Commodity Prices Historical Prices Macroeconomics

Precious Metals

With the recent rally in gold, we’ve been hearing a lot about precious metals. Actually ever since the financial meltdown last year the gold bugs out there has been much more boisterous… so I’ve finally broke down and prepared a post on gold and silver. This is another one that’s not particularly about real estate prices, but I will throw in a tie-in towards the end.

Here is a graph of the historical gold price per ounce, nominal prices in US and Canadian dollars, and in inflation adjusted Canadian dollars. Many investors generally look at precious metals as an inflation hedge, but it is prone to bubbles of it’s own… obviously as was witnessed in the early 80′s and is evidenced in the inflation adjusted figures.

For those thinking about buying gold you should take note of the tail end of this graph and that while gold has just recently reached it’s all time (nominal) high in US dollars, in Canadian dollars it actually peaked in the winter here and is a fair bit below that price currently.

So, if you’re thinking of putting money into gold, don’t just trade blindly based on what it’s value is in US dollars, you need to figure in the exchange rate into your calculations.

Here we have the same graph for silver, charts similar though it’s spike in 1980 was even more severe. Ignoring that, we can see that like gold, overtime it tends to hold it’s value without much if any appreciation, but is trending up the last few years.

For those interested in such things, here is a graph of the relationship between gold and silver prices. We can see the ratio has gone as high as 97.3 and as low as 17.2. Since 1971 the average has been 55.7, with a standard deviation of 18.1.

Finally we’ll do that tie-in with real estate, just for shits and giggles. This is a graph of the number of ounces of gold it would take to buy the “Average Residence” in Edmonton. There has been a fair bit of fluctuation, particularly in the 70′s. Over the period presented, the average has been 272, median 261 and standard deviation 101. So our current situation is right around normal, but it got as high as into the 500′s in 2007.

Interesting to note, the huge gold spike in 1980 coincided with the prior real estate bubble. While housing prices had somewhat plateaued from ’77-’82, the ratio plunged from north of 550, to less then 100.

Lastly, the same graph for silver. Average was 14,660, median 14,721 and standard deviation 5,723. In this case we’re currently well above the long term mean, and it’s interesting to look at the differences in pattern/scale of some of the movements between gold and silver with this measure.

So, take it for what it’s worth. Like any of the other commodity analysis’ I did earlier, any relationship with real estate appears anecdotal at best, but I included it because it’s been requested often. What I take from looking at this data is that like other assets, beware of bubbles, and be sure to figure in the exchange rate should you start putting your money into any investments.

Alberta Foreclosures Macroeconomics Personal Finances


Hope everyone enjoy their Thanksgiving long weekends, and filled up with turkey and complex carbohydrates.

In the comments section of last weeks post on consumer debt someone referenced these stats on bankruptcies/insolvencies in Canada. I managed to find their historical bankruptcy numbers, but not the proposal and total insolvency stats (insolvencies = bankruptcies + proposals).

So, we’ll take a look at the bankruptcy numbers today, and rather then do one monster post I’ll just do a series and in coming days and weeks I’ll do further comparisons between consumer debt, bankruptcies and foreclosures.

Rather then just quoting the hard figures, most of these measures have been derived to give a better historical context. This is a figure of the number of consumer bankruptcies per 1,000 people in Alberta for any given year. Also included the long term average and median figures for comparative purposes, and a projection of what the 2009 figure will be based on the numbers through August and long-term seasonality.

As we can see, through 2008 we were still in the average range overall, but actually quite low when compared to the prior 20 years (given the shift there must have been some kind of change in measurement and/or legislation around 1990). During the boom period we saw bankruptcy figures fall, but are expected to spike back up this year to pre-boom levels.

It is also interesting to look at the historical figures. For example, we’ve talked here often about the early 80′s recession and have heard the stories about the devastation felt by residential real estate. We can see bankruptcies did double from the boom days in the 70′s to the bust in the early 80′s… but the rate stayed constant right through the rest of the 80′s, no discernible spike as one might expect.

Then in the early 90′s we see the rate climb from 1.0 to 2.25… this also coincided with a recession (though minor compared to a decade earlier), but curiously in the mid 90′s the rate took off again and topped out above 3.5 after the recession had already played itself out.

