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Calgary Housing Affordability Update November 22, 2009

Posted by DustinRJay in Calgary real estate, Uncategorized.
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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 Housing Recovery Already Underway? October 20, 2009

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

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 Resale House Price Model April 22, 2009

Posted by DustinRJay in Calgary real estate, short term real estate trends, Uncategorized.
Tags: ,

The following graphs illustrate the historical relationship between absorption rate and house price changes in Calgary.  As the absorption rate decreases, demand exceeds supply, and house prices rise.  When the absorption rate is high, supply exceeds demand and house prices fall.  While I do not believe this metric is useful for determining long term price point, I do think it is useful for determing the near term price trends.

Calgary Absorption Rate Correlation

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Calgary Resale House Price Model

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Recent history indicates that an annual absorption rate of 4 would be a market that is roughly balanced.  In 2008, Calgary had record amounts of resale inventory and these inventory levels have dropped in 2009.  Also, sales dropped dramatically following the credit spread crisis, but have since improved on a seasonally adjusted basis.   If the current inventory glut continues to decline at it’s current annual rate, and sales stay flat seasonally adjusted, it is possible that the Calgary housing market will bottom in December 2009 after falling further in autumn.  I think there are upside risks and downside risks to this forecast.  I believe it is prudent for all market participants to err on the side of caution both when formulating business plans and household budgeting.  It’s probably also worth noting that house prices are likely to increase by only in the zero to very small single digits for a number of years after bottoming, so there is no rush even if you are trying to time the bottom.

Data:  Bob Truman – First Place Realty

Worth A Read – TD Report on “Demand-Driven” Alberta Overhang April 7, 2009

Posted by DustinRJay in Uncategorized.
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This report is from TD economics.  Below is an excerpt specific to Alberta, with a link to the full report at the end of the post:

“Wild Rose country was overbuilt substantially during its boom years, and mounting inventories in Calgary and Edmonton are cause for concern. Indeed, even over 1991 to 2001, housing starts in Alberta had already overshot household formation by 12%. With oil prices having subsided from their fever pitch and expansion projects now on hold, the net inflow of migrants has slowed dramatically and may even cease completely during 2009. The previous pace of homebuilding could not be sustained and slowed precipitously during the fall. Alberta’s starts further declined to 13,100 units in February, 61% lower than a year prior. With Alberta’s economy set to contract by 2.5% this year in real terms and roughly 10% in nominal terms, homebuilding has likely not yet bottomed. While around 30,000 new households will form in the province during 2009, starts are likely to be nearer 14,000 units on the year.

Even accounting for the population inflows, the province’s homebuilding overshot fundamentals by nearly 10% during the commodity boom. From 1991 to 2006, Alberta has approximately 72,000 more housing starts than new households, and the estimated 13% overshoot of fundamentals during 2002-2008 exhibits this excess. Now, plunging sales-to-new listings ratios and mounting unsold inventories clearly indicate that the present stock of homes is excessive. As of February, Calgary had an overhang of 1,133 unsold units (874 singles and 259 multiples) and a sales-to-new listings ratio of 0.29, indicative of a definitive buyer’s market, having now fallen to its lowest value in two decades. Similarly alarming is Edmonton’s surge in unsold inventories. As of December, Edmonton had 1,747 unsold units (1,254 singles and 493 multiples) its largest recorded overhang ever – and conditions for sellers in the resale market have deteriorated sharply. In both of Alberta’s major cities, homebuilders have worrisome unsold inventories of new singles, and, with demand having cooled rapidly, resale markets already appear saturated. 

The steep appreciation of house prices during Alberta’s boom times now appears to have been far too optimistic.  Although income growth was very strong, Albertan housing during 2007 and 2008 was especially overpriced relative to fundamentals. The quick climb of Albertan resale prices substantially eroded affordability and, even though Albertans were Canada’s highest income earners on average, the growth in household income was not sustainable.  The 9% year-over-year decline in Alberta’s average resale price in February is evidence that past prices exceeded fundamentals. Those inflated prices drove homebuilding in excess of fundamentals. Given Albertans’ deteriorating incomes and the overhangs of unsold inventories, Alberta’s resale prices probably have another 20% leg down over 2009.”

