A great little article from across the pond, it has a similar theme to Canadian housing.
"But high house have all kinds of insidious, damaging effects. As a result not even the baby boomers can really be said to have benefited. They may have lost out less than other groups, but ultimately everybody loses from high house prices."
1) The young suffer
Firstly, and most obviously, young people can’t buy a house and settle down. As a result, young working couples are delaying having children, and end up having less children than they say they would like to.
An average first time buyer household in Saskatchewan buying an average bungalow with 5% will pay about 50% of their income for housing and that does not include student debt.
2) Working home owners suffer
People who do manage to buy a house can then end up spending a fortune servicing their mortgage. At present things don’t seem to be so bad, because of unprecedentedly low interest rates. But as interest rates rise, those who stretched themselves to buy in the boom years may really start to suffer.
70% of young families need both people working just to make ends meet in Canada and
8.8% of Saskatchewan households have debt loads above 40%. This is the highest percentage of households in any province.
3) Older home owners suffer
Not even the baby boomers really gain. By late 2009 a staggering 80% of first time buyers under 30 needed help from their parents. Those with housing wealth are pestered to be the “bank of mum and dad”, feeling pressured to help out – or even guilty if they can’t help their kids get on the housing ladder.
In many cases parents end up with their grown up kids living with them, when they would much rather they moved out. So many young people now live at home it even has a modern acronym to describe it as a lifestyle trend – “KIPPERS” – “Kids In Parents Pockets Eroding Retirement Savings”. More scientifically, the ONS noted that the proportion of young people under 30 with a mortgage fell sharply from 43% in 1997 to 29% in 2009%. The boomers lose out in other ways too, because of the wider effects on our society.
I do not know what these kind of stats are like in Canada or even Saskatoon, but there are definitely parents helping out their children to buy a home.
4) Social mobility suffers
If being able to buy a house depends on having well off parents, then wealth or poverty will increasingly flow down families, reducing social mobility. The rich stay rich, and the poor stay poor, which is not very attractive.
5) Society suffers
As Alex Morton pointed out in a brilliant paper two weeks ago, expensive housing pushes people into social housing, and our social housing system then pushes people into dependency, because of the perverse incentives it creates. (The more needy you become, the higher up the queue you jump.) Even controlling for every other possible factor, people in social housing are 20% less likely to be in work than equivalent people who are not in social housing. While Britain as a whole is isn’t a “broken society”, on some of our big housing estates society definitely is broken, breeding crime and other problems that affect us all.
In Saskatoon, whether you call it lax lending or subprime lending, there are programs to encourage people to get into the housing market who have no business getting into the market. There are probably hundreds of these across the country. Percentage wise, Canada has now put more people into homeownership than the Americans did at their peak. ( 71%-69%) A society with too high of a home ownership rate built on a foundation of debt is detrimental to economies in the long run.
6) Taxpayers suffer – in all kinds of ways
Last but not least, we all suffer as taxpayers. The Government spends £20 billion a year on housing benefit, £15 billion in building, maintaining and subsidising social tenants’ rents, and at least £7 billion in welfare payments, due to higher unemployment rates among social tenants. These costs have shot up in line with rising housing costs.
The number one reason housing costs have risen is the constriction of supply. Our tight planning laws have made it difficult to build new houses – even though polls show people all over the country think we need more.
What is the government going to do about it? We need more housing. Ministers are beavering away on ways to reform the system. But so far they have been shy about setting out their ultimate goals, and we don’t know how radical they are going to be.
They should shout it from the rooftops: high housing costs have hurt us all, and it’s time to put a stop to them.
In Saskatoon, condo conversions, subsidizing builders and buyers, restrictions on who builds homes, and the cranking up of lot prices are just a few of the blunders that will bite back in the near future.
Who gets hurt by high house prices?
In the end, everybody loses, except the banks because that is where the misallocation of capital goes to. If prices stayed even with inflation or wages, then there would be more money left over that is put into the local economy.
