It's Just A Matter Of Time

Canada could be headed for a housing and mortgage meltdown similar to the one that has devasted the U.S. economy, Merrill Lynch warned Wednesday.

Canadian households are more financially overextended than their counterparts in the United States or Britain, a report issued by Merrill Lynch Canada economists David Wolf and Carolyn Kwan says.

So it's revealed that Canadian home owners have more debt than their US or British peers. How comforting.

“What worries us is that Canadian households have been running a larger financial deficit than households in either the U.S. or the U.K.,” the Merrill report says. “... After 40 years of net saving, Canadian households moved into sustained deficit in 2002. In 2007, household net borrowing amounted to 6.3 per cent of disposable income, a wider deficit than in the U.K. and not far off the peak U.S. shortfall seen in 2005.”

But yet many still believe we are different.

To read David Wolf's full report, "The Tipping Point," click here.

Update:
Perhaps the Merrill Lynch report has ruffled a few feathers among other economists (are they speculators themselves?).

The nature of the decline in Canada is much different than that of the
U.S., said Benjamin Tal, senior economist at CIBC World Markets Inc.

"You need a trigger for a crash in the housing market. In 1989 to
1990, the trigger was double-digit interest rates that killed affordability in
Canada. In the U.S., the trigger was subprime, and a huge increase in default
rates when people who were not supposed to be in the business of owning a house
did, and that created artificial demand," he said. "Unless Canada goes into a
major economic recession ... I'm missing that trigger."

Let me do your job for you.

Falling house prices. That is the trigger. It's simple.

40 year mortgages, 0 downpayment, etc...all these new mortgage products introduced by the CHMC over the last two years force-fed false affordability on unsuspecting home buyers. These are the same home buyers that would not even qualify for a traditional 25 yr amortization period. People who have no business buying houses bought during the last two years. Just talk to my single hairdresser who owns 3 properties. A significant majority of homes bought in the last two years were bought with 40 year mortgages. Once can argue that affordability is now worse in 2008 than it was back in the 1990s as now the principle amounts of mortgages are astronomical.

In the US, the trigger was not subprime. Subprime would have never been an issue if house prices continued to rise or remained static. Those who were overextended once the teaser rates adjusted to higher rates could easily escape by either selling their property or refinancing their mortgage. When house prices fell in the US, those home buyers with subprime mortgages were trapped. They couldn't sell because there were no buyers. And they could no longer refinance their mortgages because their property was losing significant value. The only option was to default.

The same scenario is occurring in Calgary and other cities across Canada. Houses aren't selling under similar principles. I fear that sellers are unwilling to lower their prices because they will take a big loss. Intelligent buyers, are exercising their patience on the sidelines. Meanwhile, home prices which have risen exponentially over the last two years are starting to come crashing back down. Soon many Canadians will be in the same trap. Severely upside down on their mortgage they will be forced to either sell or refinance their mortgage. Both of which cannot be accomplished when asset values are decreasing. Skyrocketing inventory is a symptom and precursor of what is to come.

Reality check, as house prices slide in every major Canadian city - real estate is still unaffordable to the average wage earner. These include important people such as teachers, firefighters, nurses etc.

Even if our own meltdown is a fraction of what happened in the US, it will still have a significant impact on our own economy. Perhaps an in-house grown recession (pun intended).

To simply ignore all the warning signs and to discount what is happening in the US is complete ignorance.

Alberta Retail Sales Fall

Alberta was the only province in the country in July to see year-over-year retail sales
drop into negative territory, according to data released Monday by Statistics Canada.

The federal agency said retail sales in this province declined by 0.9 per cent from July 2007 to July 2008 while at the national level retail sales have increased by 4.9 per cent.

[Insert record scratching sound here]

Alberta leads the nation in real estate price declines and now in retail activity. In consideration to the economic decline of the manufacturing sector in Eastern Canada, this simply shows that the "solid economic fundamentals" may not be solid afterall.

"Using the year-over-year level of sales alone, it would be tempting to
conclude that Alberta has the weakest economy in the country," said Hirsch. "It
was the only province where sales in July were lower than last year.

"But that impression would be incorrect. Sales per person in Alberta are
still by far the highest in the country."

He said that at $1,455 per person, retail spending in the province is 34 per cent higher than the national average of $1,083. But Hirsch said even that figure has come down over the past year. In 2006, retail spending in Alberta, he said, was more than 40 per cent above the national average.

