Global housing bubbles move in a synchronized manner

One of my earlier posts was about how many people in Saskatoon felt it was undervalued and when house values rose 56% in one year, the real estate association felt that was normal.  Hundreds of cities around the world felt they were undervalued at one time as well and that it was justified to have their market scream skyward 30 -80% in a few years even though the fundamentals did not support the rise. I have felt that most housing markets in a specific category whether it be emerging markets or industrialized moved in the same direction but not always at the same speed or length.

In September 2004, the IMF wrote a report about the world economic outlook.  In chapter 2 they took a look at the global house price boom.  It is 66 pages, here a some key pieces:

"House prices in many industrial countries have increased unusually rapidly in recent years and in some cases these increases do not seem to be fully explained by economic fundamentals.  More importantly, the analysis in the first essay shows that, even though housing is not traded, house prices are highly synchronized across industrial countries. Specifically, a large share (about 40 percent on average) of house price movements is due to global factors, which reflect global co-movements in interest rates, economic activity, and other macroeconomic variables, which in turn result from common underlying shocks. A key implication of this finding is that, just as the upswing in house prices has been a global phenomenon, it is likely that any downturn would also be highly synchronized, with corresponding implications for global economic activity."

Here is an article by Robert Shiller in 2003

The “Housing Bubble” that Peaked around 1990 by

"The period of the 1980s, and the price declines in many cities in the early 1990s, is now widely looked back upon as the example, or model, of a boom cycle that led to a bust. A pattern of sharp price increases, a peak around 1990 and then a decline in many world cities, including Boston, Los Angeles, London, Sydney and Tokyo, looks consistent with a bubble

This housing bubble in 1990 affected many of the same countries as the recent bubble but there were more cities in each country this time.  ( In Canada, Toronto and a few other cities had housing bubbles in 1990 but the contagion did not affect every city in Canada as it has at this moment.)

The Asia Crisis of 1997 and the Real Estate Bust of the Emerging Countries
1997 saw the Asian Financial Crisis wipe out real estate values across part of Asia.  Hong Kong and the Philippines more than 50% drops.  Ouch!

."

That chart has data up to 2008.  There are more countries that should be added to it in 2010 and I expect Canada to be added down the road.

The global housing boom was an illusion of wealth built on a mountain of debt. Now, countries like the United States and most of Europe are experiencing the unravelling of the wealth.  But the debt remains.  This is the synchronization of global housing markets working in reverse of the boom. Canada is not different and we will join the rest very soon.

RBC affordability report

"In its quarterly housing affordability report, Royal Bank of Canada said the cost of home ownership moved lower for the first time in more than a year over the summer, as low mortgage rates and prices made it easier for buyers to pay for their homes."

 But while homes were more affordable they were still more expensive than long-term averages in many markets, suggesting “greater than usual tensions exist for Canadian home buyers.”

With low rates and lower prices it may have been easier for buyers to afford a home, it still does not mean it is affordable.  Emergency low interest rates will not be here for ever and same with high house prices.

It’s the first time affordability has improved since mid-2009. The RBC Housing Affordability Measure shows the proportion of median pre-tax household income required to pay the principal and interest on a mortgage, property taxes and utilities. The figures assume a 25 per cent down payment and a 25-year loan at a five-year fixed rate.

What are the figures when a 7 percent downpayment is used?( the national first time buyer average which includes the cash back mortgages)  Affordability is worse. Affordability bubble big time.  Then add normal interest rates.  BIG HOUSING BUBBLE!  A downpayment of 25% skews the report.

How does Saskatoon fare?

It looks like affordability has improved by one percent point, but would I believe that Saskatoon is one centers in the nation with low downpayments.  Saskatoon experiences more boomers leaving the city than the national average because of retirement to warmer centers ( loss of wealth to the city) and is replaced with young workers with debt and little to no savings.  There are people are moving here, but most are not wealthy.

Whole report is here

Canadian Housing and Baseball Sluggers ( On Steriods)

A parody on Canadian housing during the bubble era with baseball sluggers during the steroid era.

Its 1998, 4 years removed from the strike ( its 2006, 5 years removed from the recession of 2001) baseball has returned to glory ( housing is a great investment) with Mark Mcgwire and Sammy Sosa leading the charge of baseball sluggers cranking home runs like never before ( with Calgary and Edmonton leading the charge of housing markets bidding up house values like never before).

Record home runs brought more fans back to the game and the level of excitement for baseball was higher than it was for years in respect to Americas national past time ( record house prices brought more buyers into the market and the level of excitement for housing was higher than it was for years in respect to Canadians most beloved asset)  While there were whispers of alleged steroid use, the baseball commissioner and team owners turn a blind eye to the possibility ( while there were whispers of an alleged bubble, the finance minister and the real estate association turn a blind eye to the possibility).  It did not matter that some players came out of nowhere to crank 50 or more home runs in one year, ( it did not matter that some cities had house values crank 50% or more higher in one year) it was good for the game ( it was good for the economy).

What baseball authorities failed to see was that by not doing something at the first sign of steroid use would have negative long lasting effects on baseball and its fans down the road( what housing authorities failed to see was that by not doing something at the first sign of a bubble being formed would have negative long lasting effects on housing and the economy down the road).  For the player that wanted to do it right and stay clean may have meant that he was pushed aside in respects to playing time by someone else who did cheat ( for the buyer that wanted to do it right, save and not get into too much debt meant he lost out in a bidding war and was priced out in respect to someone else who used too much credit).

