Personal Finances - Edmonton Housing Bust

Category: Personal Finances

Thursday, April 8, 2010

Unpopular Opinion

Over the long weekend the old gang from my U of A days had a little get together at one of our old haunts. Back in the day we probably spent more time hanging out in that bar than we did in class… or in my case, several times over. As the years have passed and we’ve taken our respective journeys through life, careers, and families, our meetings have become fewer and farther between. It’s probably been three years now since we last got together like this.

But we came together to celebrate a return. Our one friend and his wife had spent the last few years out east attending med school, and having completed that found a position in Edmonton and was coming back! Exciting news, and a worthy reason to get together… the irony that the last such get together was something of a sending off for the same couple, was conveniently lost on us for the evening.

So the evening progressed as the conversation and alcohol flowed. I was happy to have him back, beyond just being a good guy, we had rather similar interests and we were the only two geeky enough to spend time discussing esoteric topics ranging from string theory to moral relativism. It’s nice to have someone to be pretentious with once in awhile. Our respective significant others find our discussions of such things tedious to the nth degree, so they peeled off to discuss items more to their liking.

Which was a great for all involved… until a little later in the evening when the doc-to-be’s wife mentioned they were in negotiations to buy a house, and my girlfriend, who has an unfortunate habit of talking in an elevated manner when she’s got a few drinks in her, loudly proclaims that, “Kevin think buying a house now is idiotic.”

Amazing how she never has any interest in discussing such things with me, and other than peaking over my shoulder now and again while I’m writing something, would never waste a moment of her time actually reading my stuff… but evidently she’s picked that much up, I guess what she lacks in tact she makes up for in osmosis.

Of course amongst young professionals real estate is a hot topic… and as if pissing in the poor woman’s cornflakes wasn’t enough, there were several other couples who had bought in recent years who were now also offended. I now not only looked like an asshole, but didn’t even have the satisfaction of actually delivering the blow oneself (which is really the only tangible benefit of looking like one). While I have no shame in the opinion I hold, I acknowledge in this case that mine is most often an unpopular one, so tend to only offer it when asked, and try to do with with a tad of diplomacy.

So as the eyes of the room, as if in slow motion, worked from my tipsy girlfriend, to the mouth agape recipient, and then finally of course to me… I was quickly trying to work out my strategy for a response. The pool tables were at the other end of the bar, so there was nothing to hide behind… the windows looked double paned, so jumping out those was out… and every one had seen me with the girlfriend many times before, so saying I’d never met that crazy bitch wasn’t an option either.

So I figured if I’m going to look like an asshole, I might as well look like a well-informed one… with the attention of the room squarely on me, I reeled off what I thought was an intelligent and succinct defence of my position. There was really no point going long winded, as even in this well educated bunch, you can see their eyes immediately glaze over when macroeconomics enters the discussion and no one that bought recently is going to magically convert. I already knew the response was going to be “but it’s different here” anyway.

So, I took a couple minutes and spoke my peace… and the immediate response was, of course, “but it’s different here”… and while I would have loved to debate them on each and every one of their contentions, I had already had more than my fill of being the centre of attention. I had already done as well on the damage control front as possible and engaging the mob further would only result in my being fitted for a tin foil hat. Sometimes less is more, as they say.

At this point most everyone went back to their earlier discussions fortunately, though as the evening progressed my seemingly unpopular opinion became a very popular topic of conversation. At some points there were as many as a dozen of us holding court discussing our thoughts on the matter… and I was pleasantly surprised to see a fair number agreed with me.

First it was a lawyer… though that didn’t really surprise me. When we lived in dorms together he was forever picking fights and taking the unpopular opinion if for no other reason than to play devils advocate. He just loved to be a shit disturber, so obviously he made an inspired career choice. Whether he legitimately agreed with me or not I’ll never know, he just likes a fight.

Then a bank analyst and financial advisor chimed in and said they agreed entirely, and started ranting about debt and fiscal irresponsibility. They told some eye-popping stories about what their clients have been doing to buy homes and just in general, and that there was no talking those people out of it. Talking about macro tends and the big picture like we do here is scary enough, but it really hits home hearing the stories of individuals making reckless mistakes… and they just kept coming and coming. It was terrifying.

Eventually I got back talking to the returning doc-to-be, and we were both rather sheepish. Before the whole brouhaha he had actually mentioned that he was buying a home, and I had congratulated him and asked him all about it without exposing my true thoughts on his decision… as it really isn’t my business how he spends his money, and he was very exciting about it all and I have no interest in being a killjoy. He’s a friend, and if he’s happy, I’m happy for him.

