Categories
Alberta Canada Foreclosures Personal Finances

Interest rates and defaults

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

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

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

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

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

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

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

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

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

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

Categories
Canada Macroeconomics Personal Finances

Consumer debt

I got my Wild Cherry Diet Pepsi, and I got my Black Jack gum here, and I got that feeling… mmm that familiar feeling that something rank is going down up there. Yeah, I can smell it. I can almost taste it.

Summer is gone and it’s fucking snowing again!

Alright, so you can’t really smell snow. Give me a break, I’m working on a theme here!

Anyway, as you may have deduced by that I’d done as many posts in the five days as I had in the prior month, my little month from hell has ended and I now have more time to dedicate to the all important business of blogging.

Today I think we have a really interesting one, not so much directly related to housing, but moreso to the greater socio-economic front… that being, consumer/household debt.

Statcan has some good data sets on such things, here is a link to the one I used. Actually that one is slightly more up-to-date then the set I used, it’s up to October where as the data I used was only up to May… but one was free (thanks in no small part to the university never deactivating my database access even years after convocation), whereas the other costs $43, which would effectively increase this blogs budget infinitely, and would provide essentially no perceptible difference. I digress.

Actually that data only gives you the total debt, I then divided that by the population at any given time (available here), to come to a per capita level of credit which would be more relatable. Could have also done it on a per household basis, but I could only find one data set for that and it only went back to 1997. It would just be a function of per capita anyway though, so it’s all the same.

As I’m sure you noticed, there are three lines. The green one in the middle is mortgage debt, relating to the purchase of residential housing. The yellow line, is consumer debt, things like credit cards, lines of credit, automobile loads, etc. Finally there is the blue line which they call “Household Credit,” which is the sum of mortgage and consumer debt.

The above graph is of nominal values. As those of you who follow the blog knows, nominal values are not terribly useful when talking about long term comparisons, so lets adjust it for inflation.

There, that’s better… and a little bit scary. As we’ve discussed before incomes have been fairly flat for the last 30 years when adjusting for inflation, so to see household debt has increased 3x in the last 25 years since the last big boom/bust cycle.

This isn’t all together surprising, as we have also discussed how real estate prices have increased faster then the rate of inflation throughout recent history anyway, and residential mortgage debt makes up the majority of total household debt.

What is more alarming is how consumer debt has taken off, particularly in the last 15 years, where it appears to be growing exponentially. Like mortgage debt, this is no doubt linked to the decline of interest rates over the last 25 years.

The current recession has done nothing to quell Canadians thirst for debt, as they continue to rack it up at a record pace thanks to the rock bottom rates we’ve seen the last six months, even while Americans have pulled back at the same time.

The question now is that rates have for all intents and purposes reached their absolute bottom, they must now go up. The degree to which that will happen is yet to be seen, but once it happens it will contract the levels people are capable of carrying… which would have a devastating effect on not just real estate values, but the economy as a whole.

Here is a look at a bit of a different angle of the numbers, this the year-over-year change. Much more volatile, but we can also see, the forms of debt tend to track together. When consumer debt spikes or dives, so does mortgage debt, to different degrees but strikingly similar patterns.

We also know the last big decline in real estate values came in the early 80′s, and we can see the mother of all troughs. Such a decline in not only mortgage debt, but also consumer debt would obviously have a major impact on the economy, and this would seem to be consistent with has been happening in the United States the last couple years after their housing bubble popped.

So, one would expect that if the same were to happen here in Canada, we would see a big contraction in not just mortgage debt, but also consumer debt, which currently stands at record levels and an extended period of relatively high year-over-year growth.

Exactly what is to come is difficult to say, but there is no doubt that if interest rates were to return to historical norms it could spell big trouble considering the level of debt carried by Canadians.

So, until next time, just look inside yourself and you’ll see me waving up at you… naked… wearing only a cock ring.

Categories
Canada

Gazing into my crystal ball

So, in an e-mail I was asked why I haven’t referenced the bond market in awhile since they’re so important to interest rates.

Well, the reason is simple, because I haven’t felt they’ve moved enough to warrant a change in interest rates, so their fluctuations are not really of much concern at this point. Interest rates tend to only adjust when they have too, so unless yields go up over 3% or drop below 2%, I don’t see them interest rates changing.

