here are the western provinces. They've all been tracking up this year, no surprise given the recession, but none nearly to the degree Alberta has... though I have a hunch B.C. soon will be charting a very similar path as their bubble deflates, and ultimately will could even dwarf us.

Saskatchewan and Manitoba enjoy the opposite end of the spectrum with by far the lowest rates in the country, 0.25% and 0.27% respectively. Saskatchewan could later has issues as they had a bit of a bubble form there last year, so time will tell for them, but Manitoba appears relatively safe as their market has remained very stable.

Now the east, and national average for good measure. They have actually all been fairly stable the last six months, creeping up just slightly. Quebec has held their 0.35% rate for the fifth consecutive month, while Ontario held at 0.43 for the fourth straight month. The Atlantic region also held from July at 0.48%.

Nationally, the rate continues it's slow steady climb, now at 0.43%... up from 0.42% in July, 0.38% six months ago, and 0.28% a year ago. Largely due to increases in Alberta and BC, though Ontario was also accelerating last year.

Interest rates and defaults

Continuing our consumer debt series, and today we'll take a look at how interest rates play into things. So lets jump right in and start with interest rates and bankruptcies.

Here I've overlayed interest rate and the national and provincial bankruptcy rates. What we can take from this graph is that the gradually decreasing interest rates haven't had any noticeable impact on bankruptcy rates. The one thing that does stand out is the dramatic spike in interest rates in 1994/1995, which coincided with the start of a more gradual spike in bankruptcy rates which eventually topped out in 1997.

It's hard to say if, or how much, of a causal relationship may exist between these happenings, but as we discussed in my last post, people are increasingly likely to default on loans early in their terms, particularly when the rates charged are high. So the rise in bankruptcy rate could be a remnant of people taking on debt during the interest rate spike... or it could be nothing. Worth noting anyway.

Moving on, now we'll hit on interest rates and mortgage arrears. This data goes back one more year, and here we can see there was an additional spike in interest rates in 1991... and like the bankruptcy rate, we can again see an arrears spike lagging, and topping out about two years after the interest rates did.

Again this could be a coincidence, but such a relationship would seem rather intuitive and seems to show abrupt interest rate spikes may contribute to later spikes in loan defaults. The slow decline of interest rates don't appear to have a major effect, but rapid increases do seem to be a noticeable driver.

So, obviously in our current low rate environment this could spell trouble ahead as rates are almost assuredly to rise at least back to more historical norms. That graph is also another reminder of just how historical norms have been and how fortunate borrowers have had it for the last decade. 7.5% appears quite moderate over the last 20 years (and if we went back 30 it would look even better), but if we suddenly found ourselves in that situation tomorrow, havoc would be wreaked, and not just on the real estate market.

Finally, cause I have the data and went to the trouble of making the graph, we'll take a look at interest rates and average bankruptcy deficiency We hit on this last week, but for a quick and dirty explanation, deficiency is the surplus of liabilities over assets upon filing for bankruptcy.

This data goes back much further, all the way to 1976 and the series was annual. Obviously what catches everyone's eye is the big spike there in the early 80's. Seems there were a whole lot of bankruptcies that included foreclosures during that spike, especially in Alberta.

Beyond that period there doesn't appear to be as much a relationship between the measures as the ones we've discussed earlier. But as I discussed last week, most of the time the majority of bankruptcies do not include foreclosures, so that isn't surprising. While we don't have foreclosure numbers going back to the early 80's, the deficiency measure would seem to indicate there were a whole lot of them.

Anyway, hope you guys found this interesting, a little macroeconomic food-for-though to chew on this weekend. Take it for what it's worth.

Anatomy of a foreclosure

Spent most of yesterday sorting through my database full of info... updating, upgrading and quite a bit of deleting. Long over due as it was a colossal mess, and I needed a refresher over what I had. It was good and got a ton of ideas about things I could cover... and which in all likelihood will be forgotten by time I can get around to it.

And in that spirit, I'm doing a post on something I just randomly stumbled upon while surfing archive.org today. Found a old page that was once from the foreclosurescanada.com site and thought it would make an interesting topic.