In 2007, Barry Bonds set the record for most home runs in a career ( In 2010, Vancouver set an Canadian record going over 1 million dollar mark for a house).  But his assault on the record books will always be questioned with his use of the clear and cream and steroid use ( But Vancouver's record average price will be questioned with the use of cheap mortgages and sustainability of Asian money and being in a bubble).

In the last couple of years, it has come apparent that prominent baseball players like A-Rod, Roger Clemons, Manny Ramirez, David Ortiz and others hit more home runs than they should have based on the fundamentals of baseball players abilities compared to history.  ( In the last few years, it has come apparent that prominent Canadian cities like Vancouver, Calgary, Saskatoon, Toronto and others have reached higher house prices than they should have based on the fundamentals of housing markets compared to history).

Just like the steroid era in baseball, we will look back on the era of the Canadian housing bubble and say "shame,shame."

Subprime is alive and well in Saskatoon

We have all read and heard about how the United States gave too many mortgages to too many people who lived in trailer parks.  At the peak of the market in the States, it was estimated that 22% of the mortgage loans were of the subprime quality.  Contrast that to conservative the Canadians where subprime was only 7% of the mortgage market.

Reading the Star Phoenix I came across an ad for affordable townhouse housing. 

Tenants Own Your Home For Less Than Rent! Free Downpayment Available Through Government Grants.  No Strings Attached.  Minimum income of $35,000.  Max income of $52,000 ( with children) Max income of $44,500 ( without children).  Affordably priced from $224,900.  Low monthly payments from $1170 a month.  At last, affordable housing is here.

The last sentence should say " at last, subprime lending is here."  This works out to 4 times income with children or 5 times income with no children.  I did the calculation and after taxes, insurance, condo fees, and utilities, the monthly cost is close to $1600 a month.  Which leaves a family of four with about $400 a week for food, personal products, car, gas, insurance, tv, internet, phone, daycare, baby and or kid supplies, clothes, miscellaneous items. Savings? Who needs savings when they are building equity.  These people will definitely be house poor and it baffles me to think that the Government and the City of Saskatoon is encouraging this so called dream of home ownership. 

These units were built as army barracks back in the 50's.  They were fixed up and moved from the airport area right next to a fenced off high voltage electrical distribution system at the edge of Fairhaven.  Also right beside these units is Circle Drive, the busiest freeway in Saskatoon.  At least they are within walking distance from Tim Horton's.

I'm sure other cities in the country have their subprime secrets. Here is a story about  Canada's dirty subprime secret from the Globe and Mail.

Looking at the Canadian mortgage and there are definitely mortgages out there that banks would not lend if there were not insured by CMHC.  Any cashback mortgage is really a subprime mortgage.  Here a couple that you can get today. There is more.
CIBC Up to 7% Cash Back Offer
National Bank Cash Back Mortgage

What about the discontinued 0 down and/or 40 year mortgage? Yep, those were subprime as well.  The interest only payment mortgage that some Canadians got for a couple of years were also subprime.

What about the "investors" who bought rental properties hoping for asset appreciation (before they needed 20% down) but need to subsidize the rental each month?

Remember that almost 80% of all subprime mortgages in the US were the ARM (adjustable rate mortgage).  Buyers got this type of loan at a teaser rate of 1 or 2% and when the rates reset at 4 and 5% many homeowners were screwed.  Now just think of Canadian VRM's which are kind of like teaser rates at 2 and 2.5% in 2010.  When it comes time to renew in 3 or 5 years will this reset at 5 or more %?

I am not saying this country will see a fall out like in the United States, but it is fair to say that there are thousands of Canadians who should not be mortgage owners and we will see some sort of fall out in the next few years.


Addition to this post:
Looks like the City has more subprime loans:
Mortgage Flexibility Support Program

Save 140k or more: Blowout sale in the Hamptons

Saw this ad about a week ago in the weekly listing paper.  These condos have been on sale since summer if not sooner.  Seems like the developer needs to get rid of them.  Otherwise, why would there be discounts from 52k to over 85k on units that were priced between 280k and 360k. Or they were probably just overpriced.  It must be disheartening to have bought one of the units before the blowout sale.  Figure in closing costs, cmhc fees, a buyer with 5% down could be out 20% to 30%.  Negative equity. Not good.
Regardless, with prices being slashed from 52k to over 85k, I wondered what the total savings is for buying a place that is discounted by 52k.  So I plugged 52k into a 25 year mortgage averaging 6% ( interest rates might be higher than that down the road).  Total savings over 25 year is 99k.  Not bad.  Now just think what a buyer would have needed to make ( gross income) to pay that 99k off over 25 years.  This would depend on the marginal tax rate but an average household would have needed to gross over 140k to cover that cost.  So a savings of 140k. 

Now if you are buying a home, just think of the savings if you can knock off 20k or 30k or more off the purchase price.  Depending on what interest rates do,with this way of thinking, you could save up to 100k over the 25 years.   Just some food for thought if you are buying.

Saskatoon housing was undervalued (Just like the rest of the world)

"Saskatoon housing was undervalued before and now we have caught up."  I hear that at work, at Rider parties, at family gatherings.  We were not undervalued.  What happened to Saskatoon was an equilibrium of housing market forces with other city markets within Canada and the world.

The late 80's and early 90's saw a housing bubble that affected many places throughout the world. Japan is noted as the post boy of that real estate bubble, as real estate still has not recovered 20 years later.  Places like California had a bubble as well.  Canada was no exception to the bubble party and the hangover in the 90's.  According to CREA data, the average Canadian house sold via the MLS went for $146,965 in 1989, with prices staying pretty much flat throughout most the 1990s. As late as 1999, the average Canadian house price had risen to only $158,145, an increase of just 7.6% over the decade.  Adjusted for inflation the return was in negative territory.
 
