Fine Print – What Wenzel et al Won’t Tell You April 28, 2013Posted by DustinRJay in Calgary real estate, urbanism.
Tags: Calgary real estate, Manning Centre, urbanism
1 comment so far
After 200,000 page views on this blog and being dormant for the past few years, the time has come finally to make a post.
The recent fracas about developers making large private donations to political hubs like the Manning Centre in efforts to influence council has spurred my interest. In particular, why are certain special interest groups using opaque means to influence public policy?
In Calgary, there has been a renewed interest in urbanism as evident by the high rates of skyscraper and residential construction since 2000. In Toronto, studies show a renewed interest in downtown among younger demographics. And in the US, among younger demographics there has been a dramatic change towards increased public transit and cycling usage.
This evolving area for housing research is highlighted by Rob Shiller, eminent economist where he notes that “it’s plausible that a broad change in thinking is ahead, reducing demand for large suburban homes”.
The following spreadsheet highlights one of the major drivers for urbanism; that being the cost of congestion, parking and to a lesser extent vehicle replacement costs and fuel.
The key point is that living in a greenfield community would have inferred costs of $400,000 (net present value of 25 years at 3% rate) beyond living in a more bikable/walkable/transit friendly neighbourhood if you consider that your employment would be in the downtown.
This is something that you won’t hear about from those marketing greenfield construction. And this view of looking at affordability from a holistic point of view isn’t shared by homebuilders like Shane Homes. With such a large inferred cost ($400,000) these aspects of affordability are non trivial.
The spreadsheet below can be tailored to your situation:
Tags: bankruptcies, Calgary real estate, foreclosures, mortgage arrears
Much has been said about the growing amount of mortgage arrears in Alberta, but how much does that impact supply? As shown in previous graphs on this blog, the resale market has generally been rising whenever sales\new listings is greater than 50%. Given that Calgary condo and single family home average resale prices has risen over the last year, the supply\demand situation has obviously shifted to create stability in the market.
Most Calgarians know by now that mortgage arrears and bankruptcies are up. And most Calgarians I believe may think that the correction was due to the increase in bankruptcies. This couldn’t be farther from the truth.
2009 was a year that had a lot less new listings than in 2007, and 2008. So even while bankruptcies have increased, supply is down measurably as well. Supply due to bankruptcies remains a fairly small contributor to the overall resale supply picture.
One of the problems that caused the initial correction, was not a vast increase in bankruptcies, but that supply levels during the correction period were much greater than demand. Resale supply can come from many sources including death, divorce, and job transfer, but also low rental yields and offloading by investors, new housing construction and speculation of a market downturn.
Alberta bankruptcies are likely to continue to increase into 2010 (2.7 times January 2007 filings), as the rising mortgage arrears (4.2 times January 2007 amounts) have shown that banks have a bit of a backlog of mortgage arrears to clear out. Banks and the CMHC should communicate to developers and other market participants to expect more supply from mortgage arrears turning to bankruptcies going forward.
The following graph shows an estimate of Calgary consumer bankruptcies (estimated as 33.5% of the total Alberta population when compared to the Calgary CMA which includes the towns of Airdrie, and Cochrane in addition).
[click above image to enlarge]
Note that bankruptcies also include mortgages, bank and company loans, credit cards, taxes, student loans and utilities. In 2006, mortgages were declared as a liability in a bankruptcy only 17.5% of the time. Therefore, I believe the bankruptcy estimate as a component of new listings is a more pessimistic guess than actuality. One also needs to consider that bankruptcy filings have not kept up with mortgage arrears, and this may be because the judicial and banking system is in the process of staffing up to deal with a higher volumes as compared to the cylical lows in mortgage arrears that occurred in mid-2007.
Please vote below and feel free to elaborate on those risks further in the above comment section!
Calgary Housing Affordability Update November 22, 2009Posted by DustinRJay in Calgary real estate, Uncategorized.
Tags: affordability, Calgary real estate
As noted in previous posts, Calgary’s affordability has been on an improving trend. RBC economics shows that the current affordability in Calgary is nearing cyclical lows. If one looks at the period, all of the time between 1998 – 2005 I would consider fairly good times to buy. Since 2007, a combination of rising household income, falling house prices and lower interest rates have all improved the affordability of housing.
It’s important that individual market participants come up with a budget before buying that includes maintenance costs, condo fees, taxes, water, gas, electricity, insurance and mortgage costs. One should also budget for a higher interest rate environment when renewing in 5 years and consider things like retirement planning as well, risks of losing a job, and the amount of disposal income one will have available after tax.
I think the affordability metric is one indicator of the relative value of housing (particularly in Canada) as Canada has not had the same volumes of subprime lending. Studies have shown that regions within the US with higher amounts of subprime lending have fallen faster and harder than regions that don’t have the same amount of subprime lending (even if prices are relatively elevated in both cases). In regions with high amounts of subprime lending, I believe it is more important to pay attention to price to income instead of affordability.
I think that affordability is a leading indicator for future mortgage arrears. When affordability becomes stretched, it’s likely that mortgage arrears will increase countercyclically over the following years. The Calgary real estate correction in 1982 was predicated on extremely poor levels of affordability as noted in a previous post.
[click above image to enlarge]
To see the most recent RBC Report click here: RBC Housing Affordability Report
Calgary CMHC Forecast Bias – From Optimist to Pessimist? November 16, 2009Posted by DustinRJay in Calgary real estate, CMHC.
Tags: bias, CMHC, forecasts
Studies have shown that there is a tendency among analysts to be consensus seeking. More often that not, analysts are benchmarked against their peers so an analyst may be rewarded even if his prediction is off the mark as long as it is not too far off from consensus. According to some studies, analysts are more likely to be optimistic when revising downwards, and pessimistic when revising upwards.
Although limited data is available, I believe CMHC is prone to some bias tendencies. CMHC always forecast price increases for the following year since they have been putting out forecasts in Calgary since Q1 2008. This illustrates they may have an upward bias to forecasting prices. In addition, during the correction period in 2007 and 2008, there were four consecutive downward revisions. The probability of four consecutive downward revisions is 1 in 16. While the economy and oil prices did deteriorate considerably over this same period, I believe that the consecutiveness of the revisions may reveal a bias in CMHC forecasting towards being overly optimistic when revising downwards, with the potential of being pessimistic when revising upwards.
