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Calgary Housing Recovery Already Underway? October 20, 2009

Posted by DustinRJay in Calgary real estate, supply and demand, Uncategorized.
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25 comments

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.

Housing Market Activity

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Price Changes

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Calgary Econometric Rent Model March 26, 2009

Posted by DustinRJay in Calgary real estate, supply and demand.
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2 comments

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.

Calgary Econometric Rent Model

[click above for larger view]

Source: CMHC Rental Market Statistics, UBC Centre for Urban Economics and Real Estate

Inventory Zenith March 3, 2009

Posted by DustinRJay in Calgary real estate, mortgages, supply and demand, Uncategorized, US real estate.
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9 comments

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.

Inventory Zenith

[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.

Sources: Bob Truman – First Place Realty, Mike Fotiou -First Place Realty, CREB, CIBC, Bloomberg

Dichotomous Marketplaces – Calgary Trends in Construction for SFH diverge from Resale Market January 8, 2009

Posted by DustinRJay in Calgary real estate, supply and demand, Uncategorized.
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317 comments

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:

dichotomous_marketplaces

CMHC housing information available here.

Glut Today, Excess Demand Tomorrow January 3, 2009

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

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.

Here Today, Gone Tomorrow

Click above image to enlarge.

Data: CREB, Bob Truman – First Place Realty

The Price is Not Right… (But Not by Much) December 22, 2008

Posted by DustinRJay in supply and demand.
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15 comments

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

The Price is Not Right... (But Not By Much)

Click above image to enlarge.

Data:  Bob Truman, First Place Realty – Old Criteria

A Tale of Two Markets August 23, 2008

Posted by DustinRJay in Calgary real estate, supply and demand.
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3 comments

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

Calgary Real Estate Price Elasticity of Supply June 16, 2008

Posted by DustinRJay in Calgary real estate, supply and demand.
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12 comments

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, 2008

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

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.

Condo Crazy

Credit Junky Nightmare – Credit Cycles Effect on Housing Market (Part 2 of 3) May 14, 2008

Posted by DustinRJay in Calgary real estate, mortgages, supply and demand.
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5 comments

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:

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.

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.
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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

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

Posted by DustinRJay in Calgary real estate, supply and demand.
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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.

Calgary Real Estate Supply & Demand January 2008 February 2, 2008

Posted by DustinRJay in supply and demand.
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11 comments

A review of supply and demand is important in understanding the direction of house prices.  The following graph shows the recent trends of inventory and year over year sales.  In summary, the market has changed dramatically from last year:

  • Current inventory is more than double January 2007
  • Sales are down more than 30% year over year

New CREB President Takes The Reigns

Please feel free to post your own interpretation.