The entire world’s property markets move in a synchronized manner, highly affected by the US economy and US interest rates. But when the world wide housing bubble was launched in the early 2000's not all countries and cities saw values climb at the same time.  Some places saw housing bubbles launch overnight but in other places it took awhile but they eventually achieved bubble heights. Places like Las Vegas and Phoenix started their bubble more than one year after cities in California started their bubble.  Vancouver had lift off before Calgary and Calgary had lift off before Saskatoon.  Thus was the phrase " our housing is/was undervalued".  Housing markets use this phrase to justify 20%-70% increases in house prices in a matter of a couple of years.

Phoenix:
The "Catch Up" Effect - Much of the current appreciation we are seeing in the Phoenix metro area can be attributed to the lackluster performance during the 80s and 90s. During that period, home prices were relatively flat, so the current rise in prices can be seen as a "catch up" effect.

Las Vegas:
Las Vegas real estate at the beginning of 2003 was undervalued

South Africa in 2005:
"Why do Analysts believe South African real estate is undervalued?"

Vancouver in 2004:
"We are undervalued for Canada for the level of quality that is standard in our market and we are undervalued in relation to the low-profit margins that Vancouver developers accept."

Richmond BC
Richmond BC real estate has always been affordable and undervalued for the most part.

Montreal in 2006
Montreal’s home prices were sorely undervalued through the 1990’s.

Canadian Resort Properties in 2004
"Re/Max says the areas of Banff/Canmore, B.C.'s Okanagan Valley, and properties in Atlantic Canada are of particular interest to American and European purchasers. "Given current property values in prime international recreational destinations such as Cape Cod, Nantucket, the Hamptons, Aspen, and Vail, many of these Canadian markets are undervalued,"

United States Housing Market 2004
Bear Stearns economist David Malpass arguing that the housing market was healthy and that much of the rise in prices simply represented a "catch-up" because they had lagged behind the rise in equity prices since the mid-1990s.

Here is a quote about Saskatchewan.
"The Saskatchewan market was at least 30 to 40 per cent undervalued last year and the market has simply caught up to other areas in Canada," said Harry Janzen, executive officer of the Saskatoon Region Association of Realtors (SRAR).


So in a nutshell, the United States housing markets like California were undervalued to the rise in equity markets in the 90's.  When the California cities rose in value, Phoenix and Vegas then undervalued to cities in California, were justified to see house prices launch.  The rest of the world saw this and they were undervalued as well and so a huge spike in prices was fine.  Vancouver and BC resorts were undervalued to other comparable world cities and world class resorts so its was normal for the rocketing of house values.  Then Calgary was undervalued and when prices cranked up higher than was justified by wages it was normal and then Saskatoon was one of the last markets to shake the undervalued status by rocketing up over 50% in just one year. The one common theme in every housing market is that the rise in houses values was not in sync with the rise in incomes ( Saskatoon has experienced house prices rise 3 times faster than wages over the last 12 years).

By 2007 Saskatoon was one of the last cities in the world to shake their undervalued status, some of the first cities in the world that launched their house prices had their bubble pop.  Then one by one, cities around the world had their housing bubble pop.  It really was just an equilibrium of house prices upward and it will be an equilibrium of house prices downward.  Like it was said before, most of the entire world’s property markets move in a synchronized manner.

Compared to the 2000's, house prices in 1990's were undervalued, but that was because houses were considered places to live in and not really an investment like we come to believe in the last few of years.  In the 90's, investors and speculators were feeding the dotcom bubble.  After the dotcom bust and the lowering of interest rates, investors, speculators, boomers, young couples turned to real estate as the safe haven the stock market they all felt wasn't.  It did not matter if it was Phoenix, Madrid, London, Miami or Saskatoon, cities around the world had house values rise ( some doubled in a few years) without incomes or other fundamentals to support to rise in values.

Now that the global housing boom is over and the bust has hit numerous cities in dozens of countries, people should ask one more time, what was Saskatoon housing undervalued to?

Housing market forecasts: Las Vegas 2005 vs Saskatoon 2010

"Low interest rates, population and job growth, along with consumer confidence will keep the housing market stable."

Is this from the monthly press release for Saskatoon real estate? No, this is a paraphrase of Las Vegas real estate in 2005 and the projection of the housing market up to 2008. 

Here is the report with some main points.
-Overall, the Las Vegas economy has been growing rapidly, and this growth is forecast to continue. -The rapid employment and population growth have created very strong demand for housing. During 2005, the increased demand for sales housing has led to a significant volume of condominium conversions of rental developments throughout the metropolitan area.
-recent job growth lowered the average unemployment rate to 3.7 percent, the lowest level since 1990.
-From 2006 to 2008, approximately $11 billion of new construction activities are planned
-Since 2000, the median sales prices of both new and existing homes have doubled
-As of January 1, 2006, the population of the HMA is estimated to be 1,846,000, an average annual increase of 81,800 since the 2000 Census and almost 30 percent greater than the average annual gain during the 1990s. During the 3-year forecast period, the population is expected to increase even faster.
The consumer confidence index was measured at 107 at that time (1985 =100)

After reading that report why would you bet against Las Vegas in 2005.  Let's fast forward 5 years.
-unemployment rate is 15%
-consumer confidence index is now under 50
-a 30 year mortgage can be had for under 4%
-home sales and prices have tanked

Take a look at Zillow which measures US home prices and values over the past ten years.  In 2001, the average price for Las Vegas was 135k, by 2005 the average was 280k.  In 2010, the average house price is down to 123k.  Clearly, the rocketing of house prices was not justified.  Saskatoon had an average house price of about 140k in 2004 and by 2008 had approached 300k.  In 2010, the average price is hovering at 300k.  Saskatoon had the same kind of lift off, but just a few years later.