The Bank of Canada rate isn’t likely to change either. Even with the markets rallying, they want to keep the dollar down as much as possible, and raising their short term lending rates would cause the dollar to jump, and that would be disastrous for manufacturing, tourism, et al. So, their pledge to keep the rate at 0.25% into 2010 is still good at this point.

Now, if the market rallies continue, that would likely draw up bond yields, as investors become less risk adverse it takes a bigger payout to get them to put their money in bonds… and with governments around the world racking up massive deficits, there is a ton on the market so as time goes on yields will have to continue rising to absorb the increased supply.

Though, peaking in my crystal ball, I’m still wary of the current market rallies… these gains haven’t been based on much, and the fundamentals of the economy still don’t appear to have turned the corner even if stock prices indicate otherwise… so at this point, I still think we could have another mini-crash or two left before stability truly returns.

Thus, six months from now I don’t expect interest rates to be much above where they are today, though there could be a hike and cut or two between then and now as the markets fluctuate. When interest rates do start climbing for real it will be hard and steep, but for the next few months at least I think they will remain around current levels.

But that’s just my two cents on what’s happening and where we’re heading in the short term. Of course as we’ve seen, the markets are anything but rational, so your guess is as good as mine and a lot can change in six months… and you need look no farther then the last six to see that.

Late addition: The July employment numbers were released today, and again they weren’t good. Another 11,900 full-time jobs were lost in Alberta, putting the tally since last fall at 82,000 lost, which has erased some gains made in the spring and is now at a new low. The unemployment rate was also up, now standing at 7.2%.

Categories
Alberta Canada

Beaver Style

After another night burning the midnight oil, I decided that today I was going to take today off… my first day off in over a month. Yes, I know, you don’t care, but this is my sandbox, so that just sucks for you now don’t it! But before I’m off to engage in at least eight different kinds of debauchery, I figured I’d do a entry since I had the chance.

The realtors are out there all whipped into a tizzy screaming we’ve hit bottom and the current surge is just confirmation that real estate only goes up, the market has corrected! Hallelujah! Holy Shit! Where’s the Tylenol?

But has it? Just what has changed from six months ago? Inventory is still poor, prices are about the same if not a bit higher, vacancy rates are way up, foreclosures are up, arrears are up, and more people are out of work thus so earnings have to be down. So, if anything that would suggest the market has softened.

And most of that recipe is true right across the country on this fine Canada Day… so what has changed? What would cause real estate not just in this city, but right across the country to rally?

Pretty simple really… interest rates. They’ve went from low, to ridiculously low… and not surprisingly, the lower they got, the stronger sales got. The market didn’t correct, interest rates plunged and suddenly the combination of that, seasonality and emotion has manifested itself into a suckers rally. That it’s happening across the country, just supports that.

The fundamentals are still poor, even with the interest rate plunge creating something of a temporary illusion of affordability. But people who felt burnt in the last boom, suddenly they could qualify for a ton of money and having been seemingly left behind in 2006, are jumping in with both feet.

Problem is, as soon as the economy starts showing signs of life, interest rates are going to go back up. Even 6% would leave affordability in tatters, and while for many recency clouds their judgement, 6% is still very low historically. So just imagine if they went back up to 8%.

The market hasn’t corrected, all the problems that were there six months ago, are still there today, and in many cases have actually gotten worse… interest rates going down have just delayed the inevitable. This whole thing was fueled by credit, piling on some more isn’t solving any problems, it’s just buying time all the while making it worse. It’s like paying off one credit card with another.

This correction isn’t going to be quick. It started two years ago, and will quite likely still be ongoing two years from now. This is not an efficient market, it’s an emotional one, so there will be many rallies, dives and plateaus along the way.

Those focused on the short term will continue to call bottom in thinly veiled attempts to convince themselves… but my focus on this blog is the long term, and until the fundamentals are corrected, there will be no bottom to be had. Even when it is, it cannot be recognized until well after the point.

So, now I’m off to enjoy an ring in our nations birthday by going out with some fellow Canadians, drink some Canadian beer, and maybe even watch some Canadian football… and later on, might even throw on some Anne Murray and see if the girlfriend is up for doing it beaver style (which I believe involved doing it in a mud hut).

