Edmonton Housing Bust

As promised, here is the second part of the consumer confidence numbers from last week. These pertain to whether people feel it’s a good or bad time to make a “major purchase” and the findings are actually rather interesting. First we’ll start with the national numbers.

For the nation as a whole it’s interesting to note that for most of the decade leading up until ’08 obviously more people than not felt it was a “good” time to make a major purchase, but the trend was actually slowly declining. Even with interest rates generally going down over this time and driving down the cost of borrowing, the number of people who felt it was a “good” time to make a major purchase was declining… and we know that over this time Canadians haven’t been shy about spending.

Then obviously the financial crisis hit and the script was suddenly flipped, and we had a big spike in the number of those who felt it was a “bad” time to make such purchases. Once we got into ’09 though that number started to improve, until the “goods” and the “bads” were about equal and tracked closely for the last year. It’s interesting that the most major of all purchases, homes, had a banner year last year, but consumer confidence was actually lower than it had been for most of the decade prior the financial crisis.

Now we have the numbers for the prairie, and while they look similar to the national numbers, there are some subtle differences. Going left to right, we note that the level of consumer confidence pretty much held it’s level from ’02 to ’06… but interestingly, just as home sales and prices in Alberta (the primary driver of the prairie figures) took off in ’06 and ’07, the confidence numbers started to slide… and actually started to tank just before market peaked in mid ’07.

So, that downturn in consumers willingness to make major purchases showed up in the resale numbers… but there was no real apparent sign that there should have been a boom. Very interesting. Though I guess we should remember that in ’08 things were just getting cooking for Saskatchewan’s housing boom, while Alberta was really one the skids (Manitoba remained fairly balanced all the way through). So it would be interesting to know what the Alberta only numbers would have looked like.

Anyway, from mid ’07 to the financial crisis the “goods” and the “bads” were about equal… then we had the “bad” spike after the market collapse, the “goods” had a little rally last year as the credit orgy took root, but since it’s cooled and now “good” and “bad” are about equal again.

I must say, it’s curious that during the HUGE housing boom in ’06 and ’07, the number of people who felt it was a “good” time to make a major purchase actually waned… even with low interest rates and relaxed lending standards. Makes one question whether there is any correlation with this measure and real estate at all.

Anyway, it is something else to discuss and ponder this weekend before the June resale numbers come out for Edmonton. From the sounds of it the sales numbers will be soft, so it will be interesting to see what happens on the price front. It also looks like inventory grew, but by how much? So many questions. Have a good weekend guys and gals!

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

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

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

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

Have a great Canada Day everyone!

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

What? Just me?

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

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

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

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

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

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

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

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

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

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

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

At least that’s my guess.

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

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

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

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

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

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

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

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

So, I guess the question is, now what?

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

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

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

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

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

This morning Mark Carney pulled the trigger, and announced a change in trajectory for the target overnight rate… moving it up to 0.50%…. up a quarter of a percent from where it’s been since April 21st, 2009, when it was set at 0.25%. This was actually the first rise in the rate since well before the financial crisis, going all the way back to July 10th, 2007, when it was raised from 4.25% to 4.50%… and it’s been all downhill from there, until today.

There has been a lot of ink spilled recently about this increase, but as we can see from the historical data, 0.50% is still obscenely low. Even compared to the 2.00% that was thought to be rock bottom back in 2002 and 2004 (levels not seen since the post-WWII period). A lot of people seem to think our “recovery” may be too fragile to handle an increase in the overnight rate… but, frankly, if the economy can’t handle this, this isn’t a recovery. Hell, if it can’t handle 2.00% this isn’t a recovery.

Regardless, this should be merely the first of many announcements of ratcheting up the overnight rate to come over the next couple years. If we’re ever going to legitimately recover, the economy is going to have to handle the rate returning to historical norms. How quickly it happens is yet to be seen, nor has the long-term side effects of the policy of slashing rates to the bone… the latter I suspect will not be pleasant. The answer to a credit bubble is not another credit bubble… that merely kicks the can down the road, and more often than not makes it much worse.

P.S. If you’re looking for a little something to get you through your workday, here is an interview with Danielle Park, where she offers lots of sage advice about how to handle your investments going forward, appropriately enough titled, Avoid Extremes.

Sorry the updates have been a little sparse this week, the girlfriend has been on a week-long “Sex and the City” binge, of which I was ordered to partake under threat of never having sex again if I didn’t… not saying I made the wrong choice, but lets just say a lifetime of self-abuse suddenly doesn’t seem so bad in hindsight. I’ll even put my manhood at stake and admit the tv series wasn’t half bad, but those movies are brutal… and 2½ hours, are you kidding me, there wasn’t even a plot?!