So where did the "experts" go wrong? Does "what happens in Vegas, stay in Vegas?"

In 2005, construction, real estate development and tourism were the three biggest drivers of growth for Las Vegas housing market.  But too much of their economy was based on these industries which was fueled by credit. It was not sustainable as we all know now.  It was a system based on credit that pushed up house prices beyond income and once houses became unaffordable and consumers were tapped out, the game was over.  Just because interest rates stayed low and billions were invested in that city, did not mean that the housing market was going to increase or even stay stable.  While speculation and subprime played a big role, the biggest problem is that Las Vegas's housing market clearly strayed away from the long term growth fundamentals of their housing market.  Once house prices are out of line in according to inflation, income, rents, it is only a matter of time before the market blows up.

Saskatoon has had construction, real estate development and retail services see the biggest amount of growth over the last few years.  Housing activity accounts for over 20% of the economy.  Add in the record number of cranes in the city, with a record number of commercial construction around the city and we can see that the city has experienced a building boom.  A boom that has been financed with debt.  Since 2003, City of Saskatoon debt has grown from 20 million to almost 200 million, with more debt being added in the near future.  The City of Saskatoon's debt ceiling is 298 million.   Household debt has rocketed towards the sky. The federal government will be turning off the spending taps in the spring.  Austerity is around the corner. The rest of the western world should be an indication of what a credit bubble can do to a housing market when a housing market strays away from the fundamentals and consumers use their houses as a ATM.

This is from Saskatoon's housing market press release for October 2010

Consumers continue to express their confidence in the local economy as evidenced by their buying patterns. Employment numbers continue to increase. New home construction is doing well, retail sales are strong and when coupled with low interest rates conditions are favourable for a sustainable market environment.

A sustainable market environment for the long term is not solely based on low interest rates, job growth and confidence.  In a nutshell, Las Vegas realtors said the same thing in 2005.  Look at how that turned out for them.  We need to ask :what are the long term fundamentals? Have incomes and/or inflation kept up pace with house price growth? What does affordability look like? Average price to average income? Interest rates? Credit growth? Is the credit growth sustainable? How do these all compare to historical standards? No mention of that because that may lead some unsuspecting buyers that the market is in a bubble. 


Now to be fair, to suggest that Saskatoon's housing market will fall like Vegas is wrong, plain and simple.  There is one similarity, house price growth ( homes doubled in value in 5 years in both markets). I am very bearish on Saskatoon's housing market but Saskatoon won't even come close to the downfall that Las Vegas experienced. Vegas housing could be down for a generation, while Saskatoon might fall slowly for 5 years and then have stagnant growth after that.  Vegas took overbuilding, speculation, and subprime to the top of the US bubble.  Saskatoon is nowhere near the top of the Canadian bubble when we look at overbuilding, speculation or the little bit of subprime Canada experienced ( US subprime was 22%, Canada was 7% of mortgage markets).

This post was more about how reports or forecasts of various housing markets do not correctly analysis their respective markets.  If Las Vegas realtor boards showed how the growth of housing market was not in line with the long term growth fundamentals from the beginning, sellers and buyers would have had a better understanding if the market was truly sustainable over the long term.  Realtor boards need to look at the fundamentals, fundamentals and the fundamentals.  And if the fundamentals and house prices are out of line, that means the growth has been the result of credit.  And the question that should be asked, "is the credit growth sustainable".  The same of thinking should go for the Saskatoon realtor board, but we all know that they need to install confidence into the markets.  We will see how that works in the future.

Holy Crap: People actually read this drivel!

I did not mean to start a blog.  Being an arm chair economist, I kept certain websites as my favorites like CMHC or statscan.  When I would have a conversation about the housing market, I would try to remember certain numbers or what some guys had said.  Then it got to the point, why not put it all together and try to connect the dots. So I did and then I thought I should post the blog on other sites.  I made the mistake of posting on a few realtor sites in Saskatoon about a housing bubble under a couple of different names and now I am probably banned. I never said anything malicious, my blog posts are fair and balanced.  No name calling. But all my posts were erased from all the realtor sites. I am a man I can take it. 

Since inception, each day this blog has received over 100 visitors until it reached it reached over 200 one day for some odd reason.  Then I found out that one of my posts was on  canadabubble's homepage.  I have to admit, it was cool.  I am not the best writer, actually the drivel I write is quite amateurish. My spelling and grammar ain't the best!  But I am a numbers guy, and to me that is more important than writing an essay even though I may try.  I felt that Saskatoon's housing market did not have a proper analysis of whether or not it is in a bubble.   Nobody had done any calculations, historical comparisons, debt spending, etc.  So that is what I am trying to do.  There must be some interest in what I have to write with the traffic.  And while it is only a handful, I have had visitors come from google searching " Saskatoon housing bubble", so there are people out their with suspicions.

Good or bad, I'll keep posting, even if it is just a couple people a day reading.

