Edmonton Housing Bust

With the ink still yet to dry on their recent settlement, it seems the Competition Bureau isn’t done with the CREA, word is already making the rounds that they are aiming to take another bite at the MLS apple.

Last time around they wanted to open up listing capacity to a la carte services, now they apparently want access to historical stats that the database collects. Details are still pretty sketchy as to just what this challenge may entail, but it would seem that they want to increase public availability to historical sales data that could previously only be obtained through the services of an agent, and perhaps open the door to services such as Zillow like in the states.

Obviously the potential of access to such data would be practically a wet dream for a stats geek like me… and while I would love it, my take on it is that I’m not really sure the CREA is under any legal or moral obligation to share that data with the public, much less beyond what they already do in many markets with their monthly releases.

Beyond that, virtually all their historical data can already be had… for a price (second and third from the bottom). A fairly steep one, which is I don’t have it on this site…but if any of you readers are willing to part with six grand to buy me access, I’d be more than willing to take it!

Truth be told, I’ve managed to scour pretty much all the data I want exclusively from free sources, and actually quite enjoy the hunt as far as that goes. But I suppose as far as that goes, my interests as a blogger differ significantly from the general public interest for such information, which I would presume to be largely limited to accurately pricing their homes. At which point one would need neighborhood specific data, which is only currently available either through an agent, or via the Conference Board’s CREA II database for a tidy $6025 (a year).

So, after much meandering, and as much as I’d love to get my hands on such data… I’m not really sure how much merit such a challenge really has. Of course the rules change when you’re dealing with a monopoly, which the MLS pretty much is in a de facto sense, which is probably why the Competition Bureau is pursuing the matter, but even at that, I’m not really sold. But I’m also not a lawyer, so who really knows?

It’ll be interesting to see how this develops. Perhaps we could see some positive steps, like standardized reporting of data across the country, but at this point the fight seems to be about something other than what we stats geeks may consider to be of primary interest.

Perhaps an odd choice of video to open today’s post, but in a weird way, it’s kind of fitting. Those of you unfamiliar with the show “Oz” would gather from that clip a first impression of the show radically different than what the show really was, and are probably wondering why Juno’s dad is singing and dry humping a dude (FWIW, that’s got nothing on what he did to him in the very first episode)… those with only a passing interest or knowledge of it, probably now think it is far more bizarre and perverse than you ever imagined… and those of us who watched the entire series are hopefully laughing your asses off.

Anyway, on to actual news. So the big story this week was the CREA and Competition Bureau deciding to play nice and avoid going to tribunal. We’ve been following this story for almost a year, as it had it’s ups and downs. So, those of you hoping for a Brock Lesnar vs. Cain Velasquez like showdown, ya ain’t gonna get it.

For those curious, I’ve uploaded the actual agreement. Seems that for the most part this entire pissing contest has been over the wording of a few mere sentences. Who knew when semantics crossed with bureaucracy could waste so much money?!?!

Both sides have of course spent the last few days telling the world how they won, or at least didn’t lose. Can’t really give either side the knockout, but I guess I’d have to give it to the Competition Bureau a slim decision on points. Though, time will tell I guess.

Long story short, basically now the MLS will be open those who wish to offer a la carte realtor services. Some argue it always has been, but while that may be true to a point in theory, in practice some regional boards have not. So this order basically declares the CREA and all it’s regional boards must allow such services, and if a boards fails to it can be sanctioned and even suspended from participating in the MLS.

I don’t really think the decision hurts the CREA much, as they had more-or-less been offering this concession already. More than anything, they probably just don’t like all the press this has gotten, and widespread airing that fees and services are largely negotiable. Historically the modus operandi tended to rely on pretty much just herding everyone into the same compensation structure and hoping they don’t dig or ask questions.

Personally, if I was buying I’d look to strike a buyers agency agreement with an agent that would see you pay them by the hour, and that any commissioned offered to the buyers agent by the seller would go straight to me. This removes most of the moral hazard that if rife in the current arrangement.

Of course, most buyers probably wouldn’t go that route, since they think they’re getting the service for free… but most of them probably couldn’t spell amortization, much less explain what it is. Unfortunately our naive and lazy consumer nature is exposed… that’s what they rely on.

