United States - Edmonton Housing Bust

Category: United States

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

Monday, January 4, 2010

Bailout Nation

Filed Under: United States

Welcome back! We’re just going to do a quick post tonight, cause the December resale numbers should be out in the next two days and I have a neat little analysis on tap for later in the week. Hope everyone has recovered from all the merriment and revelry of the holidays. Things were good in the EHB household… though I do suspect that some of Santa’s elves broke in here and systematically shrunk all my pants in the last week or so. Not that I have any proof, but that’s the only explanation I can think of for them to suddenly be more snug than usual.

As I’ve gotten older I’ve noticed that my list of people I need to buy for keeps growing, all the while my list of things I want keeps getting shorter. This year it was just a couple books, couple movies.. but chiefly Megan Fox complete with a pool full of chocolate pudding. Admittedly there may have been some practical limitations on that last one, and judging from the dirty look the girlfriend flashed me after giving her the list, possible some issues above and beyond those.

Regardless, the good sport that she is, she came through with the books. I was particularly excited about the Barry Ritholtz tome about the financial crisis, ‘Bailout Nation‘. Those who have explored my “recommended reading” blogroll would have noticed the link to his blog ‘The Big Picture‘… and my tweets are also continually directing people to his entries. Anyone who likes this blog would surely enjoy his. Tons of stats, analysis, macroeconomic discussion, clever, practical, and a vastly better writer than yours truly.

I could hardly put the book down, tore threw it about a day and a half. It was fascinating, and a great play-by-play for all the who’s, what’s, where’s, when’s and why’s of the financial crisis. A big part of that being the housing bubble in the U.S., which he discusses at length.

Which while we find ourselves in a different boat here in Canada insofar as the impact a housing bust would have on our financial sector (the taxpayers are already on the hook here should boom go bust… whereas in the U.S. it was the instrument holders holding the bag, at least initially before the government bailed them out to a large extent), the housing sector itself appear very much in the same boat. Prices suddenly and severely got out of line with everyone from income and market rents right up to GDP (speaking of which there is a fascinating look at the housing booms effect on GDP growth, something I’m going to try to replicate for Canada).

If you find yourself wandering through a bookstore and have a few minutes, I suggest picking up a copy (it would be in the finance and/or investing section) and read through Chapter 21 – The Virtues of Foreclosure. It’s only ten pages, and at least two of those are graphs, so it’s not heavy reading. You’ll notice he hits many of the same points I’ve been hammering on here, only far more eloquently and succinctly. In fact, I’ll probably be stealing and paraphrasing much of it in the future.

In conclusion, it’s a great and very informative read for any of your arm-chair economists out there, or just anyone interested in finance. Like I said, it’s an easy read, he’s got a very pragmatic viewpoint, writes in a conversational style and the chapters are relatively short so you just fly through it. And no I’m not getting paid for all this gushing, I just think that for anyone that enjoys my blog here it’s something should read and would enjoy.

4 comments

Tuesday, December 8, 2009

Big in Japan II: Electric Boogaloo

Filed Under: Canada, HPI, Japan, United States

Greetings brothers from other mothers. Today we’re going to do a big of a supplement/appendix to Saturday’s post on Japan… this time around we’ll do some comparing and contrasting of their HPI with ours, as well as the Case-Shiller index from the States.

Here they are charted out without any adjustments. Kind of a mess, we have different index points, some peaking before the index point, others after, yadda yadda yadda, ~~I’m really tired today~~ it’s a mess. So, lets do some adjustments and see how it looks then.

Alright, since we’re obviously concerned with “bubbles”, lets find the respective peaks and count back six years. Why six years, well, it would have been ten, but the Canadian data doesn’t go back that far, nor does the U.S. Composite 20… so basically I went back as far as the shortest data set allowed.

We can see by far the biggest bubble was in the Japanese major city index, followed by the U.S. composite 10, then U.S. composite 20, the Canadian composite 6, and then finally the Japanese nationwide. Interesting to note that Japan bookends the high and low ends. Also since their asset bubble was back in ’91 they have the long tail.