And frankly this guy was about to become a doctor, so money shouldn’t be an issue going forward… and even if it wasn’t, that couple had been living out of her fathers pocket since they got married as undergrads almost a decade ago, so they aren’t even playing with their own money anyway.

Fortunately that is information I have not shared with the girlfriend, as even though it’s well known within the circle and subject of plenty of snicker behind of backs… there are certain things that just don’t need to be drunkenly blurted in public.

12 comments

Tuesday, March 23, 2010

Chequing line

Filed Under: Personal Finances

Gonna do something a little different today… this time I’m looking for your input.

Basically, I’m looking to set up a new chequing account. I’m currently with BMO, and nothing against them, I’ve never had any trouble with them… actually, the only time I’ve had trouble it was with another outfit, and BMO came to the rescue, really went to the wall for me and got it straightened out.

So, I’m appreciative and will keep my other business with them… but I don’t like getting dinged $14 a month for having a chequing account just cause I don’t leave three grand in there to do nothing. Granted, I probably waste several times that any given month on other crap, but it’s a matter of principle.

It’s been a while since I went looking to set up new chequing account… actually the aforementioned one was the first, and there was no shopping involved in that one. I was moving into residence to start at the U of A, and BMO was right across the street from Lister Hall (4K steals all!)… and as it turned out, even more conveniently, within a mere meters of Dukes and Windsors, a crawl I will confess to have made one more than a couple occasions.

Anyway, as my abilities to take advantage of free student banking have long since expired, I figured it was time to finally break the chains and see what is out there… and as far as the brink and mortar bunch are concerned, there doesn’t appear to be much. They all either want you to keep thousands of dollars sitting there doing nothing, or will nail you for $10-15 a month.

The only real option out there seems to be PC Financial. Their offering looks pretty good though. Unlimited transactions, online banking, bill payments, chequing services, and you can use the CIBC ATM network.. all for free. So the price is right.

The drawback is that if you have an issue you can’t get it addressed in person, but it must be done over the phone or online… and from what I’ve read their customer service leaves much to be desired. But I’m fairly low maintenance in that regard, and thus quite intrigued.

So, long story slightly longer, I’m looking for some of your experiences/advice. Have you banked with PCF? If so, how was it? Know of any other similar offerings out there? Got a cousin that could hook me up? Anything else to add?

16 comments

Wednesday, March 17, 2010

Weekly mortgage payments… don’t believe the hype

Filed Under: Mortgages, Personal Finances

You guys may recall a year ago I did a little piece on accelerated mortgages, and said weekly/bi-weekly payment schedules were grossly overrated. They will save you a tiny bit of money (emphasis on the word “tiny”), but are not the be-all-end-all that they are made out to be, and nothing that can’t be accomplished with monthly payments. It seems Garth Turner feels otherwise, and inevitably every time he tells people in his blog that they should go to weekly payments, I get deluged with e-mails asking why King Garth says one thing, and I say another.

To which I say, just cause he can work a keyboard, doesn’t mean he can work a calculator.

Admittedly, in my first piece I did make a small error in my calculations, as someone pointed out that I did not compound “half-yearly not in advance” as is custom on mortgages (at least fixed-rate ones anyway). The difference is very small, and really not material to the conclusion… but it is worth revisiting just for the sake of clarity and cause we’ve probably got a lot or readers that weren’t with us a year ago.

So lets say you’re mortgaging $300,000, at 5%, over 25 years. If you want to pay that off weekly, it would cost you $402.01 per payment, 52 payments per year, for a grand total of… drum roll please…. $20,904.52. If instead you went monthly, it would cost $1,744.81 per payment, 12 payments a year… for a total of $20,937.72.

So, going weekly rather than monthly, you would save a grand total of $33.20 a year… or $2.77 a month.

Yeah, that little. And if you don’t believe me, just do the math yourself on how much interest $402 would earn in a week… at 5%, it’s about 39 cents…. multiply that by six (total of three payments, one held for three weeks, one for two weeks, and one for one week, 3+2+1=6), so you have $2.34… and the difference between that and $2.77 is a rounding error due to the average month being longer than 28 days.

Then if you figured in the pittance in interest your bank pays you in interest on your balance that would be lost, it’s even a little less… and if you have a shitty account plan, it may not even cover the added transaction costs incurred with the 40 extra annual transactions… and that’s not even mentioning the time and headaches associated with timing issues that could arise when there are five payments due in a month, etc.