So, if you ever decide you’re going to buy, be smart about it. Expect to do some work, know you stuff, and treat it like you’re playing with hundreds of thousands of dollars, cause you are. Many seem to forget that since they’re usually borrowing the vast majority of the funds, but that is your money, and the bank won’t let you forget that… not two months, two years, or two decades from now.

Before I go, just a quick note… I’m doing the final move this weekend, and despite setting it up a month ago, I’m not going to have internet at home until mid-November. So, unless I have an unwitting neighbor with an unsecured wireless network, the site might get a little quiet. Hopefully between the library and flash drives I’ll still be able to throw a few posts up in that time. If you’re looking for something to do, go check out “The Girl Who Kicked the Hornets’ Nest“… though for the uninitiated you’d want to check out the two prequels on DVD first.

Earlier this week the Edmonton Journal ran a piece written by Gary Lamphier regarding the housing situation… his contention being largely spelled out in the title, “Yes, there’s a housing bubble in Canada – but only in three cities”… those being Vancouver, Victoria, and Toronto… but not in the rest of the country, and particularly not Edmonton.

So, before reading on this post, I encourage you to go read and digest that article in its entirety as I’ll largely be sticking with discussing it’s contents and figures.

Now, the first thing that struck me is that all the numbers he cites don’t really add up. When you follow him from one contention to the next, the numbers he cites at later in the article are somewhat at odds with numbers he earlier (even a quick look at his price and income data tells you his affordability figures should be significantly different, and not nearly as favourable to his argument). That’s not to say that those numbers are necessarily incorrect… but the problem is they’re taken from a wide variety of sources, who each use different data sets, and thus they paint a very muddled picture.

Before we get into all that, lets just acknowledge that everyone agrees that not only is B.C. in a bubble, but that they are in a world of their own galaxy far far away. They are nothing if not a testament to just how far a market can get out of touch with fundamentals, yet just keep going. What we are going to examine is his contention that Toronto is obviously in a bubble… but not Edmonton.

Now much of his logic seems to be based around that Toronto is setting new highs in price, while Edmonton is actually below it’s 2007 peak… which is to say nothing of how we reached those heights in 2007. To conclude we’re not in a bubble just because the we’re past the peak is akin to declaring someone with a big honkin’ tumor to be cancer free just cause they didn’t find any new tumors. Such an omission is not just spurious, but a horrendously disingenuous.

We can just compare peaks using the very numbers he does, and by extension prove that Edmonton must have a bubble too if Toronto is in one now. If the average detached home in Hogtown goes for $459,000 and average income is $101,400 that yields a price-to-income ratio of 4.53… at peak here the average detached went for $420,000 and average income is $90,000 that’s a ratio of 4.67.

That would mean that affordability at peak in Edmonton was WORSE then it currently is in Toronto… a city obviously in a bubble, according to Lamphier. So by his reasoning, Edmonton must have been in a bubble… an inference he neglects to touch on… but that obviously isn’t an issue anymore since our numbers have improved since then to 4.32… which actually doesn’t seem all that much better than Toronto… but, pfft, since when do they teach introspection in J-school?!

Now, you may be questioning my reasoning there knowing that that ratio is not used in affordability calculations (directly anyway)… but remember the three numbers used in affordability calculations are price, income and interest rate, and interest rates would be constant between cities, thus the higher the price-to-income ratio, the worse the affordability would be.

Of course Gary also scoffs at Toronto prices rocketing up 13.3% YoY, obvious bubble… while Edmonton only went up 11%, nothing but a steady rebound (though I suspect this may be something of bad info on his part, as from the TREB numbers they’re up closer to 20%… I just enjoyed his complete lack of cognition while trying to draw a massive distinction over a relatively minor difference).

Regardless, over the course of the article Mr. Lamphier seems to think he is an authority on spotting bubbles (and I’m not even arguing whether Toronto is in one, what has happened there in the last year is ridiculous), but my issue is that his memory apparently only goes back until the peak in 2007, and is thus quite oblivious to what got us to that peak. So lets move back the comparison period a little further… back to, say, January 2006.

So, I guess my question for Mr. Lamphier would be, that if Toronto is so clearly in a housing bubble… just exactly what do you call what happened here in ’06/’07? Cause, even considering the recession, what’s happened there is positively pedestrian compared to what happened in Edmonton. Just because we may not have set new highs doesn’t mean there is not, and has not been, a housing bubble in Edmonton… nor are we out of the water. Not by a long shot.