Spending more than the average Canadian should not be used to as a metric of economic health. Albertans may make more money than an average Canada. This then equates to greater spending statistics. But Alberta is an inflationary (and CPI) leader in the nation so it is all relative. Consumer confidence is vital in triggering spending in an economy. In Alberta, we are constantly reminded that we live in the most financially insulated place on Earth. With that instilled confidence, retail activity should not be faltering. Perhaps the reassuring fundamentals were exaggerated? With the current global financial crisis, consumer confidence will not return to the utopia levels of the boom years. This will hurt demand for real estate. As seen in the recent pending sales statistics, there isn't a significant push in demand. Despite the new mortgage rules coming into affect on October 15, 2008, this shift in consumer spending will further downward pressure on home prices.

One simple explanation why retail activity may be down is that Albertans no longer have disposable income after bills and other necessary expenditures. The opportunity cost of carrying a large mortgage, discretionary income becomes a scarcity.

I believe the term is being "house poor."

As house prices continue to slide, it will be interesting to see what many upside down Albertans will do when they reevaluate their financial well-being.

Uncharted Waters

Alot has happened in the world since I last blogged. Concerning the financial sector, we're witnessing a historic market meltdown on Wall Street. Many of the prominent investment banks are falling one after the other. Over the weekend, Henry Paulson (US Treasury Secretary) and Ben Bernanke (Chairman of the Board of Governors of the Federal Reserve) are putting the final touches on a $700,000,000,000+ (yes, that's what billions looks like) bailout plan to rescue Wall Street. The problem with this bailout is systemic on many levels. The bottom line is that the already cash strapped US taxpayer will be on the hook for this bailout. Where is everyone going to get the money? It will be like pouring gasoline on a huge burning fire. We are also witnessing the nationalization of the banking system and disintegration of the free market. A postponement of the inevitable which is now amplified exponentially. Keep in mind the Federal Reserve is composed of a group of private bankers! To pump money back into the system, money printing machines will run 24/7. This will only lead to one thing: hyperinflation. This will translate to a future of higher interest rates which will wipe everyone out. I just hope that the shields on the USS Alberta are at maximum capacity and will hold.

Back on the home front, Stephen Harper has called a federal election approximately one year earlier than expected. Remember that Harper is the same person who introduced Bill C-16 back in 2006. This bill was aimed to structure a 4 year time period between federal elections. Now, there is only one perception of this bold move. It is the only way he will win a majority government. But why call an election so early? Timing is crucial. Amidst a straight face, Harper knows the truth of Canada's impending economic condition. In 2009, the economic landscape of Canada will further deteriorate as we follow in the wake of the US. Despite all the current hot air pumping that Canada's fundamentals are strong, we just cannot ignore what is happening to our neighbours down south. There is no doubt we will be affected to some degree.

In Calgary, we are seeing a loosening of the social fabric. Murders, shootings and crime dominate headlines each day. Road rage is the worst I have seen in my lifetime here. Many attribute these factors to a growing city but I believe that you have recognise the increased levels of stress by living in the most expensive inflationary province in the country. The city just feels different now. Calgary continues to lead the nation in real estate price declines amidst having the oil sands in our backyard. Office vacancies in the city are also set to rise. Another condominium project has stopped construction bringing the total now to three (Gateway Midtown, Manchester Station, and Skytower). The diplomatic answer to the construction stoppage is high construction costs. But in reality, you'll find many of the buyers have walked away from their deposits not willing to gamble anymore in a dwindling housing market. There are more tough times ahead for the real estate industry. Surely, all these elements portray the sound "economic fundamentals" that have been eternally preached. I think not.

For those of the bulls remaining who believe that house prices will just plateau and not decrease sharply, don't be foolish or overly confident. Looking at past historical trends with a statistical fine tooth comb will not prepare you for what will happen in the next couple of years as the world enters into a position of financial chaos and eroding economies.

In times like these, the most favourable position is to be debt free.

Calgary Listings Disappearing? Something Smells...

Something smells like fish.

I can't write a huge post today because I am back hard at work. But has anyone noticed on mls.ca that the listings in Calgary have magically disappeared? I receive "private client" email lists and yesterday I received an update with 38 properties for sale.

Today, that list went to 6 properties with no explanation.

Could this just be an honest mistake?

Or is this CREB's response to dismal sales, decreasing prices and impending "soft crash?"

Something just doesn't feel right and hopefully the glitch in the system gets fixed.

Real Esate In the Negative Western Conference 2008

On Saturday, August 23, 2008, real estate "investors" from across Canada gathered in the beautiful city of Calgary to attend the REIN™ Western Conference. For those of you who are not aware, REIN (Real Estate Investment Network) is headed by Don R. Campbell who helps individuals invest in real estate. Don also predicted that property prices in Calgary would appreciate by 11% in 2008 and listings would fall by April. Inventory is still high and prices have decreased thousands of dollars. REIN's success may have been amplified during the time of free credit, "innovative" mortgage products and coincidental economic boom. I would imagine the REIN network increased its member base the most during the last two years as many wanted to ride the wave of the boom and profit. I have spoken to some REIN members who are average income earners who bought multiple rental properties during the boom. Many individuals who subscribed to REIN during the boom may be in a bit of trouble with no clear distinguishable bottom to the real estate "soft landing."