Happy Canada Day everyone!

Categories
Canada Mortgages

Of bonds, banks and mortgages

TUESDAY UPDATE: Reports are circulating TD is about to raise their 5-year fixed rates another 0.4%

We’ve been hearing lots about central bank rates being at historic lows, and it’s influence over mortgage rates… but anyone following my Twitter feed the last while has no doubt noticed my little obsession with the bond market.

While on the surface there doesn’t seem to be much reason for a site like mine to concern itself with such things, but in fact the bond market is very influential on mortgage rates, and thus has a very big effect on the real estate market.

Mortgages themselves are essentially bonds, in exchange for the banks money, the buyer agrees to pay it back over a specific time at a specific interest rate. The bond and mortgage back securities markets are closely tied, and thus so are mortgage rates (which are usually slightly higher then bond rates).

So today I’m going to take a look at the relationships between bond yields, bank rates and mortgage rates. Here is a look at these rates since 1981.

As we can see, all three tend to track quite similarly. Also of note, mortgage rates are usually the highest of the three. For the sake of this post we’re going to be using Government of Canada 5 Year Bond Yields, and the average lending rate for 5-year fixed mortgages (as they are the most popular here in Canada).

We will start by looking at the relationship between the central bank rate and mortgage rates. As we can see here, there is a significant relationship between the bank rate and mortgage rates (these are through December of 2008), with an R2 value of 0.9064, the pattern is also obvious from the chart.

We’ve been hearing lots of late about how Mark Carney has been pledging to keep the Bank of Canada’s key policy rate at 0.25% until next June. Which from the trendline equation would suggest a mortgage rate of about 3.25%, which was never quite realized as 5-year fixed rates never got much lower then 3.95%, but that is certainly within the expected range.

The issue though is that even despite the assurance that the bank rate will not change, mortgage rates have started to creep up, advertised rates went up to 4.15% last week with suspicion it could be headed higher shortly… why is this? Well, the simple answer is we’ve been seeing a lot of upward movement in the bond market (and a huge jump in US T-Notes).

As we can see from this graph, there is an even stronger relationship between mortgage rates and bond yields then there was between mortgage rates and bank rates. This is evident in how the plots more tightly hug the trendline, and the R2 value of 0.9647, which is extremely high (1.0 would be a perfect relationship).

So while the bank rate may not change, if the bond yields rise it would appear that we should expect mortgage rates to rise as well. Especially since at this point the bank rate is being intentionally depressed, thus a short term decoupling would not be unexpected as the other two are still largely at the will of market forces.

Finally, we’ll do a scatter plot for bank rates and bond yields. The relationship of these two appear to be very similar to that the bank rate and mortgage yields, complete with a similar R2 value of 0.9046. Which is again a very strong relationship in its own right, but not as significant as bonds and mortgage rates share.

So, while the bank rate is expected to stay low for the foreseeable future (though we are hearing increasing reports that it will be heading up by year end, well before next June as initially promised), that is no promise that mortgage rates will stay down. For a better idea of where mortgages are headed, keep a close eye on the U.S. Treasury Note market, and Bank of Canada bonds (though they largely follow T-Notes).

If bond yields continue to rise, mortgages will follow. Which in turn will force the governments hands when it comes to quantitative easing (which is aimed at keeping bonds and financing rates down, but is intensely disliked by most debt holders).

Categories
Alberta Canada Foreclosures Mortgages

Latest Mortgage Arrears Figures

The Canadian Bankers Association released their latest mortgage arrears stats today, these are for March.

As we can see, they’re continuing their meteoric rise, and have now passed the 0.50% threshold. 2,416 Albertans now find themselves three or more months behind on their mortgages (typically at the point foreclosure proceedings begin, though it often takes another six months before such properties hit the market). There are now over three times as many Albertans in arrears then there were two years prior (740 in March ’07), and well over double the number from a year ago (1,054 in March ’08).

We still haven’t neared the levels witnessed in ’96/’97, but are well above the long term average (0.37%) and the current acceleration is showing no signs of slowing down (if the current trend holds (~0.03% MoM, we could hit the 0.70% level by October).

