I’m Moving!

No, I didn’t buy a house – the prices are still too high 😉 .

I’ve relocated to blogspot!

http://crebb.blogspot.com

Please update your bookmarks and feeds.

Thanks for your support and readership.

Calgary Leads Nation In Sales Decline

In an article on reportonbusiness.com, it appears that Calgary leads the nation in new listings (along with Western Canada) and also sales declines.

“By contrast new listings soared to their highest recorded level at 154,217 units in the first quarter, led by Calgary, Edmonton and Vancouver.”

…

“On a year-over-year basis, sales volumes fell in 16 of the 18 major markets for which data was available, led by a 35.9 per cent drop in Calgary and a 29.8 per cent decline in Edmonton.”

Most bullish specuvestors and the real estate “value” chain will pump many reasons for buying. Alberta’s infallible natural resources based economy is the most commonly used “empty” validation for entering into a lifetime of debt. If Alberta’s economy is hyped to be the most vibrant and strong, then why are sales volumes the worst in Canada?

When will people understand the key principle in a marketplace is affordabibilty. It’s no longer about the economy when house prices have risen past the sustainable threshold. The “invisible hand” of the market is slowly proving this fact.

If you still believe in a balanced marketplace, you’re dreaming in technicolor.

A potential scary/sobering reality is that Calgary may become the epicenter for the real estate crash in Canada.

Updated News Articles:
Canada’s Housing Boom “Officially Over”
Just Bought A House? Don’t Read This
Alberta House Price Boom Dying Down
Calgary Home Sales Plummet
Housing Demand Declines In Calgary
Stretched buyers fuel boom in housing
Engine behind the country’s housing boom has been increasingly leveraged first-time buyers
Alberta mortgage debt reaches $60B
Housing woes hitting home

 

  

Color Red For Condo Sales

There is another condominium project starving for potential buyers.

It’s the Colors project by Battistella located on the corner of 1st Street SW and 13th Avenue SW (right beside Chocolate Condos in the Beltline district). Once again, the location is good considering the project is in the inner city. The project is probably months away from completion and appears to be desperate for buyers. The following is a promotion that Battistella is running to spur sales. Needless to say, the promotion is “meaty.” Are these promotions honest elements of a “balanced” marketplace?

 

 

Even when promotions and marketing are rampant for these developments, buyers are retreating at a more staggering pace. Most sellers were anticipating increased sales numbers during the “spring rush.” But with sales volumes so low, what will be the financial outcome?

Condo April 1 – 15 2008: 294, 588 (projected) 30% decrease
Condo April 2007: 839
Condo April 2006: 922

With many more new condo developments hitting the market soon, there is severe trouble ahead. Inventory levels will be astronomical while sales continue to dwindle. Soon many condo developers will have to cannibalize their competition with heavier promotions and price reductions to attract buyers. The cannibalization will extend to the already heavily saturated inventory of resale condos. It will be a fierce race to the bottom.

If you’re a potential condo buyer out there in the Calgary market; the best thing to do is to wait.

Back To The Basics

This past weekend I was enjoying the nice weather when I received a call on my mobile phone. Not recognizing the phone number, I let it go to voicemail.

I checked my voicemail later on during the day and the last person I would ever think to contact me, did. It was the real estate “professional” that I had been talking to in the spring of 2007 when I was browsing some condo units in the city. It was during that time I was researching the market and planning to either purchase or wait on the market. We had not spoken since because of obvious differing market perceptions. As a consumer, I was trying to educate myself on the market while the “professional” was just interested in earning 6%. Our last communication revolved around the individual’s belief that prices would climb forever and I’d miss my chance in entering the market (“forever”). I knew better.

This “professional” left a message indicating that a property that just “came across their desk” and wondered if I was interested. It was a condo in the NW quadrant of the city and the price had been recently reduced by $20,000 as the seller was motivated. Further details revealed the condo was ~800 sq. ft., and now priced at $300,000. It was a “deal” in the opinion of the “professional” because neighboring similar units were $320,000 and $350,000 respectively. No thanks.