The name of the conference is suitably coined: How to Create Wealth in Real Estate, No Matter What the Market Does.

Is this truly realistically possible?

As with many other organizations who's reputation and livelihood depend on real estate appreciation, the keynote to this conference was more an assurance to REIN members (each member pays a subscription fee of $3375.04 every 17 months - that's crazy!) that the sky isn't falling. I now understand why Don has to be so upbeat about the prospects of building wealth through real estate. People have invested alot of money, personal savings, trust funds etc. in his word and advice. Any honest and realistic negative sentiments would crumble the network.

Best-selling author, Steve McKnight was flown into town from Australia to present his insights on the Canadian Real Estate market. Invite an individual from another country to come speak to others about how to be successful in real estate investing in this country. Makes sense right? Isn't real estate mantra such that proclaims that markets are localized region to region? Are real estate invesment fundamentals applicable internationally now? I digress.

The following are Steve's "Six Generations of Wealth:"
1. Trade Time For Money
2. Save More Than They Spend
3. Asset Appreciation
4. Income Generation From Assets
5. Income Reinvestment
6. Asset Maximization

For those buyers who bought at the peak, "Generations" 2-6 are simply not plausible in the current softening real estate market as property values decline. One can argue if fundamental #1 is possible in a declining market is possible. Time spent worrying about financial health is not my deftinition of time well spent. I even believe that the second fundamental violates what most REIN members have been advised. An average income earner purchasing multiple rental units would be classified as not saving more than you spend. In bubble fundamentals, rent will never cover the full cost of mortgage payments, maintenance costs, etc. of the property. In a declining housing market, rent increases are not feasible (you will see rent decreases). So the owner of the property is responsible for assuming a month to month financial loss which negates the flowing from one generation to the other. The members of REIN are advised to hold real estate over the long term but to actually make it long term requires financial survival during these present times.

SFH Market's Worst Nightmare/Enemy: the Condo Market

The simple physics of building implosion/demolition. Place highly powerful explosive charges to knock out supporting infrastructure and allow the building to cave in on itself.

One can argue that the condo market and the sfh market are two different markets but one must also make the realization that the two have a relationship. The condo market can be portrayed as supporting the sfh market. Does anyone notice how all of the realtor authored blogs avoid talking about the condo market?

Could the collapsing condo market in Calgary bring down the sfh market?

Remember that the condo market is seen as the easiest entry point into real estate especially when price hyperinflation occurs such as they did in Calgary in the last couple of years.

With the announcement of construction being halted on the Gateway Midtown towers yesterday, it indicates that there is substantial trouble in the condo market in Calgary. Right now there is severely low demand for condo units and there will be soon a enormous influx of product coming onto the market. Inner city fundamentals are out of touch with reality.

With a severe reduction in demand and record high inventories, prices will have to come way down.

As Radley77 has beautifully composed graphs comparing the two markets and levels of construction, we can see that the quantity of multi-family units continues to increase outstripping single family units.

For the bulls out there who remain, seeing the quantity of condos being built in the future should be concerning because the element of inventory will not be manageable.

I believe that there is a relationship between the condo market and the sfh market.

If inventories continue to skyrocket, prices will come down as they have now. Because condos have a price point much lower than a sfh, they will become more attractive to the first time home buyer looking to enter into the real estate market.
Once that buyer is removed from the pool of buyers then the sfh inventory will be stagnant and will continue to increase if prices in that market are not lowered (in accordance) to attract buyers.

Once the new mortgage rules come into effect in October, the pool of buyers will be reduced even more.

The reality may be that the condo market may be the first go, followed then shortly by the sfh market.

Layoffs and Stalled Condo Projects

Thanks to Jim A. for emailing in that comic!

I haven't posted in a while because of heavy work commitments. Thanks for your patience and understanding. Since my last post, not much has changed in the local real estate market. Much that was predicted by "doom and gloomers" has come to fruition. The market continues to soften heading into the Fall. Prices are falling and inventory levels are still at record highs. Many condo projects are stuttering to the financial finish line. Things are soon to get interesting.

