Inventory New Construction

Over/Under Supply

For awhile now I’ve been thinking about trying to attempt to quantify the relationship between population growth and housing construction. We’ve been hearing for a year or two now about how our city is actually overbuilt to a significant degree.

This of course would come to a surprise to many as just three years ago there was an apparent serious housing shortage, and stories of tent cities propping up around the city. As it turns out that shortage was largely artificial and a result of speculative buying, and as reports such as this one from TD point out that we’ve actually been somewhat overbuilt all along.

So, today I decided to sit down and try to hammer out some kind of quantification for this… but I wouldn’t take any of this as gospel, it’s really more of a scientific wild ass guess then anything. Regardless, on with the show.

This is just basically an overview of the stats from which the subsequent findings arise. So you can examine that at your leisure.

From this data I derived some long term averages and medians to attempt to make something tangible out of that mess. Basically what I found was that for every new unit completed you needed somewhere between a 2.1-2.3 person increase in population.

Those familiar with the censuses probably know that typically Edmonton and centres like it have somewhere between 2.5-3.0 people per household (FWIW, according to the Statcan numbers I have over the last decade Edmonton has came in at 2.73).

So you may be thinking this is the big “Aha moment,” and that that alone proves we’re overbuilt… but no. That would ignore all the redeveloping/rebuilding that goes on, which I think it’s fair to assume makes up that difference. I’m not in the industry, but just as a laymen, to say 20-30% of new construction would qualify as redevelopment/rebuilding sounds reasonable.

So, now assuming that 2.1-2.3 range is appropriate lets compare how many units would be needed to absorb that population increase vs how many units were actually completed over this period.

So here we see the patterns formed by the yearly numbers (non-cumulative). No surprise, the completion numbers tend to lag the demand fluctuations… obviously it takes time to actually build the places. This also doesn’t take into account the relative inventory positions, for that we’d run the numbers cumulatively.

This, I think, is a much more telling graph as it gives a relative supply position (assuming something resembling balance in 1987 of course). It seems to give a believable pattern as one would expect some ebbs and flows as when demand is falling you’d see a large pullback in supply in subsequent years, and conversely when demand returns you’d see an overcompensation in the other direction as builders rush back in.

In any case, one would expect in balanced market conditions that the figures generally fluctuate around zero, which they do. Then we hit the boom.

What I find quite interesting is that the build up of over supply actually came about from 2003, 2004 and 2005… before the price explosion really hit. This was during a time when the market was hot and building steam but prices were still within historical means.

From 2006 until now the over supply has merely maintained… somewhere between 8,000 and 22,000 units if my factors are correct (personally I’d probably place it closer to the 2.2 curve if not a bit below, but that’s just me).

I suspect this pattern may be more due to under-reporting of migration early in the boom, thus oversupply was probably slower to build in actuality as the new construction stats are actuals whereas population/migration are estimates. Over the long term they’re adjusted to be correct, but in any given year they are prone to significant variance with what is actually experienced. But we have to go with what’s given, so I digress.

For arguments sake, lets say it’s in the 10-15,000 range. Which is a significant degree to be overbuilt, even with starts slowing it’s worth nothing that when this data cut off there were still another 11,400 units under construction.

Figuring that all in and the ratio of persons per household and that’s a couple years worth population growth even with zero subsequent starts, maybe even more as migration is slowing. It will take time to absorb all these new units, and it’s going to be a drag on the market.

Of course all that is assuming my little SWAG has any validity whatsoever… which I’m not sure I’d quite extend it, but I think it’s fair to declare it a good discussion piece at least.

Asking Prices New Construction

Warranty? What Warranty?

Over the last month there has been a great many stories appearing about the effects of shoddy construction practises here in Alberta… particularly concerning stucco exteriors with faulty membranes.

A quick googling turns up this and much more:

No bailouts over faulty condos: gov’t

Faulty new homes not widespread, builders say

Thousands of Alberta homes could rot, experts say

No tally kept on rotting buildings

Membrane, not stucco, is the problem

Shoddy workmanship blamed for leaky homes

Dream home a nightmare of problems

Edmonton condo owners face $8M bill for repairs

This is some scary stuff, people are getting hit with some massive bills for repair. In that last story a woman who paid 150K for her condo 5 years ago, is now being hit for a 45K repair bill. There aren’t too many young adults who can swallow that kind of hit to the wallet easily.

Hell, it can even knock the established for a loop, one of the stories talks about a couple nearing retirement now forced to take out a second mortgage just to cover repairs to their home.

Seeing we’ve been talking about asking prices, I thought it would be interesting to see if we could find any listings from the complexes mentioned in the above articles. In this article they were talking about a building on 102 Ave and 120 St, which is now faced with about 450K in repair costs for the 29 unit building. There are a couple… a 1000 sqft unit for 270K, and a 1055 sqft on for 300K.