[click above image to enlarge]
For these reasons, I believe that the BEST information available from CMHC may not be only the price that they are forecasting for the next year, but also information in which revisions are being made counter to previous trends. CMHC has broken with the previously held consensus revision trends as of Q3 2009 and that may be newsworthy in itself.
To find the current CMHC housing market forecast click here and go to the “Order Desk”, then “Housing Market Information”, and click on “Housing Market Outlook.”
Calgary Housing Recovery Already Underway? October 20, 2009Posted by DustinRJay in Calgary real estate, supply and demand, Uncategorized.
Tags: Calgary real estate, supply and demand
It’s been awhile since my last post, so I thought I would share some interesting information.
The first graph illustrates the historical supply and new listings on a seasonally adjusted basis. Sales and new listings have been adjusted on a seasonally adjusted basis so that it gives a leading edge indicator of of how the resale market is performing. For example, December is typically the worst month of the year for sales and May is the best and there is a fairly consistent seasonal pattern to resale volumes. This adjustment also allows one to determine whether price movements are caused to to changes in supply or changes in demand. In the past few years, sales volumes I believe soared well above demographic demand, and in early 2009 were well below demographic demand. I believe future sales volumes will fall moderately from here due to what has been described as demand driven overbuilding (premature buying) that occurred in 2006.
Looking at new listings, one can see that supply is not the problem that many blogs had predicted would happen due to high foreclosures. Supply is much lower than it was in 2007 and 2008 and this is I believe because a much lower percentage of loans was granted to debtors of poor credit quality as compared to the US. I think there is also a rational component to the ebb and flow of activity in the resale market.
The series of events that occurred over the last few years may be as follows…. In 2005\2006 as rental vacancy dropped to 1%, and perceived slowness to bring new product to market, buyers reduced their personal time horizon to buy. This is driven by a belief that if they do not buy now, then they risk further price appreciation occurring or waiting a long time for house prices to drop. Potential sellers also recognize that there is a lack of supply, and put off selling. Speculators also enter the market to drive up demand in the short term, but do not immediately cause an increase in supply. In mid 2007, when inventory is increasing, and new construction was high, it is apparent that supply can satiate demand at that price point. Potential sellers and speculators that were delaying selling rush to the exits to cashout. Also, buyers suddenly realize that there will be a price correction, and now instead of reducing time horizon to buy, they increase the time horizon to buy as they realize that in the near term there was going to be a price correction. This causes a very sharp and sudden shift in both the supply and demand balance. In 2009, when housing construction nearly ground to a halt (especially with MFH starts) buyers have now begun reentering the market once again as inventory depletes. Potential sellers may also now be once again delaying selling purchases due to perception that the market has turned the corner, and less risk from a wave of supply coming from foreclosures.
In summary, I believe the price correction in the resale market is over for now as indicated by the graphs below… Although, I do not see why a relapse into a bear market is not possible if sales were to drop again. Housing corrections typically occur over a period of several years, and historically taken at least 4 years to unwind so I would not be surprised to see further price drops if the supply\demand situation shifts once again. There are reports that the Calgary commercial office space is overbuilt and vacancies will rise to 20% in the coming years and will halt commercial construction in Calgary for several years. The good news is this will provide stability and growth opportunity for businesses in Calgary as they can better keep a lid on operating costs.
[click above image to enlarge]
[click above image to enlarge]
Calgary Resale House Price Model April 22, 2009Posted by DustinRJay in Calgary real estate, short term real estate trends, Uncategorized.
Tags: calgary house prices, econmetric model
The following graphs illustrate the historical relationship between absorption rate and house price changes in Calgary. As the absorption rate decreases, demand exceeds supply, and house prices rise. When the absorption rate is high, supply exceeds demand and house prices fall. While I do not believe this metric is useful for determining long term price point, I do think it is useful for determing the near term price trends.
[click above for larger view]
[click above for larger view]
Recent history indicates that an annual absorption rate of 4 would be a market that is roughly balanced. In 2008, Calgary had record amounts of resale inventory and these inventory levels have dropped in 2009. Also, sales dropped dramatically following the credit spread crisis, but have since improved on a seasonally adjusted basis. If the current inventory glut continues to decline at it’s current annual rate, and sales stay flat seasonally adjusted, it is possible that the Calgary housing market will bottom in December 2009 after falling further in autumn. I think there are upside risks and downside risks to this forecast. I believe it is prudent for all market participants to err on the side of caution both when formulating business plans and household budgeting. It’s probably also worth noting that house prices are likely to increase by only in the zero to very small single digits for a number of years after bottoming, so there is no rush even if you are trying to time the bottom.
Tags: economics report, TD
This report is from TD economics. Below is an excerpt specific to Alberta, with a link to the full report at the end of the post:
“Wild Rose country was overbuilt substantially during its boom years, and mounting inventories in Calgary and Edmonton are cause for concern. Indeed, even over 1991 to 2001, housing starts in Alberta had already overshot household formation by 12%. With oil prices having subsided from their fever pitch and expansion projects now on hold, the net inflow of migrants has slowed dramatically and may even cease completely during 2009. The previous pace of homebuilding could not be sustained and slowed precipitously during the fall. Alberta’s starts further declined to 13,100 units in February, 61% lower than a year prior. With Alberta’s economy set to contract by 2.5% this year in real terms and roughly 10% in nominal terms, homebuilding has likely not yet bottomed. While around 30,000 new households will form in the province during 2009, starts are likely to be nearer 14,000 units on the year.
Even accounting for the population inflows, the province’s homebuilding overshot fundamentals by nearly 10% during the commodity boom. From 1991 to 2006, Alberta has approximately 72,000 more housing starts than new households, and the estimated 13% overshoot of fundamentals during 2002-2008 exhibits this excess. Now, plunging sales-to-new listings ratios and mounting unsold inventories clearly indicate that the present stock of homes is excessive. As of February, Calgary had an overhang of 1,133 unsold units (874 singles and 259 multiples) and a sales-to-new listings ratio of 0.29, indicative of a definitive buyer’s market, having now fallen to its lowest value in two decades. Similarly alarming is Edmonton’s surge in unsold inventories. As of December, Edmonton had 1,747 unsold units (1,254 singles and 493 multiples) its largest recorded overhang ever – and conditions for sellers in the resale market have deteriorated sharply. In both of Alberta’s major cities, homebuilders have worrisome unsold inventories of new singles, and, with demand having cooled rapidly, resale markets already appear saturated.