While burning the midnight oil this evening (morning), I was listening to QR77 news talk and sports radio. The hourly news reports that there are soon going to be layoffs in residential construction as the Calgary real estate market further cools. An official with Jayman was interviewed and a short clip was played outlining the change in their employment outlook. I'm sure that other developers and builders in the city are soon to follow the same inevitable path. This was bound to happen as housing starts have decreased substantially as compared to Calgary's boom years. The same thing happened in the US. But yet Calgary is different. This morning, the following article in the Calgary Herald was available: Layoffs strike Calgary's once-booming homebuilders. These type of layoffs are just the beginning.

In addition, an elite-multimillion downtown condo project has ground to a halt in construction. Gateway Midtown has stopped construction and has also laid off 41 employees in the process. Watercooler talk has it that many purchasers have walked away from their deposits while demand has significantly dwindled. As condo prices and demand continue to decline, many of these million dollar projects are at risk. Even if they are in a excellent location such as downtown Calgary (where all the head offices of oil companies are situated). The only way the project can continue its construction I would imagine that it would take all the suites to be completely sold out at peak prices. The reality is that's not going to happen. Strangely, Gateway Midtown is very close in proximity to many other beltline condo projects currently underway or completed. The suspension of this condo project proves that inner city fundamentals in a healthy economic environment are sometimes out of touch with reality.

But of course, Calgary is different than the rest of the world.

Canada's Own "Subprime" Borrowing Slapped In The Face

I don't have much time to blog but I'd like to just quickly put up a post regarding today's news. This might be redundant, as most of you have already heard (in the MSM or on other blogs), the federal government is tightening mortgage lending practices. A slap on the face, if you will. Not extreme but it is certainly a step in the right direction.

According to the Finance Department announcement, the following changes will be made to the rules of government guaranteed mortgages:

• Fixing the maximum amortization period for new government-backed mortgages to 35 years;
  
  
• Requiring a minimum down payment of 5% for new government-backed mortgages;
  
  
• 45% maximum TDS ratio (Total debt service ratio - % of gross annual income required to cover payments associated with housing and all other debts and obligations, such as car loans and credit cards)
  
  
• Establishing a consistent 620 minimum credit score requirement; and
  
  
• Introducing new loan documentation standards.

All changes become effective on October 15, 2008 and affect all mortgage lending institutions.

I'm afraid that it's too little, too late. About 62% of first time home buyers choose the 40 year mortgage route as affordability has been stripped in the past years during the real estate bubble. Is this the government's own indirect admission that 40 year mortgages are kin of the famous subprime mortgage? No more liar loans with no downpayment, no authentic documentation and relaxed lending. This will certainly put further downward pressure on prices. In addition, the pool of buyers just shrunk dramatically. The implications of this announcement will be widespread. The government should have done away with the 35 year mortgages as well. The market will always correct itself. Those who forced affordability and bought in the last two years will have a nasty financial ending.

Now, the pressure will be squarely on the sellers. Those now wanting to get out because of the new changes will have to take a financial loss. Remember we are still at record inventory levels. To sell in this marketplace would mean to lower expectations and prices dramatically. On the already over-saturated condo front in Calgary, watch for more intensive promotions (free cars, free gym passes, free trips, first born children, free home entertainment systems, free kitchen makeovers, etc.).

Now I wonder if Ed Jensen will recant his statement in Creb's June report that the market will pick up in activity in the Fall?

I'm expecting realtors (some who are struggling) across Canada to further increase their advertising/marketing budgets from now till October 15, 2008. With sales down 30%-40% yoy already, what will most of them do after that date?

I can already envision the new emergency marketing slogan:
"The best time to buy is now - before October 15, 2008."

Letter To The Editor

Recently, CREB released it's June summary package for the city of Calgary. In conjunction, Mario Toneguzzi released his June housing report.

********

RE: "Calgary home sales continue decline, prices hold steady," July 2, 2008

Dear Editor,

I am disappointed at Mario's inability to gather facts with prudent responsibility concerning accuracy of information. Provided that he writes articles where information is disseminated to the masses, journalistic integrity should be of utmost priority. This should be done to circumvent further financial entrapment of unprepared, unqualified and uneducated home buyers. The article does not challenge the facts presented by an association that's main goal is to market the real estate market in an eternal positive light for only one reason, profit. It would have been deemed more efficient and similar in purpose if Ed Jensen had wrote the article himself.

CALGARY - Calgary's residential real estate market in the first half of this year has been marked by declining sales, increasing listings and stabilizing average sale prices compared with a year ago.

...

And the average sale price in both markets is close to a year ago - up by 0.20 per cent for single-family homes ($472,163) and down by 0.76 per cent for condos ($312,460), according to statistics released by the Calgary Real Estate Board on Wednesday.