Monday, February 28, 2011
Sunday, February 27, 2011
Measuring a housing bubble
Yale economist Robert J. Shiller offers a checklist of seven symptoms that might be used to diagnose a bubble:
And the home ownership rate across Canada has skyrocketed. It is even higher than those reckless Americans.
Well, is he wrong? Guess we will find out.
- Sharp increases in the price of an asset.
- Great public excitement about said increases.
- An accompanying media frenzy.
- Stories of people earning a lot of money, causing envy among those who aren't.
- Growing interest in the asset class among the general public.
And the home ownership rate across Canada has skyrocketed. It is even higher than those reckless Americans.
- New era theories to justify unprecedented price increases.
- A decline in lending standards.
Well, is he wrong? Guess we will find out.
Saturday, February 26, 2011
US Home Prices Mapped
From Seattle Bubble
I thought it would be interesting to post one more viz on the latest Case-Shiller numbers. This time I’ve put the data from all twenty cities on a map. The size of each circle represents how far back prices have rewound (larger = further back), and the circles are color-coded by how much prices have lost from their peak value. Float over a circle for the details about that city.
Here’s what the National Association of REALTORS had to say about national housing bubbles just a few years ago:
Of course, it could be worse. You could be the guy that wrote a cocky “21 reasons to bank on the Phoenix real estate market” blog post in July 2006, just one month after prices peaked there.
Phoenix house prices are now down 54% from the peak.
I thought it would be interesting to post one more viz on the latest Case-Shiller numbers. This time I’ve put the data from all twenty cities on a map. The size of each circle represents how far back prices have rewound (larger = further back), and the circles are color-coded by how much prices have lost from their peak value. Float over a circle for the details about that city.
Here’s what the National Association of REALTORS had to say about national housing bubbles just a few years ago:
Has there ever been a national housing price bubble? No.Note that every city tracked by Case-Shiller sits at a home price level lower than when that NAR document was published in 2005. Oops.
How long have home prices declined in the past?
Although there are exceptions to any general finding, most metro areas that experienced price declines were relatively short lived (several years). … Very few people buy at the top of a market and then sell in a short timeframe. After several years, home prices level and return to normal appreciation patterns.
Of course, it could be worse. You could be the guy that wrote a cocky “21 reasons to bank on the Phoenix real estate market” blog post in July 2006, just one month after prices peaked there.
Phoenix house prices are now down 54% from the peak.
Friday, February 25, 2011
Do Saskatoon residents benefit from high oil prices?
Some analysts say that oil may hit $200 or go even higher due to turmoil in the Middle East. Finance Minister Jim Flaherty says " Higher oil price no cause for alarm".
Canadians drove their vehicles, on average, 16,249 kilometres during the year, up 0.6% from 2008. With Saskatchewan more spread out than the rest of the country, the average is probably closer to 20,000 kilometres for Saskatchewan drivers.
There were more registered vehicles (229,000) than people in Saskatoon (219,000) in 2009. With 2.4 people per household, that means that the average household drives about 40,000 kilometres a year in Saskatoon. (People in Saskatchewan drive more km than the Canadian average)
If oil hit $200 a barrel, the price at the pump would about $2 a liter for people in Saskatoon. So Saskatoon residents would pay a higher fraction of their income for energy than the rest of the nation as Saskatoonians drive more. And even though there is oil in Saskatchewan, we pay the same or even more than the nation at the pump. No home town deals here.
From Jeff Rubin's blog he was the Chief Economist at CIBC World Markets and believes that the high oil prices in 2007-08 is what led to the world wide recession
"There are many ways that oil shocks affect the economy, and none of them is good. As the prices of gasoline, diesel and home heating fuel rise, consumers’ energy bills eat up a growing share of their after-tax income, forcing cutbacks in more discretionary areas of spending. The next thing you know, people are going out to restaurants a lot less, taking fewer vacations and buying fewer clothes."
