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Volatility in Housing Markets (Part 2 of 2) July 27, 2008

Posted 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.


1. section31 - July 28, 2008

“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”

I just don’t see this panning out like that. I moved to Calgary in April and now it is the middle of the summer, the supposed high time of the year in real estate sales and prices are now down 15-20% from when I arrived here. And that is LIST PRICE. I saw a Condo go from $300 to $240 and SFH’s go from $470 to $400. That is a massive drop in just 6 months. That isn’t exactly a soft landing in my opinion. The only thing I can think of that is keeping the “average sale price” from tanking is the fact that there is very few houses available under 400K anyways. So basically the realestate market is saying housing prices are good but they are sacrificing sqaure footage for price. There were a few houses I was eyeing that were 389 for 1500 sqaure feet when I arrived but alas they are gone and the only the monster 2100+ sqaure feet are left.

2. RJT - July 28, 2008

Interesting analysis Radley. I suppose it really depends on what a “soft landing” means. I also think it depends if you believe the inventory will clear at close to current prices.

I think the most likely scenario is one where new builders in the outer suburbs lead the price declines, as their volume is off huge and like any company, they will keep producing as long as they can do it profitably (remember, land costs are generally sunk, so marginal costs are all that matter when deciding to build or not).

I expect average and median real prices to drop by 30% over the next few years. Whether this is a nominal drop or real depends on what happens to wage inflation over that time.

3. section31 - July 28, 2008

P.S. Tought this would be good for a laugh. I spoke with a new housing agent and she told me that to buy an existing house “A” would cost $440K, but if I wanted one built from scratch it would cost me 525K because supposedly the new lot prices are high?

I couldn’t help but laugh. According to that logic, I could buy a house for 440K, then turn around and sell it for 525K via arbitrage. Why would a development company function like this unless they have massive inventory? The only logical conclusion I can think of is that they have a ton of homes to unload and want to discourage new start ups since they would only further depress the prices of there existing inventory.

4. RJT - July 28, 2008

Sorry for the double post, but in addition, the high volatility (on the upside) only occurred since 2004, so it is likely that there will be high volatility on the downside soon, and once the market clears and the bubble is over the market will revert back to the “usual” low volatility.

I would argue that this is what we’ve seen in the States, low volatility for 100 years, followed by huge increase over a 3 year period, followed by a bust with large decreases.

5. section31 - July 28, 2008

One last thing and please take this with a grain of salt. When I first moved here there was a McMansion I liked for 550K in the South West of Calgary. I was talking with an agent and later confirmed online with a bit of digging that there is a new development (not even started yet) in the South East wich is pegging the exact same house (yes exact specs) for $400K. That is pretty scary when the developer is forcasting a 30%+ drop next year or so from this April.

6. nonplused - July 28, 2008

I still dissagree with the calculation of volatility used in this analysis. The accepted way to calculate volatility is to take the stardard deviation of the log normal return of the data (i.e. standard deviation of ln(p2/p1). This is then used in a log normal distribution to calculate p10, p50, etc. For more see:

There are also a number of other sites that explain the calculation in great detail.

The idea behind statistics is that when you have a limited data set (which is what historical prices are), the data says something about the nature of the distribution but does not fully describe it. So you “fit” the data to a distribution. In the case of real-estate I believe a log normal distribution would be most appropriate.

By using a histogram, the assumption is that the historical data contains all possible outcomes and no thing can happen in the future that has not already happened in the past. I do not believe there is anywhere near enough data in the set to conclude that.

Therefore, the current volatility in the Calgary market to the upside indicates that if the market moves to the downside the potential is there for it to be just as violent on the way down. And because the market moved up strongly for a considerable period of time, without going into it in great detail but the calculation should yeild a p05 potential decline of larger magnitude than any of the annual increases were (as well as a p95 increase that is larger than anything we’ve seen).

7. radley77 - July 28, 2008

Just to reflect on the last year: median price for SFH is down from 435G to 411G (5.5% annual decline), which is inline with a P90 scenario. I agree with RJT that the biggest risk is due to overbuilding. Calgary has shown that it is overwhelmingly capable of supplying residential units to the market as per the earlier price elasticity of supply post. I thought the point about land costs already being sunk was very well taken.

I don’t think we will see the same style of declines as seen in the west coast of U.S. as we don’t have the foreclosure crisis that they have. The U.S. market has risks due to mortgages resetting at higher rates, our risk is more long term due to 40 year amortizations. What I mean, is that they were going to see house declines earlier in the real estate cycle, and we will likely see more risk from the mortgage markets later in the cycle.