Last month it was requested to take a look at the year-over year change in these figures, so here those are (this is of the % of mortgages in arrears, NOT the raw total of mortgages in arrears)

From mid ’07 on we’ve seen an explosion of mortgages going into arrears, and in the last 8 months this has leveled off at roughly 120% year-over-year increases, which means the figures have more then doubled over any given 12 months. Such year-over-year increases haven’t been seen in the last twenty years, and likely not since the early 80′s when the first bubble burst.

It is interesting to note the contrast with the first graph, where we saw that as many as 0.70% of mortgages were in arrears during the mid-to-late 90′s… and this second graph we can see that was reached after an extended period of more moderate year-over-year increases (30-50%).

This time around it’s been a result of rather explosive year-over-year increases (110-130%), and while it has leveled off, it has leveled off incredibly high and as of yet shows no sign of slowing yet… beyond that, much of the economic turmoil (layoffs, etc) experienced in the new year would still be largely unfelt in these figures.

On a national level, arrears ticked up to 0.39% from 0.38%. Like last month, Alberta again has the highest rate in the country, and is opening it’s lead, as the Atlantic has dropped to 0.44%, while Ontario remained at 0.41%.

At the opposite end of the spectrum, Manitoba and Saskatchewan now enjoy the lowest rates, at just 0.22% each. B.C. is next at 0.29%, but the effects of their housing bust is starting to be felt as the rate there is growing rapidly (they were a nation low 0.16% a year earlier).

Categories
Alberta Canada Foreclosures Mortgages

We’re #1!

It’s been a tough week for the province… first we find out that the provincial government thinks our beaches and children are too damn ugly to use in advertising, so they have to co-opt some from England. Okay, and yeah, that foam finger is actually one for the Oakland A’s, but what can I say, our foam fingers here in Alberta just don’t stack up… err, I mean, its use was intentional and to give a more global focus… yeah, that’s it.

If stock photography is good enough for the Province of Alberta, dammit, it’s good enough for my blog! And, honestly, as a marketing type, whomever thought up that “It was intentional” defence, should be given a one-way ticket to Northumberland to find new employment.

Then, as Two-third pointed out, Alberta had the biggest decline in retail sales in the nation in February. Add to that Mark Carney lowering the bank rate and telling Canadians to start spending like crazy or he is going to unleash “quantitative easing.”

So yeah, it’s been a tough week… but fear not, the Canadian Bankers Association had news that is sure to erase all those bad memories. They released their February numbers, and Alberta is now leading the nation in mortgages in arrears.

So suck on that Atlantic Canada, we’re the champs now!

As of February 0.48% of all mortgages in Alberta are now three months in arrears or more. Up from 0.45% in January, and 0.22% a year earlier. Alberta has seen something of a meteoric rise in this regard since bottoming out at 0.14% in 2007, at which point we were neck-and-neck with B.C. for lowest rate in the nation.

Arrears were up all across the country though, the national average now stands at 0.38% (up from 0.36%). Manitoba has the lowest rate in the country at 0.23%, followed by Saskatchewan (0.25%) and British Columbia (0.27%). At the opposite end of the spectrum, Atlantic Canada comes in at 0.46% and Ontario at 0.41%.

So what does it all mean… well, if you’re looking for new business opportunities, I’d say repossession is going to be a real growth industry for the next year or two. Arrears are showing no sign of slowing down, and if people are behind on their mortgages, they’re likely behind on all kinds of credit.

A lot of boys will be parted with their toys, so if you’re liquid and in the market for quads, trucks, plasma tv’s, etc… you can probably get a helluva deal.

Not that these are situations necessary to cheer… but that’s reality. For those with cash in hand, recessions can be a great time to acquire assets, business, personal and luxury… unfortunately real estate is still grossly overpriced, give it time though, even that will one day correct, then it’s vulture time!

Sidenote: I’m trying something new with the comments, because the amount of people posting as “anonymous” was out of hand and you never knew whether you were dealing with one person or six. So please enter some kind of handle to identify yourself as if you want to comment.

I’d rather avoid forcing people to register with Blogger or OpenID, but if this doesn’t work that’s what we’ll have to do. So, if you have any comments or questions, fire away.