In a consumer spending economy such as Saskatoon's the majority of people will feel the pinch. Think about it, how many upgraders are in Saskatoon, how many oil rigs are within 1 hour of this city, how many head offices of oil companies are there in this city? If you guessed between 0, 0, and 0, you would be correct unless I missed some obscure company.
Who benefit from higher oil prices?
Oil Companies are huge winners, Government of Canada, Government of Saskatchewan, oil workers, and oil company shareholders also benefit. That is it. Sure the Government of Saskatchewan could generate more revenue and might be able to pay down the debt and could possibly cut taxes as a result if oil prices stayed high for a long time. But the couple percentage points cut in taxes will not offset the extra $2000 and average Saskatoon family will pay for gasoline in a year compared to 2005. And this is not including the extra costs associated with the rise of oil like food and transportation, etc. In a consumer spending economy such as Saskatoon's, the majority of people will feel the pinch. A higher fraction of income from business's and consumers is eaten up, leaving less money left over for discretionary spending. And wages in a consumer spending economy do not go up in a environment like that.
The amount of workers in Saskatchewan that work in mining and energy is about 25,000,( someone correct me if I am wrong here) but the vast majority of these people do not live near Saskatoon. As for oil and gas in Saskatoon, there is really nothing.
Think about it, how many upgraders are in Saskatoon, how many oil rigs are within 1 hour of this city, how many head offices of oil companies are there in this city? If you guessed between 0, 0, and 0, you would be correct unless I missed some obscure company.
There is a reason why oil companies make billions and it is from the wallets of residents that live in places like Saskatoon from around the world. So the majority of Saskatoon residents do not benefit with high oil prices. It is along the same lines as who benefits from high house prices. Only a few.
Finance Minister Jim Flaherty says he's not overly worried about the risks of a spike in oil prices due to instability in the Middle East. Rising oil prices have both positive and negative impacts in Canada, he said Friday. “We export a lot of oil out of Canada, we consume a lot of oil in Canada as well. The oil sands, the oil industry in Canada is good for the entire country,” he said after an address to the Halifax Chamber of Commerce.
Well of course there is no cause for alarm. If oil prices stay high for a decent length of time, big oil companies make more money, the Governments make more money and if consumer spending craps out and the housing bubble bursts, rising oil can be used as the scape goat as the cause. Really, no cause for alarm for the Government. They may even welcome the rise in oil. But there is a huge cause for alarm for the majority of Canadian consumers and does not matter if you live in Ontario, Newfoundland, Saskatchewan or Alberta.
Canadian driving habits
Canadian driving habits
There were more registered vehicles (229,000) than people in Saskatoon (219,000) in 2009. With 2.4 people per household, that means that the average household drives about 40,000 kilometres a year in Saskatoon. (People in Saskatchewan drive more km than the Canadian average)
From Jeff Rubin's blog he was the Chief Economist at CIBC World Markets and believes that the high oil prices in 2007-08 is what led to the world wide recession
"There are many ways that oil shocks affect the economy, and none of them is good. As the prices of gasoline, diesel and home heating fuel rise, consumers’ energy bills eat up a growing share of their after-tax income, forcing cutbacks in more discretionary areas of spending. The next thing you know, people are going out to restaurants a lot less, taking fewer vacations and buying fewer clothes."
In a consumer spending economy such as Saskatoon's the majority of people will feel the pinch. Think about it, how many upgraders are in Saskatoon, how many oil rigs are within 1 hour of this city, how many head offices of oil companies are there in this city? If you guessed between 0, 0, and 0, you would be correct unless I missed some obscure company.
Who benefit from higher oil prices?