So, as far as the Canadian figure goes our bubble is bigger then Japan’s (as a whole), but well below the U.S. bubble. It is worth noting the Canadian cities peaking has been a little more spaced out then our American counterparts, and in light of the recent national flurry we’re in all likelihood going to set a new peak as the fall numbers become available… so the Canadian curve would thus need to be reset in that event.

In any case, it’s unlikely the Canadian peak will get anywhere near the U.S. figures… unless we just go completely off the rails for another year or more (particularly Toronto). After the last eight months though, never say never, but it would take a whole lot to pull us up to that level.

These are the respective decline from peak figures. Again, Japan’s extends far beyond everyone else. Interestingly, we can see the two U.S. composites have declined at eerily similar patterns despite having varied peaks as we noted in the prior graph.

We can also see that the current ultra-low interest rate environment has not just spurred prices in Canada, but also the U.S. as their curves too have suddenly made a stark move up. Difference being that south of the border they’re still down 30% from peak even after this upswing… whereas in Canada we were still early in our decline, thus much of those losses have been erased and we’re now approaching a new high (which would reset this graph).

National numbers only do you so much good as real estate is more a local creature and can vary widely from region to region. So lets take a look at some city numbers. As I mentioned in the prior article, I have been unable to obtain any city specific numbers for Japan, but we’ll compare some major cities in North America to what happened to the Japan major city composite. At least that will give us a general idea.

For Canada I picked Calgary, Vancouver and Toronto as they are our most hotly discussed real estate markets. To make them easier to pick out, I made them the dashed lines. For the U.S. I selected Miami, Phoenix and Seattle. Miami having the biggest bubble (as per Case-Shiller), Phoenix was about 7th out of the 20 but much discussed, and Seattle was about in the middle of the pack.

We see here the Miami curve is actually quite close to the Japanese major market composite. Down a little, we see Calgary close to Phoenix, with Vancouver not far behind. Down a little more we have Seattle, then finally Toronto’s curve looking downright flat compared to the others.

Unfortunately for us in Edmonton we aren’t included in the Canadian HPI. But if we want to get an idea of where we might be on this scale lets start by comparing Calgary resale stats from this period with their HPI… indexing Calgary’s various resale averages/medians using the same method (index point six years prior to peak) we find peaks in the 225-to-240 range. Knowing their HPI topped out at 226, seems we’re right in the range, near the low end.

Now looking at Edmonton’s resale averages/medians, we come out with peaks in the 260-to-280 range… the low end of which would put us right up at the top with Miami. The same relationship between resale and HPI holds for both Vancouver and Toronto as well. So, take that for what it’s worth, but it would suggest that the bubble we experienced in Edmonton could very well be right up there with the worst in the United States.

Japan/Canada/U.S.A. - Decline From Peak - Cities

Finally here is the decline from peak for all the cities (the Japanese one is cut off in this and the prior graph, but the full plot is available in the earlier graphs). Pretty serious stuff in Phoenix and Miami, with 54.5% and 48.5% respective declines from peak. Even Seattle which had a much more moderate bubble has fallen over 20%, well beyond the classification for a “bust.”

We can certainly see the effects of the interest rate plunge on both sides of the border (except it seems in Seattle). Even in the U.S. markets where residential real estate had been written off for dead prices have jumped significantly in recent month. It’ll be interesting to see how the next couple years play out, as rates stay low for now and what will happen when rates start jumping. But only time will tell.

6 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

Wednesday, November 18, 2009

Up

Filed Under: Alberta, Canada, Foreclosures, United States

Yesterday the CBA released the September mortgage arrears figures and… cue the broken record… they’re up. The Alberta rate now stands at 0.67%, drawing ever closer to our record high (0.69%), up from 0.34% a year earlier and 0.65% in August.