Categories
Alberta Canada Commodity Prices Historical Prices

Oilberta Redux

Earlier this week I did an entry on the relationship between oil prices and housing prices in Edmonton, and there were some interesting findings which led to new hypothesis’. There was also some good ideas that came up in the resulting discussion.

So tonight I’m going to take a bit of a deeper look at possible relationships with housing prices… or maybe I’m just doing it because that last one got lots of comments and I’m an attention whore… it’s really hard to say.

In any case, beyond just oil we’re going to look at natural gas, stock markets, and several other possible indicators. Be forewarned, there is going to be a ton of charts and graphs in this one, so if that isn’t your thing, well, you’re probably on the wrong blog. Anyway, this one will be a big’uns.

Like the last entry, I’m going to use Toronto as my control sample. Partially because Toronto isn’t exactly known for oil and gas (well, other than hot air… I kid, I kid), and it’s also the city I have the next best data set on.

This time we’re going to be using yearly averages rather than monthly, so you’ll notice the graphs look a bit different. As real estate tends to be a bit of a lagging indicator and prone to a fair bit of seasonality, yearly may actually be the better measure. I also have the yearly averages for Toronto going much further back, so that should improve the findings.

And here we have a plot of oil (West Texas Intermediate) and natural gas (Henry Hub) over the same period, also yearly. You’ll notice they chart fairly similar paths. You may be thinking to yourself that this graph doesn’t show prices getting as high as you recall, or diving last fall, but remember, these are yearly averages and/or spot indexes. These won’t look nearly as volatile as daily, weekly or monthly figures… for example here is the the monthly figures semi-transparent over the yearly ones.

As discussed in the prior entry, oil and home monthly prices in Edmonton had a high correlation… but they also had a very high correlation with Toronto prices. Which led me to conclude it was a spurious relationship.

These correlations remain using the yearly figures over a longer term… and are also present with natural gas. Though that shouldn’t be surprising, as noted earlier, oil and gas followed quite similar paths and actually have a correlation of 0.89 from ’72-’08.

Over the full term, ’72-’08, Edmonton had a correlation of 0.90 with oil, and 0.86 with gas. Toronto came in at 0.71 with oil, and 0.82 with gas. While the gas values came in quite close, there was a fair difference in oil.

This appears to be a timing issue though, as over the last 10 years both cities came in at 0.89, and over the last 20 years Toronto came in at 0.91 and Edmonton at 0.92.

On the natural gas front Toronto actually came in higher over the shorter terms, 0.84 to 0.79 over the last 20, and 0.80 to 0.63 over the last 10. Quite a large difference there on the latter.

As a result, I would again hypothesize that the correlations are due to a spurious relationship, due to a common lurking variable.

Here are a couple scatter points to illustrate the what we’re looking at.

You’ll notice the R2 value is lower than the correlation. For those unfamiliar, R2 is the coefficient of determination, and is the correlation squared (so, obviously its symbol would just be R).

In those graphs you can see the general trend formed over time. The higher the correlation, the tighter the plot points correspond with the trendline.

You may be wondering if there is a relationship between year-over-year gains… and to answer that in a word… no. Regardless of the city and the commodity (or any of the multitude of other indicators discussed later for that matter) any relationships are negligible at best.

To give you an idea of that, lets contrast the above graph of Edmonton vs natural gas prices to Edmonton’s year-over-year price change plotted against those of natural gas. You’ll note in the earlier graph that the points are often grouped and you can see an overall trend.

Now note in this year-over-year graph that the points are all over the place with no apparent rhyme or reason. The R2 is also almost 0, which just reinforces that there is little or no relationship.

As I have said before, I think the relationship between oil/gas and real estate is a spurious relationship due to a common lurking variable… and I’ve theorized that variable could be the greater economy and/or financial markets as a whole.

To further explore that line of thinking, I compiled a couple spot indexes for the NYSE Composite and S&P/TSX Composite. Here is a look at how those have performed over time.

These being composite indices they give you a good idea of the overall stock markets. With the NYSE being the largest stock exchange (by dollar value) in the world, and TSX being the dominant one in Canada they should be pretty good indicators for our situation.