The steep appreciation of house prices during Alberta’s boom times now appears to have been far too optimistic. Although income growth was very strong, Albertan housing during 2007 and 2008 was especially overpriced relative to fundamentals. The quick climb of Albertan resale prices substantially eroded affordability and, even though Albertans were Canada’s highest income earners on average, the growth in household income was not sustainable. The 9% year-over-year decline in Alberta’s average resale price in February is evidence that past prices exceeded fundamentals. Those inflated prices drove homebuilding in excess of fundamentals. Given Albertans’ deteriorating incomes and the overhangs of unsold inventories, Alberta’s resale prices probably have another 20% leg down over 2009.”
Calgary Econometric Rent Model March 26, 2009Posted by DustinRJay in Calgary real estate, supply and demand.
Tags: Calgary real estate, econometric model, rent
1 comment so far
There are really three separate, but linked, real estate markets: the resale market, the new construction market and the rental market. The following graph shows the historic relationship (1973-2008) between vacancy rates and rental increases for Calgary and has a good correlation of R²=0.80.
[click above for larger view]
Calgary Real Estate Historical Yields March 25, 2009Posted by DustinRJay in Calgary real estate, rental yields, risk spreads, valuation models.
Tags: bonds, Calgary real estate, yield spreads
One way of evaluating assets is to compare them to a safe investment. Arguably, the safest investment in Canada is Government of Canada bonds. The biggest risk with holding a bond, is that it is subject to inflation over the term that you hold the bond, but virtually guarantees return of your capital.
The following graph compares the historical rent to price ratio for Calgary against historical long term bond yields. One of the benefits of real estate over bonds, is that the dividend (rent) can be expected to grow over time, and the asset value will appreciate over long periods of time. A bond does not offer any upside from the coupon rate. Therefore, it’s usually irrational that real estate, which has more risks in comparison to Government bonds should yield less. The following graph helps identify some of the recent price corrections including the 1982, 1991 and 2007 corrections.
[click above for larger view]
One interpretation is that given recent rental increases, lower bond yields, and lower house prices that the current rent to price ratio is more competitive than bonds, and therefore offers fair value.
Inventory Zenith March 3, 2009Posted by DustinRJay in Calgary real estate, mortgages, supply and demand, Uncategorized, US real estate.
Tags: Calgary real estate, supply and demand
As discussed in a previous post, leading indicators at that time had pointed to the balance of inventory tipping towards excess demand in the near term. That has now happened, and year over year inventory is down 7% in Calgary.
The following graph illustrates a potential medium term price point. It is based on two points wherein inventory was dropping on a year over year basis. Prices dramatically above these points may lead to excess supply, and prices below have tended to lead to excess demand.
[click above for larger view]
Also noteworthy is:
- Wave of speculators in 2006 & 2007 resale market now appears to be over and unlikely to be a source of supply for some time.
- Calgary single family home construction was the lowest since 1995 in 2008 and the low level of housing starts is expected to continue into 2009. This is lower than demographic growth and therefore resale inventory appears poised to continue siphoning off from it’s current high levels.
- Drop in interest rates is likely having an impact on inventory. As interest rates drop, the yield spread between rent and mortgage rates improves thus increasing affordability and relative investment value. Some investors and homeowners may choose to delist if they believe their is more value in renting, or that the resale market is likely selling at a bigger discount to the new home construction market. New construction inventory may not be able to be supplied at the current price point. Note: Buyers need to run various budget scenarios to determine the risk of rising interest rates.
- Mortgage arrears in Alberta, while expected to rise, are at cyclical averages. Mike Fotiou, at First Place Realty, lists approximately 2.3% of inventory on the market as a foreclosure or judicial sale. This contrasts to the situation in the United States where 45% of sales are distressed properties. Canadian banks had argued that only 5.4% of Canadian mortgage market originations were nonconforming, compared to 33% of the market in the US was subprime and Alt-A. To date, the reduced exposure to shady loan origination practices in Canada appears to have largely insulated our housing market from the same level of credit defaults. As in the US, the extent of credit defaults will not be fully understood until house prices find a bottom. As year over year inventory is already dropping, this does not seem to be a large source of supply.
- Absorption rate is a source of imperfect information that may results in real estate mispricing. For instance, the absorption rate was 3.1 at the peak of the market in July 2007 and could have been perceived as a ‘good time to buy’ or ‘balanced market.’ However, year over year inventory increases were greater than 100% at the time and should have been an extremely strong indication that the market was about to correct. I think that absorption rate provides a good estimation of how the market will behave in the near term. However, a comparison of year over year inventory changes may provide a better estimate of how the market will behave in the medium term.
Random Thoughts on Oil and Multiple Equilibria Supply/Demand Points February 23, 2009Posted by DustinRJay in Uncategorized.
Tags: oil, supply and demand
Oil prices have tumbled dramatically from $147.27 on July 11, 2008 to $38.00 on February 23, 2009. Many experts have weighed in that oil prices were a speculative bubble. The rationale for higher oil prices stemmed from emerging demand from China and India, coupled with oil supply being relatively flat in response to higher and higher prices and was featured in a number of bullish economic reports, most notably Merrill Lynch and CIBC.
Since then, oil demand has dropped, and oil prices have declined. Small changes in supply/demand dramatically impact price, (e.g. consumption is down ~5%, yet prices are down more considerably). Petroleum product infrastructure has been designed for transportation and piping, not storage.
There is a fat tail risk for energy company bankruptcies. Companies that expanded and acquired heavily and drilled many new wells in a high commodity price environment, may no longer payback the original capital investment borrowed due to poor netbacks. AJM, McDaniel, Sproule have price decks that result in higher asset valuations, due to oil contango but this is based on a paper valuation that I do not believe fully reflects that the global economy has entered the worst economic recession since World War II. It may take 2 years to determine bankrupt energy companies from healthy ones as future oil barrels have a high degree of price uncertainty. The following quickie back of the envelope economics illustrates the difficult economic hurdles the Alberta energy industry currently faces:
Alberta Back of The Envelope Oil Economics
Average new oil well drill production: Assume 28.3 bbl/oil
Average annual decline: 18% year over year
Average well reserves estimate: 41,300 bbl (as calculated)
Well Cost Estimate: $1,000,000
Tie-In and Facility Cost: $300,000 (estimated average cost per success well)
Edmonton Par: $46.40/bbl
Finding & Development Cost: $31/bbl (as calculated above)
Operating Costs: $14/bbl (estimated based on companies such as Pengrowth and Husky)
Royalties (estimated 20%): $9/bbl
Plus corporate economic hurdle = You Do The Math!