Then in another article from just this week, we hear about a 200 unit building that is now faced with an 8 million dollar price tag to repair mold and rot damage in their six year old building. Couldn’t discern from that article where it was, but Global TV did a little piece on it last night, and from that I figured out it was at 104 Ave and 122 St. Just a few block from the other building.

Since in the piece they talked about the developer, Tessco, I took a look at their site… and yup, there it was, Glenora Gates. Also found six listings on MLS from the building, (onetwothreefourfivesix). Ranging from a 770 sqft unit for 200K, to a 1137 sqft unit for 290K.

It would be interesting to hear how forthcoming the real estate agents are with the information about the damage and cost of repair. Or if perspective buyers will be left to find out about it in the condo board minutes… cause, there is nary a mention of any such deficiencies on their listings.

Obviously one must feel for those who currently own, and are now faced with these huge repair bills for problems that should have never been. Many will now be faced with taking a second mortgage, or forced to sell (likely at a significant discount to boot).

Going forward, for those looking to buy, whether new or old, be sure to do your homework… and if you see any building with a stucco exterior, condo or otherwise, be asking even more questions and don’t stop until you get answers. All those people talking up a property will want nothing to do with you once problems arise… and as we’ve been seeing, new homes are no exception as the new home warranty program has been exposed as no help whatsoever to these people.

New Construction

New Home Prices

What’s happenin’ negazots?! It’s been a rather dreary day here in the Alberta capital, so I figured I’d do a quick post on new home prices to fill the time.

I’ve gotten several requests to do this, but I’ve never been able to find real great historical data on it… still haven’t, but the CMHC Housing Now reports have been including single detached prices going back to mid-05, so that’s better then nothing.

This is through February, they release their March numbers on Thursday, so you can keep an eye out for that should you be interested in such things.

Here we have a graph of new single detached median prices, city proper and metro, as well as resale SFH median for comparative purposes. As we can see, city and metro prices tend to track quite closely.

A few interesting observations when comparing new with resale prices. The big one is how new prices have continued to climb the last year and a half while resale have been going down.

One would suspect some lag, as new sales tend to be largely bought on spec, often the transaction occurs several months before completion. Whereas resale tends to have relatively shorter possession periods. But lag doesn’t account for the difference in this case.

We should note in late 2005, when prices were still fairly stable that new prices were about 20-25% greater then resale (I’d hypothesis that this was likely due to our propensity to build bigger and bigger homes over time, so was likely rooted in new homes having more square-footage)… thus one would expect this to remain, but we can see during the run-up that new and resale prices were about even.

I suspect this was the result of the aforementioned lag effect. As when resale prices settled down and plateaued in that $375K territory, new values eventually also plateaued around $450K.

That of course makes it all the more perplexing that when resale prices started falling last summer, new prices started going up. Really quite interesting, though they seem to have again leveled off.

Further puzzling as sales tallies have fallen off over the same period, like resale, the totals have been really quite poor for the last two quarters, and unabsorbed inventory keeps climbing. Not exactly a recipe for price escalation.

Though, as we’ve been hearing increasingly, it does sound like builders are starting to aggressively slash prices in the last month or two (which wouldn’t be apparent in the above graphs as those figures only go through February). As of February new prices were 50-60%, which is obviously a whole lot more then the 20-25% pre-boom levels.

It’ll be interesting to see over the next few months if that ratio starts to get any closer. If the rumblings of price slashes are true, it could happen quite rapidly as they attempt to clear out inventory.

New Construction

New Construction

Thought I’d take a quick look at the new construction stats for Edmonton today, as CMHC released their latest report last Friday. Lots of good stuff in there, but I’m only going to look at a handful of numbers from Table I… starts, unabsorbed units and under construction units to be exact.

Here is how those graph out over the last few years…

There has been a lot of talk recently about the drop in housing starts in the city, and rightly so as they are at the lowest levels experienced in at least seven years, and only about 1/3 to 1/2 of what they usually are. Starts were cooling throughout ’08, and it appears that will continue well into, if not right through ’09.

The number of unabsorbed units are also growing, but are well within historical norms. What may be a bit alarming is the number of units still in process. While the number of under construction units have fallen drastically since peaking in late ’07, they are still above pre-boom levels… there is obviously no shortage of housing already available in the city already, so with 11,409 still coming down the pipe, the glut is only going to grow.

While we should expect to see unabsorbed inventory continue to climb, I expect a great many of these units were already bought on spec, so with the obvious downturn it’ll be interesting to see how many people start walking out on their deposits, as has began to happen in Vancouver.

I also would not be surprised to see the dilemma of “accidental landlords” become something of an epidemic… as there is already a great deal of vacant listings on MLS coupled with the very low resale levels, a lot of these owners will be stuck with either renting them out of going through foreclosure.

Beyond the housing situation, one has to expect the layoffs in construction to keep on coming, as more and more projects are finishing, new starts are no longer keeping up. Good news for homeowners looking to get small jobs done though, should be no problem finding someone to do those jobs now, unlike a year ago when you couldn’t even get someone to return your calls.