Saskaboom: Spending, Spending and more Spending

It is of no doubt this City has experienced a boom over the last few years.  Saskatoon is booming, Saskaboom, call it what you want ( I call it Saskadebt).  This boom has brought lots of construction and has  instilled a tremendous amount of confidence in the economy.  The boom has mostly been in spending.  A spending boom.
City of Saskatoon
The City of Saskatoon has not only increased spending substantially but they have also increased total outstanding debt 8 fold over the time of this boom.  In 2003, the city debt was 27 million.  By the end of 2010, city debt will be an estimated 171 million. This is from the capital budget of 2010:
 The 2010 Capital Budget contains borrowing of $45.4 million for a number of projects...

The total outstanding debt is expected to be an estimated $171 million by the end of 2010, well within the approved debt limit of $298 million for the City.
The City of Saskatoon’s 2010 Capital Budget provides a total capital investment of $326.6 million

With the Traffic Bridge, new bus barns and anything that pops up out or the ordinary, don't be surprised to see the city debt well over 200 million by the end of 2011.  This increase in spending is definitely not sustainable and will need to be scaled back in the future.
In comparsion, before the boom, city spending was a paltry 165 million in 2005. Spending has almost doubled in 5 years.  And here we thought that only Saskatoon homeowners spent more than drunken sailors!

Federal Government and the Economic Action Plan
With the world wide recession of 2008-09, the Canadian Federal Government stimulated the Canadian economy with their Economic Action Plan.  As we have been told in Saskatoon, we are not immune to what is happening to the rest of the world, but we have weathered the storm rather nicely.  With that said, the federal government has pumped tens of millions of dollars into Saskatoon's economy ( search Saskatoon on the map) through this initiative, but this will all end in the spring of 2011.  The Feds know that they have return to balancing the books by cutting spending.

The Saskatoon Homeowner
With the wealth effect, the Saskatoon home owner has led or has been near the top of retail sales growth over the last 5 years in the country.  To believe that the Saskatoon home owner will continue to spend like drunken sailors with debt loads near the peak is wishful thinking.  Saskatoon homeowners spent $469,977,171 on real estate in 2005.  This doubled to $1,065,494,799 in 2009.  Inflation in that time period throughout Canada was 7.8%.

Retail Sales Growth

Boomers

The boomers have just passed their peak spending age ( 2008) and now austerity will set in before retirement.  Saskatoon demographics from stats can shows that the boomers are a significant part of our population.

Construction

Saskatoon is no different than the rest of the world when one considers the construction boom.  20% of Saskatoon's economy is based on housing activity. This includes the construction of new homes, the rental, sale and renovation of existing homes. Non residential construction can be viewed with the record number of cranes that dot the city skyline. The Stonegate Centre, University Heights Square, Preston Crossing,  and Blairmore areas have experienced substantial building construction for retail services. Saskatoon has 2 new hotels, the Sheraton in Stonebridge and the Best Western in Blairmore.  Discovery Plaza is a new office building downtown which is occupied by BHP Billiton.  The Luxe, King George Hotel and J.B Estates are new developments that are a mix of residential and commercial space.  River Landing looks like it has the go ahead for the 200 million dollar development.  The University has millions of dollars in new development in new student residences and major projects such as the expansion of Health Sciences.  The 200 million dollar children's hospital will be built in the near future. Without a doubt, Saskatoon's pace of construction will slow down in the next few years as the construction growth the city has experienced is not sustainable.

To recap

The federal government will need to raise taxes and cut spending in the near future to pay for the stimulus programs and balance the books. The city will get close to their debt ceiling within a few years if spending keeps getting out of hand and will need to cut spending.  Homeowners and especially boomers will not be spending in the next 5 years like the last 5 years.  Just like trees, debt levels can only grow so high.  Expect consumer spending to slow down with some job losses through all levels of the economy.

The wealth effect that housing has on Saskatoon's economy

The wealth effect is an economic term, referring to an increase in spending that accompanies an increase in perceived wealth.  When a Saskatoon home owner sees their house rising in value, they go shopping.  In the last few years, we have led the nation in % growth of retail sales.  This post is more theory and on assumptions, but should give us good idea on what the wealth effect has done for Saskatoon housing and economy.

Here is a report is from the Dallas Fed, which is a US based entity, but this does pertain to Canadian households.
http://www.dallasfed.org/research/eclett/2006/el0611.html#6
Consistent with a growing liquidity, or MEW effect, some new studies have found wealth effects are now greater than earlier research suggested. One estimates that a $100 rise in housing wealth leads to a $9 increase in spending. Another finds that increases in housing wealth generate three times the spending from stock-price gains. Together, higher home values and financial innovations have enabled homeowners to more easily tap housing wealth. Mortgage equity withdrawals have risen sharply recently relative to income.


100,000 homes that have on average increased from $150,000 to $290,000 in about 5 years for Saskatoon, which we know was not based on fundamentals but credit.  So if Saskatoon follows this study, we can calculate that Saskatoon homes have increased in value by 14 Billion over that time period. And if households followed the pattern of equity withdrawal in the relation to rising house prices, we would find that in the last 5 years extra withdrawal of equity has increased by a total of 1.26 Billion, that would have otherwise not have been taken out if house prices remained flat over that time period.  Remember that is extra equity withdrawal, not total equity withdrawal. This money that was taken out has been used for debt consolidation, new home construction and retail sales. For example, in 2002, retail sales totaled 3.1 billion.  In 2010, retail sales are forecast to be 5.5 billion for Saskatoon. 

