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.
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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.”