What a stark contrast the year 2008 is compared to the boom years of 2006 and 2007. During those years, houses sold themselves with little effort.

Now, sales are plummeting 30%-40% year-over-year.

April sales are plummeting as it looks like we’ll have another consecutive month of dismal sales.

SFH April 1-13 2008: 569, 1313 (projected)
SFH April 2007: 2086
SFH April 2006: 2040

Condo April 1- 13 2008: 258, 595 (projected)
Condo April 2007: 839
Condo April 2006: 922

There are approximately 5700+ real estate “professionals” in the Calgary area. With commissions being paid only on sales of properties, many of these “professionals” are not making any money.

To generate sales, some of them are forced to go back to the basics. This may include generating sales leads by implementing cold call tactics. In addition, it would be interesting to see the marketing budget for the DDS these days. On some Calgary radio stations, every second advertisement concerns real estate.

Afterall, these are all signs of a “normalizing” marketplace.

Family Doctors Priced Out By High Rents

The following news article ran on the front page news of the Calgary Herald this morning. Family physicians are facing tough times in operating their businesses with the high cost of real estate.

“The Calgary Health Region study found the majority of physicians in the poll — 70 per cent of the 137 doctors who reported leasing office space — will be renegotiating their rental contracts by July 2009.

And 46 per cent of those doctors plan to quit their local family practice, retire or move their offices outside the city.

The report concludes that operating a family doctor’s office in Calgary “is not sustainable as significant overhead increases of 30 per cent or more are being reported” thanks to the city’s overheated real estate and labour markets.

Local doctors’ groups said the study is concerning, despite its small sample size, because it reflects the trend of Calgary physicians closing their offices as their income fails to keep pace with growing overhead expenses.”

It appears now that even medical professionals are now feeling the squeeze of Calgary’s overvalued real estate market.

Do you still think that this market at the current values is sustainable?

The answer is evidently, no.

 

Mortgage Payments Eating Up Disposable Income

The novelty idea that Oil and Gas was the underpinning in driving up real estate prices in the boom years is starting to wear off as the euphoria dissipates. Often, people lose sight of the fact that Alberta has always had oil. Why didn’t the boom happen earlier than 2005? The reality is the local real estate market was more driven by the element of post 9/11 free credit/money. It’s interesting to gauge the psychology of the Albertan consumer during the times when the economy is losing steam. The transition from euphoric irrational exuberance to rational exuberance is often difficult.

The preceding graph shows the recent Alberta Consumer Price Index (CPI). To review, CPI is often used as a measuring stick for inflationary pressures. CPI consists of monitoring price fluctuations of a finite collection of products and services. As you can see in the graph, Alberta’s CPI is at a 16 month low. The full economic update can be read here. So in layman’s terms, products and services are cheaper now as compared to the past year. As a result, a consumer in the “world’s hottest economy,” spending and consumption should be higher.

It’s interesting to note that the exact opposite is happening. Alberta lags behind in retail sales growth.

The disappearance of home buyers is already evident in the marketplace but it appears that alot of consumers are spending less. How is this possible? “We have oil.”

One thing to consider is that alot of frenzied home buyers who were swept up in the hype machine over the last two years are now becoming clearly overextended. Disposable income may no longer be disposable. In Calgary, mortgages for standard two-story homes evaporate 45.5% of household pretax income. In addition, maybe the invisible well of equity has been frequented too many times and is now dry?

Eating ramen off granite countertops does not make it taste better nor improve quality of life. There are definitely some opportunity costs with purchasing a home during the boom.

Different Kind of Spring Rush in 2008?

Spring is finally upon us and with 11 days to go before the end of March 2008, it seems that this year’s highly anticipated “spring rush” will be different. Sales are decimated, new listings and overall inventory are ballooning out of control.