It's just basic information on 88 foreclosures in Edmonton and Calgary from a couple week of July, 2003. Amount owing, original mortgage amount, month issued and interest rate. Figured it made a nice little random sample to examine, and even better, it's from a period when the market was far more balanced then what it's been like the last four or five years.

We can test some axioms, and see where it leads. In articles and interviews I've heard it stated that most foreclosures occur in the few years of the loan. So, lets start there:

Seems that claim holds up, at least as far as our block sample goes. Over 60% of those foreclosures had occurred within three years... over 75% within five... and 95% by year ten.

We can also see that most occur in the second year in particular, over 1/4 in fact. Years one and three are the next highest at around 16-17%... from there it seems the general trend it that the longer the mortgage is held, the less likely it is to default.

Those that looked at the linked page may have noticed that a few of those had some rather extreme interest rates, as high as 20%... obviously not made to prime borrowers. So, I also ran the numbers again for rates less-than-or-equal-to 10% just for shits and giggles and so we can see what it looks like for move conventional loans.

Pretty much looks the same, except years one and two are slightly lower, and the rest slightly higher. Not really a surprise, as obviously people taking those elevated rates are higher risk and the rates themselves make the vicious circle complete.

Of the 12 that had the >10% rates, four were foreclosed upon within a year... six in the second year... and the remaining two in the third year. Typically these were smaller loans, often under $25,000, so presumably second mortgages, but a couple were over $50,000.

Now we'll look at a slightly different angle, this is how much is owing relative to the original loan at the point of foreclosure... or more accurately, how much has been paid off. By far the highest range here are those that actually owe more then their original loan... almost 40% (also did this graph for loans with interest rates at or below 10%)

The incident rate quickly drops to about 24% of foreclosures for those that have paid back between 0-5%. In this sample almost 2/3 foreclosures involved borrowers with less then 5% of their loan paid off. Oddly the rate plummets in the 5-10% range, then bounces back up, but I'd chalk that up to it being a small sample. If we had a larger sample the curve would probably be much smoother.

In any case, we can see that the less principle one has repaid, the more likely they are to fall into foreclosure... or conversely, the more principle one has repaid, the less likely they are to fall into foreclosure.

This would obviously jive with our findings earlier in this post... and as one should expect, those defaulting early in their mortgages life would in all likelihood have repaid less principle.

While I wouldn't take any of these stats as gospel, as this was just a random block sample, at least it was a fair sized one and the results appear as one would expect intuitively. Anyway, I thought it was interesting to analyse, hopefully you feel found it interesting to some degree.

Bankruptcies

Hope everyone enjoy their Thanksgiving long weekends, and filled up with turkey and complex carbohydrates.

In the comments section of last weeks post on consumer debt someone referenced these stats on bankruptcies/insolvencies in Canada. I managed to find their historical bankruptcy numbers, but not the proposal and total insolvency stats (insolvencies = bankruptcies + proposals).

So, we'll take a look at the bankruptcy numbers today, and rather then do one monster post I'll just do a series and in coming days and weeks I'll do further comparisons between consumer debt, bankruptcies and foreclosures.

Rather then just quoting the hard figures, most of these measures have been derived to give a better historical context. This is a figure of the number of consumer bankruptcies per 1,000 people in Alberta for any given year. Also included the long term average and median figures for comparative purposes, and a projection of what the 2009 figure will be based on the numbers through August and long-term seasonality.

As we can see, through 2008 we were still in the average range overall, but actually quite low when compared to the prior 20 years (given the shift there must have been some kind of change in measurement and/or legislation around 1990). During the boom period we saw bankruptcy figures fall, but are expected to spike back up this year to pre-boom levels.

It is also interesting to look at the historical figures. For example, we've talked here often about the early 80's recession and have heard the stories about the devastation felt by residential real estate. We can see bankruptcies did double from the boom days in the 70's to the bust in the early 80's... but the rate stayed constant right through the rest of the 80's, no discernible spike as one might expect.

Then in the early 90's we see the rate climb from 1.0 to 2.25... this also coincided with a recession (though minor compared to a decade earlier), but curiously in the mid 90's the rate took off again and topped out above 3.5 after the recession had already played itself out.