From what we know about home prices, they had a significant drop in the early 80′s, and minor one in the early 90′s, but were stagnant in the mid-90′s. So, it would seem any relationship between consumer bankruptcies and real estate is probably not closely tied to bankruptcy rate.

Just some food for thought, here is the year-over-year change in bankruptcy rate. Interesting to note that based on our current pace, 2009 will have the highest increase ever. No small feat considering it was not exactly low going in. While probably not directly effecting real estate, it is a rather damning statistic for the Alberta economy as a whole.

Beyond just the number of bankruptcies, the stats also include sets on the assets, liabilities and deficiencies (assets less liabilities). I adjusted all these for inflation (2009 dollars) for comparative purposes and then divided that number by the number of bankruptcies to get a ‘per bankruptcy’ figure.

Here we can really see the effects of the early 80′s recession. While the rate was not so high, there was a HUGE difference in the sums of money per bankruptcy, and that’s likely a sign there there were a lot more foreclosures involved… where as it appears in most years the vast majority of bankruptcies involve those that do no own real estate.

When it topped out in 1984 there was an (inflation adjusted) average of about $237,000 worth of liabilities (very close to the inflation adjusted average real estate price at the peak of that boom, coincidence?!), to only about $60,000 worth of assets. The figures at play between 1982 and 1986 completely dwarfs any figures before or since.

Here is another graph that somewhat combines the two prior. It overlays the rate over the average deficiency (I included nominal and real dollars just so you can see for yourselves the effects of inflation).

Here we can see that the sums involved are really not related to the number of people defaulting. Through from 1991-2001 despite the rate being at all time highs, the average person who filed for bankruptcy was less then $10,000 in the hole.

So we can fairly safely conclude that in those years that vast majority of those going bankrupt were not home owners, or in any danger of becoming one, so the rate itself is probably of little value in predicting foreclosure rates.

What is a better indicator of foreclosure trouble is the sums involved.

The 80′s were remembered as disastrous, and the deficiencies witnessed then reflected that. We had a slight hiccup in the early 90′s, and we can see a corresponding blip in 1990. The more people that are foreclosed upon, the higher the numbers will skew.

That we have been tracking upwards the last few years could be a warning of things to come, but as we’ve discussed here, the levels of non-mortgage debt carried have also taken off of late too, so we must take that into the equation.

It will be interesting to see what the numbers end up looking like in 2009, as I could not do any projection for the deficiencies and that is the number we’re most interested in for our purposes.

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.

Alberta Commodity Prices Macroeconomics

Fueling Alberta

After this weeks announcement about the revised budget from the province, I thought it would be interesting take a look at historical revenues, particularly those coming from oil and gas. So, today’s entry is more of a general interest post and not concerning the housing market (at least not directly anyway).

So, without further ado here is a look at revenues from the last decade or so, as well as the estimated revenues for this year.

As we can see, revenues have taken quite a dive, and it’s now expected we’ll be down over 8 billion from two and three years ago, and 6 billion from last year. We can also see that shortfall is pretty much entirely due to declining resource revenues.

This is effectively the same graph, but this time the resource figures are broken down into divisions, natural gas, oil (I lumped crude and synthetic crude/bitumen together), and other. Giving us a bit more perspective, we can see that while oil is certainly down from the last three years, historically it’s actually about normal… gas on the otherhand, is very low by recent and historical measures… and other resource revenue is virtually non-existent.

This is looking at it from another angle, this time from a proportion of total revenues (that year). This again shows what we discussed earlier, and that gas is making up a mere fraction of the revenues it normally contributes to government coffers.

Now we’ll isolate just the resource figures. As we can see here, when the government talks about how volatile our resource revenues are, they are not kidding. This year we’re now projected to collect over eight billion less in resource revenue then last year (and over ten billion less then the high water mark in ’05/06). That is expected to be only the second time in this span that such revenues came in below six billion for the year, and the first time below four billion.

This graph is also good to show that typically natural gas is what drives the province… some years the ratio of natural gas-to-oil revenues got as high as 4/1 or 5/1… as opposed to this year when for the first time oil revenues are expected to exceed gas revenues.