These proclamations on pricing are misleading to the public. Firstly, average prices are not stabilizing. They are declining. A simple comaparison of June 2008 and June 2007 numbers would show a declining trend. SFH average and median prices are way lower this year compared to last June. For June 2007, the average sales price for the metro area was $496,890. The median metro home price was $439,000. In contrast, June 2008 average price is $473,774 and the median price is $408,000.

That is a decline of $23,116 (-4.7%) YOY in the SFH average price and a $31,000 (-7.1%) YOY decline in median prices.

For the condo market, the June 2007 average price was $323,269 and the median price was $304,900. The June 2008 average price is $315,042 and the median price is $282,000.

That is a decline of $8,227 (-2.5%) YOY in the condo average price and a $22,900 (-7.5%) YOY decline in median prices.

The numbers offered by CREB in their report are year-to-date numbers. By quoting these numbers psychologically mitigates the tremendous drop in prices year-over-year. The reality is June prices are substantially down compared to a year ago. The element of "statistical camouflage" should have been more challeneged in the article.

In a news release, CREB president Ed Jensen said the sales numbers "reflect that more buyers are finding a home that fits their family's needs. As we move into the summer months, it's an excellent time for buyers to capitalize on the wide selection of homes, rather than waiting for the fall when things start to pick up again."

From a historical trend, sales peak in the months of May and June. Sales never pick up in the fall season extending on to winter. Now quoting Ed Jensen (who I would assume has experience in the market and understands the past trends), that sales will pick up this fall is not conducive to objective journalism. Yet again, there is an omission of critical analysis.

Spring was supposed to be the best time to buy. Spring came and went. At that point in time, houses supposedly "went on sale" and summer was the best time to buy. Now that sales are still down YOY, the best season to buy will be fall. By fall, I can predict that winter is actually the best time to buy. Nothing like a new house as a Christmas present. Hopefully we don't get any snowfall in Calgary because that would chase buyers away as it did in Ontario earlier this year.

Perhaps it's time to find other sources for information where the cheerleading of the real estate market is dampened and not relied on for livelihood. This would promote a more pure and objective market perspective.

Afterall, journalistic mantra is such where one usually strives for the truth and challenges conventional facts and preconceived notions.

Regurgitating information from a single biased source is not the best form of journalism by any stretch of the imagination.

********
Hey everyone, I'm going to be involved in some big projects soon and blog updates will be quite slow for a bit. If anyone would like to write a guest post or submit photos, please email me: calgaryrebb@gmail.com

I look forward to hearing from you. Thanks for your continued contributions and readership.

High Energy Prices and Inflationary Pressures

Bank Of Canada Jolts Economists With Stand-Pat Rate Decision Amid Inflation Risk

"Holt said one possible explanation is that the Bank of Canada and the U.S.
Federal Reserve are co-ordinating policy in an effort to bolster the American
dollar and "take the froth" off of commodity prices."

Back in March I blogged about Serfdom Life and the continuing risk of interest rate slashing in the US and it's influence on Bank Of Canada to do the same. Times have changed. From the housing bubble evolved the food bubble and now the energy bubble. Some bullish real estate "investors" were in the mindset that in the new financially reformed 21st century, it would be impossible for interest rates increase as we now live in a "credit society." Those who can't realistically afford an object of desire could purchase on credit.

In the big picture, the pendulum which swung the way of big spending is now finally swinging in the opposite direction with purpose - to spur society back into a savings mode.

Inflation is back with a vengeance. With high energy prices, there is nowhere to escape for the average consumer.

Bernake looks like he is done cutting rates in the US. Will this be the direction of the Bank Of Canada. Interest rates will have to rise to curb runaway inflationary pressures. Banks will not hesitate to raise mortgage rates accordingly as it means more renenue.

Falling house prices, higher interest rates, rising property taxes, rising mortgage rates, high energy prices, high food prices, highest CPI and inflation in the country. It's certainly a fun time to be overextended or specuvesting in this marketplace.

Once again, it's the perfect storm folks. Take another 40k off or more and get out now while you can!

Small Pool of Buyers Remaining

According to Statistics Canada's 2006 Census of Population and Housing, 73.1% of Albertans own there "dwellings."

What does this mean?

It translates into the fact that the pool of remaining buyers in Alberta's real estate market is small. During the boom years of 2006 and on, many Albertans were "hyped up" to purchase properties to catch the fad of eternal property appreciation. It was a vacuum phenomenon, pushing home ownership levels to new highs. The real estate marketing machine was huffing and puffing, sucking in all buyers, qualified or not.

Now that the market is softening, speculators are in a state of debt shock. For sale signs are sprung up in a weed like fashion to attract potential buyers. The problem is the negative sentiments realised by the public towards home ownership. Reality has set in. House prices do increase forever and ever.