Nationally the rate held at 0.43%, and Manitoba swapped places with Saskatchewan for the lowest rate in the country (0.26% and 0.28% respectively). Alberta continues to widen it’s lead at the opposite end of the spectrum, while the Atlantic provinces are next worst at 0.49%. B.C. and Quebec were both up a tick at 0.37% and 0.36% respectively, and finally Ontario held at 0.43%.

In an effort to freshen things up, I did some digging and found some comparable numbers from the US. These are from Fannie Mae and Freddie Mac (I’m sure you’ve heard those names, they operate something like the CMHC does in Canada for those unfamiliar with them).

These graphs are of their “serious delinquencies,” which are those that fall three months or more behind on their mortgages… so, virtually exactly the same as our much discussed “mortgage arrears.” They have three different figures respectively, credit enhanced, non-credit enhanced, and total.

Afraid I’m not intimately familiar with exactly where the line is between credit enhanced and non, or how these relates to the CBA figures (I think we can safely assume from the data ‘credit enhanced’ are likely those with less then stellar credit ratings) … so for our comparisons between countries I’ll include both the total and non-credit enhanced figures and let you interpret the data for yourself.

Here we have them all charted together. We can see that traditionally non-credit enhanced US figures are very close to those we enjoy here in Canada and Alberta, while the total figures track about a half point higher (at least until their bubble burst).

While the national numbers are only starting to creep up here in Canada, the Alberta figures are tracking a pattern quite similar to those in the US 18 months earlier. Now, that doesn’t mean we’ll end up as bad off as they are down south, but it’s worth noting the similarities… so it’s not out of the question that we could be on the same road. It was also around that time that phrases like “foreclosure epidemic” really started to make the rounds.

Bear in mind, these are national numbers in the US, and foreclosure problems vary greatly amongst regions/states. I’m going to try to find some state numbers for future months… but looking at the magnitude of the change in the US as a whole leaves little doubt that foreclosures have become a national issue.

Fannie and Freddie have changed what they’ve reported periodically, so the best I could piece together for a longer term comparison is their total figures. It’s interesting to note here their total delinquency figures were quite close to the Canadian equivalent up until ’01-’02. Why and how it’s difficult to say, could be anything from a change in lending practises, to a change in methodology.

In any case, what I think we should take away from this is that before we get cocky about how low our level is currently in comparison, remember, it was not even two years ago they were right where we are now… and we’ve had a ringside seat to witness that slippery slope.

5 comments

Sunday, November 1, 2009

Bank of Canada Rate

Filed Under: Canada, Macroeconomics, United States

Greeting all, hope you all survived Halloween and are saving up for the next trip to the dentist. During our discussion about exchange rates last week, it was requested I take a look at the Bank of Canada Rate and it’s influences, so today we’re going to do just that.

Here is a look at the historical Bank of Canada rate, going right back to 1935. Seems to chart a pattern much like the mortgage rates we’re familiar with, but that’s no surprise and we’ll touch on that again toward the end.

Of note, we can see that currently it sits at it’s lowest point in history. The prior low had been 1.22%, hit for one month, July of 1958. Before that it had an extended run at 1.50% in the mid-to-late 40′s, toward the end of WWII and immediately following. The high was August of 1981, when it hit 21.03%, which was the only time it eclipsed 20%.

Now we’ll take a quick look at how the bank rate effected the exchange rate (with the US). There doesn’t appear to be much rhyme or reason to the movements, though after the big recession in the early 80′s through the turn of the century there does appear like there could be some relationship, but not so much since.

To get a better picture I think we need to include the American equivalent, the Fed Funds Rate, as just looking at the Canadian rate in a vacuum against another currency could be misleading.

So, here is how those two chart out. As I’ve said here before, we tend to move lockstep with the US, so no big surprise that we share very similar patterns. Over the above period, the Bank of Canada rate averaged to be 0.93% higher, for what that’s worth.

Bank of Canada Rate / Fed Funds Rate / Exchange Rate

Now we’ll take a look at how the spread between the Bank of Canada Rate and Fed Funds Rate relate to movements in exchange rate… and I really can’t say I see much of anything on that front. This shouldn’t really be a surprise, as our policy tends to follow theirs very closely and can adjust very quickly in that regard.