In that sense, the only aggressive seller in our market will be from developers rather than a flood of homebuyers foreclosing. Our market lacks that sort of aggressive bank-owned style of foreclosure that is going to force prices down quickly and that is why I think that 5 years of P90 is about the most conservative outcome I can imagine.

Another thing about the housing correction is that there are two parts to it: both the size/impact as well as timing. Do I think the current price point is enough to clear off inventory: No. But I don’t foresee the same kind of chaotic unwinding that is happening in the United States and therefore I am anticipating this bust cycle will take a long time to unravel.

If one feels that near term volatility is high, and therefore the downside risks are more than the P90 case the majority of the price increases occurred from beginning 2006 to mid 2007 (1.5 year span). Since the peak in mid 2007 to now has been 1 year. I would say that one might want to wait a time equal to or slightly more than the steep upside slope (>1.5 years), and by that measuring stick we are getting very close to what I think should be a return to more historic volatility.

8. section31 - July 29, 2008

At this point I think the scariest thing that can happen to the Calgary Real Estate Market is if the Feds announce a second quarter of negative growth. I suspect Okotoks prices will drop like a lead balloon let alone Calgary.

9. Michael Oliver - July 29, 2008

From one of the comments above the new home agents obviously only work for the builder/ developer. Here in Tucson Arizona I have seen and heard these new home sales representatives outright lie and feel bad for those buyers who believe anything they say. I know many unrepresented buyers have lost tons of money due to those mis-representations. Anyway this is a good post and shows details on what is happening in the Calgary market.

10. yanni raz - July 30, 2008

How much is your home worth? Well, it all depends where you live.

The real estate market is still shaking. New data suggests that home prices have hit a new record low. In every new study that comes out, homeowners from Miami, to Las Vegas, Phoenix and Los Angeles, have seen their home value go lower every time.
Is that disappointing? Of course it is.
Should we sell? Is not a good time.
Should we stick to it? Yes, if you can.
Have we hit bottom? Nobody knows.

Banks are facing their worst foreclosure crisis.
Don’t take me wrong, it’s good if you are in the market to buy a home for yourself or if you are an investor, but if you are not, and you own a home, most likely the value of your property is down at least 15 %.

Why do banks care if you are loosing your home? By having to sell repossessed homes, banks have to literally slash their prices down. It gets very costly for them, after all, they have to pay property taxes, maintenance costs, and whatever utilities that need to be paid, all of this expenses for a house that it’s just sitting there, vacant, and the bank is getting nothing in return.

The latest study by the S&P/Case-Shiller Home Price Index of 20 cities, revealed the news that for 22 consecutive months home prices dropped. Only from April to May, 2009 the decline was of 0.9 %

11. wondering - July 31, 2008

So according to some people the market is going to be spirally down, then some people say its just leveling off.

I’m in a situation that I will have to move very soon, so which is better. Is it better to pay $1350 a month for rent (have a disabled child no need 1st floor condo or bungalow, still close to their school) or is it better to spend $1450 on a mortgage (condo)? (I will need to find a place by Nov)

12. nonplused - August 3, 2008


I think your question is too personal to be answered on a site dedicated to real estate prognostication and shaky statistical analysis. There are many questions pertaining to your situation. Do you have a house now? Then you may have enough equity to move without impacting your finances. Do you need to modify the place for your child? Can you pay off a place you buy in 25 years? (Don’t fall for the 35 year thing) I suggest talking to a financial advisor (but not a real-estate professional of any kind).

13. justin - August 4, 2008

Wow this blog pulled a 180

14. nonplused - August 5, 2008

I was around in 1982 and from my recollection when Calgary decides to tank, it does it overnight. I think it’s possible we’ll give back all of the notional increases from 2006 on in a single quarter, possibly even the 4th quater of 2008. It’ll take a while to work through the statistics and the “averages” they report won’t reflect the full impact until you see the 2009 “average”.

15. section31 - August 8, 2008

Right now is the absolute worst time to buy a house. The market is on the DECLINE (housing correction), and there is a strong possiblity the second quarter GDP results will be negative for Canada. It historically takes about 1.5 to 2 years for a market to correct itself from a huge spike in prices. Wait until the average Single Family housing price drops to say $400 atleast. The historical trend for these homes in Calgary states that we should be at about 300K right now, but instead we are at something crazy like $460K still (time lagg of course).
Given the strong possiblity of a recession in Canada buying a home right now just doesn’t make financial sense. If you can take the spread between the cost of a mortgage + heat + water + etc – rent payment and put that money in some safe investments then do it.

Also, don’t forget the rental rates are droping in this city as well. I am noticing a good 10% drop since April. (perhaps due to all the empty and unsold homes people thought they could flip and now are forced to rent out)

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