From a historical trend, the start of spring has been associated with an increase (frantic, for boom years) in real estate market activity, resulting in skyrocketing prices. Since the snow has melted, the real estate market can carry on (we never got that much snow in Calgary so I don’t know what we can blame the dismal sales on)! Interesting to note, the month of March represented the annual peak in sales activity. So if you’re a seller, you’re highest probability of selling your property is this month. In March 2007, there were 2272 SFH sales and 1026 condo sales. In March 2006, there were 2049 SFH sales and 995 condo sales. The month of March is important as it sets up the market for the next 2-3 months when market activity is the highest during the year.

To get a better idea as to what direction the market will be heading in the near future we can employ simplistic supply-demand economics.

Demand
Sales activity in the Calgary real estate market has been eroding since last year. Sales are down 30%-40%. If demand in March is low, the precedent will be set for the rest of the year.

SFH March 2008 Sales (MTD): 886 / 1601 (projected)
SFH March 2007 Sales: 2272
SFH March 2006 Sales: 2049
___
Condo March 2008 Sales (MTD): 350 / 625 (projected)
Condo March 2007 Sales: 1026
Condo March 2006 Sales: 995

In addition, the following news stories which ran in MSM illustrates just how unaffordable Alberta housing is. The super-perma optimistic public sentiment is definitely turning. The once persistent pursuit (hype) of owning a house has been rescinded, as reality sets in. Simply put, buyers are realising that housing is too expensive and not sustainable by current income(s).

• Albertans Less Eager to Buy Homes
• Affordability for housing has dropped to 18 year low,
• Housing Affordability is an Oxymoron
• Resource Boom Can’t Last Forever
• Canada begins tracking U.S. into slump
• Update: Calgary’s Resale Market Suffers Deepest Decline

Supply
Supply levels for both SFH and Condos itself evident. Inventory is at all time record highs so early in the year. It’s scary to anticipate how much inventory will be on the market by the end of 2008. The following statistics do not include other supply sources such as welist.com or comfree, etc.

SFH March 2008 Inventory (MTD): 5691 / 6351 (projected)
SFH March 2007 Inventory: 2340
SFH March 2006 Inventory: 1166
___
Condo March 2008 Inventory (MTD): 2685 / 2960 (projected)
Condo March 2007 Inventory: 726
Condo March 2006 Inventory: 1,028
(source: findcalgary.ca)

Price
Prices have remained stagnant since last month. Analyzing prices in these current market conditions would not allow someone to truly understand the market. As mentioned already on other real estate blogs, one reason why SFH prices have stayed stagnant over the past months is due to the tapering of variance in sales mix. The sales mix is evident if we analyze the communities with highest sales activity in Calgary:

Zone A/B Feb 12-Mar 6 Top 5 Communities in Sales:
1. Coventry Hills
2. Tuscany
3. Taradale
4. Martindale
5. Panorama Hills

Zone C/D Feb 12-Mar 6 Top 5 Communities in Sales:
1. Bridlewood
2. Evergreen
3. Cranston
4. McKenzie Lake/McKenzie Town
5. Cranston
(source: creb)

What do all these 10 communities have in common? They are all new communities in Calgary. All these new communities have similar property product line, with mid to upper tier housing units. This confirms that presently, majority of buyers in the Calgary market are moving up, into bigger houses (in newer communities) which cost more money on an overvalued basis. This will keep average and median within a stagnant range.

Economics 101, with lower demand and higher inventory, prices will have to retract to achieve market equilibrium.

With March sales being dismal compared to other years, this sets the stage for the next remaining months of the highly anticipated “spring rush” in Calgary. Every seller in this city has been waiting for this “phenomenon.” If March is any indication as to what is to come then this year’s “spring rush” will be weak at best. Interesting to note is that demand has returned to almost pre-boom levels. Yet inventory is at all time record highs and asking prices are still way too high. The ball is now in the sellers court. Buyers aren’t buying anymore. The have nothing to lose. With each passing day, their savings accounts grow. On the other hand, the carrying costs for sellers holding multiple mortgages will be a continuing financial burden.