So, for the most part it appears that exchange rate movements are more dependant on stimuli other then central bank rates. That’s not to say they couldn’t be, but because we’re tied to the hip to the US, and our economy dependant on exporting to them, maintaining consistent policy (and thus exchange rate) is often viewed as desirable.

Finally, we’ll tie this back in to housing by comparing the Bank of Canada Rate to the average five-year-fixed mortgage rate and prime lending rate (what variable mortgages are tied to).

They seem to be fairly consistent in their behaviours, tracking together with the bank rate the lowest, the prime rate shifted above that, and the five-year-fixed rate another shift above that, with the odd deviation here or there. Noticably, in the mid-50′s there appeared to be a larger spread then since, and there was a lot of turmoil during the runaway inflation of the 70′s and resulting recession in the 80′s, but the pattern largely persists.

Since 1951, the prime rate has averaged to be 1.42% higher than the bank rate… and the five-year-fixed rate 1.34% higher than prime (or 2.76% higher than the bank rate). It’s remained in that ballpark over the last 20 year, and 10 year periods as well in case you were curious.

So, hopefully that answered any questions you may have had about the Bank of Canada rate! On tap for later this week will be the October resale stats release, and a long-term look at fixed vs. variable mortgages, and which performed better. Enjoy what’s left of your weekend!

4 comments

Monday, October 26, 2009

Exchange Rate

Filed Under: Canada, Japan, Macroeconomics, United States

Was hoping to do an update on the latest arrears figures, but it doesn’t look like they’ll be released today… so, instead I’ll do a post on something I kind of touched on in the last post, and is more a general interest/macroeconomic issue, exchange rates.

Obviously for we Canucks, the big’uns is the United States, and here is a look at how much one Canadian dollar is worth in US dollars going back to 1950. These are the monthly averages of the noon spot-prices for those wondering.

Up until it’s collapse in 1971, the Bretton Woods system controlled international currencies, but unlike most, Canada’s dollar was allowed to “float” until 1962. At that point you can see a very distinctive flattening as it then had a “fixed” value.

In 1970 the dollar was again allowed to float, this in an effort to tide inflation, at which point it’s value relative to the US dollar started to climb (probably at least in part due to Nixon Shock). Soon thereafter Bretton Woods collapsed, and the value of the Canadian dollar has been floating ever since.

For much of the time the value floated up until 1976, the value of the dollar was usually above par with the US dollar, but after November 1976 the Canadian dollar weakened significantly and would not again reach par for over thirty years (September of 2007).

So, it’s been a volatile last thirty years for the Canadian dollar relative to it’s US counterpart, no time more then the last six. Obviously this kind of movement, particularly upwards, will play havoc with much of our economy, especially export and tourism sectors.

I also took a look at the daily stats, so for those trivia buffs out there the all-time record high for the Canadian dollar is trading at $1.1030, reached November 7th, 2007… the all-time low appears to have been $0.6179, reached on January 21, 2002. So, both relatively recent, particularly the high.

For curiosities sake, I also graphed out a few other international currencies. Mainly for my interest, but some others may find this stuff interesting, if for no other reason then to gain a historical context for what the dollar has been worth around the world. Starting with the Euro and UK Pound.

Here we have the Yen, it’s obviously increased in value significantly over the last sixty years, but it’s been relatively stable for the last twenty or so years… even before the onset of the “Lost Decade.”

Finally we’ll do the peso, just so our other NAFTA partner doesn’t feel left out, and with increased globalization Mexico is becoming increasingly relevant. The dollars value has been rising relative to the peso, or conversely, the peso has been losing value, on a whole for the last fifteen years. This would obviously be advantageous to Mexico as they have become an attractive option for manufacturing goods for the rest of North America.

7 comments

Monday, March 16, 2009

The subprime dilemma

Filed Under: Canada, Mortgages, United States

The Globe and Mail article from yesterday got me thinking about our subprime mortgage situation in Canada.