The findings also may support my earlier musing, with both having significant correlations with real estate prices in both Edmonton (NYSE-0.87 TSX-0.92) and Toronto (NYSE-0.88 TSX-0.89).

To go a little deeper even, I consulted a Statcan report of the leading business indicators. These include ten different measures (including the S&P/TSX index) from various sectors of the economy.

Here is a list of the others, average work week-manufacturing, housing index, United States composite leading index, money supply, new orders-durable goods, retail trade-furniture and appliances, durable goods sales excluding furniture and appliances, shipment to inventory ratio, finished products, business and personal services employment.

Here is a look at just a few of those and how they’ve charted out.

I’m not going to look any deeper into these specifically, I just wanted to give you guys an idea of what they graphed out like. All the measures listed above appear to have a decent correlation on one level or another with real estate prices, except the average work week one which didn’t appear to have any correlation.

What I found most interesting was the composite of those ten different figures. As it covers many different sectors of the economy, it gives you a measure of the economy as a whole. As such, I’m going to focus primarily on that single measure, and here is how it graphs out.

And here is a scatter plot of the composite vs Edmonton real estate prices.

You’ll note that the points all plot fairly close to the trendline. Also interesting to see the snakelike pattern, which is present in the the natural gas plots earlier, but are not as clear as in this one.

Here is the time series for the leading indicators and Edmonton’s real estate prices. We can see there is far less variability in the composite than in housing, but they both are clearly trending up. This also reveals itself in a high correlation between the two, 0.92. The relationship also remains very strong regardless of the term, something that cannot be said for oil or gas which vary from very strong to moderate depending on the period.

Here we see the same composite graphed with Toronto prices. Again they look quite similar, and real estate remains the more volatile. The correlation for these two come in at 0.90.

FINALLY, we’ve arrived at the last graph. Here is the Edmonton prices plotted out with the composite, oil and natural gas prices for comparison. Yes it’s a bit of a mess, but I tried to make it as understandable as possible considering the multiple axis’ values. But I think it’s a good visual anyway.

I’m sure some will take exception with the scaling, but I tried to be as fair as possible and match up the various lines with housing prices long-term as best as possible. So just as a disclaimer, scaling can be misleading, so take it for what it’s worth and remember these can be made to appear to back up any conclusion.

Alright, here we can see the relative volatility of the four indicators. Oil and gas being the most so, then real estate, and finally the composite which is very smooth and relatively straight. It’s this smoothness is probably what yields the consistently high correlations, as all the prices increase over time.

I suppose one can see any number of things from the graphs, but I feel that these findings largely back up my earlier hypothesis that housing prices are probably more closely tied to the overall health of the economy, than to individual commodities.

While positive correlations exist between home prices and oil/gas in Edmonton, the same correlations exist in Toronto, a market without such resources close at hand… therefore implying a spurious relationship between the two factors.

While oil and gas certainly effect financial markets and the economy as a whole, throughout Alberta and Canada, it is still but one factor, granted one of the bigger.

That said, I’m not sure a direct causal relationship between be proved between the economy and real estate either. The economy is too complex for even an army of economists with lifetimes to study it to truly understand… much less one half-assed blogger.

So again, I conclude that while oil and gas certainly has a big effect on the local and national economy, I feel they do not have a direct causal relationship with real estate prices. But I don’t think any single indicator can claim a direct causal relationship. Real estate prices are effected by hundreds, if not thousands of variables… earnings, supply, demand, seasonality, land, labour, materials, just to name a few.

Oil and gas prices would certainly effect several of these, but there is a limitless interplay amongst these variables and countless others, and the effects of all these just cannot be quantified in an acceptable fashion.

That the same correlations exist between oil and gas prices and cities in both producing and non-producing regions indicate that real estate prices drill a lot deeper. Pardon the pun.

Categories
Canada Commodity Prices Historical Prices

Oilberta?!

One of our frequent commenters, Two-Thirds, offered up a couple local real estate folklore that he’d like to see tackled… his wish being my command, here is the first, the relationship between oil prices and real estate prices in Edmonton.

Those that have been reading this blog for awhile have already seen graphs of Edmonton’s historical prices several times, so we’ll start with a look at historical oil prices instead. For this post I’ll be using a spot index of West Texas Intermediate Crude… that seems to be the most commonly cited oil price, so should be a good standard.

