Edmonton Housing Bust

Over the last week or so we’ve been hearing about a glut of completed but unabsorbed units forming on the new construction front. It’s also been awhile since I touched on such things, so figured now is as good a time as any for an update.

Most of the hysteria is Toronto-centric… and rightly so, as their new construction inventory has almost doubled from a year ago, and that build up is almost the exclusive domain of apartment/row units, which inventories have more than tripled in the last year. We’ve also seen similar, but not as steep climbs in Vancouver and Calgary.

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So what about Edmonton? Well I’m glad you asked, even if you didn’t. Edmonton actually hasn’t had much change year-over-year, though that isn’t exactly cause for celebration, cause it was really bad last year. We just haven’t gotten worse. To put it another way, even with Calgary’s year-over-year worsening, we still have over 25% more inventory in the system.

Taking a look at the graph we can see how we got here. While our overall total hasn’t changed a lot going back two years, the composition of it has changed drastically. Before last years mini-boom we had a large glut of freehold units (mostly single-family-homes) remaining unsold… those got cleaned out with the high sales the city experienced.

But… condo’s didn’t sell quite as well, and with their longer construction cycle, continued to hit the market fast than they could be sold, and largely offset the freehold drop.

Unfortunately I don’t have data going back beyond 2006, so it’s hard to say exactly what “normal” levels are, but we do appear to be in the ballpark for what we were experiencing in early ’06, just before things started to get ridiculous… so our current levels may not be so bad, at least as far as the developers are concerned.

That is of course to bear in mind that these figures only pertain to brand new construction, and has nothing to do with the resale market. The market as a whole does not appear nearly as healthy, but it seems that for the most part the ones holding the bag now are the first-time-buyer/speculator.

That shouldn’t come as a big surprise though, as I suggested last year when sales started to take off that it was essentially a “Get out of jail free” card for builders, cause it allowed them to clear out a whole lot of established and under construction inventory that they otherwise would have had to hold… and until that was cleared out, we were unlikely to see any more building sprees. As the binge only lasted about a year, it was very much a boon to the developers and allowed them to regulate their inventory levels.

Decided to peel my ass off the sofa tonight and actually do something. I found my way over the Howe Street to see if they had any podcasts worth listening too. They didn’t, but I clicked on Mish’s latest to kill time. For those unfamiliar with him… you remember that kid back in junior high, kind of short, scrawny, who was relatively bright, but not nearly as smart as he thought, and always VERY obnoxious. The kind of kid that you didn’t necessarily condone people kicking his ass… but it didn’t necessarily disappoint you when it happened, and it was no mystery as to why it happened… except to him.

Well, Mish is that kid all grown up… and even when you agree with what he has to say, he still rubs you the wrong way. Anyway, he briefly touched on housing starts, and I figured I haven’t too a look at those in a while, so no time like the present. And yes, I do realize that was a very long segue that really went nowhere, but lets face it, you aren’t here cause I’m a good writer.

So, lets start with prices. That seems to be all anyone worries about anyway, and I also included the resale median just for comparative purposes. Seems we’ve had a lot of spikes in the last year, but the general trend has been down. This isn’t really a surprise, as because of the nature of the transactions new construction prices tend to lag the resale market, and for the most part the resale market largely only held after a brief spring increase. There was also a lot of excess inventory in their ranks, so it’s not a recipe for rapid price escalation even with the historically low interest rates.

Moving on… lets do sales. This is interesting. Obviously new construction sales are smoothed (again, by the nature of the transaction) compared to resale tallies, but even so, sales were very low all year. According to the resale numbers we were seeing record numbers for SFH sales, even exceeding those rung up during the boom (and yeah, that is terribly troubling going forward from a debt/macroeconomic sense, but is a subject for another day)… yet new sales hardly had a pulse. As we were going into the spring with very high levels of unsold inventory, this would seem to indicate that perhaps the interest rate induced binge didn’t do much to clear it out.

And this would seem to confirm that. Unabsorbed inventory appears to be somewhat range-bound in 1,500-1,750 territory. I’m a little surprised by this, I admit. I thought that the spring/summer would have been a god-send to the builders and allowed them to clear out a lot of the inventory… evidently, not so much.

Graph is a bit of a mess, I apologize. But I wanted to included starts, and completions just cause the former in particular gets a lot of hype. Starts kind of took off in the summer, but have slowed going into the fall. Some find them to be a good economic indicator, but I’m kind of luke warm to them. I think the under construction stat is probably a more valid indicator.

Speak of the devil. Whodathunkit? A segue that went somewhere! This is a look at the number of units under construction at any given time going back to 2003. As we can see, while low by historical measures, we’re still close to normal and have leveled off after a big drop. For those, like me, who think the city is significantly overbuilt, that leveling off is actually not a good thing as we need to flush out the excess inventory before we start building more units. On the bright side though, at least we don’t have 16,000 and change under construction any more… and for those in construction on the other hand, I’m sure it’s very welcome news though.

I think that is pretty good for today. Now I’m off to watch ice dance… a statement I never thought I would utter, and an act that I believe will also result in the revoking of my “Man Card.” Tak’er easy all!

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.

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.