You buy a house for half a million dollars and...

...one early evening(8 pm) you hear a doorbell. You are surprised to see someone who resembles your neighbor. He asks if the sound of music that he's hearing is coming from your house. You wonder, what sound is it? And then you remember, oh yes, it's your 4 year old who is listening to the nursery rhymes on youtube and hooked up to your 10 year old Philips stereo. You politely say yes...and promise to turn the volume down.
This is not a hypothetical example. A friend of mine who is renting a place in NW Calgary had this exact experience a few days ago. Without getting into the legalities of the situation(was it too much noise, 8 pm late enough etc) and the 'home owners' rights, the question that needs to be asked is- what the heck is going on?
We all know the story of rows of houses getting gutted in Edmonton because there was too small a distance between the homes.
A house that sells for nearly half a million and you have neighbours complaining of noise. And this isn't unruly teenagers doing a late night party, but the sound of nursery rhymes.
Also, these houses don't share any common wall, but the distance between them is no more than a couple of feet. After all, the developers, the city and everyone else needs to account for such massive scarcity of land in Calgary, right?
If this were attached houses, apartments, condos etc, such complaints would be understandable.
But if after spending close to half a million dollars, your little kids can't dance to a nursery rhyme at 8 in the evening at slightly higher volume, you are forced to wonder the entire point of buying a house.
And you recognize that something is seriously wrong with the situation. The bankers, realtors, mortgage brokers and pretty much the entire real industry complex wants to sell overpriced shoe boxes to naive young families and push them into debt subservience for most of their productive lives.
So may be this is a warning to those who are thinking of jumping into the housing market at this stage for lifestyle reasons-that their kids can have room to run around and play-Beware! What you buy might appear a bit spacious than the townhouse or condo you are currently living in, but don't expect a lot of space for yourself or your family. You'll be living in a tight and cramped subdivisions built by greedy developers, rapacious municipalities, voracious bankers and less than truthful realtors, all abetted by the economic policies and framework created by your 'government representatives.'
As for my friend, she is a 'lowly renter.' She'll be looking for a better place once her lease expires in the next few months. She does thank this blog and the commentators that she did not buy. Now imagine what would be her feeling at this stage if she had bought the same house for $483,000 with 10% down and 35 year mortgage. Worse, if most of the neighbors were in the same boat financially.
Happy renting!

Weekend Open Thread

• Retail sales in Canada down sharply in November. Ex-gasoline, sales fell 1 per cent in November. You won't find a glorified mention of this item in the mainstream media.
• Why? Because they will be highlighting the other release from StatsCan- the fall in number of EI recipients. Which is a news to be welcomed, if it were not for the real possibility that those falling off the EI rolls are venturing into the territory of self employment or under employment.
• Vacancy rates in the office and industrial sector in Alberta have soared. More so in Calgary than in Edmonton so far. But while passing through some of the industrial sections of North East Calgary, there was a glut of industrial space waiting to be leased. This reflects the level of pullback in the primary sector that has driven the prosperity of Alberta over the last decade or so.
• What are your observations?

And then they'll say they never saw it coming

Almost all the 'institutional liars' claim that they never saw the financial crisis coming. In the Canadian context, we were told that there won't be any recession. Prior to that, circa 2007, there was not even a brief mention of a housing bubble anywhere, except at places like this blog.

3 years later, with 5 % reduction in GDP, over half a million jobs lost, real estate values falling by over 10 to 15% from the peak, it seems people seemed to have learnt nothing. 'Real estate investing' is back in vogue and a lot of 'investors' want a piece of the action. Here's an ad in local Calgary classified for a 50 year old apartment building:

Year Built
1957 (est)
Construction
Wood frame
Suite Mix
4 One Bedroom Suites 600 sf +/-
4 Two Bedroom Suites 700 sf +/-
8 Suites Total 5,200 sf +/-
Appliances
8 refrigerators, 8 stoves, 1 washing machine,
1 dryer
Rental Rate Range
One Bedroom - $750 - $875
Two Bedroom - $875 - $950
Comments
• Clean building New roof
• Historically low vacancy

Annual Rent $82,500

Laundry $ 1,800

Gross Income $84,300

Less: Vacancy (1%) $ 843

TOTAL $83,457

EXPENSES

Taxes $ 5,902

Insurance $ 2,400

Utilities $ 7,026

Caretaker $ 2,400

R & M $ 4,800

Misc. $ 1,000

TOTAL $23,528

Net Income $59,929

Price $1,600,000

A cap rate of less than 3.75 per cent with very aggressive occupancy assumptions for a 53 year old wooden building in a boom/bust city of Calgary. Sorry, I forgot we had mastered the business cycle. I won't be surprised if CMHC underwrote the mortgage for this type of loan to a 'smart investor'.

Back in the days of 'Alberta Advantage' a property like this would sell for no more than 30 to 40k per unit.

a note on the moderation of comments-it will be stricter. far more stricter than before. if you post a personal attack, it will be deleted. if you post an insult twice, you will be banned.

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.

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.
  

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.

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:

IS THE CANADIAN HOUSING MARKET IN A BUBBLE?

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 …