Again, we’ll break it down by percentage of contribution. We can see in the last four years there has been a shift and oil is becoming more prominent and gas revenues has settled in just below the 50% mark. Quite the change from earlier in the decade when it was generally in the high 60′s/low 70′s.

What the future holds for this balance will be very interesting to follow. How will the increased gas production in the US effect production here and market price? How will changing environmental effect the oils sands?

Anywho, that was a little look at oil and gas revenues for the province from the last decade or so to send you off on your weekend. If you have any questions, comments and/or observations, fire away.

Historical Prices Macroeconomics

Population and Migration

I’ve been meaning to take a look at this for a while and finally got off my fat ass and did it… or I guess technically, sat on my fat ass and did it… um… I digress.

So, today I’m going do another reader request and to take a quick look at population/migration and it’s effect on real estate prices. Many speculate that it was high migration and growth that not only triggered the run up in prices, but also argue that it should sustain that level of prices. We’ll see if that theory stands up and earns my unpatented stamp of approval, or not.

Lets start with population. Here is a look at Edmonton’s reported population from 1962 to present, charted against the inflation adjusted residential average price in Edmonton.

As we can see there, the population curve is quite gentle and consistent. Contrast that to the price curve, which the late 70′s bubble is quite pronounced, as is the spike in prices witnessed of late.

It could have likely been deduced from the first graph, but here is some further derivation to back up that overall population growth doesn’t appear to have much impact on prices. Prices are very volatile, and largely appear to move independent of population.

Included in this graph is the percent change of both Edmonton and Alberta populations, I didn’t include Alberta’s population in the first for scaling purposes. Alberta’s, like Edmonton’s population, generally fluctuates between 0%-5% growth year-over-year (FYI, the spike in Edmonton’s population in 1964 was due to their annexation of Jasper Place).

Thus we will conclude that overall population growth has no direct relationship with residential real estate prices. Now, onto migration.

That is a graph of net migration into Alberta since 1962, and it’s two primary components, interprovincial and international migration. As we can see, interprovincial appears to be the primary driver of net migration. From here on out we’ll just deal with net migration, I just wanted to give you all an idea of what how international and interprovincial figures stacked up.

Now here is a graph of net migration and year-over-year price change (bear in mind those migration figures are for the entire province, not just Edmonton). If there was a relationship between the two, one would expect that migration would be the leader, but as can be seen in 70′s through the 80′s it was actually price that lead through the first bubble. We can also see that through the 90′s, even with fairly good migration, prices really didn’t seem to respond.

There are some periods that may appear to support a relationship, like in the late 80′s and in ’05 and ’06, but on a whole it doesn’t appear there is any direct relationship. It’s also interesting to note that the recent spike, which reached record level in 2006, still doesn’t appear to be anything exceptional, and migration retreated quickly in 2007 and 2008 back to historical norms.

This leads me to conclude while there is likely some short term effect of migration on price, but in our recent boom its effect was probably over blown. I would hypothesize that the shortage of inventory and rental units experienced was more rooted in speculative buying then actual increased demand.

As we’ve seen an explosion of listings since the peak, particularly of condos and smaller homes, largely of which have been sitting empty. This appears to support the hypothesis that we saw a great increase in properties bought, and then held to be flipped at a later date.

This sort of behaviour was also evident in the rental market, where the number of total units dropped from 75,267 in 2005 to 67,907 in 2008. These were largely due to condo conversions. That kind of contraction will of course increase demand, even if the population increases. The number of occupied units actually only increased about 775 from ’03 to ’06, then dropped by over 4,000 in ’07 and another 3,000+ further in ’08.

Beyond that, our current situation where we find the city seriously overbuilt and with another 10,000 units in construction. We can’t get to that point without demand being perceived as much higher then it is in actuality.

So, while a rapid increase in migration could likely pinch supply short term, the escalation of prices we experienced here was more rooted in speculation and good old irrational exuberance.

And as far as long term price support goes, not a chance. As I’ve said before, Edmonton isn’t Manhattan, we can build for as far as the eye can see in every direction and generally it’s not any problem getting materials or labour… any short term situations where demand outweighs supply, will quickly be corrected… or as we’ve witnessed, over-corrected.