Oil Companies are huge winners, Government of Canada, Government of Saskatchewan, oil workers, and oil company shareholders also benefit. That is it. Sure the Government of Saskatchewan could generate more revenue and might be able to pay down the debt and could possibly cut taxes as a result if oil prices stayed high for a long time. But the couple percentage points cut in taxes will not offset the extra $2000 and average Saskatoon family will pay for gasoline in a year compared to 2005. And this is not including the extra costs associated with the rise of oil like food and transportation, etc. In a consumer spending economy such as Saskatoon's, the majority of people will feel the pinch. A higher fraction of income from business's and consumers is eaten up, leaving less money left over for discretionary spending. And wages in a consumer spending economy do not go up in a environment like that.
The amount of workers in Saskatchewan that work in mining and energy is about 25,000,( someone correct me if I am wrong here) but the vast majority of these people do not live near Saskatoon. As for oil and gas in Saskatoon, there is really nothing.
Think about it, how many upgraders are in Saskatoon, how many oil rigs are within 1 hour of this city, how many head offices of oil companies are there in this city? If you guessed between 0, 0, and 0, you would be correct unless I missed some obscure company.
There is a reason why oil companies make billions and it is from the wallets of residents that live in places like Saskatoon from around the world. So the majority of Saskatoon residents do not benefit with high oil prices. It is along the same lines as who benefits from high house prices. Only a few.
RBC Affordability Report, housing bust recognized in Alberta
The new affordability report from RBC is out.
Housing affordability improved modestly for the second consecutive quarter in the fourth quarter of 2010. Homeownership costs were lowered by small decreases in the five-year fixed mortgage rate (posted) during October and November of 2010 amid minimal home-price appreciation (even outright declines in certain local markets).
Saskatchewan:
The Saskatchewan housing market finished 2010 on an enviable note. Home prices, for the most part, rose slightly in the fourth quarter, yet housing affordability improved for the second consecutive time. The provincial home resale market gained back solid forward momentum in the second half of last year (notwithstanding some softening in the final months), which contributed to re-establishing a stronger balance between demand and supply. Generally, the price increases in the fourth quarter more than reversed declines in the previous period but were too small to negate the beneficial effect of lower mortgage rates on affordability. The RBC Measures fell between 0.6 and 1.1 percentage points in the quarter, although the levels continue to be modestly above historical averages in the province. In our view, the Saskatchewan market will take its current affordability position in stride as a rebound in provincial economic growth, and, especially, continued strong migration inflows will support housing demand this year.
The measures for the affordability report are based on a 25% down payment, a 25-year mortgage loan at a five-year fixed rate.
With the majority of our population growth not having much wealth, it is fair to say they guys are not putting 25% down. This is what it looks like to put 5% down on an average bungalow with an average income in Saskatchewan. About 50% of income would go towards feeding the house.
Robert Hogue, senior economist with RBC and author of the report, said a combination of a housing bust, slowing economy and population outflows starting as far back as 2007 has created a real estate market that has been “sideways at best” for the past few years
Of course, at the end of the article, they talk about the market possibly skyrocketing.
Whatever measure is used, there is no denying that Alberta had a housing bubble with a single family house in Edmonton down 16% from the peak and Calgary also down 10% from the peak, better than the 18% and 18% drops experienced from the high of 2007 and the low of 2009.
Wednesday, February 23, 2011
Capital Economics: Housing downturn to hit economic growth
A couple of weeks ago, Capital Economics wrote a report detailing that Canadian housing could fall 25%-35% in the next few years. Today they have another report. I have not subscribed for a membership there, but Ben over at Financial Insights has and he has the whole report here. Canadian Economic Outlook (Q1 2011)
I suggest reading Ben's analysis of the report as he is probably the best blogger on housing in Canada but I will post a couple of things that were of interest to me.
"Relative to incomes, our calculations suggest that Canadian housing is now just under 40% over-valued, which is about the same level of excess that the US market reached before it collapsed. (See Chart 1.) We have pencilled in a 25% cumulative decline in house prices over three years, mirroring what happened south of the border.