From what we know about home prices, they had a significant drop in the early 80's, and minor one in the early 90's, but were stagnant in the mid-90's. So, it would seem any relationship between consumer bankruptcies and real estate is probably not closely tied to bankruptcy rate.

Just some food for thought, here is the year-over-year change in bankruptcy rate. Interesting to note that based on our current pace, 2009 will have the highest increase ever. No small feat considering it was not exactly low going in. While probably not directly effecting real estate, it is a rather damning statistic for the Alberta economy as a whole.

Beyond just the number of bankruptcies, the stats also include sets on the assets, liabilities and deficiencies (assets less liabilities). I adjusted all these for inflation (2009 dollars) for comparative purposes and then divided that number by the number of bankruptcies to get a 'per bankruptcy' figure.

Here we can really see the effects of the early 80's recession. While the rate was not so high, there was a HUGE difference in the sums of money per bankruptcy, and that's likely a sign there there were a lot more foreclosures involved... where as it appears in most years the vast majority of bankruptcies involve those that do no own real estate.

When it topped out in 1984 there was an (inflation adjusted) average of about $237,000 worth of liabilities (very close to the inflation adjusted average real estate price at the peak of that boom, coincidence?!), to only about $60,000 worth of assets. The figures at play between 1982 and 1986 completely dwarfs any figures before or since.

Here is another graph that somewhat combines the two prior. It overlays the rate over the average deficiency (I included nominal and real dollars just so you can see for yourselves the effects of inflation).

Here we can see that the sums involved are really not related to the number of people defaulting. Through from 1991-2001 despite the rate being at all time highs, the average person who filed for bankruptcy was less then $10,000 in the hole.

So we can fairly safely conclude that in those years that vast majority of those going bankrupt were not home owners, or in any danger of becoming one, so the rate itself is probably of little value in predicting foreclosure rates.

What is a better indicator of foreclosure trouble is the sums involved.

The 80's were remembered as disastrous, and the deficiencies witnessed then reflected that. We had a slight hiccup in the early 90's, and we can see a corresponding blip in 1990. The more people that are foreclosed upon, the higher the numbers will skew.

That we have been tracking upwards the last few years could be a warning of things to come, but as we've discussed here, the levels of non-mortgage debt carried have also taken off of late too, so we must take that into the equation.

It will be interesting to see what the numbers end up looking like in 2009, as I could not do any projection for the deficiencies and that is the number we're most interested in for our purposes.

A glance at commercial real estate

Had a little window to do a post today, so figured I'd take a quick look at the commercial real estate stats for Edmonton. I have had a passing interest in just seeing how they've shaped up over the years, and how they look now. So, without further ado, here is a look at historical sales and inventory tallies.

We'll start with sales. I guess what I find interesting is that there is really no sign of the big economic boom what-so-ever. Sales actually appear to be lower from 2005-Oct '08 then they were earlier in the decade. Though, of course, with the new commercial construction stats quite likely tell a different story, it's just interesting it never showed up in the resale market.

We do see a drop off from mid '07 through this spring that's timing coincided with the drop off in housing sales... but considering the economy was still largely motoring through that period I would be very hesitant to equate the two.

It is interesting to note that 2008 was pacing to have the by far the lowest yearly sales total going back to at least 2001 even before the the financial crisis hit... then things got even worse on the sales front. So, that would suggest there was trouble brewing on that front before the economic bubble burst, but again like the residential market, sales took off again in the spring.

Some interesting movements to say the least.

Now we'll look at inventory. This one again you'd be hard pressed to tell there was an oil boom roll through the city in the last five years. Inventory shifted down a bit from 2005 onward, but not to a big degree.

We've been hearing this year that commercial real estate could have a real inventory problem with all the construction and development we witnessed. This is suspected to be a big problem in a lot of North America in fact. Of course commercial real estate tends be leased much more so then residential, so the true scope of the problem may not surface in resale inventory, but I would assume it would still be relative.