At least that’s my opinion.

EDIT: Had a request for the graphs of change in net migration vs change in price, so here they are. I had already prepared them, but they got cut from the original post to keep the length down.


Doom and Gloom?

It seems a lot of realtor blogs out there like to label anyone that doesn’t encourage everyone to run out and buy a house as purveyors of “Doom and Gloom.” Seemingly we are advising everyone to just give up, stock up on ammo, and start working on recipes for rock soup and roadkill.

I can’t speak for the rest, but I don’t see doom. What I do see is a return to 2005 or so, or even 2005+20%, to figure in the time value of money. Real estate prices going down isn’t even gloom for that matter… well, other then for those that bought in the last three years. It’s not until prices get back to affordable levels that the sector as a whole will get back on track and sales recover. Great gains can be made during a bubble so long as one remembers it’s a bubble, it’s only when one mistakes a bubble for the norm that they get in trouble.

Sure, they’ll be some gloomy days in our near future. After all, we’ve only just gotten our feet wet in this worldwide recession/depression (“re-pression” anyone?!), but that goes far beyond real estate.

And 2005 wasn’t so bad! As I recall it, it was actually pretty good. Optimism was high in Edmonton, business was good, money was flowing, Russell Crowe was throwing phones at concierges, no one had heard of Joe the Plumber, and I was dating this tasty little number from Mexico City. Things were good. I mean, things were really good, that girl was wild!

Okay, okay, back on topic.

Why 2005? Well, that was really the last time real estate prices were still in line with historical values and household incomes. Things started to go crazy in 2006, and didn’t slow down well into 2007. For the last year and a half we’ve seen prices slowly make their way back down, and there is still a long way to go.

But for those that bought in 2005 or earlier, which is the vast majority, you really have nothing to worry about (as long as you didn’t treat your home equity like an ATM during the boom that is). You’ll end up just as well off as you were just a few short years ago.

Unless interest rates suddenly jump into the double digits I don’t see property values overshooting that landing by any appreciable margin. And looking at the long term rates banks are offering, they don’t seem to be indicating such hikes will be coming… but if they do, yeah, you might want to grab those guns and start working on that rock soup.

For the renters out there, it’s time to start playing hardball with your landlords. Vacancies are rising and rents are dropping. With more and more “accidental landlords” emerging every month, you’re just gaining more leverage.

For the landlords, if you were established before the boom you should be just fine too. If you could make a go of it before, you should have no problems adjusting now… and lets remember, you made off like bandits during the boom, so you’re good to go!

Some will tell you that downturns are all bad news, but busts are actually necessary and healthy for the economy in the long run. Like any business cycle, there will be winners. Those with money in hand, hold the power, and are going to be able to profit from this cycle. Unfortunately there will also be losers though, and those that got themselves over-leveraged during the boom are going to have a very rough time of it.

As long as we’ve had financial systems, we’ve had booms and busts. While neither is particularly healthy by themselves, they do seem inherent, inherently human in fact. The presence of one requires the presence of the other. No matter how many we’ve had in the past, and lessons we’ve learnt, one day we will again repeat the cycle.

When that next boom comes, we will again tell ourselves that this time it’s different, this time we’re different… but the results will be the same. A bust is just a necessary remedy for a boom. So even though those with a vested interest in the current bubble keep urging you to spend, spend, spend… all you’d be doing is trying to re-inflate that artificial bubble. We can’t spend ourselves out of a recession we’ve spent ourselves into, we would just making the underlying problem worse (in this case, debt), and making the ultimate fall that much further.

Much like removing a band-aid, sometimes it’s just best to just suck it up and get it over with. There are some gloomy days ahead as we recover from our little consumer orgy, but there are many more bright days ahead of those. We’ll learn from our mistakes and get on with living. Just like things turned out to be not as good as they seemed during the boom… things aren’t as bad as they may look during the bust.

We weren’t the first to go through it, and we won’t be the last. There is no doom, we’re just heading back to where we should have been all along. No better, no worse.

It’ll take a couple years to get there, and there will be some tough times along the way, but we’ll get there. So just keep your head up and soldier on… and fellas, if you can, get yourselves a girl from Mexico City, seriously, you’ll thank me!