In general, prices are high enough to cover operating costs, but not enough for capital investments. For the most part, the stock market is very focused on earnings growth and therefore rate is king. Bondholders require coupon payments, and therefore shutting in production to increase asset value may not be an option due to high debt loads.
When demand increases, there could be a second oil price shock resulting in yet more economic turmoil. Prices could rapidly climb as current prices are more reflective of operating costs, and would need to shift upward substantially to incorporate finding and development costs and adequately compensate investors (shift in supply/demand equilibria point).
It is likely less expensive to increase production through acquisitions than drilling. A well capitalized energy company could evaluate shutting in production to increase asset value (as in general, prices are too low to drill), and use existing cash reserves to acquire depressed natural resource assets.
An Open Letter to Diane Colley-Urquhart February 15, 2009Posted by DustinRJay in Uncategorized.
Tags: Diane Colley-Urquhart, NAMBI, NIMBY, public policy, urban sprawl
On September 9, 2008, Calgary city council debated and approved $25 million in funding to be allotted for two pedestrian bridges in downtown Calgary. This issue was revisited on January 12, 2009, when yourself and three other aldermen put forth a motion to halt the design of the bridge and the motion subsequently failed.
Calgary’s extensive pathway system and pedestrian bridges around the river are a primary reason why I chose and enjoy living in Calgary. Currently, the pedestrian bridges are a part of my daily commute and habitat. Calgary spends 4% of it’s transportation capital budget on pedestrians and cyclists and 0.37% of it’s operating transportation budget on pedestrians and cyclists. This is disproportionately less than the 7% of people that use biking and cycling as the primary mode to get to work and is a minimal part of the overall transportation budget.
Calgary also spends much more costs due to suburban sprawl. The cost of roads and interchanges, maintenance including snow removal, public transit, water and sewer is much higher in comparison to the revenue generated for low density suburban areas versus a high rise downtown condo tower. To further illustrate my point, the estimated cost of the pedestrian bridges is small in comparison to the $2100 million cost estimate for Calgary’s ring road.
Although I’m not a city planner, it seems intuitive that from a city efficiency standpoint that a high density building could have up to a 20xfold increase in profitability, thus decreasing the tax burden on residents. Alternatively, the extra profits generated from high density may be used to increase the overall quality of life for the surrounding residents.
200 units per half city block
1/2 city block
Bridlewood Suburban Area
20 units per block
10 city blocks
The revenue generated in each example would be roughly the same, but the city’s cost would be much higher for the equivalent suburban area.
Recently, a private enterprise has entered an agreement to purchase the Shawnee Golf Course for purposing of developing residential real estate. Subsequently, you submitted a motion requesting that city administration evaluate the option of using public funds to purchase and operate the golf course. The Canadian Federation of Independent Business has requested that the City of Calgary embark on a plan to sell it’s golf courses to private enterprise. Higher density residential zoning would increase the tax efficiency of the city of Calgary and allow private enterprise to develop an opportunity. This is counter to your previous arguments regarding the pedestrian bridges that you were acting as an advocate on behalf of Calgary’s taxpayers.
I believe that by supporting private enterprise and transit orientated development , that public funding can be better targeted at improving quality of life for all Calgarians.
In summary, I fully support the development of the bridges and believe that city council should avoid NAMBIism and adhere to these policies:
- Council should encourage development that minimizes sprawl to reduce the overall cost to taxpayers
- Council should attempt to allocate equitable infrastructure funding that is proportional to the tax revenue generated
- Council should not needlessly revisit projects that have already received approval unless there has been a significant new development
Trendsetter or Trendfollower? February 3, 2009Posted by DustinRJay in stock market, stocks, Uncategorized, volatility.
Tags: bear markets, S&P 500, technical trading
The following analysis was performed to backtest the S&P 500 against two investment strategies. A common belief is that the 50 day moving average (SMA) is indicative of a resistance level or support level for the market. When the price crosses above it’s 50 day moving average it means that investors are willing to pay more for the stock than the average of the previous 50 days and is typically regarding as a technical bullish signal.
The trading strategies analyzed are:
- Buy and hold
- Only buy when the S&P 500 crosses above the 50 day moving average, sell when the price drops below the 50 day moving average.
The following graph shows the value of an initial $100 investment on a logarithmic scale, as it is easier to identify relative percentage changes. What this sort of analysis reveals are that:
- Investment returns are about the same over long periods of time: e.g. Buy and hold strategy had a 49 fold return versus the 44 fold return of the SMA strategy.
- SMA strategy is out of the market or allocated to cash over a significant period of time compared to the buy and hold strategy
- Risk profile is vastly different over the short term (especially in volatile bear markets): e.g. Buy and hold strategy lost 31% since the Lehman failure on Septeber 15, 2008 versus 5% for the SMA strategy
- Transaction costs add up and shouldn’t be ignored: The SMA strategy would have had resulted in 881 different transactions over the time period analyzed. At a ballpark cost of $5/trade, the SMA trading strategy would have cost $4405 resulting in returns being entirely eroded.
Based on this, different demographics may have different investment objectives. It makes sense in general for young people to have a more aggressive portfolio as to fully expose themselves to the full upside of the market over long periods of time, similarily it makes sense for older people to have a more conservative portfolio that is geared towards capital preservation. In the current market, I am looking to change my allocation from a moderately conservative portfolio to something more aggressive. Generational lows in US housing sales and vehichle sales should support a floor to certain sectors of economic growth. In addition, credit market spreads (leading indicator) have improved greatly since the Lehman bankruptcy in September and price to earnings ratios seem relatively close to fair value given the large expected drop in corporate earnings.
In summary, paying attention to the SMA may be useful for people looking to reallocate money into a higher returning investment with most of the upside exposure, yet wanting to avoid the potential for more drops in a volatile bear stock market.
Dichotomous Marketplaces – Calgary Trends in Construction for SFH diverge from Resale Market January 8, 2009Posted by DustinRJay in Calgary real estate, supply and demand, Uncategorized.
