Edmonton Housing Bust

Figured I’d throw up something as a bit of a send of for the upcoming long-weekend… or, sort-of-long-weekend, or for those taking Friday off, extra-long-weekend. Yesterday the Conference Board of Canada put out their latest Index of Consumer Confidence, and I figured we’d take ourselves a little look-see at that.

Here we have the national, and prairie provinces break downs. We can see in both cases we’ve rebounded from the depths of the recession, but are still below pre-recession levels.

Nationally we’re sitting at 83.64, which is actually the lowest level since December, and almost ten points below the long-term average of 93.24 that goes back to 2002. On the prairies we’re a fair bit higher at 98.48, the highest level reported since March, but also below our long-term average of 100.56. So, overall we feel better here in our flat little part of the world, but are still a little wary.

I’ll just leave it at that for today, and let you start your holidays. Get to that voodoo that you do so well. Next time we’ll take a look at how peoples attitudes are towards making major purchases (hint: not quite as rosy as the above findings).

Have a great Canada Day everyone!

It’s Tuesday, so you know what that means?! Time to explore debt ratios! Yea!

What? Just me?

Anywho, so yesterday Statcan released the 1st Quarter National Balance Sheet Accounts figures… and within that, a couple ratios that we like to follow around here. debt-to-income, and debt-to-GDP. The Bank of Canada also released their latest Financial System Review yesterday, and it discusses these topics to a degree, but the data we’ll discuss today is more current.

We’ll start with debt-to-income… and, uh, yeah, it’s still rising, and unlike previous recessions where it’s slowed or even reversed course, this time it appears to have accelerated if anything. It now sits at 148.94%, so when the 2nd Quarter numbers come out we could very well have crossed the 150% barrier. It’s hard to glean much context from that graph other than, it’s been for the most part going up for the last 20 years.

So, just for some reference, when the housing bubbles burst in the US and UK their ratios were in the 160-165% range (according to the BoC’s revised measures for those nations). So, we’re not quite there yet, but are rapidly approaching, and the ratio also tends to continue climbing for a couple quarters, or even a year, after home prices reverse, so we can still expect some upward drift even if we’ve hit the turn this spring. Since topping out, the UK appears they are now below our current level, and the US still a tad above, but also trending downward.

Now debt-to-GDP. Again another rather dull graph, yet more interesting than the first. Here we can see the movements had a bit more swing, but were overall in a general upward direction at a modest pace from ’90 to about ’06… then it seems to start to accelerate… then we got to the financial crisis and it really took off in ’09, jumping almost 10% before leveling off a bit in ’10, and now sit at 94.0%

If you look around online there are a litany of these measures, all with different findings depending on just what is included. This is a measure of household debt. Most of the numbers floating around only seem to be regarding government debt, so bear that in mind should you do some further reading. For some international perspective, the US topped out at 97.0% a year ago, but has since seen theirs fall to 92.5%, so they’re obviously been doing some cutting back, while we’ve been piling it on. So, while we’re not as high as the Yanks got, we’re higher than they currently are.

Statcan released their 2008 Survey of Labour and Income Dynamic reports this morning, and that is important because it’s pretty much the only long-term income data out there. Needless to say, for stat-geeks it’s something like Christmas morning.

With the updated data we’ll be able to do all sorts of revisits and new analysis in the coming months, but for today we’ll just give you the quick and dirty findings that are all that really get press anyway.

So, here they are…. median and average economic family incomes, inflation adjusted. As we’ve noted in the past, this recent boom has rocketed us to record highs, well above any levels experienced in the prior 30 or so years, even those witnessed during the prior doom from the late-70′s. Even at those highs, they were still climbing quite steadily through ’07.

But is seems the financial crisis through a bit of a wrench into those gains, at least on the average. Median incomes continued it’s steady climb, rising $2,500 to $67,800… but the average actually slipped a tad, dropping $500 from $84,900 to $84,400.

So what happened there? Well, my purely speculative answer would be that incomes and employment continued to be strong through most of ’08, and with the financial crisis not arriving until the fall it meant that those gains were largely locked in. Incomes had already been earned, and the job losses didn’t really start hitting hard until December and well into ’09. So, on the employment front, ’08 was still a very good year on the whole for most… which would support an improved median.

The weakening average is probably largely due to investment losses incurred during the crisis. With the average significantly above the median we know that to a large degree it is driven by those with a lot of income… and typically those with higher incomes, would have more investments, and would therefore be more exposed to the market downturn. They still would have done better than the year before on the employment income side, but that was more than wiped out by losses on the investment side.