So, as I’ve said, before you get talked into going to a weekly or bi-weekly payment schedule that any “acceleration” is due to the amount paid to the bank in a year, not the frequency of payments (as you are led to believe). Anything that can be accomplished with weekly payments, can just as easily be done with monthly payments. How often you pay makes virtually no difference… how much you pay on the other hand, makes all a HUGE difference

That said, if you typically carry a decent balance and don’t get hit up for transaction fees, by all means, go weekly. It’ll save you a couple bucks every month… save it up and at the end of the year you can buy yourself a case of beer and celebrate having knocked another year off your mortgage.

But if you want to pay off your mortgage quicker, there is only one trick, and that’s paying more in and decreasing your principle… you can cut them 365 cheques a year and it won’t pay it off any quicker… no matter what Garth says.

14 comments

Thursday, January 7, 2010

The Perfect Storm

Filed Under: Alberta, Canada, Historical Prices, Mortgages, Personal Finances, United States

Greetings all! We’re going to do something a little different today, and that’s very interesting… or at least I think it’s interesting. I’m going to take a look at the changes the CMHC made, how it affected lending and even touch on why what happened here wasn’t all that different than what happened in the US. I was meaning to get this done a bit faster, but turns out it’s a little more time consuming than I thought it would be, ’tis complicated stuff.

Before we start, I compiled this little graph as something of an all-in-one backgrounder for this post. The contents are nothing that hasn’t been discussed ad nauseam already on this blog. This is just so you can consult for reference. So here that is.

This is all concerning Edmonton. We have median household incomes, median single-family-home prices and average 5-year fixed rate mortgage interest rate. Incomes and home prices are inflation adjusted, and are in 2007 dollars. Why 2007? Well, that’s what the data set came in for incomes, and to compile the final graph I could not adjust it… and frankly it’s close enough to today’s dollars, All figures in this post are in 2007 dollars.

Enough of that, on to the good stuff. This is a graph documenting the changes in CMHC lending standards, and it’s effect on how much money a person could qualify for. These percentages hold true whether you make $1/year or $1,000,000/year, so income level have no effect on this measure.

We set our base effect (0%) as the maximum amount one could qualify for going into 2006 when amortizations were limited to 25 years. We’re using 6% as a steady interest rate through the entire period. We know in reality they float, but for theoretical and practical purposes we’ll use 6%, and as we could see in the first graph interest rates were generally right around 6% from ’03 through early ’09 (and are likely to return there once the “emergency rates” expire).

For example a person, lets call him Dave, is making $60,000 a year, could qualify for about $250,000 in financing assuming he has no debts in January of 2006 or any time early. Just for example purposes, and to use a nice round number.

In March ’06 we saw the first mandated change, and that was extending amortizations to 30 years. That change allows Dave to qualify for ~7.5% or ~$18,500 more than he did before. They also dropped the need for a 5% downpayment, unfortunately the effects of that can’t really be quantified. We’ll discuss it’s grander effects a bit later, but for our purposes here we just kind of ignore it.

So we jump ahead a few months to June. Here Harper and Co. really open the flood gates. Sure they again extend amortizations another 5 years, now to 35… but the real coup de gras was insuring interest-only mortgages. That one blew the doors right off.

Here I split the line just so we can see the effects of the amortization extensions (green line), as other wise they would be lost in the effect of interest-only payments. The move to 35 year ams would have allowed Dave to borrow another ~5.5% above and beyond. So he could now borrow 13% or $32,500 more than he could five months earlier.

We follow that green line a little further, and in November the feds started insuring 40 year amortizations. That allows Dave to borrow another 4.1% (notice the diminishing returns on the 5 year extensions?), and that’s 17.1% more than he could borrow less than a year prior. For a guy making $60,000/year, that’s another $42,750 in financing he could qualify for. No small increase.

Of course that’s nothing compared to what the interest-only option offers. That route offered 28.9% more financing (or about $72,000 for Dave). Now we consider that this financing wasn’t just available to Dave, but to everyone in Canada.

We recall that real estate in Edmonton (and Alberta as a whole) was pretty hot in ’05. It was the talk of the town, everything was selling and the economy was cooking… then we hit ’06 the feds take an axe to lending standards, and over the first six months all these hormonal consumers find themselves with greatly increasing levels of available financing.

