Wednesday, December 23, 2009

The Day of reckoning is coming

Here’s something to ponder on the Christmas eve: Alberta finally has seen negative inter provincial immigration (something we did mention several quarters ago as a distinct possibility). We have also seen the mortgages in Alberta that are in arrears (pdf) rising to the highest levels in years. We also have a fairly high level of unemployment, both official and the invisible ones (those who are off the EI rolls).
The economy grew in October but only because utilities were slightly costlier and the realtors and mortgage brokers found some bigger fools who seem to learn nothing from other peoples' miseries(US bubble, Albertans who bought at peak who are still under water etc). Despite that we are still meandering somewhere in late 2005 GDP level territory. And given the population increases since then, we are certainly doing a lot worse than a lot of special interest groups would like you to believe.

So all in all, the "solid fundamentals" that drove the Alberta's real estate market during 2005-2007, have all but vanished. Just to recollect, remember all the arguments from that era:

  • People are moving in droves to Alberta.
  • There are plenty of jobs.
  • There's Alberta Advantage.

Yet, the prices keep on rising in late 2009. Which means, there must be some other factors at work. Like the factors we discussed way back in 2007 - speculation fueled by cheap credit and abetted by CMHC. And nothing else. Nothing is more important to the health of real estate market than the availability of cheap and accessible credit. And accessibility sure means NINJA loans, government underwriting, lax conformance to solid rules of lending.
Jobs don't matter. We have seen that. Negative inter provincial immigration doesn't matter. We just saw that in this quarter. Overall shrinking economy doesn't matter. We saw that this quarter.
But credit matters only until it stops mattering. Sooner or later something will give in.

The Honourable finance minister, having woken up woken up to the reality of a real estate bubble and the devastating aftermath it might unleash when it bursts, is contemplating changes to the CMHC's requirements.

That this bubble will collapse is a mathematical and financial certainty. Will it collapse under its own weight, like it had started doing last summer, or will it be done by exogenous forces?
Will 2010 be the year when bond vigilantes finally wake up? Will the bond market really live up to its reputation as the scariest thing?

For all the renters who have managed to save goblets of cash, don't forget to share your good fortune with those in need around you. Happy Holidays to all of you.

Friday, December 18, 2009

China Bust Scenario

  • Is China overheating? An interesting post from Mish. Of great interest should be the video below where in a brand new huge city has been built with the obvious motivation of boosting the GDP numbers. Mal-investments? Who knows?
  • What happens when the China boom turns to a bust or eventually runs out. For Canada, and even more for Australia, the only growth story has been commodities. Take away Commodities and Canada's financial situation overall becomes a lot more perilous.
  • Obviously for most Canadians, such a scenario is nearly impossible to imagine. But remember until a few years ago nobody believed that housing prices could fall across the whole country, a la USA. So we are big fans of possible events that could become probable. Whenever the China bubble pops, the ramifications will be felt in the down under and the Great white north.
  • Leaving aside all other cases such as higher interest rates, CMHC, real estate speculation, this is the real wild card that not too many people want to talk about. Why? Because they don't see it happening.
  • And pray tell, what's our plan B, should commodities fall?
  • A couple of more interesting perspectives on Chinese bubbles and GDP calculations.
  • But such unsalubrious thoughts should not consume us during the Festivus season. Happy holidays to everyone.

Wednesday, December 16, 2009

Yet another voice on Bubble

It seems all the contrarians who successfully called the US housing bubble and global credit bubble are somehow feeling remiss in their obligations to their readers by holding back in their perspective on the Canadian real estate.
The latest one to call the Canadian bubble is yet another contrarian-Karl Denninger. He rarely minces words and boldly proclaims what a majority of Canadians will be loathe to admit:

Canada is in for a housing bust WORSE THAN OURS.

And what is his rationale?
Canadian family income as a whole ("families of 2 persons or more") is allegedly $70,000 (approximately.) The average house price? $325,000.
That's a multiple of 4.64, or dramatically into bubble territory (the maximum for affordable housing is roughly 3x, so this is 154% of the maximum!)
It's worse in places like Vancouver - there the ratio is over 10 (!) for single-family homes and about 8x for all residences.
And he concludes by warning:
Beware Canadians..... you can argue over the timing of the outcome here, but if you think the "bad event" won't happen and act on that belief, don't cry when a year or three down the road I start piping up with "I told you so!"

That's too much truth in there to be handled by the mainstream readers. So enjoy the double top formation in Canadian and Alberta real estate prices.

Thursday, December 10, 2009

Canadian Housing is a Bubble, says Rosenburg

One of the better known analysts who is bullish on Canada, the loonie and overall Canadian economy has a somewhat surprising take on the Canadian housing market. Dave asks, if the Canadian market is in a bubble? And the answer is yes, even though he is somewhat more conservative in his estimates of the over valuation.

This adds to the list of commentators (Shilling, Mish, numerous bloggers) whose voices have not yet produced cacophony unpleasant enough for the BOC or the Feds to do anything about it. But if they don't do anything now, they'll have to do something in the next few years.
It's a funny and tragic commentary on the human emotions-most of us will continue to merrily believe "it can't happen to us, until it happens." The bubble has burst in the US, Spain, Ireland, UK and several other parts of the world. But where it hasn't, the unflinching confidence in real estate and 'we are different' thrives.

From today's Breakfast with Dave:


It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.
While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).
In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …

Tuesday, December 1, 2009

Real estate surge no ‘blip,' TD says

How do you categorize the definat housing market in face of rising unemployment, continual contraction of the economy, global recession, massive problems in the economy of our largest partner, surging trade deficit and {add your list of other problems with the economy here}? Here are the choices:

a) It's a bubble.
b) It's a bubble on steroids fueled by the greatest fools who have learnt nothing from the real estate debacle in the US, UK, Dubai and several other parts of the world.
c)It's based on strong fundamentals.

If you answered c, you can get a job as an economist with the TD Bank. But seriously, why would you answer it any other way? If you make a good chunk of your money by lending obscene amounts of money riskfree to the greatest fools in many generations, this would seem an appropriate response.

Let's talk a little bit about the fundamentals here, since we haven't dealt with those in a long time. I'll focus on my favorite ones-the ones that use the cost of production model:

-How expensive should land be in a country like Canada where there's no dearth of land? Especially in Alberta where there's usable land. Why are lots in Calgary sub division three to four times as expensive in Texas? New Mexico? Colorado?
I won't even mention the lot sizes here. The newer lots are a fraction of the size of older lots in the same city. I won't dare do a comparison with the US suburbs here. Everything is so much smaller. Because the developers can get away with it, just as retailers, auto makers, cell phone providers and everyone else in our country can get away by milking the sheep-would be Canadian homeowners.

-Why should there be so much difference in cost of construction across different parts of Canada? Yes, excluding the cost of a lot, why does it cost so much more to build a house in Calgary or Vancouver than in say Guelph or Barrie? I won't even venture to do a comparison between the US construction costs and the Canadian ones. We no longer have the problems of 'surging labour costs' as evidenced by the nearly 8% unemployment in Alberta.

What are the real fundamentals behind the house price increases? If you have been reading this blog for a while, you know the answer. And it's a four letter word.

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