You likely recall we’ve been covering the whole Competition Bureau vs. CREA showdown since last fall, and after another little dust up in the winter it’s not looking like there will be much action again until they go to tribunal later this fall… but it still seems every once in awhile we get a new story resulting from their legal maneuvering.

Along that vein, last week a story was making the rounds about the Competition Bureau objecting to the National FSBO Network (NFN) wishing to participate in the tribunal. How much of this is legitimate objections, versus mere posturing is highly debatable, at this point I’d imagine if someone made a motion to suggest that water is wet, the other would automatically object regardless of substance. It’s not like it is hard to see that it’s going on both ways.

Regardless, it’s worth taking a minute and discussing just what NFN is looking to do… and for what it’s worth, I hope they do get to be heard at the tribunal. They may not be directly involved with the case, but they will be affected, and I don’t think it hurts to involve some outside perspectives.

On the surface, the CREA and NFN would seem like strange bedfellows… being they’re something of direct competitors and all. But in this case they feel they have a stake in the outcome, as if the CREA is forced to change their rules and allow owners to basically obtain the same services through the MLS, that it would wipe out the NFN. Thus they feel forcing changes on the CREA would effectively stifle competition rather than promote it.

I’m not so sure I agree with that argument though… yes, within their stated, and very narrow, parameters it would hold water… but when extended to the big picture, not so much. In fact, it almost comes off more like the exception that proves the rule… a niche created by anti-competitive behavior, and dependent on that continuing.

As such I’m not even sure the Competition Bureau should object (assuming said objection is anything more than reflex), as any lawyer worth their salt should be able to turn that line of logic into a reinforcement of their position. If either side thinks the case will hinge on this argument, they might as well just quit now and save themselves some embarrassment.

The Competition Bureau are looking to increase competition… in this argument the NFN is obviously trying to protect their turf, but truth is they’re doing so by wanting to avoid competition… which, call me crazy, but would seem to totally defeat the purpose. For whatever niche of the FSBO market that may be inconvenienced by the proposed changes that would be more than offset by the wave of new business opportunities that would then be available to such services… and ultimately the end is served by increased competition and a better served public.

While the outcome of the tribunal will only be legally binding to the CREA, no one said other players wouldn’t be affected by the decision. Should the decision be in the Competition Bureau’s favour, FSBO outfits will certainly feel the effects. The proposed changes are meant to induce competition, and that’s not a one way street… doors will be opened, but you’re not insulated from it, yours are no exception.

If these changes so through the FSBO crowd better get their work boots on, cause the game will change drastically.

So, after months of trying to talk down the market, this morning Dim Jim fired the first actual shot across the bow of the housing bubble (not that one exists… according to him… on the record…). On April 19th three new rules will take effect:

1. Qualifications will be based on 5-year fixed rate

2. Refinancing will be limited to 90% LTV (down from the current 95%)

3. Properties purchased for investment purposes will require at least 20% downpayments to qualify for CMHC insurance

For the most part this appears far too little, and MUCH too late… but to be gracious, I guess it’s at least a step in the right direction.

As per the first change, qualification using 5-year fixed rate, it’s a small step to saving first-time buyers from themselves by limiting the amount of financing they can qualify for. So even if they are planning to opt for a variable rate mortgage, and/or a different term, the maximum amount of financing they can qualify for will be based on the current 5-year fixed rate (which is generally a higher rate than VRM’s or shorter terms). Still rife for abuse, but a slight tightening.

Change #2 is aimed at limiting those who borrow against perceived equity in their homes. We saw all kinds of this in Alberta the last few years as with the rapid run up in prices, as soon as they figured they had a little equity, many people would immediately borrow against that and treat their home as something of an ATM. This not only greatly increases their respective debt loads, but also leaves them dangerously exposed to a market downturn, and negative equity. This might save some people out east from repeating the same mistakes made here, but it won’t do much for us in Alberta.

Finally, change #3 takes aim at those buying investment properties. Frankly, I don’t think the CMHC should have been in the business of offering this kind of insurance in the first place. Their mandate was to allow people to own their own homes, not subsidize the speculative activities of others. Not to say I have any issue with people engaging in real estate speculation, I’m all for it… but if one is going to reap the rewards, they should bear the full risk, and that includes obtaining financing on the free market, not via taxpayer backed guarantees.