To give you a better idea of the prices, here is the inflation adjusted price, and in Canadian dollars. As you can see from the graph, oil prices can be pretty volatile and undergo some very big swings, quickly.

It only goes back to 1971, this is because that is as far back as I could obtain exchange rates for… but that’s okay, since as you can see from the prior graph, prices were pretty much stagnant before the ’73 Oil Crisis, and Edmonton house prices were also pretty stable up to that point anyway.

It’s also good because creating these graphs over such long periods makes my year old iMac behave like a 486 trying to run Quake.

Now here is a look at how oil prices chart against Edmonton’s residential average price going back to 1971. We can see they have somewhat similar patterns, but it doesn’t appear that Edmonton’s real estate prices are nearly as reactive to oil prices as some may think. It is hard to say though, as real estate is something of a lagging market, not nearly as reactive as the oil market.

Realistically it takes time for the benefits of higher oil prices to makes its way through the economy. It takes months, if not years, for new projects to get off the ground, and the money from that to circulate.

So, when looking at the first boom in the 70′s, it could be argued that the rise in prices was, at least in part, due to the big spike in oil prices in January 1974. That delayed reaction could also explain why there was no apparent effect on real estate prices after the further spike in ’80 when prices briefly eclipsed $120/barrel (2009 dollars) then started shooting back down.

Also as oil prices started to move up in the late 90′s, real estate prices again started to creep up by the early 00′s… but real estate also started to decline while oil prices were still rocketing up too.

To counter that though, we can also see that real estate prices were declining during a period when oil prices, while dropping, were still well above what they were in the mid 70′s when they may have triggered the boom. Of course there were external factors at play at that time, like the NEP, which effect would be extremely difficult to quantify.

Then there is the big drop around 1986 when the price of oil plunged over 60%, and stayed there… while real estate prices seemed to have no effect, delayed or otherwise.

So, what’s it all mean? Hard to say, I guess one can see in those graphs what they wish.

To take a more statistical approach, we can take a look at the correlation between the two… this actually yields a seemingly remarkable result… a positive correlation of 0.68 since 1971. Anyone familiar with the measure knows that actually indicates a significant relationship.

But there could be many different factors at play, so to get an idea of what kind of correlation is normal I decided to also run the numbers against a control city that isn’t generally associated with oil and therefore one would not expect to find such a correlation… in this case, Toronto.

I only have the full numbers for Toronto going back to 1995, so to compare apples-to-apples as best as possible, I re-ran the number for Edmonton over the same period. Here are the graphs of those.

If you were shocked by the high correlation between Edmonton prices and oil prices earlier, you haven’t seen anything yet. Edmonton from 1995 to now is an astounding 0.87. Seems like that would make the relationship a slam dunk!

Not quite it seems. Sit down for this one. Toronto during the same period had an even higher correlation with oil prices… 0.89.

The two are very close, and this stays true (though in lower correlations) for the periods of the last 10 years and the last 5 years, inflation adjusted and nominal. Even figuring in moving averages with terms as long at 3 years to account for lagging reactions, there just doesn’t appear to be substantial differences between the two cities.

So, while a high positive correlation remains, I think that this finding of a non-oil and gas market having as high or higher correlations would pretty much refutes an actual relationship between oil prices and housing prices in Edmonton. Home prices here appear no more linked to oil prices then other cities in Canada.

To look at it from another angle, there is an equal correlation between real estate prices in Edmonton and Toronto, as their with between Toronto and oil prices. Though this should not be surprising since both also had similar correlations with oil.

In any case, I would have to conclude any kind of relationship between real estate prices and oil prices is anecdotal at best. It looks to be a spurious relationship caused by some lurking variable(s), and likely present in most if not all Canadian markets.

As is often said in statistics, correlation does not imply causation.

It seems that the real driver of real estate prices has probably more to do with the overall financial markets of which oil is a part of, or perhaps the economy as a whole… which would at least in part explain Toronto having just as high a correlation.

And just for shits and giggles, here is a little measure I derived… basically it’s how many barrels of oil it would take to buy an “average residence” in Edmonton at the market rates.