Canadian household debt is now up to 150% of disposable income, well in excess of what we saw in the US. (See Chart 2.) Admittedly, low interest rates mean the servicing costs on that debt are not currently excessive.
Since real estate (structures and land) accounts for slightly more than one third of household assets, substantial declines in house prices would hit household net worth hard, prompting households to raise their saving rate. (See Chart 3.)
I suggest reading Ben's analysis of the report as he is probably the best blogger on housing in Canada but I will post a couple of things that were of interest to me.
"Relative to incomes, our calculations suggest that Canadian housing is now just under 40% over-valued, which is about the same level of excess that the US market reached before it collapsed. (See Chart 1.) We have pencilled in a 25% cumulative decline in house prices over three years, mirroring what happened south of the border.
Canadian household debt is now up to 150% of disposable income, well in excess of what we saw in the US. (See Chart 2.) Admittedly, low interest rates mean the servicing costs on that debt are not currently excessive.
Since real estate (structures and land) accounts for slightly more than one third of household assets, substantial declines in house prices would hit household net worth hard, prompting households to raise their saving rate. (See Chart 3.)
As we noted earlier, the housing sector has become tremendously bloated during the boom. Construction now accounts for 7% of overall employment. (See Chart 6.) Even without big declines in house prices, we would expect that share to shrink back to its long-term average of about 5.5%, which would involve the loss of 250,000 jobs."
Construction growth in jobs for Saskatoon
From 1999-2005, construction jobs as a percentage of total jobs averaged 5.2% of total industries in Saskatoon. This was close to the National average. In 2009, that percentage had jumped to 8.1% for Saskatoon. Since 2009, the construction boom in Saskatoon has increased even more with a record number of cranes in the city. 2010 was a bigger year than 2009 in housing starts by over 30%. 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. The University started there over 1 billion dollar expansion in 2010 in new developments in new student residences and major projects such as the expansion of Health Sciences. The Conference Board said "construction will support growth in Saskatoon" in 2011. Government stimulus from the feds is still flowing and City of Saskatoon is growing spending by leaps and bounds with construction projects such as the South Bridge. I would not be surprised to see the percentage over 9% of total jobs right now. If Capital Economics is right, and Saskatoon goes back to the normal percentage of construction jobs within 3 years, that would be loss of about 5000 jobs in Saskatoon. I don't believe we will see that sort of slow down that quickly, as there are projects down the road such as the Childrens hospital, Traffice Bridge, Willowgrove School, etc. along with the University expansion that will creat jobs. But with housing expected to slowdown, it could be interesting how this all plays out in the next few years.
From 1999-2005, construction jobs as a percentage of total jobs averaged 5.2% of total industries in Saskatoon. This was close to the National average. In 2009, that percentage had jumped to 8.1% for Saskatoon. Since 2009, the construction boom in Saskatoon has increased even more with a record number of cranes in the city. 2010 was a bigger year than 2009 in housing starts by over 30%. 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. The University started there over 1 billion dollar expansion in 2010 in new developments in new student residences and major projects such as the expansion of Health Sciences. The Conference Board said "construction will support growth in Saskatoon" in 2011. Government stimulus from the feds is still flowing and City of Saskatoon is growing spending by leaps and bounds with construction projects such as the South Bridge. I would not be surprised to see the percentage over 9% of total jobs right now. If Capital Economics is right, and Saskatoon goes back to the normal percentage of construction jobs within 3 years, that would be loss of about 5000 jobs in Saskatoon. I don't believe we will see that sort of slow down that quickly, as there are projects down the road such as the Childrens hospital, Traffice Bridge, Willowgrove School, etc. along with the University expansion that will creat jobs. But with housing expected to slowdown, it could be interesting how this all plays out in the next few years.