On the whole I don’t think these changes will do much, but might save a few from over extending themselves. Ultimately the damage to the market is already done though, especially here in Alberta where the horse was out of the barn four years ago. When the market turns again, and the crash ensues I imagine we’ll see changes with actual teeth in the aftermath (or at least one can hope) to keep it from happening again… but for now it’s an issue of politics, and even acknowledging, much less doing something to pop, the bubble would be too damaging for the bureaucrats to risk, even if it is in our long term interest.

One thing about the last few months that has been immensely entertaining is witnessing the sheer hypocrisy and gall coming from groups like CAAMP… one minute their trumpeting how wise and conservative Canadian borrowers have been, and there is no way they are overextended and that first-timers are really eminently qualified… and the next screaming that raising downpayment requirements by a mere 5% or capping amortizations to 30 years would destroy the market in one fell swoop. Apparently blissfully oblivious to that the two positions are pretty much mutually exclusive, as if the former was actually true, the latter would be manageable.

But apparently being eminently qualified and being capable of saving 5% more to put down are different things to the mortgage brokers of Canada… and realizing such would really put a damper in their cognitive dissonance.

You may recall a few months back we talked about the Competition Bureau declaring that the CREA’s has some rules that are anti-competitive concerning their MLS system. At that point the CREA did a lot of posturing and pumped out some bravado, but said they’d seek something of a settlement with the Competition Bureau.

Since that time evidently they’ve been in negotiations, to some extent anyway… but earlier this week the Competition Bureau dropped the hammer on them again and announced that there would be no settlement reached, and thus, they’re taking the CREA to tribunal. Where both sides will argue their side, and then the tribunal make there decision and the results will be binding.

In the wake of this, the CREA does what every company with a PR department does… that being twist some arms in the media, feign indignance and posture. They also issued another internal memo to their members laying out the changes they were willing to offer the Competition Bureau. That can be read via this link.

I’ll spare you reading through that moaning, and just show you the amendments. The italics represent new language, and crossed out represents the old language. So lets take a look.

RULE 17: OPERATION OF A BOARD’S MLS® SYSTEM

17.1: Acceptance of Listings

17.1.1: The Three (3) Pillars of the MLS® Mark
Only listings that comply with the following three (3) pillars of the MLS® Mark can be placed on a Board/Association’s MLS® System.

17.1.1.1: Membership
Only REALTORS® may place a listing on a Board/ Association’s MLS® System.

17.1.1.2: Agency
A listing REALTOR® must act as agent for the seller to sell the property and to assist the seller throughout the entire time of the listing contract in order to post, amend or remove a property listing in a Board’s MLS® System. The nature of any additional services to be provided by the listing REALTOR® is determined by agreement between the listing REALTOR® and the seller, subject to applicable regulatory requirements and the Rules of CREA and Boards/Associations.

17.1.1.3: Compensation to Co-operating Broker
The listing REALTOR® agrees to pay to the co-operating (i.e. selling) REALTOR® compensation for the co-operative selling of the property. An offer of compensation of zero is not acceptable.

17.2: Interpretations of the Three Pillars of the MLS® Mark

17.2.1: The listing REALTOR® shall receive and present all offers and counter offers to the seller.

17.2.21: The listing REALTOR® shall be available to provide professional advice and counsel to the seller on all offers and counter offers unless otherwise directed by the seller in writing.

17.2.3: The mere posting of property information in an MLS® system is contrary to CREA’s Rules. A “mere posting” occurs when the listing agreement relieves the listing member of any obligations under the Rules, including the obligation that the listing REALTOR® remain the agent of the seller throughout the term of the listing contract.

17.2.42: The listing REALTOR® is responsible and accountable for the accuracy of information submitted to a Board/Association for inclusion in the Board’s MLS® system, and the Board/Association is responsible for ensuring that the data submitted to it meets reasonable standards of quality.

17.2.53: Only REALTORS® are permitted to display the MLS® trademarks in signage, advertising, etc.

