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Credit Junky Nightmare – Credit Cycles Effect on Housing Market (Part 3 of 3) May 15, 2008

Posted by DustinRJay in Calgary real estate, mortgages, Uncategorized.
Tags: ,

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:

Alberta Mortgage Arrears on the Rise

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.


1. Mark Pitcher - May 16, 2008

Calgary (Alberta, Canada) housing market is definitely a bubble that
is bursting. The situation could be as bad as the worst region of
the US housing market bubble. Those who speculated houses and
were greedy will be punished the natural rule of economy.
Wait and see.

2. wait - May 16, 2008

Hey Rad, do you use office XP to generate those graphs? They look good, I frame each one and put them in my room haha.

Yeah, the biggest arrears curve is coming up soon. Just watch. 40 yr mortgages, 0 down, etc. Most are house poor already, The dollar amount for arrears will be going up.

3. radley77 - May 16, 2008

I use Office 2007, and it works pretty slick. Glad you like!

Yeah, the mortgage arrears is going to start climbing to it’s cyclical averages at the least. I have been tracking it closely for awhile now, expecting it to start climbing pending record amounts of inventory and a peak in prices.

The poorest affordability conditions in a generation should lend itself to higher trending mortgage arrears pretty fast.

For holders of Canadian originated asset backed commercial paper – BEWARE!

4. Keahi Pelayo - May 21, 2008

I had no idea mortgage troubles had made it Calgary. I thought oil was driving your market. Thanks for the insight.

5. Johnny0 - May 26, 2008

I am also an engineer in my mid 20s, and I have seen many of my peers strech themselves to get into the housing market over the past 2 years. Many of them were just landing their first jobs and taking on 350k+ mortgages. Some of my friends have had parental help making the 5% down payment, but many others have been no money down. All of them are acting irrationally out of greed (“I’m going to make a killing by getting into real estate now!”) or fear (“If I don’t buy now I’ll never own a house!”). Given that many of the mortgages issued over the last few years have been on sloppy lending terms, such as very low or no down payment, 40 year terms, ect, it wouldn’t surprise me if in the aftermath morgage arears spike well above past highs in the trough of this cycle.

If prices drop more than 5% off their highs, many who have bought in the last 2 years will be in negetive equitity positions. Unless there is a quick rebound, I would expect these people to walk away from their underwater mortgages in large numbers. The resulting glut of of properties on the market could lead to further depression of prices, a greater number of people in negetive equity positions, and a vicious cycle down. My only concern is that in Canada, the structure of the mortgage market is such that taxpayers will be left footing the bill.

6. pestilent - June 2, 2008

Pestilent says : I absolutely agree with this !

7. Chauvinist - June 19, 2008

Somehow i missed the point. Probably lost in translation 🙂 Anyway … nice blog to visit.

cheers, Chauvinist.

8. section31 - July 4, 2008

As an add on to what “Johnny”, I am interested as to how much gas prices / commoditiy prices will play a factor in the arear rate?

Its starting to look like 1982 all over again, as much as I want prices to crash so I can get a cheap house, I can’t help but feel horrible for all those people that stretched themselves to get into a house only to lose everything after a sharp “correction” in prices.

9. Udayan - July 16, 2008

I myself am an engineer in my mid-20’s and only recently started following these posts as I am looking to get into a place. There is always the dilemma as to whether waiting is the best course of action in expectation of the market heading south, or whether snagging a ‘deal’ in the present circumstances is best.

I myself am of the opinion the investing within the inner city is always a good proposition as RE on the periphery of the city experiences the sharpest decline in case there is a correction. Commutes with gas prices the way they are today can only held provide a floor for inner city real estate. Again, if renting is the name of the game, there are always quite a few takers closer to the downtown core. Typically your renter’s profile may be a single working professional, a new entrant to the workforce, an out of towner etc. Families where both spouses are working tend to have larger disposable incomes and may rent the townhouse’s, single detached homes for a limited duration until they find the home that they want to settle into. They also bring greater financial wherewithal and possibly some equity from their previous sale(in case they owned).

The other thing which I wanted to highlight is gone are the days of $80 barrel for oil. The EIA is forecasting prices of $130 for some time to come with the possibility of it rising to $180 within a 3 year period. Personal transportation has just barely penertrated a small segement of the developing world and their energy consumption will continue to increase dramatically. North America cannot wean itself off oil any time in the near future and the other thing to look into is that oil is a huge component of manufacturing and not solely used as a transportation fuel. Calgary’s/Alberta’s economy will continue to flourish with some abatement in the rapid growth rate.

The other point I would like to mention is that some of my young engineer friends have stretched themselves pretty thin with some big mortgages. However, do I think they will default, absolutely not! I think getting into a house after foreclosure would be close to impossible and the people who have invested in RE as a primary goal of having a roof over there heads are not going to be taken in by these cyclical trends. They are in it for the long run and as long as their expectation is that price will increase over the course of 10-15 years, they will stay the course and not sell/forclose. Just my two cents.

10. section31 - August 8, 2008

Question Udayan: If you were a banker and a person has negative equity upwards of $50,000 and there is another person with positive equity, why would you give a loan to the person with negative equity?
The point is, no body is going to give a mortgage out to someone with negative equity. So the people whom are “in it for the long run” are dealing with banks who are “in it for the short run”. They are not charitys and will not extend a loan to people in negative positions (Don’t forget that the first 5 years of a mortgage is almost entirely interest so despite the high mortgage payment almost zero is going into the principal and equity). They will force foreclosure and give the house to someone in better financial standing. Mortgage renewal time will not be pretty for anyone in 2-4 years.

11. section31 - August 8, 2008

P.S. Hope none of your “engineer friends” plan on moving anywhere in the next 10-15 years either. Real Estate Fees and Closing costs will rip you for a good 15K ouch!

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