So, the spiking of inventory that has taken root since last fall could be a sign of trouble, but it's still early (this plot is only up to June FYI), and while much higher then they were a year earlier, they are not at all-time highs just yet.

This could be something to keep an eye on. Admittedly, I'm not terribly familiar with the ins-and-outs of commercial real estate (these are the numbers from the EREB). If any of you are a little more boned up on that market, it would be interesting to hear your take on it.

Indicators

Greetings all, hope you're all ready for the weekend. My apologies for the lack of updates, it's been a crazy week, but I'm sure you don't care... so, I'm gonna try to fire of a quick write-up before I head off to the football game (here's hoping it's not as bad as Mondays!).

Anyway, a while back CM, one of our regular readers from made a comment I liked over on Mike Fotiou's blog. He listed off a half dozen or so economic indicators for Alberta real estate he liked to follow that I think are very good. For an even more complete list you can visit CM's site where he lists over a dozen, as well as links to many other sites of interest for those who follow real estate.

So today I figured I'd list some of the ones he follows, as well as some I follow, and some we've even discussed here before. So if you are so inclined you can check them out, and decide for yourself if/how you feel they influence the real estate market and the economy here in Wild Rose Country.

• Employment - It would stand to reason the more people working, the more likely they are to be buying real estate, and just spending money in general. I particularly like to follow full time employment numbers. I think that gives you the best sense of what's happening in the trenches.
  
  
• Consumer Debt - As you guys know, I harp on mortgage arrears endlessly... and arrears are closely tied to foreclosures. Some dismiss these as trivial, but I think they give an impression of overall market health, and if increasing numbers of people are falling behind on their largest monthly expenditure, I find that troubling. It's also good to keep an eye on the levels of household debt, and credit card delinquencies.
  
  
• Commodities - As we've discussed here in recent weeks, oil, and particularely natural gas revenues are a very big part of the Alberta economy. Not just in direct government royalties, but jobs and incomes directly and indirectly tied to production. When prices are up, production goes up, which means not just more jobs in the oil patch, but those people are spending that money too, which creates a massive spin-off effect. Conversely, when things tighten up like it has lately, the entire economy feels that too.
  
  
• Interest Rates - These are a biggie as they are such a big influence on affordability... and what drives interest rates are bond yields. As Canada is something of a minnow on the global financial markets, our bonds tend to just go with the flow so it's easiest just to follow US bonds. CM likes to follow the 10-year bonds, I like the 5-year... basically same shit, different pile, they pretty much follow the same pattern, just shifted.
  
  
• Real Estate Prices - And all those others lead up here. While certainly a lagging indicator, ultimately these are where the buck stops. Many different dimensions to look at, resale prices (which we discuss ad nauseam here), home price index, new home price index.

Hope you find those interesting, and if you have some more or your own feel free to list those in the comment section. Sorry this is a bit of a short one, but I'm tired, it's Friday, and I want to watch some football and maybe drink an overpriced beer... or twelve. Have a good weekend!

Fueling Alberta

After this weeks announcement about the revised budget from the province, I thought it would be interesting take a look at historical revenues, particularly those coming from oil and gas. So, today's entry is more of a general interest post and not concerning the housing market (at least not directly anyway).

So, without further ado here is a look at revenues from the last decade or so, as well as the estimated revenues for this year.

As we can see, revenues have taken quite a dive, and it's now expected we'll be down over 8 billion from two and three years ago, and 6 billion from last year. We can also see that shortfall is pretty much entirely due to declining resource revenues.

This is effectively the same graph, but this time the resource figures are broken down into divisions, natural gas, oil (I lumped crude and synthetic crude/bitumen together), and other. Giving us a bit more perspective, we can see that while oil is certainly down from the last three years, historically it's actually about normal... gas on the otherhand, is very low by recent and historical measures... and other resource revenue is virtually non-existent.

This is looking at it from another angle, this time from a proportion of total revenues (that year). This again shows what we discussed earlier, and that gas is making up a mere fraction of the revenues it normally contributes to government coffers.

