Edmonton Housing Bust

Those of you kicking around the comments section, or my twitter feed the last couple days in all likelihood came across a discussion of a an interview on CBC Radio regarding the Canadian real estate market, and featured Danielle Park, and Gregory Klump. The latter did not have a good show to say the least, and has since become a bit of a whipping boy for the blogosphere.

And today, I intend to pile on a bit more… but will also try to examine the point I believe he was trying to make.

Mr. Klump is the “Chief Economist” for the CREA. Before we even begin that already begs the question of why a trade association would need an economist… which quite simply, is that they don’t. The position serves no practical purpose for their operations.

Which begs another question, if they don’t need one, why do you they have one? The answer to that one is quite simple too… marketing. The position is to be a mouth piece for the CREA. But not just any mouth piece, a mouth piece that they can give a fancy title that they can trot out as an “expert”. Cause if you sound official, people are more likely to assign credence and legitimacy to what comes out of your mouth. They’re economists in name only, their true function is to project their employers desired messaging (and the CREA isn’t the only one’s doing it either fwiw).

So, theoretically speaking, they find someone willing to whore out their credentials, and voila… they have themselves someone who sounds like they should be taken seriously… and conversely it keeps gas in someones minivan. A real win-win. You know, theoretically.

Once you know that, his rather disastrous performance yesterday starts to make a bit more sense. He managed to keep it together through his obviously scripted opening, but as soon as he was asked even the simplest of follow up queries it soon turned into a mess of mangled logic and random talking points. Basically it was a “You Bet’cha” short of being a Sarah Palin interview.

He was obviously coached to stay within some narrow parameters, and when he painted himself into a corner he started throwing out some rather incoherent econo-babble… I assume in an effort to overwhelm/confuse/obfuscate the layperson… unfortunately for him, to anyone with even a passing knowledge of economics it was quite obvious he was hopelessly full of shit. At that point if they would have let Ms. Park loose on him I’m pretty sure he would have crawled under the desk and assumed the fetal position.

But anyway, as much as I’d love to pile on some more (who am I kidding, I still may), I figure I should address the hypothesis he made while still somewhat coherent. That being that this will be a “demand driven downturn,” and one would not result in prices going down because they are “sticky”… but instead sales dropping and prices going sideways for an indefinite period of time.

Anyone who has taken economics during their post-secondary years I’m sure will recognize this sort of graph. I won’t go into too much depth on all this, as most of you probably already are familiar with it or can look it up, and those that don’t have probably long since stopped reading. As marked, the vertical axis is “Price”… and the horizontal is “Quantity”… the blue line is the “Supply” curve… and the green line is the “Demand” curve. Where the two lines intersect is called “equilibrium”, and the price and quantity at that point at P1 and Q1 respectively.

Beyond that, long story short, that whenever supply or demand shift and a free market thus finds itself out of equilibrium, over time it will tend (move) towards equilibrium. Basically, the market will always try to move towards balance.

Klump theorizes that there will be a downward shift in demand (supply would remain constant), which is represented by the dashed line on the graph above. In such a case, we would expect that the market would then move towards a new equilibrium at the point of P2,Q2. It’s rather intuitive, as if demand dropped and supply didn’t change, one would expect fewer products to be purchased and those that do sell to be at a lower price… and on the supply side, as the selling price was lower, that would make it less profitable to produce, thus fewer would be made… and you can kind of visualize how this would create a new equilibrium.

But it’s not that simple, at least according to the Klumper. He theorizes that because prices are “sticky” going down, that there will be no price declines to create equilibrium (if you don’t already, you’re gonna hate that word by time we’re done)… but instead all the work will be done by quantity as seen above.

We can compare the two scenarios a little better here. In his scenario, where prices remain constant, that quantity takes an even bigger cut than if it had to just return to equilibrium. So basically sales would grind to a halt while sellers hold out for the higher price and buyers are unwilling to go that high.

His scenario is actually quite conceivable… but only in the short term. In the long term, it fails in both theory AND practice, even for real estate. The market will not persist infinitely without tending toward equilibrium. I may not have a fancy MA in economics, but my modest degree in marketing and finance tells me when I’m being sold a bill of goods, and how.

He is indeed correct that home prices tend to be “sticky”… but again, this is only true in the short term. I don’t think any reasonable person would argue that prices should or will decline at anywhere near that pace that it shot up. We saw first hand here in Edmonton just how explosive their growth can be… in 16 months the median home went up 89% between January ’06 and May ’07. Baring in mind diminishing returns would require just a 47% drop to retrace the same nominal drop, even so, no one is calling for that kind of drop, much less doing it in such a protracted period.