If you think we are not like the Americans and we don't use homes as ATM's, you are wrong.  At the peak of their bubble in 2006, Americans withdrew 16% of their equity.  In the 12 months of this study, Canadians took out just over 12% of their equity.  This equated to a 8% rise in the average household income.  Home renovation tax credit and other spending on houses led us out of recession.  This works when house prices rise, but the US experience tells us that the game can only be played for so long and fall out can be disastrous.

http://www.caamp.org/meloncms/media/Fall%20Consumer%20Report%20WEB.pdf
“The survey data indicates that 18% of mortgage holders took out equity from their homes or increased the amount of the mortgage principal within the past twelve months. The average amount of equity take-out is estimated at $46,000.

As with all Canadian studies, we will just plug the average for Saskatoon.  This is for total equity extraction over the last year, as the former calculation was for the increase in equity extraction over the last 5 years.  Hopefully it makes sense.

Saskatoon has approximately 105,000 units of housing.  The home ownership rate is about 70%. So there are about 73,000 owner occupied units here. We will follow the Canadian average, ( I believe we have borrowed more, but we will stick to the Canadian average until we see different numbers for now).  The average amount taken out was $46,000 for the 18%.  Spread out between all home owners and the average amount take out of their home is $9,000.  Multiply that by the 73000 home owners and we see that Saskatoon home owners extracted just over 650 million dollars from their homes over the last 12 months.  This number would be bigger if we used all homes, but we will just follow the report.
That might seem like a big number and it is, but compare that to the nation, as throughout the nation Canadians borrowed 41 billion last year from their homes. 

How does this fit in with GDP for Saskatoon?  According to SREDA total GDP for Saskatoon CMA is forecast to be 10 billion in 2010.  So if Saskatoon followed the nations average, 3.6% of this cities GDP ( 1/3 of equity extraction was debt consolidation) is a result of equity extraction of their homes.  What happens when the ATM is closed?

This is what TD say in 2008 about household spending.
"Households have been spending almost like drunken sailors over the past couple of years."
In 2009 and 2010, households cranked up spending even more.  Who spends more than a drunken sailor?

Some Saskatoon home owners, I'm sure!

Affordable housing in Saskatoon?

One of the advantages that Saskatoon had over other places in the country was affordable housing.  In the 90's and early 2000's the average house price to average household income ranged from 2 to 2.7. 
According to http://www.demographia.com/dhi.pdf

Historically, the Median Multiple has been remarkably similar among the nations surveyed, with median house prices being generally 3.0 or less times median household incomes.
For metropolitan areas to rate as 'affordable' and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household income.

In the latest survey, Saskatoon measured at 4.4, but I am not to sure about their numbers as they used 56k for the median income and 254k for the median house price.  According to statscan the median household income is about 82k and the median house price is near the average of 293k from October 2010.  The number we end of with is 3.57 which is labeled as moderately unaffordable and definitely in bubble territory with this measure.

To allow this to occur, new starter housing of an acceptable quality to the purchasers with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual household income of that urban market. 

So new entry level housing should not be more than 2.5 times the gross annual household income.  And I can see why because new buyers are just starting out with little savings and some debt load from post-secondary schooling. Also, new areas need young families to populate the area and if they are starting a family, 2 incomes may not be always be coming into the household.  And when they do have 2 incomes coming in, daycare can take a huge chunk out of take home pay.


We know that they median household income for Saskatoon is about 82k.  So 2.5 times 82k = 205k.  So anything over 205k for new entry level housing is deemed unaffordable.  If we take a look at the new development in Evergreen, we will see that the cheapest lot is 105k. ( We should expect the HPI to climb again next year) Knowing that construction costs are about $200 sq/ft and the minimum area to build is just over 1000 sq/ft, it would be hard for a house to cost less than 300k.  This is almost 100k over what is deemed affordable housing for new entrants.

So maybe I am wrong and new entry level housing means a townhouse.  Looking at Willowgrove which is near Evergreen and we see that the cheapest 2 bedroom townhouse is 259k.  Still, not affordable and in bubble territory. 

When we look at how the rest of the western world embraced the credit and housing bubbles and are now dealing with the effects of the fall out, it is hard to see how it can be different here. It is now just a matter of how long this lasts in Saskatoon.

Mind set of the average house owner

Today I was talking with an acquaintance and of course the subject of real estate came up.  30 y/o guy who has a University education, big home, 2 new vehicles,loves hockey, has just finished a basement reno and likes to keep up on financial news.  I told him that I believe that prices are going to come down over the winter and especially in the spring when listings will rise to near or past all time highs and the demand is not there to stop the leak.

His response was "what are you talking about? The economy in Saskatoon is very strong, people are moving here, there is job growth, interest rates are low, there is confidence in the local economy and housing market.  The real estate board (his sister is a realtor) said prices will increase this year and next year. Plus our resources would save us from any fallout in the nation.  The growing economy in Saskatoon will fuel more house price appreciation.  Our banking regulation is better than the States. We don't have subprime." 
His reply is an indication that the real estate boards press releases are doing the job they are suppose to.  And that is to install the one thing that separates the United States housing market from Canada's : confidence.

My reply was "it was never the economy that fueled house price appreciation. Rather, it was house price appreciation that fueled the economy."  Then I get the deer caught in the headlights look. I love these conversations, most people do not know what they are up against until I start talking fundamentals, affordability, bond market, global housing bubble, etc.  Then I get the deer run over by a truck look.

After I was done my spiel, his response was " if housing crashes like you say it could; we will see many jobs lost and much wealth erased.  You don't want that kind of environment?"
My response was "Of course it is not what I want, its not up to me what the market does, its what I see when I look at the numbers.  Historically, and the global housing bubble proves that these prices are not sustainable for the country and this city.  Prices always revert to their long term fundamentals."