Now we'll isolate just the resource figures. As we can see here, when the government talks about how volatile our resource revenues are, they are not kidding. This year we're now projected to collect over eight billion less in resource revenue then last year (and over ten billion less then the high water mark in '05/06). That is expected to be only the second time in this span that such revenues came in below six billion for the year, and the first time below four billion.

This graph is also good to show that typically natural gas is what drives the province... some years the ratio of natural gas-to-oil revenues got as high as 4/1 or 5/1... as opposed to this year when for the first time oil revenues are expected to exceed gas revenues.

Again, we'll break it down by percentage of contribution. We can see in the last four years there has been a shift and oil is becoming more prominent and gas revenues has settled in just below the 50% mark. Quite the change from earlier in the decade when it was generally in the high 60's/low 70's.

What the future holds for this balance will be very interesting to follow. How will the increased gas production in the US effect production here and market price? How will changing environmental effect the oils sands?

Anywho, that was a little look at oil and gas revenues for the province from the last decade or so to send you off on your weekend. If you have any questions, comments and/or observations, fire away.

Where's the beef?

There's been a fair amount of news coming this week, none of which appears particularly helpful for the housing market. EI numbers for June came our yesterday, they're way up. The June Teranet HPI also came out, and they say even with the huge sales tally in Calgary, prices were still down month-over-month. And finally, this morning the Provinvial government held court and told us they're expected to run a 6.9 Billion dollar deficit this year... and this just days after the feds told us they were up to their ears in deficit too.

Now, I'm sure some of you wonder what any of that has to do with real estate in Edmonton. So, lets start at the beginning, the EI numbers. Well, rising EI numbers mean fewer people are working and a soft employment situation... typically people with no job and no money don't buy houses (though, as we've seen the last three years, it no longer seems to stop the banks from giving such people money, but I digress).

On to point two, the Calgary numbers. They are relevent because pretty much anything happening there, is happening here too. The sales and prices in both cities tend to track together, we both boomed at the same time, we both started "correcting" at the same times, and we both even had a big spring surge in our resale markets.

The bulls like to spout how that surge was a result of improving fundamentals, but as is becoming increasingly apparently, that wasn't so. Not only that, but the HPI numbers display the reported price gains in the resale were an illusion caused by an upward shift in what people were buying and not actual values of homes... and that as well as the sales, was caused by record low interest rates.

Which provides a nice segway into the deficit news. Interest rates at current levels are not sustainable even when governments are behaving themselves, but when they rack up deficits they need to issue debt... and when everyone is doing it, it floods the bond market, which drives up yields, which drive up interest rates. So, not only are interest rates bound to go up, they're bound to go WAY up.

Then of course there is the other ugly consequence of governments issuing debt... that's government having to pay it off. Which will inevitably mean higher taxes, and those hikes will be hitting us from all angles... federal, provincial, business, property and consumption. So, if interest rates going up wasn't going to have enough of a depressing effect on real estate prices, taxes will be taking a bite out of net earnings and providing a double whammy on housing.

Particularly troubling about the provincial deficit numbers is the effect natural gas is having on it. Oil seems to get all the press, but in truth it's actually gas that drives the province. Approximately 2/3rds of the provincial non-renewable resource revenue comes from gas, or in otherwords, gas kicks in about double the money oil does.

Sobering Factoid: Two years ago non-renewable resource revenue made up almost 30% of the provinces total revenues... this year, it's expected to make up just 13%.

And there does not appear to be much hope in sight for gas prices in the near-term either, prices just recently dropped below $3, and some are even calling for it to go below $2. A far cry from the $13 it was trading at not so long ago, and even the $3.75 the province is currently bemoaning in their budget.

Add to that, demand is low and no change in that expected in the near future, strategic reserves are overflowing, and with the improved feasibility of massive quantities of shale gas throughout the US... even if/when demand comes roaring back, there is a lot more domestic supply available for our neighbours to the south.

The current situation is all made worse by that while production at current prices is often uneconomical and there is already surplus supply, American producers have to keep pumping for fear that otherwise they could lose their leases. Suddenly natural gas is no longer a license to print money up in Wild Rose Country.

If real estate prices being at unsustainable levels weren't troubling enough, a softening job market and record deficits are foretelling even bigger troubles to come.