TD Economics Special Report – Overpriced and Overbuilt: Canadian housing market returns to fundamentals

Inventory Zenith March 3, 2009

Posted by DustinRJay in Calgary real estate, mortgages, supply and demand, Uncategorized, US real estate.
Tags: ,

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

Random Thoughts on Oil and Multiple Equilibria Supply/Demand Points February 23, 2009

Posted by DustinRJay in Uncategorized.
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Oil prices have tumbled dramatically from $147.27 on July 11, 2008 to $38.00 on February 23, 2009.  Many experts have weighed in that oil prices were a speculative bubble.  The rationale for higher oil prices stemmed from emerging demand from China and India, coupled with oil supply being relatively flat in response to higher and higher prices and was featured in a number of bullish economic reports, most notably Merrill Lynch and CIBC.

Since then, oil demand has dropped, and oil prices have declined.  Small changes in supply/demand dramatically impact price, (e.g. consumption is down ~5%, yet prices are down more considerably).  Petroleum product infrastructure has been designed for transportation and piping, not storage.

There is a fat tail risk for energy company bankruptcies.  Companies that expanded and acquired heavily and drilled many new wells in a high commodity price environment, may no longer payback the original capital investment borrowed due to poor netbacks.  AJM, McDaniel, Sproule have price decks that result in higher asset valuations, due to oil contango but this is based on a paper valuation that I do not believe fully reflects that the global economy has entered the worst economic recession since World War II.  It may take 2 years to determine bankrupt energy companies from healthy ones as future oil barrels have a high degree of price uncertainty.  The following quickie back of the envelope economics illustrates the difficult economic hurdles the Alberta energy industry currently faces:

Alberta Back of The Envelope Oil Economics

Average new oil well drill production:  Assume 28.3 bbl/oil
Average annual decline: 18% year over year
Average well reserves estimate: 41,300 bbl (as calculated)
Well Cost Estimate: $1,000,000
Tie-In and Facility Cost: $300,000 (estimated average cost per success well)

Edmonton Par: $46.40/bbl
Finding & Development Cost: $31/bbl (as calculated above)
Operating Costs: $14/bbl (estimated based on companies such as Pengrowth and Husky)
Royalties (estimated 20%): $9/bbl
Plus corporate economic hurdle = You Do The Math!

In general, prices are high enough to cover operating costs, but not enough for capital investments.  For the most part, the stock market is very focused on earnings growth and therefore rate is king.  Bondholders require coupon payments, and therefore shutting in production to increase asset value may not be an option due to high debt loads.

When demand increases, there could be a second oil price shock resulting in yet more economic turmoil.  Prices could rapidly climb as current prices are more reflective of operating costs, and would need to shift upward substantially to incorporate finding and development costs and adequately compensate investors (shift in supply/demand equilibria point).

It is likely less expensive to increase production through acquisitions than drilling.  A well capitalized energy company could evaluate shutting in production to increase asset value (as in general, prices are too low to drill), and use existing cash reserves to acquire depressed natural resource assets.

An Open Letter to Diane Colley-Urquhart February 15, 2009

Posted by DustinRJay in Uncategorized.
Tags: , , , ,

On September 9, 2008, Calgary city council debated and approved $25 million in funding to be allotted for two pedestrian bridges in downtown Calgary.  This issue was revisited on January 12, 2009, when yourself and three other aldermen put forth a motion to halt the design of the bridge and the motion subsequently failed.

Calgary’s extensive pathway system and pedestrian bridges around the river are a primary reason why I chose and enjoy living in Calgary.  Currently, the pedestrian bridges are a part of my daily commute and habitat.  Calgary spends 4% of it’s transportation capital budget on pedestrians and cyclists and 0.37% of it’s operating transportation budget on pedestrians and cyclists.  This is disproportionately less than the 7% of people that use biking and cycling as the primary mode to get to work and is a minimal part of the overall transportation budget.

Calgary also spends much more costs due to suburban sprawl.  The cost of roads and interchanges, maintenance including snow removal, public transit, water and sewer is much higher in comparison to the revenue generated for low density suburban areas versus a high rise downtown condo tower.  To further illustrate my point, the estimated cost of the pedestrian bridges is small in comparison to the $2100 million cost estimate for Calgary’s ring road.

Although I’m not a city planner, it seems intuitive that from a city efficiency standpoint that a high density building could have up to a 20xfold increase in profitability, thus decreasing the tax burden on residents.  Alternatively, the extra profits generated from high density may be used to increase the overall quality of life for the surrounding residents.


Arriva 42
200 units per half city block
1/2 city block

Bridlewood Suburban Area
20 units per block
10 city blocks

The revenue generated in each example would be roughly the same, but the city’s cost would be much higher for the equivalent suburban area.