The new home construction market has shifted in comparison to the resale market. The new house price index for Calgary continued to rise into 2008 as compared to the resale market which peaked in 2007. The new house price index for Calgary has only recently had a year over year decline and as of October 2008 had declined by 1.6%. Against this price backdrop, single family home starts dropped 44% against a 29% drop in sales. Also, there was a large shift towards higher end houses in Calgary and the top end of the market experienced large sales growth. SFH units under construction have retreated to 2001 levels.
It is possible that participants from both marketplaces may find opportunity in new places for 2009. Builder’s may find less demand for high-end houses due to the slump in stock prices greatly affecting the wealthier class. The resale market may experience less new listings due to less people buying new at the top of the real estate pyramid. People looking to buy at below $350,000 may find that the best source of supply is in the resale market.
Below is a table of changes in the new SFH market that occurred over the last year:
CMHC housing information available here.
Glut Today, Excess Demand Tomorrow January 3, 2009Posted by DustinRJay in Calgary real estate, supply and demand, Uncategorized.
Tags: Calgary real estate, inventory, supply and demand
A review of inventory trends and prices is useful for helping to understand what the future price trend will be for the Calgary market. From the following graph, some conclusions can be made:
- Falling levels of inventory generally lead to higher prices and vice versa.
- Inventory is dropping at the fastest rate since the Spring 2006 bull market rally. Inventory has fallen 41% since the peak inventory in May 2008 to December 2008.
- Inventory rose most dramatically in 2006, by a smaller amount in 2007, and even smaller amount in 2008. The implications is that resale inventory appears poised to fall on a year over year basis for 2009. As of September 2008, single family home housing starts are at the lowest levels since 1986.
- Recent major market events including the oil price decline, and Lehman Brothers bank failure have not increased inventory levels.
- Major sources of supply were in response to high prices, not foreclosures; that source of supply now appears to be tapped out.
- Calgary real estate market has crossed into a state of excess demand, after several years of excess supply.
- Current high levels of inventory require risk management to bring inventory in with long term trends.
Click above image to enlarge.
The Price is Not Right… (But Not by Much) December 22, 2008Posted by DustinRJay in supply and demand.
Tags: Calgary real estate, demand, supply
In 2005 and 2006 supply was much less than demand and house prices rose. A ratio of 50% sales to new listings ratio has historically kept prices in balance. House prices overshot the supply/demand balance and started to fall. The crossover of the supply/demand balance indicates a level of price support at ~$375,000. Demand is likely to rebound slowly as prices drop. Supply is likely to retrace the supply/price relationship. As illustrated below, some overshoot to the downside is likely to burn through the current inventory.
Of particular interest is that supply had a high degree of elasticity in respect to price whereas sales did not. As a corollorary, I think that to some extent:
- Supply = f(marginal cost of supply), linear relationship
- Demand = f(consumer confidence), nonlinear relationship
Click above image to enlarge.
The 2008 Stock Market Crash – Irrational Despondence? October 9, 2008Posted by DustinRJay in Calgary real estate.
Tags: Calgary real estate, geometric series, investing, long term trends, stock market crash
Since the S&P 500 peaked in 2007, the stock market has plummeted a whopping 42% from the peak. The dot-com bubble deflated over several years, whereas the United States housing bubble has collapsed over a much shorter time period and has brought down with it the American banking system. Fear has run amuck, and the question is, has rational thought regarding value given way to irrational fears regarding market risks?
If one believes that the market is a somewhat random geometric series of cash flows that resembles exponential growth, then one should be able to identify peaks and troughs in the market by defining an “upper peak” and “lower trough” line.
The recent bear stock market has easily broken through the previous “lower trough” line and therefore savvy investors may now find substantial value in good stocks that have solid balance sheets and dividends that pay above safe investments like bonds. The following graph shows the S&P 500 and the upper and lower trading bands:
How does this relate to Calgary real estate? Bear markets such as the 1987 stock market crash did not have an impact on Calgary real estate prices and there has been virtually no correlation between Calgary real estate prices and the S&P 500.
There is likely a stronger linkage between the S&P/TSX Capped Energy Index and Calgary real estate prices. Overall, the slumping stock prices in this sector will likely result in less money available for capital expenditures, and less shareholders cashing out. In turn, this may result in less demand for high end real estate in Calgary over the next 12 months.
I believe that in the energy sector in particular, one can find substantial value through scouring balance sheets for price to earnings ratios, price to book value ratios and dividend yields. The most recent CIBC World Markets Canadian Portfolio Strategy Outlook makes the argument that TSX stocks are at the cheapest since 1987, and furthermore that energy stocks will provide the most upside over the next year.
Full Disclosure: I have positions in Calgary real estate and corporations that are components of the S&P/TSX Capped Energy Index
Futures Market Predicting Troubled Assets Relief Act Passed Quickly September 24, 2008Posted by DustinRJay in Uncategorized.
Tags: futures market
The Intrade futures market is currently predicting that there is 73% chance of approval for $700 billion US government bailout (Troubled Assets Relief Act) being approved before the end of the September. Passage of this act will help to reduce risk spreads and LIBOR rates and is seen as essential to preventing systemic risk to the American financial system. In addition, passage of this plan should make it easier for American banks to lend and mitigate damage to the US housing market. Most analysts expect this bill to be approved quickly barring any political interference.
Calgary Misery Index – A Reason For Optimism in The Housing Market September 23, 2008Posted by DustinRJay in Calgary real estate, inflation.
Tags: Calgary real estate, inflation, misery index, unemployment
The misery index is a commonly used as a metric for stagflation. Stagflation is a combination of high unemployment and high inflation. High inflation and low unemployment rates created sharply rising house prices in the Calgary real estate market during the period from 1973 – 1983. In 1983, rapidly rising unemployment caused inflation levels to cool significantly, and house prices to fall. Again in 1990, upward trending unemployment rates caused house prices to stay flat for roughly 8 years.
In general, the following conditions are supportive of real estate growth:
- Low unemployment
- High Inflation
The following graph illustrates the relationship between inflation and unemployment to house prices:
Tags: Benjamin Tal, CIBC world markets, economist
Real Estate Economics and Budgeting August 28, 2008Posted by DustinRJay in Calgary real estate, valuation models.
Tags: budget, Calgary real estate, economics, investing
I think having a budget that you are comfortable with is critical to any investment strategy. By laying out the cash flows, and expected asset values you can get a feel for various economic parameters such as:
- Net present value comparison of various strategies
- Rate of return
- Sensitivity to various economic parameters such as interest rates and inflation
- Affordability or liquidity risks
I put together a budget of various shelter scenarios:
- Renting and Investing the Difference
I hope you find this budget useful as I believe having a well laid out plan is extremely important. Having a solid budget in place will create long term value for investors and create a successful financial environment for your family.