Anyway, enough ranting. Still waiting on fresh bankruptcy and arrears numbers… so instead we’ll take a look at the latest Survey of Employment Payroll and Hours that came out Wednesday. These are through March of this year.

Lets start with the employment numbers. We can see after a big drop in the wake of the financial crisis, the total numbers (blue line) had bottomed out last spring, and have since been creeping up a little as he heading into 2010… then they look like they took a pretty big jump there in March, of around 16,500. We should bear in mind these figures often get revised, but that’s promising none-the-less.

I also included a measure of the number of payroll employees as a percentage of the eligible population (of working age) from Statcan’s Labour Force Survey (green bars). This measure takes into account population fluctuations. This shows a trend very similar to the nominal figures, but we see even with the apparent jump in March that we’re still below the 60% mark… something that hadn’t been experienced since ’04.

So while the worst may be behind us, we’re still a long way from the good times of just a few years ago. So those expecting things just to start rolling again will be disappointed. We should also note that these figures make no mention of full-time vs. part-time jobs.

Now we have the average weekly earnings. These hardly show any signs of the losses experienced on the jobs front, and seem to be more or less continuing their established pattern (bearing in mind, these too are subject to revision). It’s interesting to note the seasonality in these figures… often building through the fall/winter, then softening in the spring/summer. So while we’re very near the $1,000/week mark, don’t be surprised if it falls off over the summer, and not breach it until late winter, or next spring.

I guess that’s good for a dreary Saturday, and those of you fellas out there that haven’t been dragged to SATC2, count yourselves lucky. Honestly, for a show so much about fashion, they sure wear some hideous clothes… granted, this is coming from a guy who takes his fashion cues from Charlie Sheen on 2½ Men (cargo shorts for every occasion!)… I guess I wasn’t quite done with the ranting after all. Anyway, hope you’re all having a good weekend.

It’s been an eventful week, but heading into a new one there has been little to show from it. Big snow storm rolled through Tuesday, but that’s pretty much all melted now… then there was the apparent market crash on Thursday that sent shock waves through the financial world, but that reversed as quickly as it plunged and had rebounded most of the way back.

Sorry it’s been a little while since the last update… got a little busy… a bit lazy… and that nothing particularly pertinent to our discussions arose… so, all that in combination doesn’t lend itself to productivity on the blog front. But I think I found something to spur a little inspiration.

On Friday Statcan released their latest labour force survey. We’ve talked about the provincial job stats a fair bit (as recently as last month even), but today we’ll look at a more local level take a peak at how Edmonton and Calgary have fared comparatively since the financial crisis.

First we’ll bring up jobs lost. We see some interesting contrasts between the cities. Calgary shed jobs quick, losing 24,000 within the first six months… but then leveled off and had a rebound late in ’09… but that was short lived and since they’ve lost whatever was gained and then some, now sitting 27,000 below their peak level.

Edmonton on the other hand had a much more gradual drop, taking a full year before hitting the -19,000 mark… but then having a sharp spike in the winter… but those went as easy as they came, and then some… the capital is now 20,800 short of where they were in December ’08.

For those curious, these figures are seasonally adjusted, 3-month moving averages (which makes that spike in Edmonton’s numbers even more drastic), and make no distinction between full-time and part-time jobs.

Now we’ll look at the comparative unemployment rates. Over the last decade the two cities have tracked very closely, not really a surprise though. Both cities currently sit at 7.6%, and obviously well above any level seen in the last decade. This is the highest rate seen in Calgary since early ’96, and (other than last fall) the highest in Edmonton since early ’97.

Those of you kicking around the comments section, or my twitter feed the last couple days in all likelihood came across a discussion of a an interview on CBC Radio regarding the Canadian real estate market, and featured Danielle Park, and Gregory Klump. The latter did not have a good show to say the least, and has since become a bit of a whipping boy for the blogosphere.

And today, I intend to pile on a bit more… but will also try to examine the point I believe he was trying to make.

Mr. Klump is the “Chief Economist” for the CREA. Before we even begin that already begs the question of why a trade association would need an economist… which quite simply, is that they don’t. The position serves no practical purpose for their operations.

Which begs another question, if they don’t need one, why do you they have one? The answer to that one is quite simple too… marketing. The position is to be a mouth piece for the CREA. But not just any mouth piece, a mouth piece that they can give a fancy title that they can trot out as an “expert”. Cause if you sound official, people are more likely to assign credence and legitimacy to what comes out of your mouth. They’re economists in name only, their true function is to project their employers desired messaging (and the CREA isn’t the only one’s doing it either fwiw).