As we can see, this can be very volatile, with values anywhere from 2,500 all the way to 6,500 not being unusual over the last two decades. The median since 1971 has been 3,835 barrels, with a standard deviation of 1,270 barrels. Such a large range again would make me question any kind of hard relationship between oil price and house price, even figuring in real estate being a lagging indicator.

So in conclusion, while I’m sure oil prices have an overall economic impact on our fair city, of which housing prices would be a part of, from the data I’ve ran I see no tangible evidence of a direct causal relationship between oil and home prices. Any implication of such a relationship appears to be spurious. So, in the absence of any otherwise compelling evidence, this one is…

Categories
Alberta Canada Foreclosures Mortgages

Record number of Albertans in mortgage arrears

The real estate bulls out there will say I’m being sensational… and I’ll say, gee thanks! I always thought I was pretty good, but sensational?! Really?! I mean, I’ve been working out, and my girlfriend has told me I’m the best she’s ever had… but I’ve told her the same thing… and lets just say I know for a fact at least one of us is lying. Not saying which one of us though.

Where was I? Oh yeah, sensationalizing. Okay, yes, yes my title is somewhat sensationalized… but it is also true, and if the pushers out there can cherry pick figures, why not I?!

By now I’m sure you’re all wondering what I’m rambling about, so, lets get on with the show. Today the Canadian Bankers Association released their January numbers of Canadians in arrears on their mortgages, complete with provincial breakdowns.

As the title implies, as of January, there are more Albertans in arrears on their mortgages then anytime since they started recording such things. A graph of that can be found here:

As of January, 2,168 Albertans were three months or more behind in their mortgages. The first time it has eclipsed the 2,000 mark. The previous high water mark February 1997 when it was 1,835, and that number stood until December last.

As you can see, during the boom the number took a big dive, bottoming out in May of 2007 at just 649… since the market has cooled though, the number or those in arrears has skyrocketed up more then three-fold, increasing by more than 100 per month through 2008.

Now, some will argue it’s not really fair to compare straight numbers because the population has swelled greatly, as has the number of mortgages outstanding… and I agree. I just wanted to justify my “sensational” title… now we’ll get on to a better measure, the ratio of mortgages in arrears to the total number of mortgages.

So yeah, by this measure things aren’t so bad… yet anyway. Currently we are sitting at 0.45% of mortgages being in arrears. Slightly above the long term average of 0.37%, but well below the previous high of 0.69% in February 2007.

What should be troubling is that this number is rising quite rapidly, having bottomed out at 0.14% in June of 2007, and increasing every month since, and more then doubling since a year prior.

Some may blame the recent downturn in the economy for this, but remember, the stock markets and oil didn’t plunge until autumn of 2008… and this measure is only of those at least three months in arrears as of January. So the effects of that shouldn’t really be seen yet.

We should also remember all the layoffs that started hitting in the new year, piled up quickly, and continue to… the number of those in arrears is bound to really take off as for savings erode and EI benefits start to expire. When the full effects of that is felt this figure could very well surpass those heights reached in 1997.

Rising numbers of those in arrears will obviously increase the number of foreclosures, and should those start hitting the market en masse its going to put even more downward pressure on prices. This is an emerging issue, and something that will be very interesting to track over the next couple years.

For those curious, here is how Alberta stacked up against the national average:

Alberta was in the same range as the rest of the country, especially since 1995. Since 1990 the national average has been 0.42%, while Alberta came in at 0.37% as mentioned earlier. Also interesting to note that the rate has started to increase nationally over the last six months, and currently stand at 0.36%.

For an idea of how the rest of the provinces stacked up, here is the chart for western Canada.

Here we can see the western provinces have been pretty close for the last decade. It is interesting to see how much of an outlier Saskatchewan was during the early 90′s. Since 1990 B.C. has had the lowest average in the nation at 0.32%, Alberta was second. Saskatchewan (0.54%) and Manitoba (0.49%) on the other hand were on the opposite end of the spectrum.

Here is the eastern half of the country. Quebec is a bit more erratic then the rest, but nothing like Saskatchewan. The average for Ontario was 0.41%, Quebec was 0.49%, and the Atlantic provinces come in at 0.41%.