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Risk Spreads – A Red Light on the Real Estate Market February 7, 2008

Posted by DustinRJay in Calgary real estate, risk spreads.
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4 comments

Typically, when looking for a good investment opportunity, one expects a higher return than a safe investment like a bond. 

A mortgage product has risk and therefore should have a higher return than a bond.  By an analysis of the spread above the safe investment  vehichle one can determine periods of heightened risk in the credit markets.

Typically, heightened risk in the credit markets has accompanied recessions.  Also, this has proved to be one of several warning indicators for the peak in the housing market cycle.

As you can see in the following graph, large jumps in the risk spread (red zone) have typically accompanied the start of a bear market in real estate.  In addition, a recession has often followed a sharp increase in the risk spread.  Currently, the risk spread is the highest it has been since the early 1980’s bear Calgary real estate market.

This sort of analysis is useful in identifying some of the creamier investing opportunities (green zone) when the risks have been smaller.

Risk Spreads - A Red Light on the Real Estate Market

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Canadian REIT Firesale – No Decoupling From US Real Estate January 29, 2008

Posted by DustinRJay in stocks.
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8 comments

Both Canadian and American real estate investment trust indices have performed extremely poorly over the past three quarters.  Canadian real estate investment trusts are down roughly 25% from peaks in early 2007.  This is very similar to the performance of US real estate investment trusts.  If investors expected Canadian real estate to outperform American real estate, the indices should have diverged.

The following graph is a comparison of Canadian vs. American real estate investment trust indices:

Canadian REIT Firesale - No Decoupling From US Real Estate

One possible reason for the repricing of Canadian REIT’s is that both Canadian and US real estate prices have roughly doubled since 1995 and this has raised the same concerns of overvaluation that are present in the US markets.