I strongly encourage people to come up with their own budgets, and perform due diligence before making any investment decision.
The budget excel spreadsheets that I came up with are here:
The Long View August 25, 2008Posted by DustinRJay in Uncategorized.
Tags: appreciation, Calgary real estate, housing cycle, inflation
The following graph shows the average house prices from 1973 to current. For most of the graphs on this blog it has shown Calgary real estate from an inflation adjusted perspective. If one was to consider inflation however, it can be seen that buying real estate can be helpful as a hedge against inflation.
There are better times to buy than others, however I believe that for the average person that bought at the peak in 1983 or 1990 with a 25 year horizon that they are still probably very happy with their decision.
What do you think?
A Tale of Two Markets August 23, 2008Posted by DustinRJay in Calgary real estate, supply and demand.
Tags: Calgary real estate, inventory overhang, MFH, overbuilding, SFH
A split has occurred in regards to the single family home and multi family home construction environment. The following article address the differences in supply-side characteristics for each market.
Calgary single family home market:
- Correction in starts largely historical, capacity to overbuild looks minimal, last couple data points may point to a bottom approaching as housing construction returns to historical rates, orderly unwinding likely
Calgary multi family home market:
- Construction has continued unabated, capacity to overbuild in place, projects such as Gateway Midtown being suspended point to major trouble signs ahead, long way to drop for construction starts to return to historical rates, disorderly unwinding possible
Ye Olde Real Estate Vintage August 19, 2008Posted by DustinRJay in Calgary real estate.
Tags: Calgary real estate, Vintaging
Bob Truman, at First Place Realty, is one of the sole providers of real estate information and statistics in Calgary besides the CREB. I use a lot of Bob’s data in my graphs, so he deserves a big shout-out for making this information available to the public!
The following is a graph comparison of the change in:
- Truman Index
- Average Price of SFH in Calgary
- Median Price of SFH in Calgary
Some of the primary points this graph makes are:
- Lots of spread in market value can create opportunities and risk as properties may be bought and resold for a gain or loss of +/- $80,000
- Value of a good REALTOR can add $40,000 of value per transaction, alternatively a poor REALTOR can cost you $40,000 of value per transaction
- Some flippers still appear to be making good money even in a market with high inventory
- Truman index seems to fit well with older vintage SFH average and median data but poorly with more recent sales. This may be due to changes in real estate market mix, recent profitable flippers skewing the trend or loss aversion.
- The majority of sales in 2006 and 2007 are still “in the black” as a total of 67% were resold at or greater than the previous sale price.
- A good deal on a purchase and sale may be worth the same value as perfectly timing the market
- Pulling the title and using a vintaging methodology can be another tool for assessing value
- Same sales pair data was from sales during the period August 1 – 14, 2008
- I apologize in advance for the “busy” graph.
Greenomics and the Value of Living Close to Work August 17, 2008Posted by DustinRJay in Calgary real estate, commute.
Tags: Calgary real estate, carbon footprint, commute, gentrification
I perceive a lot of value in living in downtown Calgary. I love the quick access to Flames games at the Saddledome, downtown nightlife, shopping on 17th Avenue, and jogging along the river pathways. Since recently moving, I have found myself walking to work and my vehicle has sat parked, except for weekend hikes.
My commute time is much shorter and my transportation costs have dropped dramatically. For those that are considering living in the inner city vs. the suburbs I came up with an estimate of the value placed on living in close proximity to your workplace.
I considered various factors that would change if one eliminated the use of one vehicle in their household as a result of living downtown. These include:
- Fuel costs
- Vehicle replacement costs
- Insurance costs
- Maintenance costs
- Parking costs
- Value one places on a shorter commute time
- Carbon footprint
The value I place simply on living close to work over the course of 25 years is about $250,000 at a discount rate of 7%. Also, it would result in having an extra 163 days of life not stuck in traffic over 25 years. Furthermore, over the span of 25 years, my carbon footprint would be reduced by 76,700 kgs. ¡Qué bueno!
By doing this exercise I also found that fuel costs are relatively small in comparison to the other costs associated with owning a vehicle. I believe that fuel costs are still much too small to encourage large fuel-efficiency improvements.
You can access the spreadsheet here and tailor it to your unique situation:
Things that go BOOM! August 9, 2008Posted by DustinRJay in Calgary real estate, stock market.
Tags: Calgary real estate, energy, stock market
The S&P/TSX Capped Energy Index is formed primarily of companies that have headquarters in Calgary. Since 2001, the index has quadrupled creating wealth on a massive scale. The boom in commodity prices has resulted in energy companies making more money, spending more money and allowing vested shareholders to cash out.
Excess liquidity brought about by the strong financial performance of Calgary energy companies was likely a major contributor to the Calgary house price boom.
The following graph shows that:
- S&P/TSX Capped Energy Index outperformed Calgary real estate as an investment
- Performance of the S&P/TSX Capped Energy Index was likely a leading indicator of the real estate boom
Volatility in Housing Markets (Part 2 of 2) July 27, 2008Posted by DustinRJay in Uncategorized.
This is a follow-up to my previous post about volatility in the housing market. For those that are looking to buy or sell a house, you may want to research what the worst and best annual scenario may look like.
The results and graph using the same data set as my previous post are below:
- P90: -5.6% (90% chance of price growth being greater than -5.6%)
- P50: +5.9% (50% chance of price growth being greater than +5.9%)
- P10: +19.9% (10% chance of price growth being greater than +19.9%)
Inflationary effects like rising household income and rent increases will continue and house prices will continue to have softness as long as there is high inventory. I believe this will entail a soft landing for the Calgary real estate market with the market chugging along between P90 and P50 for between 2-7 years.
Volatility in Housing Markets (Part 1 of 2) July 20, 2008Posted by DustinRJay in Calgary real estate, volatility.
Tags: Calgary real estate, volatility
In general, housing prices have a low volatility compared to other asset classes. This is due to the underlying fundamental value (rents) being a relatively stable cash flow. This compares against stocks which have larger variance in earnings and therefore larger volatility in price.
A lookback at historical real estate volatility can help to give a forecast probability cloud. By comparison, the S&P 500 has a VIX index which is representative of S&P 500 volatility over the next 30 day period and is referred to by some as the fear index.