With sales already down 30%-50% yoy, and an inventory gluttony epidemic - who is going to save the sellers now?

Apparently, few are left with those heroic abilities.

The key to salvation - a conversion of the masses of "bitter" renters and "basement dwellers" into potential home owners. This would increase the pool of buyers in the market. To accomplish this would mean for realistic price reductions in the market.

UPDATE (June 4, 2008):
Home Ownership At Record Levels ... So Is Mortgage Debt.

"In total, Canadians owe an amount fast approaching $850-billion on their homes, more than double what it was a decade ago, with percentage growth in double digits in recent years.

If trends continue as expected, the value of all outstanding mortgages will surpass the $1-trillion mark some time toward the end of next year."

Home Qwnership And Mortgage Debt Highest In Decades: More are buying outside their means

'The rise in mortgages likely reflects more incentives now available to entice first time home buyers, said Jim Rawson, regional manager for Invis in Toronto.

"Younger people are stretching themselves," he said in an interview, although he said they are still qualifying for the mortgages.'

Here Is What $320k Will Get You

Real Estate Type : Single Family
Building Type : House
Bedrooms : 1
Bathrooms : 1
Interior Floor Space : 925.70 sqft
Storeys : Bungalow
Built in : 1926
Land Size : W:8.840m D:36.580m Shape:REC
Title : Freehold
Location : 112 9 Av NECalgary, AB T2E 0V2
MLS®: C3322995

Aren't post grow-op properties supposed to be a good deal?

This is more evidence that the Calgary real estate market is out of touch with reality. The seller of this property is looking for $320k for a post grow-op establishment. The house is most likely extensively damaged and is currently being evaluated by the Calgary Health Region. The MLS listing makes reference that the purchase would be more land motivated (even though the lot is in an ambiguous location).

It's still astonishing to see the level of denial that still exists in the marketplace.

Bullish Hopes Sputtering

Chicken soup won't help. Not doom and gloom but rather reality.

Calgary inventory at all time record highs (7127 SFH + 3373 Condo), sales/new list ratio in the tank, sales down yoy 30%-50%, median price down yoy, average price down yoy, days on market up yoy.



As of May 16, 2008 there are 10500 properties on sale, sacrificial offerings from many financial tight rope walkers who are losing balance. Sellers are in a mixed progression mode from fear, desperation and panic. Capitulation soon to follow this summer when sales are further reduced as stressed out Calgarians partake in $ummer vacation$ and the $tampede. The financial arithmetic no longer computes in purchasing real estate in Calgary, unless the "low ball" technique is engaged. Yet, there are still a few suspended in a perpetual state of denial - hoping.

"I'm standing my ground on this one. There is no subprime lending in Canada even remotely similar to that in the USA. Not even close!"
The great hope that we avoided the same pattern of lending as seen in the US. But in Canada, we have our own diseases. 0 down, 30, 35, and 40 year mortgages are just some typical examples of unconventional lending practices (ticking time bombs)recently introduced in the market in the last two years. Not covered is the potential of higher mortgage rates in the future. As house prices plateau and soon decrease, buyers who forced affordability will face impending financial apocalypse. Again, not an overnight phenomenon. One that will present itself gradually over time.

"There is a good possibility that many of these buyers will be coming from Ontario and Quebec."
The great hope of a locust-style provincial invasion of laid off Eastern workers. The seller loses all focus and care for human condition. Forget the sheer emotional drain of losing your livelihood. Come to Alberta, so specuvestors can unload their ill advised lifetime debts. The hope of naivety, that is their goal. But this story has been written before and the ending resulted in net negative migration away from Alberta in late 2007 and early 2008. What will be different this time around? Nothing. If positive migration occurs it will be once again temporary. The top priority of a laid off employee is not home buying. Is the labour shortage in Alberta more of a function of net negative migration (high cost of living) or a booming economy?

"The gloom and doom prognostications predicting a correction as in the U.S. will not come into fruition as long as oil is over 100 USD."
The empty validation that if oil is at a high price, the world is fine. This topic as been beaten to death, revived and beaten to death yet again. Bloggers on the Alberta Bubble Blog have empirically concluded there is no direct relationship between the two variables. As per Radley77, there is a divergence of Alberta's GDP versus the recently increase in house prices. Only the naive still believe that Calgary's house prices are sustained by oil and gas. The high price of oil is a result of hedging against the dropping value of the greenback. High price of oil favours no one. Peripheral expenses will increase as a function of this. Transportation costs become more cost intensive, food production costs increase, etc. Disposable income is further stripped away from already debt-ridden Calgarians. High prices translate in to reduced demand (humans will adapt). Oil was a false validation that the real estate marketing machine integrated in their campaign in the recent years to "fog" and "bait" buyers.