Some people say it’s just as bad as in the US, but they aren’t talking about truly subprime as much as they are about effectively non-prime or non-conventional lending

On the other extreme, a lot of people had been saying we don’t have them here, so, it was only a US problem.

That isn’t true, we had, and still do have them. Now, it is important to note that they were not as common here, at least so far as the quote, unquote, subprimes went. As the article mentioned, in the US during their run-up they made up about 22% of the all mortgages, whereas here in 2007 they only made up about 7%.

I’ve spent a couple days digging for numbers online, and haven’t been able to come up with much if any hard numbers on those subprime loans. As good as I could find was in that article was their quoting Benjamin Tal as saying their were about 85,000 of them in 2006… and this would jive with the aforementioned 7% figure and CMHC reporting there were 1,220,765 mortgages issued in 2006.

So, as far as an apples-to-apples comparison goes, “subprimes” were only about one-third as prevalent north of the border, as they were south of the border.

The problem in Canada was that we had several other “innovations” that were efffectively doing the same thing… they just kept lowering the bar and caused a rapid expanding of the pool of potential buyers.

At the beginning of 2006 in Canada, to buy a home one had to be able to (a) pay it off in 25 years or less, and (b) have at least a 5% downpayment.

In March of 2006 it was decided you could take 30 years, and you could borrow that 5%, so effectively you no longer needed a downpayment.

By June, you could take 35 years, and pay interest-only for the first 10.

And in November of 2006, the coup-de-grâce, the 40 year amortization was introduced.

So, over the course of nine months, the lending standards had went from requiring you to have 5% down and pay your home off in 25 years… to requiring zero-down, you can take up to 40 years to pay it off, and you don’t even have to put a dime toward equity for ten years.

And those 40 year amortizations were some kind of popular too. TD Bank, Deputy chief economist, Craig Alexander in an April 2008 interview said that by a year after their being introduction, 37% of all new mortgages issued were 40 year, as were 9% of outstanding mortgages.

Even more telling, he quipped,

“About 60 per cent of first-time buyers are opting for a 40-year mortgage”

So 60% of first-time buyers we either borrowing more then they would have qualified for, or would not have qualified for a mortgage, in 2005.

Needless to say, the buyers pool was increased just a tad by these lending innovations.

As you probably know, late last year the government axed those 40-year amortizations and re-introduced the need for 5% down after seeing the negative effects the lax standards produced during their two year run.

While it was certainly not the only contributing factor to the run up in prices we saw here in Edmonton, and really all across Western Canada, they definitely added fuel to the fire.

The timing certainly looks suspiciously similar to the time frame of the price explosion here in Edmonton, but as I’ve said before, there were many factors in that perfect storm… though I still think it’s safe to say we quite likely wouldn’t have reached the extreme heights we did had lending standards not been eased like they were.

That’s not to say the US didn’t have 40 year amortization, they actually brought them in first back in ’05 IIRC… and they still do offer them. Though they didn’t seem to quite catch on the way they did up here.

While clearly not a perfect comparable to subprimes, I don’t think it’s a stretch to label them as non-conventional… another non-conventional comparison other for 40 year mortgages, are the Alt-A mortgages in the US. For the unfamiliar, Alt-A’s are kind of in the middle ground, they aren’t quite as bad as subprime, but aren’t quite as good as prime. Subprimes not quite as ugly sister, if you will. So, something of an apt comparison to our 40 year mortgages.

Alt-A’s often get lumped in with subprimes since that’s the word most are familiar with, but we are starting to hear more and more about them as some are expecting they are the next time-bomb to go off in the US housing crisis.

Last year Alt-A’s made up 67% of the non-prime mortgages in circulation, or about 10% of all mortgage debt. During the peak of the US housing boom, Alt-A’s made up 15.4% and 17.7% of all new loans made in 2005 and 2006 respectively. At the same time, subprimes made up 21.6% and 21.7% in those years.