17.2.64: Only the listing REALTOR® name(s) and contact information may appear on REALTOR.ca. Where the seller directs the listing REALTOR® in writing to do so, the seller’s contact information may appear in the REALTOR® only remarks (non-public) section of a listing on a Board/Association’s MLS® System. The seller’s name or contact information shall not appear on REALTOR.ca or in the general (public) remarks section of a listing on a Board/Association’s the MLS® System. The listing REALTOR® may include a direction in the General Description section on REALTOR.ca or on websites operated by CREA or a Board/Association to visit the REALTOR® website to obtain additional information about the
listing (but the nature of such additional information shall not be specified).

17.2.75: In cases w Where a Board permits listings in which the seller has reserved the right to sell the property himself/herself, that fact shall be specified in the Board/Association’s MLS® database System.

The change in 17.1.1.2 basically makes it so a seller could just employ an agent to list their property on the MLS, and could pick and choose whatever other services they wanted (open houses, representation in negotiations, none of the above, etc)… whereas before the rules stated a seller must take ALL the services, whether they want them or not. Which would seem to largely satisfy what the Competition Bureau was requesting. So, so far, so good.

So we work our way down to section 17.2… and the first thing we notice is they strike a couple rules. First, the section stating the agent must receive and present all offers is struck. This would go hand-in-hand with the first amendment giving the seller options as to what services are offered, as well as lending them the ability to accept offers directly. Again, good. The former 17.2.3 suffers the same fate, as to allow sellers that ability to acquire ala carte services, in this case merely getting listed on MLS and nothing further.

Then we get down to the last two, and things start going off the rails, and is quite likely where the Competition Bureau took issue. In 17.2.64 it formerly stated that none of the sellers personal information may appear in the listing… this was changed to say that if the seller puts it in writing that they want their contact info included on the listing that it may, but would only be available on the listing agents own website. But nowhere else.

So if someone was looking on realtor.ca, the sellers information would not be available. At most there could be a vague allusion to there being further information available on the listing agents website, but not what information. This one strikes me as quite a chintzy amendment, and designed to make it sound like they’re cooperating, when they’re really doing nothing.

The final one, 17.2.75 actually seems like a decent concession. Whereas before before their could feign ignorance and say it was up to the various boards to set the rules regarding whether the seller can represent themselves, here it states that the seller can do so anywhere. So, that’s good.

As far as their “pillars” go, other than the one I think their amendments are fair… but I think an even bigger issue isn’t really broached in that discussion, and that is access to the MLS database itself. They had a battle similar to this in the US back in ’05/’06… the Justice Department went after the NAR and won. Since then innovation has really taken hold and even with their real estate market collapsing after the bubble of their own, innovation has still revolutionized the offerings (eg. Zillow) to the consumer. In just four years, they’re now lightyears ahead of we Canadians.

That’s not to say this is a cut and dry case though. After all, this is their database. They’ve spend a lot of time and money developing and maintaining it, and within that should have the right to govern it’s use as they please. The problem though, is that in this case they could ultimately fall victim to their own success, or more specifically, that of the multiple listing service. As 90% of all transactions go through it, they have established themselves as a de facto monopoly… and when that happens, the rules change. Particularly when such a large population is effected, and such large sums of money are involved.

Arguments along those lines would be interesting to hear… on the other hand, many of the arguments trotted out by agents publicly though seem to vary from the laughable to the completely absurd. One of the most common talking points seems to surround skill and professionalism… which is really quite ridiculous.

This is an issue of database access, and to get access to that database the requirements have nothing to do with the aforementioned qualities. Taking a couple classes, passing a test and writing a cheque does not a professional make (in fact, from what I’ve read it’s little different than what it takes to sell insurance door-to-door, which BTW, are pretty much pyramid schemes if you ever wondered).

That’s not to say there aren’t ones that are great at what they do… just that the entry requirements does nothing to separate the competent from those that can’t find their ass with both hands and a compass. As opposed to say actual professions, like doctors, lawyers or even CA’s where the barriers to entry are vastly greater, and professional associations actually act like professional associations and not glorified lobby groups.

Anyway, enough of that for today. We’ll touch on this again when there are new developments… but for the next couple weeks I’ll have my ass firmly entrenched on the couch watching the Games. I’m an admitted Olympic junkie. I’ve got PVR’s hooked into DVD recorders hooked into old school VCR’s, determined to not to miss a second of it… even sprung to send the girlfriend on a cruise to make sure she wouldn’t be around to hassle me. I’m going to try to keep up with the updates, but if they’re slow coming don’t worry, I’m not dead, just binging on junk food and biathlon!