Alberta - Edmonton Housing Bust

Category: Alberta

Saturday, August 7, 2010

July Labour Force Survey

Filed Under: Alberta

The latest Labour Force Survey numbers were released on Friday, and while the unemployment rate actually hit it’s lowest point in over a year, it was actually something of a poor report for Alberta.

As of July the unemployment rate stood at 6.3%, which is the lowest it’s been since last April, and down 0.4% from June. That gain isn’t quite as impressive when you look into the numbers and realize that while we gained over 21,000 part-time jobs, we actually lost 13,000 full-time jobs in the month.

Now we’ll isolate the full-time job numbers and look at those. After looking the obvious drop witness in late ’08/early 09, it was looking like we may be finally recovering through May after some strong gains, but in the last two months much has those have been wiped out, having lost 22,600 full-time positions in that time.

Things look even a little worse when we look at the full-time employment rate (relative to the eligible working population). Currently 55.8% of those 16 and over and eligible to work currently hold full-time positions. This is just a tick above the low set in March of 55.7%, and these are levels not seen in Alberta since the year 2000. So. Yeah. Things aren’t very pretty out there.

8 comments

Friday, March 26, 2010

This and that

Filed Under: Alberta, Macroeconomics

I was hoping we’d have the January arrears number to discuss this week, but it doesn’t look like that’s going to happen… but fortunately there has been plenty of other relevant stories floating around this week, so lets take a look at those instead.

- I guess the most prominent story has been the CREA vs. Competition Bureau. We’ve tracked this story as it’s developed, first back in November, and again last month. For those that don’t want to read all that, here’s a quick background.

Basically the Competition Bureau had been investigating the CREA for some time on charges that their rules were anti-competition… to which the CREA pretty much just told them to get stuffed. Last fall though the Competition Bureau dropped the hammer and ruled that they were in fact stifling competition, and the CREA could either enter negotiation or go to tribunal (where the ruling would be legally binding)… the CREA proceeded to soften their stance and say they’d negotiate.. their negotiations basically amounted to a big song and dance and some token amendments meant to sound like issues were addressed, but in effect leaving the door open for their member associations to do nothing. This time the Competition Bureau told them to pound sand, and will see them in tribunal.

Then this week the CREA formally approved said amendments… the Competition Bureau repeated that it’s still too little, too late… and then the outgoing CREA president not only made an ass of himself, but also pretty much confirmed the Competition Bureau’s charge that the these changes were nothing but smoke and mirrors by stating, “in actual fact they make no difference in the way realtors operate their business and no difference to consumers.”

Which brings us to today, when the CREA had to formally file it’s defense before heading to tribunal, which they did, and didn’t seem to say much other than that they believe the charges are false… and the Competition Bureau remained unmoved, and wanting a legally binding solution. So, apparently the possibility of a settlement is still on the table, otherwise the tribunal will likely go in the fall. So, basically, we’ve had a week of high profile posturing, and much ado about nothing.

- In other news, Canadian 5-yr bond yields hit their highest point since the crash yesterday, briefly sitting at 2.92%. They’ve been in the 2.75-2.9 range for the last three weeks actually, which is by far the longest they’ve held that level since 2008.

- Despite that, the big banks have been chopping rates. TD is offering a 10-yr closed at 4.99%, which equals the lowest rates offered last spring when yields were much lower. This is a move to gain market share and squeeze out the smaller outfits who cannot survive on such slim margins, and may also be in response to the upcoming CMHC changes that come into effect in just over three weeks. If you’ve coming up for renewal this appears to be a prime time to do so, as you can either get a great 5-yr rate and pound money in, or if that’s not your style, lock in for 10-yrs at a very solid rate and chillax.

- Browsing over to one of the local agent blogs, it looks like prices will be up in a big way in March. Sales are also up a bit, and inventory is growing quickly, but that is to be expected this time of year. Like always it will be interesting to follow, seems a little odd that prices would be up to such a significant degree while sales are not particularly strong… perhaps those looking to buy big are jumping in before the new lending rules take effect.

- On the population front, Alberta actually experience another quarter of negative interprovincial migration in Q4 2009. This is the second consecutive quarter, and again, something we haven’t seen since 1994, and not at this level since the 80′s. Like we noted back in December though, the migration gains seen in booms can be lost just as quickly.

- And finally, I’ve added some spam protection to the site. You guys wouldn’t have noticed, but in the last week the sites comment system has been deluged with the stuff. So you shouldn’t notice any difference, but if you have any troubles commenting, please send me an e-mail, ehbust@gmail.com.

I think that’s about all for today. Hope everyone has themselves a good weekend, enjoy the weather!

3 comments

Thursday, January 7, 2010

The Perfect Storm

Filed Under: Alberta, Canada, Historical Prices, Mortgages, Personal Finances, United States

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!

15 comments

Thursday, December 31, 2009

MMIX

Filed Under: Alberta

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!

11 comments

Monday, December 21, 2009

Easy Come… Easy Go

Filed Under: Alberta, Demographics

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.

2 comments

Thursday, November 26, 2009

Survey of Employment, Payroll and Hours

Filed Under: Alberta, Macroeconomics

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.

2 comments

Saturday, November 21, 2009

Who’s to blame?

Filed Under: Alberta, Canada

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…

17 comments

Wednesday, November 18, 2009

Up

Filed Under: Alberta, Canada, Foreclosures, United States

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.

5 comments

Monday, November 16, 2009

Rental Market Update

Filed Under: Alberta, Rental Market

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!

5 comments

Tuesday, November 10, 2009

100

Filed Under: Alberta

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.

6 comments