At least that’s my guess.

Obviously we’ll have to wait a year to see how the ’09 numbers stack up, but we know from the preliminary payroll data that income gains were very modest while a lot of jobs were lost, and lost early in the year. So I wouldn’t be surprised to see some weakening in the median numbers for ’09… but we also had a lot of out migration (though that could push it either way) and investment gains were quite significant over the calendar year, so those will all factor in.

I’m sure you’re wondering, how did Calgary do? Or maybe only those in Calgary wonder that, in any case, I prepared a graph so we’re gonna talk about it dammit!

Seems down south things were not quite as rosy in ’08. Incomes there slipped on both measures, median was down $600 to sit at $69,500 and the average took a $5,100 hit on the chin. So, yeah, that’s a little bit ouch there. Both are still higher than Edmonton, but not by nearly as much as they were in ’07. These numbers do tend to be a bit jumpy from one year to the next though, so it’s something more to be observed over the long term rather than draw too many conclusions from just one year.

And for those curious how the various provinces stack, well, here’s that too. Rural Alberta must have done quite well through ’08, as the province as a whole had increases in both average (+$2,700) and median (+$2,800), and now sit at $87,800 and $69,500 respectively. Nationally average incomes were up $1,000 to $71,400, and median was up $400 to $54,800.

It’s been an interesting spring to say the least. Came in with real estate seemingly cooking after a year long binge spurred by collapsed interest rates, concerns over debt levels and explosive price increases in the face of a recession brushed off as mere hearsay… after all, real estate only goes up, no matter what’s happened around the world and even right on our doorstep.

Then inventories started to take off and sales began to slow… concerned voices got louder, embolden by their warnings coming to fruition… then independent outlets and economists started voicing their concerns… then the banks and related outlets join in to the chorus… and suddenly the tunes started to change from those even within the echo chamber.

First the stories of perpetual steady growth… then they were amended to moderate growth… then short term stagnation followed by a return to business as usual. The interpretations become increasingly massaged, but the message always remains, it’s time to go out and buy. Now in the light of some of the lowest May sales totals in a decade, even the high profile industry hacks like Soper and Klump have found that they must again change the script, and are trying in vain to stay ahead of the story and admitting that price declines are likely in the next year or two.

Of course those admissions are always qualified with notions of the declines will being moderate and nothing buyers should be concerned with… even though they readily admit that markets have priced themselves out of reach, they don’t connect the further dots that this is also at a time interest rates are at an all time low and destined to rise (leaving a market with little support, with absolutely none). The rationalization is palpable. Six months or a year from now don’t be surprised if you start hearing things along the lines of houses being shelter, not investments. When you get paid to generate transactions, god forbid anyone suggest it mightn’t be a good time to buy.

So, I guess the question is, now what?

Just sit back and watch it unfold. This will not be quick or pretty. Unlike the explosive increases that got us here, the return to the mean will be very gradual … and there will be fits and starts, those of us in Alberta already know that as we had already long since peaked and had began out descent before this little interest-rate inspired debt binge reversed out course a year ago (though I doubt subsequent bounces will be nearly as impressive as this one as it took an unprecedented market occurrence).

As the market continues to slow and prices erode, we’ll see significant rises in bankruptcies and foreclosures (even beyond what we’ve already experienced)… credit will tighten in response, those looking to buy will have to be better qualified and capable of carrying debt (not a bad thing), but it will only further magnify the market softening.

On the economic front, as much as the wealth effect spurred spending while prices were going up, when prices start declining and the realization that households are not as well of as they like to believe, spending will contract. Again, something that is not necessarily a bad thing, that will increase the savings rate and lead to debt being paid off… but there is a consequence, and with people consuming less there will not be support for current levels of output.

Of course many of these things sound negative in the short- or medium-term, but truth is that over the long term a return to mean is the best thing that can happen. You see, the downturn is not the sickness… it’s the recovery. Sure the booms may be more fun, but they also tend to be very destructive as they force markets and economies to function at unsustainable levels and leave them in dangerous disequilibrium.

It’s only when a market is in balance that it is truly healthy… and as far are our local real estate market goes, we haven’t seen anything even remotely resembling balanced in over four years… and it will likely be at least another three before we return. An ugly truth perhaps, but one that the sooner we realize and accept, the sooner we can recover.