Tuesday, February 22, 2011
Another reason why house prices will go down
There are numerous reasons why house prices will go down, one that is not mentioned much is the cost of living. It's going up. Last year, on average, Canadian households borrowed 8% of their disposable income to fund their lifestyles. With households at or near debt exhaustion and the Feds clamping down on HELOC's, it is safe ( I think) to say that Canadian households will not be borrowing as much in the coming years and there will be less discretionary spending. Add in some of things like energy, food, property taxes, and interest rates that have gone up and will increasing even more, that leaves even less spending for households on other things such as housing.
Whether you believe that Saskatoon has a housing bubble or not, it is undeniable that home owners are paying a bigger percentage of their pay cheque per month for housing in monthly mortgage payments and rent compared to years past. ( Other than in 2008) And this is at a time of ultra low interest rates. With interest rates at norm, 2008 levels are revisited in this graph.
Can households withstand oil, food price shocks?
As oil nears $100 mark, threat to nascent recovery grows
Reading Jeff Rubin's blog I came across the post How do oil shocks cause recessions? Jeff Rubin was the Chief Economist at CIBC World Markets and believes that the high oil prices in 2007-08 is what led to the world wide recession.
"There are many ways that oil shocks affect the economy, and none of them is good. As the prices of gasoline, diesel and home heating fuel rise, consumers’ energy bills eat up a growing share of their after-tax income, forcing cutbacks in more discretionary areas of spending. The next thing you know, people are going out to restaurants a lot less, taking fewer vacations and buying fewer clothes."
Here he talks about food prices and what is going on in Egypt
If soaring food prices are the real culprit behind growing civil unrest sweeping through the developing world, governments reaction to the crisis is only bound to make the problem worse.
More on rising food prices
"Capital Economics, however, says in a research report that soaring commodity prices will catch up and boost food inflation in Canada to about 5 per cent later this year, from its current level just shy of 2 per cent."
With rising prices and the threat of inflation, it is of no surprise that the 5 year government bond is going up and the Bank of Canada will eventually tighten credit some more this year. The bond market determines fixed rate mortgages and the prime rate determines variable rate mortgages and HELOC's. Right now, debt servicing by Canadian households is 18.6% of income, with the change to HELOC's and interest rates going up, debt servicing will be increasing, leaving less disposable income.
Monthly CPP contributions are increasing $5 a month and EI is increasing $4 a month.
While this is small now, do not be surprised to see a significant rise in both in the future if unemployment stays high and the pension crisis is not solved. Lots of little things do add up for people that have to penny pinch each month.
Other things to look forward to in 2011:
Property taxes in Sasktoon are increasing 4%
Water rates are increasing 7%.
Property taxes will be rising in the future to fund the infrastructure deficit but could also skyrocket if there is a housing bust in Saskatoon. With a housing bust, Government revenues plummet and affect entities that let spending get out of control. I am not saying that spending for the city is out of control, but by doubling spending in 5 years and having city debt rise from 24 million to over 170 million in 7 years is of concern.
What does this mean?
My estimation is that unless you are getting a wage increase of at least 7% in 2011, you are being added to the Middle Class Squeeze. And I would believe that the majority of people fall into that category. With housing at high levels and the cost of living going up along with real income pretty well stagnating, it does not bode well. Something will have to give. That will mean that people eat out less, travel less and buy a less expensive home. It could also mean that big purchases such as a home or a car are put off into the future or are not even done at all.
Most first time buyers and buyers on the fringe do not look at the total cost of debt when buying a home. Most do not understand the implications that the total cost of debt could have with rising interest rates. They just look at what they are told they can afford each month, right now, not down the road. With low income increases and energy, food and interest rates rising, this will leave less monthly income each month for those first time buyers or fringe buyers to afford their house.
Whether you believe that Saskatoon has a housing bubble or not, it is undeniable that home owners are paying a bigger percentage of their pay cheque per month for housing in monthly mortgage payments and rent compared to years past. ( Other than in 2008) And this is at a time of ultra low interest rates. With interest rates at norm, 2008 levels are revisited in this graph.
Can households withstand oil, food price shocks?