Collectively, Alt-A’s and subprimes accounted for 37.0% and 39.4% of all loans made in 2005 and 2006… sounding eerily familiar to that figure cited for the marketshare of 40 year mortgages a year ago?

COUGH** 37% **COUGH

So, a subprime by any other name may not be a subprime… but I don’t think it’s much of a stretch to say we had eerily similar figures when it came to non-prime or non-conventional lending during our respective booms.

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Thursday, January 22, 2009

We’re different, it won’t happen here…

Filed Under: Alberta, Canada, HPI, United States

Today we’re going to take another quick look at price indexes, this time comparing what happened in the U.S. with what’s happening in Canada. In an effort to compare apples to apples as best as possible, we’re going to use two indexes with fairly similar methodologies, Case-Shiller from the United States, and Teranet’s HPI here in the Great White North.

We took a look at the Canadian one Tuesday, and for the purposes of comparison with Case-Shiller, we’ll be using the Canadian data with a shifted index point so that both have the same scale. For those who haven’t seen the Case-Shiller index charted out, here’s a look at it.

Yeah, that’s a whole mess of lines… so for those interested here is a labelled version with each cities respective peaks. Might clear some things up slightly, but yeah, that’s still a mess, but it’s bound to be when you’re charting out twenty cities and two composites. In any case, just sitting back and looking at the chart as a whole you can definitely see a general “bubble.”

Now for the sake of simplicity, I’m just going to take four of those cities, one for the top, one from the bottom and a couple from the middle… and chart them against the HPI’s for Vancouver, Calgary, and Toronto, whom seem to be the most talked about real estate markets in the country at the moment.

As you probably deduced, that U.S. markets have the dashed lines, and the Canadian markets are solid lines. Before you conclude our markets maybe were not as “bubbly” as those in the U.S., just bear in mind only L.A. and Miami were at that upper peak… and that the Canadian index doesn’t include our “bubbliest” major centre right here in Edmonton. So if I just go ahead and add Edmonton’s average price index to the chart we see this…

Keeping in mind the prior entries observation that the HPI was usually slightly lower then the average price index, but generally were pretty close… one can reasonable conclude that Edmonton quite likely would have an HPI of pretty damn close to that of Miami, if not even surpassing it. Unfortunately I don’t have data for Saskatoon, as I believe theirs would have blown past even that of Edmonton’s with their recent housing boom.

In any case, it’s not too much of a stretch to reason that the bubble experienced here was just as substantial as that in the United States… we just seemed to have the boom start about 18 months later… and not surprising, the downturn start about 18 months later. For a better look at this we can shift the Canadian data back.

When you look at it this way, these Canadian markets fit right in. Obviously we see a bit more seasonality, particularly in Calgary as the lines aren’t nearly as smooth as those of the American centres. I think that can be mostly explained by that house shopping in Miami and Phoenix in Winter versus the rest of the year probably isn’t all that different an experience, Calgary on the other hand, it’s a whole new, and cold, world.

Judging from the plunges in Miami and Phoenix have taken, it stands to reason that Calgary and Vancouver (and other markets that had big run ups, like Edmonton, Saskatoon and Regina) could very well have very similar busts ahead of them in the next couple years.

Toronto on the other hand didn’t have as pronounced a “bubble”… but as you can see with Detroit’s situation, that is no guarantee prices there won’t plunge. Prices in Detroit are now well below what they were even in 2000, and that’s ignoring inflation. But then again Toronto could weather it better and only experience a moderate drop, ala Chicago, whom they’ve been tracking pretty close through this point.

So for those who still think “we’re different” here in Canada, or Alberta, looking at that graph I don’t know what to tell ya. Taking into account that it didn’t hit us until 18 months later, everything seems to be right on schedule. The boom lasted about the same amount time and was of the same magnitude, the cool down lasted about the same amount of time and was of the same magnitude… so considering we’re joined at the hip with the U.S, Occums Razor seems to imply that the big drop is on the horizon.

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