Now go back to the first graph, and notice that is right when real estate prices start going vertical. It’s not a coincidence. Real estate was on hot, but a controlled burn and sustainable… but all this suddenly available financing just threw gas on it… and at this point it just became a perfect storm.

Obviously when available financing increases in a big way… so does the pool of potential buyers. I apologize that you need to use your imagination a little with this graph. The incomes breakdowns are only available on an annual basis, so gains made over the year really cannot be represented other than those jumps. Really we’re only focusing on 2006 though, the rest are just there for reference sake.

This is a graph of the percentage of households that can qualify for $200,000 of financing at 6% interest (again, assuming no other debts). Up until ’05 it was steadily around 57% of households as incomes were stable. Then in ’06, incomes jumped an impressive 8.5% ($4800) YoY… this yield a 3.8% improvement in households that qualify. It’s important to note that relationship. If we follow the blue line further (it’s conditions are held constant with 25yr ams) we could see another 4.2% ($2600) YoY improvement in incomes in ’07, yielding a 3% improvement in qualifications.

Now we compare that to the effects changes in lending standards had on qualifications. Extending amortizations to 30 years increased qualifications by about 2.6%… 35 years was another 2.4%… and finally 40 years was another 1.5%. So if amortizations were merely lengthened from 25 year to 40 years it would have increased qualifying households by 6.5% in total. In Edmonton that represents about 32,000 households, which is by itself a VERY big one year increase in potential demand.

But again, like the prior measure, it was the interest-only option that blew the doors off. That option rocketed up the qualifying population to 74.4%, an increase of 14.1% over what it was just five months prior, and representing an influx of roughly 69,000 households that wouldn’t have otherwise qualified for that much financing.

Obviously that figures is theoretical, as credit scores would disqualify several, most already own, some aren’t looking, etc etc. So, you can just throw out that 69,000 figure. But assuming standard distribution the percentages should be fairly accurate over what had previously been available… in fact, if anything they’re understated.

You see, typically the required downpayment would be a limiting factor to buying. So, even if one could qualify for sufficient financing to purchase, they still needed to have a downpayment and this kept many potential first time buyers from buying… but one of the first lending requirements stripped was effectively removing the need for downpayments by allowing them to be borrowed. This not only further opened the door, but opened it to much riskier borrowers, ones without a established savings and those without skin in the game.

Obviously that effect can’t be easily quantified, but it was just one more control eliminated that allowed the housing market to bubble out of control. People no longer needed to plan or save to earn the right to buy… they could just pop down to the bank, piggyback a couple loans and have themselves a house. Hell, they didn’t even have to be able to cover closing costs.

That’s why those that argue that the mere absence of widespread “subprime” loans means we’re not in a bubble like the US is missing the forest for the trees. Look at their overall effect… they allowed people to a) borrow more money than they would otherwise have, and b) allowed more people to borrow money. So maybe we didn’t have as many “subprime” loans… instead we just kept lowering the bar for prime until it had the same effect.

They had an influx of new demand, and with it an expanding pool of available financing (of which lowering interest rates only further expanded)… that will heat up real estate markets, and then it just becomes a vicious cycle and feeds itself until all fundamentals have been so far bypassed the only thing supporting the market is it’s own momentum… and when that runs out, Wile E. Coyote meets gravity.

That’s not to say the effect of these new loans, or “innovations” should be ignored, their entrance into the market will certainly an increase in prices and new equilibrium… the problem is they also often cause overheating of the market and drastic overshooting of the that new equilibrium (remember these innovations also come with increased risk).

For example, in Edmonton prior to the boom typically 60% of households could finance and amount equal to the median home value in the, city and that number was steady for many years… at the peak even using the most exotic financing arrangements, only 39% could. If you limited to the loosest of what is offered today after the feds tightened standards that would drop to 36%. A very big shift, and unsustainable.

Today with “emergency” interest rates and prices having fallen from the peak and figuring in continued income growth the median home can currently be financed by about 50% of households. Better than it was, but still a ways to go before getting back to 60%… and interest rates shoot up much (even back to historical norms) it would take a great big bite out of that improvement (not to mention if amortizations get shortened to 30 years or tighten up downpayment rules).

The exact causes here may have varied between nations in name, but the effects were all the same. One must focus on the big picture and not tiny details. The lending bar was lowered… the amount of available credit exploded… demand explodes… supply is pinched short term… prices start rising… and the bubble becomes self feeding. Then add to that our human behavioural economics… mob mentality, speculation, irrational exuberance, etc, and it’s a lethal brew.