So, theoretically speaking, they find someone willing to whore out their credentials, and voila… they have themselves someone who sounds like they should be taken seriously… and conversely it keeps gas in someones minivan. A real win-win. You know, theoretically.

Once you know that, his rather disastrous performance yesterday starts to make a bit more sense. He managed to keep it together through his obviously scripted opening, but as soon as he was asked even the simplest of follow up queries it soon turned into a mess of mangled logic and random talking points. Basically it was a “You Bet’cha” short of being a Sarah Palin interview.

He was obviously coached to stay within some narrow parameters, and when he painted himself into a corner he started throwing out some rather incoherent econo-babble… I assume in an effort to overwhelm/confuse/obfuscate the layperson… unfortunately for him, to anyone with even a passing knowledge of economics it was quite obvious he was hopelessly full of shit. At that point if they would have let Ms. Park loose on him I’m pretty sure he would have crawled under the desk and assumed the fetal position.

But anyway, as much as I’d love to pile on some more (who am I kidding, I still may), I figure I should address the hypothesis he made while still somewhat coherent. That being that this will be a “demand driven downturn,” and one would not result in prices going down because they are “sticky”… but instead sales dropping and prices going sideways for an indefinite period of time.

Anyone who has taken economics during their post-secondary years I’m sure will recognize this sort of graph. I won’t go into too much depth on all this, as most of you probably already are familiar with it or can look it up, and those that don’t have probably long since stopped reading. As marked, the vertical axis is “Price”… and the horizontal is “Quantity”… the blue line is the “Supply” curve… and the green line is the “Demand” curve. Where the two lines intersect is called “equilibrium”, and the price and quantity at that point at P1 and Q1 respectively.

Beyond that, long story short, that whenever supply or demand shift and a free market thus finds itself out of equilibrium, over time it will tend (move) towards equilibrium. Basically, the market will always try to move towards balance.

Klump theorizes that there will be a downward shift in demand (supply would remain constant), which is represented by the dashed line on the graph above. In such a case, we would expect that the market would then move towards a new equilibrium at the point of P2,Q2. It’s rather intuitive, as if demand dropped and supply didn’t change, one would expect fewer products to be purchased and those that do sell to be at a lower price… and on the supply side, as the selling price was lower, that would make it less profitable to produce, thus fewer would be made… and you can kind of visualize how this would create a new equilibrium.

But it’s not that simple, at least according to the Klumper. He theorizes that because prices are “sticky” going down, that there will be no price declines to create equilibrium (if you don’t already, you’re gonna hate that word by time we’re done)… but instead all the work will be done by quantity as seen above.

We can compare the two scenarios a little better here. In his scenario, where prices remain constant, that quantity takes an even bigger cut than if it had to just return to equilibrium. So basically sales would grind to a halt while sellers hold out for the higher price and buyers are unwilling to go that high.

His scenario is actually quite conceivable… but only in the short term. In the long term, it fails in both theory AND practice, even for real estate. The market will not persist infinitely without tending toward equilibrium. I may not have a fancy MA in economics, but my modest degree in marketing and finance tells me when I’m being sold a bill of goods, and how.

He is indeed correct that home prices tend to be “sticky”… but again, this is only true in the short term. I don’t think any reasonable person would argue that prices should or will decline at anywhere near that pace that it shot up. We saw first hand here in Edmonton just how explosive their growth can be… in 16 months the median home went up 89% between January ’06 and May ’07. Baring in mind diminishing returns would require just a 47% drop to retrace the same nominal drop, even so, no one is calling for that kind of drop, much less doing it in such a protracted period.

But that’s not to say prices cannot go down at all though. By conceding that real estate prices are sticky is merely to say it won’t drop as fast as it went up. To say prices cannot go down is sheer insanity, we’ve had a front row seat to witness the deflation of the U.S. housing bubble. Declines of 10-15% year-over-year are hardly out of the question. Real estate is not immune, and it’s not any different here… hell, just go back in time a year and was happening right here in Edmonton.

Actually our situation here is a prime example of what could very well happen in several major markets right across Canada… and it wasn’t just a demand shift. As market psychology shifted we found out we also had a whole lot more inventory available than previously though, and thus we had a supply shift too… suddenly we had a wave of people willing to sell at the former price (or even at a discount), but buyers no longer willing to offer it… and that my friends was a recipe for price declines.

But observations like that scare potential buyers, and when you’re in the commission sales racket, that is bad for business… so, don’t hold your breath waiting for someone from the CREA to start acknowledging that, alas, intellectual honesty is evidently no match for a paycheque.