How I got here

I'm sure literally none of you have wondered to yourselves, "how does one become a contrarian blogger?" Well, it's not a terribly interesting story, and doesn't pay nearly as well as telling people what they want to hear, actually, it doesn't pay period... but as my experience in the last year may be somewhat relatable for some out there, I figured why not answer the question no one asked.

I'll try to spare you the self-aggrandizing life story as much as possible, but just for a slight background I grew up in a rural area about an hour north of Edmonton. Went to the U of A for a few years, and lived around campus then decided I wanted a change of scenery and major and went out of province for a couple years. So I took the scenic route through school, figuratively and literally.

So, after my wandering through the wilderness for awhile I moved back to Edmonton. It was the summer of 2006, and we were right in the heart of the boom. The housing market was on fire, everything was selling, prices skyrocketing and vacancy rates were practically nil.

I had never been one for peer pressure or conspicuous consumption, so I really had no intention of buying as I had no idea what I really wanted to do with my life at the time (still not entirely sure about that one, truth be told, but I think that makes me more interesting!). I figured I'd just rent for a couple years and see where life took me, then I'd get serious about buying something, as long term it generally does make sense.

So I went out and found a place, a nice 2-bedroom for about $920 a month. I thought it was a little high at the time, so I decided to compare the rent to what it would cost to buy the identical condo's literally across the street (at one time they were all one big complex, but at some point the one section was split off).

The exact same 2-bedroom was going for $200,000-$210,000, figuring financing, opportunity cost lost, taxes and fees was going to cost $1,600 a month, of which only about $270 a month would go towards equity.

Now, I know a lot of brokers and whatnot like to work a lot of voodoo with downpayments to make anything sound affordable, but you have to figure in an opportunity cost for your money... and the going interest rate is as good as any as far as I'm concerned, so I go in calculating costs at 100% financing. The rest pretty much comes out in the wash and you get a quick and dirty comparison. Truth be told, you should really be able to do a bit better then mortgage rates on your investments, but we're being conservative.

Suddenly $920 a month didn't sound so bad. Sounded even better considering three weeks later when I took possession the rates for new tenants had gone up to $1220, apparently I got in just under the wire. And, was banking about $5,000 a year more then I would be owning.

So, I was quite content, and I really only followed the real estate market passively, checking in to see what those condo's across the street were going for every once in awhile. By summer of 2007 when the market peaked they were asking $230,000 to $240,000. My rent went up to $1070.

Still really didn't start thinking to much about buying until early 2008. I knew I had another rent increase coming, and had gotten somewhat settled into life. I also remembered my professor lecturing us one day about how home ownership was a good form of forced savings, thought I had been pretty diligent about saving without needing to be forced. I knew long term it generally was advantageous to buy, as assuming constant interest rates your payments will stay the same as rents will continue to increase.

I really had no interest in buying one of those condos across the street, but I continued to follow them just because they were a direct comparable and probably an overall reflection of the entire market price movement wise. By the winter I started to look around online a bit, was also pleasantly surprised to see the asking prices were now in the $220,000 territory.

Come summer 2008 I figured it was time to get serious and got an agent and looked at some places. Prices had come down some more and those condo's across the street were now asking about $200,000. Knowing the pending rent increase coming, suddenly the cost of buying was a lot closer to the cost of renting. There was still about a $100 premium over what it would cost me to rent (excluding equity), but another rent increase would erase it anyway.

That the price of those had dropped $40,000 in a year probably should have raised a red flag, but I think that was probably overwhelmed by the greed induced by seeing better and better properties dropping into the range that I wanted to spend ($270,000-$300,000). I also kind of accepted the popular mantra that real estate always goes up, and figured it was probably just that the market overheated and it was probably largely adjusted back. So it's all good.

By saving diligently I had seen my downpayment swell, and bigger and better properties kept dropping into my price range. I grew up in a family where we generally didn't like to buy things we couldn't pay for outright, so I've always felt debt was to be avoided as much as possible. I'm basically of the opinion that if you can't pay it off in 20 years at the most you probably shouldn't buy it, and if you can't in 25, you definitely shouldn't. So, obviously I don't have a terribly high opinion of the 30, 35, and at that time 40 year ams, in fact the longest amortization I'm personally willing to take is 15.