What guys like this and the media fail to see is that much of our economy is based on housing.  According to CMHC, housing activity accounts for over 20% of the nations GDP.  That does not include the consumer spending that happens as a result of an increase of perceived wealth with house prices increasing.  A drop in housing activity and consumer spending could put us back into recession.  Our unemployment rate is just under 8% while the United States number is 9.6%.  With an economy that is based on 65% of consumer spending that gap will be closing when housing takes a hit and the wealth effect reverses.  Guys like this let their emotions play a role in their investment and believe it is different this time.  There are millions of people that were involved in the global housing bubble
 We eventually agreed to disagree. 

Canadian mortgage debt tops 1 trillion

Mortgage debt tops 1 Trillion
Canadian mortgage debt passed the 1 trillion in August according to a report by the Canadian Association of Accredited Mortgage Professionals titled Canadians handling mortgage debt very well.

A couple of notes I liked to bring out
Over the past 15 years, the volume of residential mortgages has expanded 194%, or about 7.5% a year. Growth was especially rampant between 2004 to 2008, exceeding 10% each year, the report said.

Of course growth was rampant between 2004 and 2008, that is where house price growth was rampant as well.

Of the 18% of Canadian homeowners who removed some equity from their homes at an average of $46,000 over the past year, the most common use for the extra cash was to pay down debt.
Robbing Peter to pay Paul.  Is that not just consolidation of debt?

"Canadians are being very smart and responsible with their mortgages," Jim Murphy, president and chief executive of CAAMP, said in a release. "They are building equity in their homes and making informed, long-term mortgage decisions."

Lets take a look at some of debt we have racked up and see how smart Canadians are( courtesy of american.canada blogspot)

Since 1999 lines of credit have increased over 720%!

 Since 1999 credit card debt has increased over 358%!

The median household income has increased by about 53% across Canada since 1998.(47k in 98 and 72k in 10 from statscan) Since 1999 mortgage debt has increased by over 150%. Then we see that the average house price has gone from about 130k in the late 90's to 330k in 2010. That is an increase of over 150%!

So to recap, Canadians have not been very smart and definitely not responsible.  House price growth has followed mortgage debt, not incomes as we are led to believe.  To top it off, lines of credit and credit card debt have exploded in the past decade.  A drop in house prices will decimate many Canadians.  Wealth will erode but the debt remains.

Do the fundamentals justify Saskatoon's housing price appreciation?

Over the long term, housing is based on the fundamentals of inflation, incomes,rents, affordability and interest rates. Since the average house price in 1998 was 100k, Saskatoon has experienced about 200% growth in twelve years. In the years 2005 to 2010 the growth was about 100%. 

Lets see if house price growth is justified by looking at the fundamentals.

Inflation
What was inflation at that time period?

According to the Bank of Canada's inflation calculator inflation growth from 1998 to 2010 was 28%.  Since 2005 until now total inflation growth was 7.8%.  Granted this is for the whole of Canada; Saskatoon did experience more inflation than the national average. Let's say 40% for the 12 years.  Does not matter, this time period was not highly inflationary looking at the calculator.

Incomes
Well, maybe it was because of wages.

The median household income for Saskatoon in 1998 was 49k and in 2010 the median household income is estimated to be about 82k.  Over the twelve years, median household income has increased about 67%.  So wages have increased, but they have not increased to the point to justify the appreciation of house prices to we have experienced.  House prices have increased almost 3 times compared to the increase in wages over the last twelve years.

Rents
Average rents have only gone up 75% over the last twelve years, so it was not because of rents.

Interest Rates

From 1998 to 2008 interest rates dropped only a couple of points with an up and down pattern in between.  Emergency interest rates have been in place over the last 2 years and are slowly climbing from the bottom.

 

Affordability

Affordability is the measure of what a household pays towards shelter each month. In the 1st post of this blog there many calculations of affordability and house price to income etc.  Currently, a detached home in Saskatoon costs about 32% of income.  Lower than the over 40% Saskatoon had in 2008.  This is factoring in emergency interest rates, a 75k down payment over 25 years for an average household. Emergency interest rates will not always be here and not everybody has 75k for a down payment unless they are move up buyers. According to TD,  Saskatoon's affordability was worse only in Vancouver and Victoria in Canada.  While RBC's report shows that Saskatoon's affordability is worse in Vancouver, Victoria, Toronto and Calgary.  Whatever the measure, Saskatoon's housing is definitely not affordable especially when compared to previous time periods.

 

CREA revises their housing outlook for 2010 again

The Canadian Real Estate Association has revised their housing outlook for 2010 and 2011 again.  Aren't they supposed to know their stuff better than the bubble bloggers?  The bloggers have known and predicted for quite some time that sales would flop. Well, they both have been wrong.  But today reminds me why the "housing experts" in the United States were wrong in 2006 and bubble bloggers were right.  That post is for another day.

In today's report, CREA slashes their outlook for 2010 and 2011 from previous reports.
National sales activity is now expected to reach 442,200 units in 2010, representing an annual decline of 4.9 per cent.  Lackluster economic and job growth, muted consumer confidence, and the resumption of interest rate increases are expected in 2011. Against this economic backdrop, national home sales activity is forecast to decline by nine per cent to 402,500 units.