About the only thing that actually is different here is we don’t have to worry about our entire financial system collapsing as a result of the housing bubble popping… you see, the taxpayers have been on the hook for this one all along. Lucky us!

15 comments

Tuesday, December 1, 2009

Personal Saving Rates

Filed Under: Canada, Macroeconomics, Personal Finances, United States

Greetings all, let me be the first to welcome you to December! Most of the country has likely recovered by now from the Grand National Drunk and all the football type festivities… except maybe in Saskatchewan, where they are probably still drinking to forget, as images of orange flags and the words “Too Many Men” join images of Tony Gabriel in forever haunting the wheaties!

13th man indeed! Mua ha ha… schadenfreud is such sweet splendor!

Figured I’d knock out a quick and dirty entry tonight. Cause, well, what can I say, I like my bloggin’ like I like my ladies. Yeah, alright, that was low hanging… but what do you want? It’s late and I’m tired. Anyway, enough of that, lets get down to business and take a quick look at personal saving rates.

Statcan released their latest GDP and economic accounts data today, or I guess technically yesterday. Regardless, GDP gets most of the press, but one of the figures that also gets some attention is the personal saving rate.

We’ve heard a lot about how Canadians are more prudent, ipso facto, better savers then our neighbours to the south, so I also dug up some numbers from the U.S. Department of Commerce/Bureau of Economic Analysis and thought I’d do a comparison between our fine nations.

From a quick look at the graph it would seem that distinction was very much valid from the mid-70′s to the mid-90′s, but not so much since. In fact, for the last twelve years or so, we’ve been eerily similar… bouncing around the 3% mark on average, hovering around all time lows.

The Canadian rate had never dipped below 5% until 1997, but since 1999 our times above it have been few and far between. The U.S. being in much the same boat. Seems that as interest rates have been steadily declining, people have been increasing their spending on both sides of the 49th. Conversely, in the period of rising interest rates (up to 1982) people saved more and more as rates climbed in Canada, while in the U.S. they kind of plateaued around 10%.

What’s it all mean? It’s hard to say exactly. But before we feel too cavalier about our position in the financial world, we should realize as far as that goes we’re just resting on our laurels and in fact have left ourselves just as exposed to potential credit problems as they have in the United States… particularly the younger generation(s).

10 comments

Saturday, October 17, 2009

Interest rates and defaults

Filed Under: Alberta, Canada, Foreclosures, Personal Finances

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.

9 comments

Monday, October 12, 2009

Bankruptcies

Filed Under: 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.

5 comments

Friday, October 9, 2009

Consumer debt

Filed Under: Canada, Macroeconomics, Personal Finances

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.

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Tuesday, August 11, 2009

A Contemporary Story – The Sorta Happy Ending

Filed Under: Personal Finances

Those you that have been following the blog for awhile, or have browsed the archives, you may have came across my musings on a couple friends of mine (original story, and the update).

Long story short, they bought a spec townhouse in mid 2006 for $200,000. Last October they decided they would be moving to Calgary post-haste and put their place up for sale at $285,000 figuring it would sell in a heartbeat (especially since a year or so earlier their neighbours units were selling for $350-400K). They also put in an offer on a house in Calgary that same week.

Didn’t quite work out that way for them, and after several price cuts and relistings they were still holding it in March and asking price was then sitting at $260,000. Their offer was accepted for the house in Calgary, but fortunately for them the financing requirement saved them as they couldn’t sell and thus the deal fell through. Which takes us to the end of the update I did on them.

The spring continued much the same, no action, and more cuts to the asking price… continued into the summer even. Finally in July they cut it down to $240,000 and it sold two weeks later for $230,000. Everything was finalized last week and they are now free and clear.

They are happy to have it over with, but as needless to say, are licking their wounds after not only getting $50,000 less then they thought they would, but going out of pocket for carrying a vacant property for almost 10 months, then there was the payout penalty.

Frankly they should be grateful interest rates plummeted and goosed the market, or they’d probably still wouldn’t have sold and would be continuing their magic carpet ride to the bottom and negative equity. Fortunately they’re out though, and on the surface ignoring what prices did during the boom, holding a property for three years and selling it for 15% more then you paid is really quite good. Could have been a lot worse.

Of course then you have to figure in all those other costs. The realtor commission takes a big $10,900 bite out first and foremost. Then they get hit with a $9,000 payout penalty because there were still over two years left on their mortgage term.