A quarterly calculation of year over year price changes by histogram for Calgary real estate from Q3 1977 to Q1 2008 helps identify the scale of price changes that could occur in one year. The results are below:
- P90: -5.6% (90% chance of price growth being greater than -5.6%)
- P50: +5.9% (50% chance of price growth being greater than +5.9%)
- P10: +19.9% (10% chance of price growth being greater than +19.9%)
Furthermore, the probability of an event occurring that is above the P10 or below the P90 for 5 consecutive years is 1 in 100,000 for each (i.e.: (1/10)^5 = 1/100,000). The shortfall of this kind of approach to volatility is that this calculation is not statistically independent as bear and bull markets typically last between 2-10 years.
What this analysis demonstrates is that even if a bearish scenario is the right approach, Mr. Market could take a very long time to unwind. The following graph illustrates what 5 consecutive P10, P50 and P90 events would look like and is meant to represent the best case, best guess and worst case respectively.
Click, Whirr – Betting the Shortcut July 15, 2008Posted by DustinRJay in Calgary real estate, market behaviour.
Tags: Alberta REIN, bank run, crowd psychology
The failure in the US housing market was not a black swan as some have described it, but an error in understanding and managing collective risks.
Some of the psychological phenomena that may have contributed to the housing boom and bust are explored in a book called “Influence – The Psychology of Persuasion.” Some of these are:
1. Social Proof – Truths are Us
- Banks rely on other banks to determine risk management practices and safe lending procedures
- Real estate investment organizations like Alberta REIN have a bandwagon effect or crowd psychology (see photos here)
2. Authority – Directed Deference
- Appeal to authority of a “REALTOR®” (don’t forget the caps lock!)
3. Scarcity – The Rule of the Few
- Appeal to buy due to lack of supply (low housing inventory in Calgary 2006 to mid 2007)
4. Commitment and Consistency – Hobgoblins of the Mind
- The real estate market has only gone upwards for the past 10 years and therefore is perceived as having no risk
And on that note, I’ll leave you with a YouTube video of last weeks bank run on Indymac as a demonstration of crowd psychology. Enjoy!
Calgary Real Estate Price Elasticity of Supply June 16, 2008Posted by DustinRJay in Calgary real estate, supply and demand.
Tags: Calgary real estate, supply and demand
The supply of residential construction in Calgary has been tightly correlated with house prices over the past 30+ years. High house prices lead to high levels of residential construction as increased margins encourage more market participants.
The following graph compares the amount of units under construction to house prices:
I believe this graph demonstrates that the Calgary real estate market is capable of oversupplying the market at the current price point and will continue to do so until developers margins are thinner. Feel free to post your own interpretation below.
Condo Crazy June 2, 2008Posted by DustinRJay in Calgary real estate, condos, supply and demand.
Tags: Adora, Akoya, Alberta Boots, Arriva, Assured on 14th, Astoria, Aura, Bluffs, Castello, Centuria on the Park, City Centre, Colours, Concord Pacific Calgary, CPA Lands II, Cristal, Destiny, Douglas Glen Condo Village, Eau Claire, Eden, Encore, Exchange, Five West, Gateway Beltline, Gateway Southcentre, Giffels at Stampede Station, Grand Haras, Grand Royal, Grosvenor on 15th, Grosvenor on 5th, Habitat for Humanity, Highbury, Horizon Housing Society, Hotel Arts East, International House, Kahanoff Expansion, Kai Towers, Keynote, LaCaille on 4th, LaCaille on 8th, Lake Placid Eau Claire, LaRive, Le Germain, London at Heritage, Luna, Marda Loop Mixed Use, Midtown Towers, Mission Crossing, Mode, Montana, National Condos, Nova, Nuera, Oscar, Ovation, Quarry Park, Ramsay Exchange, Renoir Suites, Riverfront Pointe, Riverside Quays, Skytower, The Crossings, The Seed, Triangle Lands, Tweed, Union Square, Varsity Landing, Verana, Vetro, Viva, Vox, WAM Chinook, Waterfront, Xenex
There are massive levels of new construction about to hit the condo market. There are a record 3,000+ condo units for sale in the resale market. This is relatively small in comparison to the whopping 20,000+ multi-family residential units that are in construction, approved or proposed for Calgary.
The following mosaic and slideshow was compiled based on condo construction due for Calgary.
Hat tip to Boris2K7 for providing detailed information on the Calgary Construction Forum.
Tags: Calgary real estate, residential construction
A comparison of units under construction in Calgary against population growth can help identify if there is too much residential real estate being developed. The following graph yields some interesting conclusions:
- Residential units under construction in Calgary is at unprecedented levels, easily surpassing the residential construction rate during the early 1980′s boom.
- There are record levels of inventory in the resale market with over 13,000 units for sale in the Calgary and surrounding area. This is coupled with yet another 14,000 units under construction and due to come on the market shortly. This should be very worrying for developers. Total residential units under construction would likely need to correct by more than 30% or to roughly pre-2006 construction levels to stabilize the supply/demand balance. If inventory continues to build and starts do not drop off than the correction will become more severe.
- In general: as housing starts increase, house prices go up. As housing starts decrease, house prices go down. This graph shows a recent American example.
- The fact that housing construction has increased relative to population growth is an indicator of a developing supply glut. Residential construction should have a trendline roughly parallel to population growth.
- Alberta has one of the highest costs of living and some of the poorest housing affordability in the country so it is unclear how population growth can continue at recent high growth rates. Recent Statistics Canada information has shown Alberta as having negative interprovincial migration.
- Housing production rates are firmly coupled to house prices. The number of residential units under construction has tripled since 2000.
- There is a better correlation between house prices and units under construction than population growth and units under construction.
- High carrying costs caused by a combination of high prices and higher interest rates was the primary cause of the 1980′s real estate crash. It resulted in a foreclosure boom and housing construction levels were decimated in only 2 years.
Tags: Calgary real estate, mortgage arrears
The cyclical average for mortgage arrears in Alberta has been about 0.4%. As affordability in Alberta is the poorest since the previous real estate peak in 1990, one would expect mortgage arrears to increase to closer to the cyclical average (or more). The current low rate of mortgage arrears is reflective of the fact that as house prices rapidly increase, people have more options available such as selling or refinancing.
As time passes, and more people have purchased properties that they can marginally afford and/or poorer economic conditions develops, the amount of mortgages arrears will increase. Credit risk typically appears after house prices have stagnated or begun to fall.