How does this report compare to previous ones?
July 30, 2010
National sales activity is forecast to reach 459,600 units in 2010, representing an annual decline of 1.2 per cent.  In 2011, weaker economic growth and consumer spending will contribute to a decline in national sales activity of 7.3 per cent, with annual sales totaling 426,100 units.
February 8, 2010
CREA forecasts national activity will reach 527,300 units in 2010, up 13.3 per cent from 2009. This would represent a new annual record, standing 1.2 per cent above the previous peak in 2007.  National home sales activity is forecast to decline 7.1 per cent to 490,100 units in 2011, putting it on par with annual levels reported in 2005 and 2006. 

Only 9 months between 2 revisions and they were off by almost 100,000 units which is close to 20%.  Holy crap!  At the beginning of the year they and every body's dog expected that demand would soften in the second half of the year.  But to be off by that much, it makes the "housing experts" in the US circa 2006 look .  They are forecasting 2011 to end with 402,000 units sold.  Don't be surprised to see that changed to a number that starts with a 3.  Then 2011 will be the first year in 11 years that sales are not over 400,000. 

Now think about how much growth this nation has had in housing over that time frame.  This country now has over 2 million additional units of housing since 2000.
In 2000, there were 30.6 million people.
Now we have 34.2 million people.
And housing activity is now over 20% of Canada's economy according to CMHC.
Now think about what this means to housing and our economy if sales revert to levels not seen in over a decade.
They don't get it, do you?

Oh yeah, one last thing, they expect prices to climb up.

Housing Market Indicators and other stats

This post will look at housing market indicators and other stats.


New Housing Price Index
Statscan measures the housing price index every year for the major centers.  For Saskatoon from the year 2005 the HPI increased from 126.5 to 138.0 to 191.5 to 230.9 to 213.3 in 2010. 1997 =100. .  From 1997 until 2006 the HPI in Saskatoon increased at the same rate as the nations average.  From 2006 to 2008 Saskatoon saw the most growth in the HPI across the nation going from 138.0 to 230.9.  The nations average went from 142 to 152 in the same time period. This is just one of the many stories we read about in the news that year about new housing. Only Regina and Edmonton had significant growth that could be compared to Saskatoon in this time period.

Land costs
The value of Saskatchewan land has skyrocketed over the last 5 years and the city of Saskatoon is no exception.  Lot costs are different from the east, west and south parts of the city.  But to just get an idea how prices have changed here is one example.  In one of the first phases of Willowgrove ( there were 8), an average lot with dimensions measuring 42 x 120 would set a buyer back just over 60k.  Fast forward 6 years later to the new subdivision called Evergreen about 1 mile north and lots are starting at a cool 105k.  To get an idea how other cities such as Edmonton and Calgary have seen land values increase Edmonton Housing Bust has a great blog post on that.

 New House Costs ( no land)
According to CMHC new house costs not including land from 2006 to 2009 went from 139.6 to 210.2.

Average House Price (resale)
The average house price has gone from about 100k in 1998 to a near 300k in 210.  The increase  from 2006 to 2008 was much like the rest of Canada except some places saw their increases in bit earlier.

Sales
Sales for 2010 should end up as fourth best on record, possibly third.  Sales were front loaded this year and now declines from last year are evident.  This is a major theme across the country as 2009 was the best year for some markets in relation to sales.

Listings
2010 should see listings come in as the second highest ever recorded but will not touch the record of 2008.

 

Housing Starts
2010 should shape up to be the 3rd best year in housing starts.  The graph shows data up to September 2010.

Unemployment Rate
Saskatchewan and Saskatoon has been noted as having one the lowest unemployment rates during the recession.  But 2009 and 2010 have seen an uptick, but the rate is smaller than the national rate which has been around a stubborn 8% for over a year.

Income growth
Saskatoon's median income has grown at a faster rate than the national median.  In 1998 Saskatoon was near the national median with both coming in just under 50k.  In 2008, the national median was $68800 while Saskatoon's median was $77740.  Wage growth estimated at 3% over 2009 and 2010 brings the median wage to about 82k for 2010.

Construction wages
Here we see that union construction wages  increased over 17% from 2007 to 2009.  Before that it was not measured, but I think it be a safe bet that construction wages saw growth close to that level in the years of 2005 to 2007 as 2007 was really the boom that caught our construction industry off guard and construction wages went through the roof.

Population growth for Saskatoon CMA

Throughout the 80's and 90's Saskatchewan as a whole was losing population, but the decline was mostly rural, as the major centers such as Regina and Saskatoon saw slow growth through that time period.  At the turn of the century Saskatoon saw slow growth as many young people headed to Alberta for the so called "Alberta advantage" and with retired people heading to milder climates. But over the last half decade, Saskatchewan's population has picked up with Saskatoon leading the way.  People from Eastern European countries, the Philippine's and other places from around the world are now calling Saskatoon home.  People from BC and Alberta are also finding their way back home to be closer to family and friends. In 1981 the population of Saskatoon CMA was 154000 while in 2010 it is estimated to be about 260000.

Interest Rates

Interest rates have inched up slowly from there all time lows of this past spring.  A variable rate of 2.2% and a 5 year fixed of 3.29% can be approved right now.  A far cry from the double digits experienced in the 80's.  I don't think anybody should expect to see the low rates in a few years as some expect rates will be at least double by 2014.

Retail Sales Growth

The past few years saw phenomenal growth in retail sales as many people were confident about the economy which allowed people to borrow money to buy trucks, tv's, campers etc.

GDP Growth

Saskatoon has been one of the leaders in GDP growth in Canada over the past few years except for 2009.  The forecast for the next few years is for Saskatoon to be near the top again.