Bold Predictions

We're almost approaching the midway point of 2008. With the spring rush come and gone, will the following bold predictions hold true till the end of the year?

Here is a compilation of predictions for the Calgary real estate market made at the beginning of this year. Keep in mind, some of these predictions seem formulated with an absence of supply-demand economic fundamentals (severely weakened sales and record high inventory).

"Jan 30
It speaks to the amazing strength of the Calgary economy that in spite of decreased sales and increased inventory, the price is remaining stable, or even rising slightly. If prices stay where they are now, and I fully expect them to, within a +/- 5% range, the buyers will appear. People have been waiting to see what would happen in January and now they know. My phone is busy, and many other realtors I've talked with, report plenty of interest. Sales will be down considerably this year compared to the frenzied activity of 2006 and 2007, but it seems to be a non-issue. When you compare this year's sales to the years when we had a normal balanced market, we're right on the average.

Will my prediction come true?
I predicted on Jan 30 that Single Family Home prices would fluctuate this year within +/- 5% of the January price. That would mean we could see a drop in median prices to as low as $389,500, and average price to $432,532."
-Bob Truman, First Place Realty (source: What's New Section)

"The average sale price of a single-family home in the city will flirt with the half-million-dollar mark this year, according to the Calgary Real Estate Board.

In its 2008 forecast Wednesday, real estate board president Ed Jensen said the MLS average will increase by five per cent this year to $495,800 while condominium prices will rise by six per cent to an average of $335,300.

Total sales will dip by five per cent for both the condo and single-family markets, to 7,700 and 17,500 respectively, compared with 2007."
-Ed Jensen, President of CREB (source: Calgary house prices to inch toward $500,000)

"We're looking at about 5.5 per cent moderation in MLS sales and our price growth is in the same ballpark. We're looking around the 3.5 to five per cent level, too," said Louie. "There is a lot of supply out there. Going into the last part of the year we saw demand ease off. Some of that was because of the higher prices, but also there is a lower level of net migration that we're seeing coming to Alberta."
-Lai Sing Louie, senior CHMC Calgary market analyst (source: Calgary house prices to inch toward $500,000)

"And in the long-term, real estate here looks great, says Campbell, adding year-over-year average house price gains in Calgary should be in the 11 per cent range this year."
-Don Campbell, President of REIN Canada (source: Is housing influenza infecting Calgary?)

Update:
"The CMHC's Spring 2008 Calgary Housing Market Outlook, released Thursday, said the average residential price for a resale home in the Calgary census metropolitan area will hit $429,000 this year (3.6% increase), increasing from $414,066 in 2007.

The average price is forecast to climb to $450,000 next year.

...

The CMHC said MLS sales will decline by 19.2 per cent this year from 32,176 in 2007 to 26,000, but sales will rebound in 2009 with a 2.9 per cent increase to 26,750.

Also, new listings in the resale market are expected to rise by 14.4 per cent this year to 62,000 from 54,202 in 2007. But they will drop by 9.7 per cent in 2009 to 56,000."
-CMHC's Spring 2008 Calgary Housing Market Outlook (source: Housing gains take breather)

False Sense Of Affordability

This might be old elementary news, but over the last couple of years during the inflation of the Calgary real estate bubble many home buyers were "tricked" (yes, I dare say it) into affordability.

A conventional and financially rational mortgage would follow a 25 year amortization period. A down payment requirement of 25% would be a solid foundation. In addition, a single income stream would the norm.

Since February 2006, CHMC has introduced 30, 35 and 40 year mortgages to allow prospective buyers a chance into the real estate market. In conjunction to low interest rates, a well oiled real estate marketing machine, and a booming economy this created the present bubble dynamic.

Recently, the essence of 40 year mortgages has been questioned.

"Canadians are flocking to 40-year mortgages, often without a down payment, and the rapidly developing trend is beginning to ring alarm bells for policy makers in Ottawa.

Both the Finance Minister and the Governor of the Bank of Canada are expressing concern about the situation, as the U.S. economy continues to reel from a crisis triggered by mortgage holders who were in over their heads."

The shocking statistic found in the article is that around 40% of new mortgages are of longer than conventional 25 year periods. Furthermore, 15%-20% of first time home buyers are opting for no down payments and 40 year mortgages. Since Calgary lead the sudden incline in prices, unconventional lending practices may be more pronounced in the market.

Instant applications to a life of serfdom and financial tight rope walking. Longer term mortgages cost thousands more just in paying interest and last much longer. They are only beneficial to your bank, mortgage broker and anyone in the real estate "money supply chain."