As oil nears $100 mark, threat to nascent recovery grows
"Airlines and trucking companies say they are absorbing higher costs that are difficult to pass on to consumers, even as households have to spend more of their disposable income on gasoline and home-heating fuel. "
"There are many ways that oil shocks affect the economy, and none of them is good. As the prices of gasoline, diesel and home heating fuel rise, consumers’ energy bills eat up a growing share of their after-tax income, forcing cutbacks in more discretionary areas of spending. The next thing you know, people are going out to restaurants a lot less, taking fewer vacations and buying fewer clothes."
Here he talks about food prices and what is going on in Egypt
If soaring food prices are the real culprit behind growing civil unrest sweeping through the developing world, governments reaction to the crisis is only bound to make the problem worse.
More on rising food prices
"Capital Economics, however, says in a research report that soaring commodity prices will catch up and boost food inflation in Canada to about 5 per cent later this year, from its current level just shy of 2 per cent."
Grocery prices to see 'significant' jump in February: report
"Eric La Flèche, president and CEO of Ontario/Quebec supermarket chain Metro Inc., tells the Star food prices are set to take off across Canada next month.
“In certain categories we’re expecting some pretty significant increases,” he said. Pasta and bread, specifically, may go up, by La Flèche’s estimate"With rising prices and the threat of inflation, it is of no surprise that the 5 year government bond is going up and the Bank of Canada will eventually tighten credit some more this year. The bond market determines fixed rate mortgages and the prime rate determines variable rate mortgages and HELOC's. Right now, debt servicing by Canadian households is 18.6% of income, with the change to HELOC's and interest rates going up, debt servicing will be increasing, leaving less disposable income.
Monthly CPP contributions are increasing $5 a month and EI is increasing $4 a month.
While this is small now, do not be surprised to see a significant rise in both in the future if unemployment stays high and the pension crisis is not solved. Lots of little things do add up for people that have to penny pinch each month.
Other things to look forward to in 2011:
Property taxes in Sasktoon are increasing 4%
Water rates are increasing 7%.
Property taxes will be rising in the future to fund the infrastructure deficit but could also skyrocket if there is a housing bust in Saskatoon. With a housing bust, Government revenues plummet and affect entities that let spending get out of control. I am not saying that spending for the city is out of control, but by doubling spending in 5 years and having city debt rise from 24 million to over 170 million in 7 years is of concern.
What does this mean?
My estimation is that unless you are getting a wage increase of at least 7% in 2011, you are being added to the Middle Class Squeeze. And I would believe that the majority of people fall into that category. With housing at high levels and the cost of living going up along with real income pretty well stagnating, it does not bode well. Something will have to give. That will mean that people eat out less, travel less and buy a less expensive home. It could also mean that big purchases such as a home or a car are put off into the future or are not even done at all.
Most first time buyers and buyers on the fringe do not look at the total cost of debt when buying a home. Most do not understand the implications that the total cost of debt could have with rising interest rates. They just look at what they are told they can afford each month, right now, not down the road. With low income increases and energy, food and interest rates rising, this will leave less monthly income each month for those first time buyers or fringe buyers to afford their house.
Household balance sheets in both developed and emerging markets, Mr. Holt said in an interview, are not yet strong enough to withstand sharply higher energy and food costs.
Monday, February 21, 2011
No reason for Saskatoon to have a higher house price to income than 3
People will say that a healthy market is one that has a house price to income of 3 to 4. Saskatoon has been hovering around the 4 to 4.5 mark over the last 3 years. So people I talk to say that it is not too bad here, maybe a little overvalued, but nothing serious. They figure with the economy and resources growing, wages will catch up and house prices will resume their climb in a couple of years. And they would be right if, Saskatoon had a history of house price to income in the 3 to 4 ratio. But it hasn't. Historically, Saskatoon has had a house price to income between 2 and 2.7. In Saskatchewan, a healthy housing market can be seen from 1999 to 2005 with a house price to income between 2.1 and 2.7. Since then, it has pretty well doubled, just like the rest of the country. Like I have said before, a housing market can only be compared to past history, not other housing markets.