I'm also a bit of a utilitarian. I'd much sooner pay $2 for a $1 item I want, then $1 for a $2 item that I don't. My car is probably a good example, I wanted a quality car that got good mileage... so I got a Jetta TDI. I could have got another car for much less, but I did a little cost-benefit analysis, these retain their value a lot better, and the diesel engine probably saves me a dollar for every dollar I put in the tank. Other then that it's about as bare bones as you get. Of course you need get serviced through VW, which is not only bad, but very expensive... but there is no free lunch.

Anyway, so I looked at a bunch of places, and even liked a couple so much so that I was thinking about making an offer. But I wanted to do a little market research before I commited to anything. I stumbled upon the EREB's historical average price stats, put 'em in a spreadsheet and graphed them.

The first two words out of my mouth were "Holy shit!" I then rechecked that everything was inputted correctly, and when I found it was, I can honestly say any house lust I had was long gone. Over about 30 seconds I went from being ready to make an offer, to hugging and whispering reassurances to my wallet. There was something very wrong in Kansas.

I'm no Ph.D, but I've studied some math, stats and finance during my day, and that graph alone scared me straight... and I imagine damn near anyone could immediately see something wasn't right.

So, between my affinity for numbers and a little OCD I went about compiling any and all figures I could find. Running simulations, looking for correlations (it was also during this time that I developed my extreme distaste for the New Listings statistic, that figure is an useless as tits on a bull).

I also started reading the blogs and research papers. Anything and everything basically. The more research I did and measures I'd calculate, the more it became apparent that prices were too high. Then the economic crisis hit in October, and at that point my wallet took it's turn hugging and whispering reassurances in my ear.

Believe it or not, being as close to buying as I was actually saved me tens of thousands of dollars, as I had pulled most of my investments into cash as an expected downpayment, much of which would otherwise have been lost in the stock crash. So I kind of failed upwards on that one.

That fall the landlord tore up the rental increase, and not too long after it actually ended up being decreased down to $900 a month, I'm now paying less then when I moved in. The posted rate has also dropped down to about $1000, but the complex continues to lose tenants. It's certainly a different picture then three years ago.

Despite the real estate surge the last couple months, currently the condos across the street are now asking $180,000, one was posted awhile back for $165,000 but it looked like it was in pretty rough shape. The prices on the places I was going to put bids on are down even more, 15% and 20% respectively... so, just sitting on my wallet has already saved me 40-50,000. Even if the local price numbers are similar to last year the asking prices still look to be down, but then again condo's are expected to be a big albatross on values since they're so overbuilt.

As per why I decided to start blogging, well, I just didn't really find many other sites doing the kind of analysis I am, and certainly not on the Edmonton market. Also there didn't seem to be any counter point to the seemingly infinite supply of blogs with a vested interest in seeing people buy. So I figured maybe someone else might be interested in this stuff, and putting it online kind of forces you to do your homework before opening your yap, so it's a learning experience.

Today I'm infinitely more prepared to buy a home and know what I'm getting into when that day comes then I was a year ago. Do not confuse my bearish views on the market conditions with on buying real estate in general... in general it's usually a wise investment... trouble being we're not in a "general" period, at least in my not so humble opinion.

For those already in the market, the conditions aren't really a big deal, especially if you're downsizing or moving laterally. This is because once you're vested it's all relative.

But, for first-time buyers, like myself, it's not a good time to enter. If you overpay to get in, that's a mistake you'll be paying for the rest of your days. Even those bullish on the market aren't predicting any explosive growth in prices any time soon, so there is little to be lost by taking a wait and see approach... but if I'm correct, there is much to be gained by waiting.

I don't know about you guys, but I'll take 'low-risk/high-reward' any day over the alternative. When I'm spending hundreds of thousands of dollars I want to be damn sure I'm buying an asset that won't depreciate, short term or long. I don't concern myself with trying to hit the bottom... I just want to make sure I buy on the right side of it.