"The bigger question is what happens as you go off two, three, four, five years from now, and it's no longer just a significant share of the new applications, but it's a significant share of the outstanding market," said Derek Holt, an economist at Bank of Nova Scotia. "I think we'll be in uncharted waters as to the sensitivity to shocks that most households will find themselves facing." If there is a shock in jobs, interest rates or commodity prices, "unless you see the arrival of 60-year mortgages, then you've got a household sector that's really backed itself up against the wall."

If the current state of affordability is defined as minimal down payment on a mortgage longer than 25 years, the cold reality is much different. You can't afford the house (wait for the price correction).

The most dangerous lifetime financial decision is "force feeding" affordability in a bubble real estate market.

Offending Economists Around The World

The preceding graphic was the housing market in the US where prices eventually crashed. Early symptoms included a decrease in sales and high inventory levels.

Notice the very "shocking" similarities to the trend of the Calgary real estate market. In Calgary, home sales are plummeting 30%-40% YOY. Inventory has risen to all time record highs (~7000 city SFH, ~3200 city condos). By exhibiting the same symtoms, it seems that the Calgary real estate market will suffer the same illness.

According to this article, CREA is forecasting the resale market in the province will drop by 18.9 per cent to 57,900 units this year and experience a further five per cent drop in 2009 to 55,000 MLS sales. Interesting to note, the report says the average sale price in Alberta will rise by 4.7 per cent to $373,000 while it will only go up by 2.8 per cent in 2009 to $383,300.

So how exactly does retracting sales contribute to rising prices?

As a commodity, real estate is rather complex. But don't be fooled, real estate is still bound by the same simple economic fundamentals of supply and demand. The price function isn't perfectly elastic (but rather "sticky"), therefore price fluctuations will take more time to develop.

This type of reporting should be insulting to any economist. By CREA's estimation, economists around the world should be going back to their post secondary institutions and demand for refunds on their educations. Adam Smith is rolling twice over in his grave. Insulting the intelligence of the common person will only cause CREA and its members to further lose credibility.

Contrary to real estate perma-positive pumping reports, increasing inventory and decreasing sales will reduce property prices.

It's inevitable.

More Negative Equity On The Horizon

The much anticipated "spring rush" has been a complete disaster in Calgary's real estate market. This is well documented in the MSM these days. It was during this period that sellers were hoping to unload their anvils of debt to unsuspecting greater fools. The hope and anticipation were met with retreating buyers. In analyzing historical trends, sales should dwindle further during the next coming summer months propagating further price declines.

In July 2007 we saw the peak for Calgary SFH market hit an average price of $505,920 and median price of $439,000 (achieved in June 2007). This was followed by months of declining prices. The year ended in December 2007 with an average price of $444,769 and a median price of $406,788. Summer buyers would already owe more on their mortgage loans than the value of their homes.

Suffice to say, we may start seeing month-over-month price declines as early as this month. This means the price declines will be longer and more painful for sellers this time around. With inventory at record levels and low sales, the price declines this year will be magnified.

By the end of this year, there is potential that a high percentage of home buyers during the last two years will in a negative equity position. Negative equity, an element in the real estate game that your friendly real estate "professional" did not address during the frenzied buying hysteria. But is has now become a reality for most home owners in Calgary. In combination with being "house poor," many bubble buyers will be in a constant state of financial duress. This may mean not having enough money to send your real estate "professional" a Christmas card this year.

As negative equity builds, market exit strategies for sellers are minimized and financial losses will be greater.

Those who are overextended could possibly tip the rest of the market into a severe correction.

...

A new reality in Calgary. Overextended homeowners will use creative ways to find tenants to help cover mortgage costs on multiple homes.

City Vacancy Rates Jump to 4%

The once white-hot Calgary real estate market boasted a vacancy rate of 0.5% back in 2006. According to this article, alot has changed in the past 2 years. Inventory has slowly built up to uncontrollable levels and property sales have dissipated. This has resulted in rising vacancy rates in Calgary to as high as 4%. Earlier this month, CHMC had forecasted the vacancy rate to be at 2%. It's currently double the forecasted level. With so much inventory available, the "bitter" renter has more options to choose from.

The pendulum is clearly swinging the other way. With vacancy rates much higher than anticipated, many landlords will have to be competitive (ie. lower rents) in order to attract tenants. By lowering rates, their carrying costs are adversely increased with reduced rent revenue. A quick peak at rentfaster.ca/calgary.php will reveal a plethora of rental listings.

The augementing vacancy rate is simply just another symptom of the real estate market heading into a (severe) correction.

Stay tuned.

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