Will this instalment of the “spring rush” prove disappointing for sellers? Where do we go from here? Or will this spring actually be the catalyst for a major price correction in Calgary?

Bubble Community Watch: Panorama Hills

Panorama Hills

February 12 – March 6 2008 Sales and Average Sale Price (SFH)
Sales: 16
Average Sales Price: $531,546
Active SFH Listings (March 15 2008): 112
(Source: creb, mls.ca)

A formal comparison or statistical analysis cannot be made because the listings statistic is off 9 days. But just “eyeballing” the dismal “spring sales” numbers and volume of listings, it looks like sellers will be required to substantially reduce asking prices in this community to trigger a sale. In estimation, Panorama Hills has the worst SFH sales-to-list ratio in Zone A. Will this community be the first to fall? Only time will tell. 

Serfdom Life

Ben Bernanke, Chairman of the US Federal Reserve may be ready to cut interest rates again in hopes of keeping the US economy afloat in recessionary waters. In addition to cutting rates, banks are pumping liquidity into the financial markets. A consequence of these actions results in the value of the US currency approaching third-world status. With the weak dollar, crude futures are used as a hedge against the decreasing value of the greenback. Hence, the price of oil has inflated to record levels creating yet another bubble. This time it’s a resources bubble. The lowering of interest rates in conjunction with the liquidity inundation will result in one thing: high levels of inflation. Augmented inflation can only be adjusted back to equilibrium by implementing higher interest rates. Interest rates cannot stay this low forever. When the US Federal Reserve raises interest rates in the future to reign in inflation, the Bank of Canada will follow suit.

If you’re a Calgary home owner who bought during the last two years amidst bubble economics, you are not cheering for Ben Bernanke. The more interest rates are cut, the higher interest rates will have to rise in the future to correct the current economic mess. Any consequential increase in mortgage rates would spell financial disaster for many owners who have recently paid for bubble properties, especially when home values decrease. Most first time home buyers who opted for 40 year mortgages (or other creative mortgage vehicles) should be worried, as they were “tricked” into affordability a la subprime. The general rule of thumb for real estate affordability is 25% down for 25 years (single income preferred).

Initially, low interest rates, a hyped up real estate market and a false sense of affordability sucked up many home buyers. As debts accumulate/increase far beyond salary capabilities, a life of financial serfdom becomes life itself. It’s the perfect trap, a life of constant running and sprinting on the financial treadmill with no ability to get off.

Have a good weekend everyone!

Garth Turner, He Gets it Too.

Garth Turner (Canada’s version of Peter Schiff?), Halton Member of Parliament, businessman, and real estate investor shares his opinions that Canada (Calgary as well) is not immune from the subprime crisis.

The must-read article brings home what bubble bloggers have been discussing over the past years about the hyper-overvalued real estate market in Canada. Overextended young buyers, double income requirements, 40 year mortgages, 0%-5% down-payments, assumables, etc. are all elements endeavouring to sustain the unsustainable. Some common marketing-machine driven real estate myths from the article:

1.) Unlike stocks, real estate is a riskless investment.
2.) Houses [always] appreciate
3.) Canadian lenders are more conservative [than U.S. subprime lenders]
4.) Industry experts are worth heeding
5.) You need some place to live anyway
6.) A house is a great investment
7.) Better to be an owner than renter
8.) Rising markets are normal
9.) Real estate profits are tax-free
10.) Canada is different
11.) Alberta is different

The addition of #11 (in relation to #2 on the list) to the list is a colloquial misconception in the province of Alberta. The hollow validation that because Alberta possesses energy resources, paying half a million dollars for an average house in Calgary is  justifiable. It is not.

Garth, who is also a best-selling author recently published his new book “Greater Fool,” which examines real estate and personal finances in today’s fragile global economic state.

In addition, his new blog is also now open for business, GreaterFool.ca.