The following graph shows that Alberta mortgage arrears have only recently begun to increase:
I would highly recommend to compare this graph with Mohican’s at Langley Financial Planning and Personal Sanity who originally posted a similar mortgage arrears analysis for British Columbia.
As for timing real estate transactions, it is good investment advice to be, “fearful when others are greedy, and be greedy when others are fearful.” Look to mortgage arrears for help in timing peaks and troughs, as high amounts of mortgage arrears can indicate a good time to buy, whereas low amounts of mortgage arrears can indicate a good time to sell.
More specifically, trend direction changes in mortgage arrears from cyclical highs or lows can indicate an inflection point in the real estate cycle.
Tags: Calgary real estate, credit markets
Changing credit conditions impacts the demand for real estate. If credit lending practices are loosened, it allows new participants to purchase real estate. The increased demand for real estate creates upward price pressure until the demand can be satiated.
Likewise, if credit lending practices are tightened, less participants can purchase real estate which reduces demand for real estate.
So how have credit conditions in Canada changed over the past couple years?
The following is a timeline of roll-outs of new CMHC products which demonstrates the rapid loosening of credit that occurred in 2006 through mid 2007:
- February 2006: CMHC to insure 30 year mortgages on a pilot basis
- June 2006: CMHC introduces 35 year mortgage and interest-only mortgage insurance
- December 2006: CMHC introduces insurance for 40 year mortgages
- September 2007: CMHC offers insurance for 100% financed investment properties
Recently, due to the turmoil in credit markets, the amount of subprime mortgages funded in Canada has dropped substantially. As an example, Xceed’s (Canadian subprime lender) funded mortgages have plummeted from $340.0 million to $65.7 million. This one lender has resulted in a quarter billion less financing for real estate in Canada over the same reporting period last year. Tightened lending standards helps explain why YoY sales volumes are down considerably.
In summary, credit conditions affect the demand for real estate, so it is prudent to pay attention to how it impacts the supply/demand balance.
Tags: Calgary real estate, credit cycle
When house prices are increasing, if a homeowner’s mortgage is delinquent they have the option to sell and preserve their credit rating. However, in a falling real estate market, the homeowner will often end up foreclosing due to lack of an option. Therefore credit risk typically only appears when house prices are falling.
Credit has become easier in Canada over the past few years and that has affected the supply/demand balance. The following three posts will cover some aspects of how the credit markets are changing and how risk to the mortgage markets only appears after house prices have started falling.
This rudimentary diagram shows how the credit cycle has positive feedback during the upward cycle:
And this diagram helps describe how the credit cycle unwinds:
Game Over for First Time Home Buyer? March 18, 2008Posted by DustinRJay in Calgary real estate, supply and demand.
Tags: Calgary real estate, demand, first time home buyer, inventory, sales, supply
Single family home sales have dropped off dramatically in Calgary year over year. Therefore, it’s difficult to determine if averages and medians are representative of the direction of the market or reflective of changes in composition of the sales mix.
The following graph illustrates the year over year change in sales volume by price range:
It illustrates that:
For the first time home buyer market, single family home sales volumes have experienced significant deterioration
Higher-end ($600,000+) single family home sales volumes have held steady
As an aside, things in naturally occurring populations typically lie in a log normal distribution (including distribution of reserves in oilfields). Hence, it comes as no suprise that things like household income and also house prices also lie in a log normal distribution.
ArriVa – No One Home? March 12, 2008Posted by DustinRJay in Calgary real estate, condos.
Tags: Arriva, Calgary real estate, condos, speculation
ArriVa is one of the most recent condo’s that have finished construction in downtown Calgary. Construction has finished a couple of months ago and there are currently 22 units in the building that have been listed by speculators for a total of $15 million as shown by the picture below. A review of other condo’s in the downtown Calgary region shows that there is similar amounts of speculative activity with many individuals having no interest in holding the property long term.
Calgary condo inventory has hit all-time record amounts and there are currently 2519 condo units for sale in Calgary. In addition, condo inventory is rapidly growing due to near record amounts of multi-family home construction in Calgary.
With Calgary condo inventory roughly triple last year, sales down 37% year over year for February, and listings up 40% year over year for February, I find it likely that many of these speculators will be unsuccessful with flipping there property and some will end up in foreclosure.
Credit: Original photo by Lumin8 on Flickr
Tags: boom, bust, Calgary real estate, commercial real estate, construction
The amount of commercial real estate being developed in Calgary has not been witnessed since the 70′s and early 80′s. There are currently several mega-projects being built including the Bow (236.0 m), Eighth Avenue Place I (213.2 m), Centennial Place I (176.0 m), Jamieson Place (170.0 m), and Centennial Place II (110.0 m). These commercial buildings will greatly increase the amount of square footage of commercial real estate available downtown.
The Bow, at a staggering 1.7 million square feet, will consolidate EnCana’s staff from three buildings into one. Eighth Avenue Place (Penny Lane) currently has no anchor tenant and is being built on speculation. Commercial real estate lease agents are currently having a hard time getting anyone to sign a 1+ year contract due to the volumes of commercial real estate being developed.
It is possible that there is going to be an oversupply of commercial real estate in Calgary, and after this wave of commercial real estate is finished, there will likely be an extended lull in construction.
The following graph compares aggregate height of commercial buildings constructed over 100 metres by completion year against residential real estate prices:
A timeline of images of Calgary skylines shows that there is little change in commercial development from 1985 to 2004.
Some of the conclusions I came up with after doing this analysis are fairly intuitive, but help to provide insight into timing. These are:
- Residential prices boom during periods of commercial construction booms.
- Current commercial construction levels have not been this high since the 70′s and early 80′s.
- The residential real estate bust in Calgary occurred during a time when there was record levels of large scale commercial real estate construction being completed.
- When the 1980′s commercial construction boom ended, house values fell dramatically.
- Overdevelopment of commercial real estate in the 80′s left little constructed for the following 20 years.
- Commercial real estate construction is incredibly cyclical.
- For this construction boom, there is a much greater share of construction projects over 100 metres that are residential vs. commercial.
As an aside, I encourage anyone who is looking at the Canadian real estate market to look past the sound bites. Due to their vested interest, it is difficult to find a banker, real estate agent, CMHC analyst, developer, newspaper, or radio program which has the chance to be frank and analytical.