The Home Stretch

For those who are interested, former Calgary Flame Dion Phaneuf has his house up for sale for a cool $1.3 million (MLS®: C3416738). I'm sure his financial advisors have suggested he cash out of the real estate game while there is still air left in the bubble. Either that, or Calgary has left a really bad taste in his mouth. I still don't understand why he was traded. He was going to be the future captain of the Calgary Flames. All good things come to an end. I'm sure his Realtor appreciates the free marketing. Where is my cut of the commission?

I can't believe it's been over a year since I last blogged. In the time of absence, I have been extremely busy with work, and also furthering my academics. I have been loosely following real estate in the background. Time has flown by and not much has changed in the real estate market - held buoyant by record low interest rates. Sheeple are still as irrational as ever, spending themselves into lifetimes of debt and serfdom. An average house costing close to half a million dollars in Calgary simply does not compute. Accidental landlords are renting every single room of their house(s). Calgarians are overextended financially. Majority are in the double-income trap. I have never seen so many stressed out drivers on the road in their HELOCmobiles. Realtors are still saying it's a great time to sell and buy. What does the future hold? Mortgage rates are already on the rise. Listings are exploding back on the market as the current herd mentality is to "cash out." Sales are plateauing. Calgary's favorite blogging bubble Realtor (BT) is suddenly changing his tune on his blog. The Competition Bureau is finally onto the Realtors. Finally, many home owners who purchased inside the bubble will not be able to afford their mortgage payments soon. Is this finally the tipping point?

Oh by the way, Garth Turner is coming to Calgary on Wednesday. 7PM at the Airport Radisson. My guests and I have seats, we beat the rush as now there is a waiting list for the event tomorrow. Can't wait for the truth to resonate through proverbial walls of denial, irrationality and greed.

This should be good.

"Pent Up" Demand...At The Kool-Aid Stand

Recently, Bonnie Wegerich, the new incoming president of CREB was interviewed by the Calgary Herald.

Q: How would you describe the real estate market in 2008?

A: It was an interesting market in 2008. We went from a seller's market to a buyer's market and we saw sales drop, listings go up. But we maintained our average sale price and median sale price. They stayed fairly steady.

In May 2008, average and median prices for SFH peaked at $479,564 and $419,000 respectively. By December 2008, the average SFH price was $417,398 (drop of $62,166) and median SFH price was $380,000 (drop of $39,000). In June 2008, the average price of a condo peaked at $315,042. February 2008 saw the median price peak at $295,000. By December 2008 the condo average price was $274,919 (drop of $40,123), median price was at $254,000 (drop of $41,000). Stability is not clearly not definable by those price drops.

Q: Has the market hit bottom?

A: All of a sudden we're seeing some buyers come out again and start looking for houses. I think they want to buy before the market starts to go up again.
...

Q: Will 2009 be a buyer's or seller's market?

A: I think we're still in a buyer's market at the beginning of 2009, but I see it going into a balanced market, which is better for both the buyer and the seller.

Perpetual sales pitch that prices will go up forever. In reality, sales in January 2009 are down 50%-60% compared to last year. The market, which participated in the greatest asset bubble in history is on the other side of the boom. Sales will not recover in 2009, and a buyers' market is here for the long term. Stop blaming the snow.

Q: What are some of the factors contributing to this optimism about the market?

A: Calgary has got a low unemployment rate. Alberta is the lowest in the country as far as unemployment rate goes. We still have a good economy. We have a great young population here. Interest rates are really good. So we have a lot of positive factors there that lead us to believe that it could be a really good year.

In reality, we are in the midst of deflationary pressures. Oil prices have fallen and have maintained low prices. Canada is now joining the global recession. Unemployment and layoffs will grab headlines in 2009.

The demand function has been exhausted. The element of "pent up" demand is waited upon by the real estate food chain (realtors, speculators, etc). Sadly, this phenomenon may not materialize for many many years, if at all. As evident in the past Canadian recession, demand recovery occurred four years later. Currently, we are now in uncharted waters while the sales to list ratio is the lowest in history. Year over year, January 2009 sales will be down approximately 50%-60% from last year. "Pent up" supply will accelerate as demand falls. Many conditions exist in today's reality that will continue to put downward pressures on real estate demand and prices (in no particular order):

• Unprecedented economical chaos resulting in a prolonged US recession (precipitating Canadian recession)
  
• Contraction of credit, mortgages will be more difficult to obtain
  
• Falling commodity prices in a deflationary environment
• Falling consumer confidence and psychology
  
• Increasing layoffs/unemployment
• Pool of buyers remaining is small
• Prices still remain unrealistic, sobering demand
  
• Supply still at all time highs
  
• Time and patience are now abundant commodities for the buyer

By the way, Happy Belated New Year!

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.

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.'

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)