Recently, a private enterprise has entered an agreement to purchase the Shawnee Golf Course for purposing of developing residential real estate.  Subsequently, you submitted a motion requesting that city administration evaluate the option of using public funds to purchase and operate the golf course.  The Canadian Federation of Independent Business has requested that the City of Calgary embark on a plan to sell it’s golf courses to private enterprise.  Higher density residential zoning would increase the tax efficiency of the city of Calgary and allow private enterprise to develop an opportunity.  This is counter to your previous arguments regarding the pedestrian bridges that you were acting as an advocate on behalf of Calgary’s taxpayers.

I believe that by supporting private enterprise and transit orientated development , that public funding can be better targeted at improving quality of life for all Calgarians.

In summary, I fully support the development of the bridges and believe that city council should avoid NAMBIism and adhere to these policies:

  • Council should encourage development that minimizes sprawl to reduce the overall cost to taxpayers
  • Council should attempt to allocate equitable infrastructure funding that is proportional to the tax revenue generated
  • Council should not needlessly revisit projects that have already received approval unless there has been a significant new development


Diane Colley-Urquhart’s website

Santiago Calatrava – YouTube Video

Santiago Calatrava – Wikipedia

Trendsetter or Trendfollower? February 3, 2009

Posted by DustinRJay in stock market, stocks, Uncategorized, volatility.
Tags: , ,

The following analysis was performed to backtest the S&P 500 against two investment strategies.  A common belief is that the 50 day moving average (SMA) is indicative of a resistance level or support level for the market.  When the price crosses above it’s 50 day moving average it means that investors are willing to pay more for the stock than the average of the previous 50 days and is typically regarding as a technical bullish signal.

The trading strategies analyzed are:

  • Buy and hold
  • Only buy when the S&P 500 crosses above the 50 day moving average, sell when the price drops below the 50 day moving average.

The following graph shows the value of an initial $100 investment on a logarithmic scale, as it is easier to identify relative percentage changes.  What this sort of analysis reveals are that:

  • Investment returns are about the same over long periods of time:  e.g. Buy and hold strategy had a 49 fold return versus the 44 fold return of the SMA strategy.
  • SMA strategy is out of the market or allocated to cash over a significant period of time compared to the buy and hold strategy
  • Risk profile is vastly different over the short term (especially in volatile bear markets):  e.g. Buy and hold strategy lost 31% since the Lehman failure on Septeber 15, 2008 versus 5% for the SMA strategy
  • Transaction costs add up and shouldn’t be ignored:  The SMA strategy would have had resulted in 881 different transactions over the time period analyzed.  At a ballpark cost of $5/trade, the SMA trading strategy would have cost $4405 resulting in returns being entirely eroded.

Trendsetter or Trendfollower?

Based on this, different demographics may have different investment objectives.  It makes sense in general for young people to have a more aggressive portfolio as to fully expose themselves to the full upside of the market over long periods of time, similarily it makes sense for older people to have a more conservative portfolio that is geared towards capital preservation.  In the current market, I am looking to change my allocation from a moderately conservative portfolio to something more aggressive.  Generational lows in US housing sales and vehichle sales should support a floor to certain sectors of economic growth.  In addition, credit market spreads (leading indicator) have improved greatly since the Lehman bankruptcy in September  and price to earnings ratios seem relatively close to fair value given the large expected drop in corporate earnings.

In summary, paying attention to the SMA may be useful for people looking to reallocate money into a higher returning investment with most of the upside exposure, yet wanting to avoid the potential for more drops in a volatile bear stock market.

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.

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:


CMHC housing information available here.

Glut Today, Excess Demand Tomorrow January 3, 2009

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

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

Futures Market Predicting Troubled Assets Relief Act Passed Quickly September 24, 2008

Posted by DustinRJay in Uncategorized.

The Intrade futures market is currently predicting that there is 73% chance of approval for $700 billion US government bailout (Troubled Assets Relief Act) being approved before the end of the September.  Passage of this act will help to reduce risk spreads and LIBOR rates and is seen as essential to preventing systemic risk to the American financial system.  In addition, passage of this plan should make it easier for American banks to lend and mitigate damage to the US housing market.  Most analysts expect this bill to be approved quickly barring any political interference.

The Long View August 25, 2008

Posted by DustinRJay in Uncategorized.
Tags: , , ,

The following graph shows the average house prices from 1973 to current.  For most of the graphs on this blog it has shown Calgary real estate from an inflation adjusted perspective.  If one was to consider inflation however, it can be seen that buying real estate can be helpful as a hedge against inflation.

There are better times to buy than others, however I believe that for the average person that bought at the peak in 1983 or 1990 with a 25 year horizon that they are still probably very happy with their decision.

What do you think?

Data Source: CREB, Bob Truman – First Place Realty

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.

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.