jump to navigation

Credit Junky Nightmare – Credit Cycles Effect on Housing Market (Part 1 of 3) March 25, 2008

Posted by DustinRJay in Calgary real estate, mortgages, risk spreads, supply and demand.
Tags: ,
16 comments

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:

Credit Cycle - Upward Spiral

And this diagram helps describe how the credit cycle unwinds:

Credit Cycle - Downward Spiral

Advertisements

Game Over for First Time Home Buyer? March 18, 2008

Posted by DustinRJay in Calgary real estate, supply and demand.
Tags: , , , , ,
20 comments

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:

Change in Calgary SFH Sales Mix

 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
  • Average and medians, although extremely useful, are not reflective of the health of the entire real estate market due to changes in the sales mix

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, 2008

Posted by DustinRJay in Calgary real estate, condos.
Tags: , , ,
24 comments

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.

Arriva - No One Home?

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

Calgary’s Official Bird the Tower Crane Returns – Highly Cyclical Migration Pattern March 10, 2008

Posted by DustinRJay in Calgary real estate.
Tags: , , , ,
7 comments

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:

Calgary’s Official Bird the Tower Crane Returns

 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.