This should serve as a lesson for all those potential first-time buyers out there who only plan on living in the place for a couple years before trading up… know what you’re getting into and be aware of the penalties for entering into a closed mortage. That lower rate comes with some steep penalties if you don’t play your cards right. These two knew all along they weren’t planning on living there the entire five years, but chased the lowest monthly payment they could get, and it bit them in the ass in a big way.

So, now that 15% windfall only resulted in 5% actually realized. Not quite as impressive.

Of course in their situation, since they immediately moved upon listing, over the ten months they also ate roughly another $13,000 in carrying costs (mortgage interest, strata fees, basic utilities). Which would technically put them in the red, but because of the way they did it you have to figure in even best case they were going to have to carry it for a couple months… so, we’ll say they broke even on the venture.

Not quite the cash cow they envisioned when they listed it ten months ago. The ultimate irony being that is they had listed it agressively in the first place they probably could have sold it right away for $240,000-$250,000 before the market further slid, saved a bunch of carrying costs (though would have suffered a bigger payout penalty), and actually cleared some profit… but the idea of getting their price was too much for them at the time, and they ended up worse off for it.

They’re currently renting down South, but have just signed on to get a custom house built. At least this time they waited to actually sell before committing, and this place they intend to stay in for the foreseeable future. They learned some expensive lessons the hard way, but were fortunate that it came out of unrealized gains and didn’t ruin them.

Those that bought those townhomes at the height of the boom when they were going for $350,000-$400,000 on the otherhand… they’re proper fucked.

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Thursday, April 9, 2009

Be careful what you wish for

Filed Under: Personal Finances

Of late we seem to be hearing increasingly from people predicting runaway inflation… sometimes almost cheerleading for it. For those who bought at the height of the bubble, this may seem on the surface to be an attractive viewpoint as it could quickly erase the downturn in prices.

I’m not really sure anyone that bought at the top should be quick to embrace heavy inflation though… because there is a nasty flip side to it, and that is interest rates. No matter how high inflation goes, interest rates go higher.

Over the last couple decades, it seems all the rage for fiscal policies to be fighting inflation, keeping it in the 1-2% range whenever possible… as a result mortgage rates have dropped from the double digits down to the 5-8% range for much of the last decade or so.

One must only go back to days of more moderate inflation like the mid-80′s when inflation was around 4% YOY, and interest rates were regularly 11-12%. Even just a return to moderate inflation could spell disaster for many of those first-time buyers who entered during the boom.

The problem lies in that so many people extended themselves to the max to finance these places, and “get in before they were priced out.” To them rates going up a couple points could be too great a cost, much less if they doubled.

Even with the gains in salary that comes with inflation, the interest costs at renewal would be too much. To give you an example, lets say a couple bought a SFH in ’07, and financed $400,000 (which depending on the month might only get you the median home in Edmonton FWIW). 5-year fixed mortgage rates at the time were around 6%, and while they didn’t have a downpayment, at least they were smart enough to do it with 25 year amortization. Their monthly payments would be $2,577, and like many others, they borrowed to the max of what they qualified for, and could afford.

So they’re set through 2012. Lets say that by then inflation has went up to 4% (which historically is quite moderate if not low), but with it interest rates have also shot up to 12%. Now their mortgage is up for renewal, and lets assume the bank is willing to do business with them.

If they want to have their home paid off as planned, their payments will go to $3,960 a month… a 54% increase over what they were paying before. Even with inflation increasing salaries and a raise or two along the way, many wouldn’t be able to swing that.

Even doing a complete refinance and taking the maximum term of 35 years, rather then the 20 they had left, they would still have to pay at least $3,600 a month. More than a thousand a month more then before.

Gawd forbid they were amoung the 67% of first time buyers at the time that had a 40 year amortization. Those poor souls would see their payments jump from $2,200, to $3,920 a month, and they wouldn’t even be able to stretch out the term any longer. They’d also still owe $386,000 on the house.

Ultimately for all the good inflation would do to incomes to increase buying power, interest rates would more then offset that and would actually cause prices to further decline in the short term. At 12%, for the median house to be affordable at $400,000, the median household income would have to be over $160,000 a year… as of 2006 the median household income in Edmonton was $63,000.

At the end of the day, inflation or no inflation, the average household has to be able to afford the average home… otherwise who will buy it? It’s basic supply and demand. Prices may break from affordability from time to time, as we’ve seen, but eventually they will return. They must.

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