But that’s not to say prices cannot go down at all though. By conceding that real estate prices are sticky is merely to say it won’t drop as fast as it went up. To say prices cannot go down is sheer insanity, we’ve had a front row seat to witness the deflation of the U.S. housing bubble. Declines of 10-15% year-over-year are hardly out of the question. Real estate is not immune, and it’s not any different here… hell, just go back in time a year and was happening right here in Edmonton.

Actually our situation here is a prime example of what could very well happen in several major markets right across Canada… and it wasn’t just a demand shift. As market psychology shifted we found out we also had a whole lot more inventory available than previously though, and thus we had a supply shift too… suddenly we had a wave of people willing to sell at the former price (or even at a discount), but buyers no longer willing to offer it… and that my friends was a recipe for price declines.

But observations like that scare potential buyers, and when you’re in the commission sales racket, that is bad for business… so, don’t hold your breath waiting for someone from the CREA to start acknowledging that, alas, intellectual honesty is evidently no match for a paycheque.

You guys probably read all the headlines like “Alberta unemployment rate hits 14-year high” last Friday… at least until the latest chapter in the Jaffer/Guergis saga unfolded. As per the latter, I just must say I’m outraged, I lived in Jaffer’s riding for over three years during his time in Ottawa, and was never once offered cocaine nor busty hookers. Selfish bugger, keeping it all for himself! On the bright side though, he married the right chick, cause if anyone could find a way to write off those sort of things, you know Helena will find a way!

As per the former, that’s what we’ll discussing today. First, briefly regarding the Journal’s headline, it would be a 14-year high… except that it’s actually only a 5-month high (7.48%), as back in October we were actually a fraction higher (7.54%). But who cares about trivial crap like accuracy and facts?! Pfft, leave that tripe to bloggers!

In any case, it’s pretty high regardless of my nit-picking. The number I really like to look at though is full-time employment, as I think that is a better indicator of the direction of the economy (as the unemployment rate treats full and part time jobs equally)… and on that front after some improvement in the fall, it has since stumbled back and we’re again hovering around 90,000 fewer full-timers then we did when employment peaked in Oct ’08.

If you’re interested in reading up more along those lines, then you can check the archives as I’ve done a number of pieces on those subjects… today I wanted to dig a little deeper and see if we can get an idea of just where the jobs have been lost. Bearing in mind these numbers treat full-time and part-time jobs equally, unfortunately there doesn’t appear to be a break down available for the various segments. So, we’ll just have to work with what we have, and in many cases you can tell which would be populated with largely full-time positions and which wouldn’t.

Statcan breaks jobs into two sectors (each with several segments within it, which we will get too), goods producing, and service producing. As we can see here, since October ’08, the number of jobs in the service sector have actually grown (by 11,800)… while in the goods producing side has shrunk (by 77,800).

Interestingly, this divide has actually narrowed significantly in the last couple months… the goods producing sector has gained over 16,000 jobs, while the service sector has shed over 30,000. In other words, back in January the goods sector was down over 94,000, while the service sector was up over 46,000.

One might spit-ball that those service sector losses were retail jobs lost after the holidays… but these numbers are seasonally adjusted, and most of the jobs lost were actually in the trades (12,900) and education (20,000). For those wondering, most of the gains in the service sector were in manufacturing (14,700) and natural resources (11,800).

One other note, for those curious and or wondering… the service sector is MUCH larger than the goods producing section, almost three times as big in fact. As of March their are 1.45M people employed in the services, while there are 520K employed in the production of goods.

Now we’ll break the sectors into their various components to give you a better idea of where exactly jobs have been lost or gained. We’ll start with the goods producing sector. Here we can see that since the economy turned, it’s been manufacturing jobs that have taken it most on the chin, down about 30K. Then we see construction down 20K, agriculture down 17K, and natural resources down about 10K. Utilities is virtually unchanged (not visible, but down just 100 for what it’s worth), interestingly though, they were actually growing right into last summer and were up as much as 5,800, but have shed those over the fall and winter.

Finally lets look at the services, and this is a real mixed bag. On the downside, the trades have been hit the hardest, down over 30K. Next hardest hit have been the professional/scientific/technical segment, down over 20K… and then more moderate losses in sales type jobs and educational services.

On the flip side, health care is up in a big way (over 35K), as well as “information, culture and recreation” (up over 15K)… not entirely sure what that consists of, sounds like a bit of a catch all, I’m guessing a fair bit of government of one form or another. The hospitality industry also appears to have been hiring, they too are up over 15K.

And here is a graph like the one earlier showing you the proportion of jobs in any given segment. I apologize that it’s a little hard to follow, but if you start at the 12 o’clock position, working clockwise and following the legend you should be okay. These numbers are as of March 2010, so they’re as recent as can be.

And I guess that’s about it for today. I hope you found something interesting about this little look beyond the oft reported numbers. Food for thought perhaps?! Something different in any case. Hope you’re having a good week, if you have any comments or questions, fire away.