Reasons for higher house price to income than 3 (other than cheap credit, or lax lending practices)
Big Cities
Saskatoon might be a big city for Saskatchewan but in Canada it is a small city. Small cities are classified with populations under 250,000. Example of large cities are Edmonton and Calgary and world class cities are Toronto and Montreal. So, Saskatoon is regarded as a 3rd tier city with a population ( about 225k) of about 0.6% of Canada's population. Larger cities tend to have higher house prices than small cities. Unless you are Winnipeg.
Land constraints
Certain cities around the world have land constraints such as mountains, canyons or other terrain unsuitable for building which limits supply. Even with that, cities with land constraints from around the world had their housing bubbles pop in the past. There are absolutely no land constraints in Saskatoon and area.
Water constraints
There are no water constraints around Saskatoon that would limit supply.
In fact, one could drive hours and hours to the south, west, east or north of Saskatoon and there would be no land or water barriers to hamper building.
International Head Offices
Cameco and PotashCorp have their corporate headquarters in Saskatoon. But mining workers that live in Saskatoon represent less than 2% of the working population. And other than that, there is really nothing that stands out compared to other cities in Canada. All one has to do is look at the skyline downtown and there is not much. Here is a list of Jobs in saskatoon.
Wealthy people moving here
If we look at the type of population growth in 2010 of 7000 people, we find that 3300 were international immigrants, about 2000 were from the birth - death ratio and most of the rest were an influx of aboriginal and young students from rural Saskatchewan. This type of growth has little to no wealth. Net inter provincial migration is near 0. And we know that wealthy boomers in Saskatchewan are the most likely to leave the province out of all the provinces. Saskatoon is not a retirement place like Kelowna where wealthy people tend to move which would inflate the house price to income number.
Conclusion
Whether it is the Demographia report showing Saskatoon severely unaffordable at 4.3. Or the median family income of about $82,000 buying a average family home at $345,000 putting the price to income over 4.2. Or that the average first time buyer in Saskatchewan putting 5% down on an average bungalow would have to put about 50% of their income towards housing and this is not even factoring in their debt load. Or the fact that 50% renting households in 2005 paid 30% of their income towards rent and since then, wages have not kept pace with rent increases. Or the fact that Saskatchewan is leading the pack in the biggest percentage of households with debt service ratio above 40%.( Majority of this is in Saskatoon)
The housing market is clearly not near the historical averages and is not healthy. A higher cost of housing that eats more income is just plain misallocatted capital. And in the long term, once debt exhaustion hits, this will have a big effect on the broad economy. Especially an economy like Saskatoon's that is building the retail service economy to have an even bigger part of the economy than before. Something will have to give and I expect it will be house prices.
Reasons for higher house price to income than 3 (other than cheap credit, or lax lending practices)
Big Cities
Saskatoon might be a big city for Saskatchewan but in Canada it is a small city. Small cities are classified with populations under 250,000. Example of large cities are Edmonton and Calgary and world class cities are Toronto and Montreal. So, Saskatoon is regarded as a 3rd tier city with a population ( about 225k) of about 0.6% of Canada's population. Larger cities tend to have higher house prices than small cities. Unless you are Winnipeg.
Land constraints
Certain cities around the world have land constraints such as mountains, canyons or other terrain unsuitable for building which limits supply. Even with that, cities with land constraints from around the world had their housing bubbles pop in the past. There are absolutely no land constraints in Saskatoon and area.
Water constraints
There are no water constraints around Saskatoon that would limit supply.
In fact, one could drive hours and hours to the south, west, east or north of Saskatoon and there would be no land or water barriers to hamper building.
International Head Offices
Cameco and PotashCorp have their corporate headquarters in Saskatoon. But mining workers that live in Saskatoon represent less than 2% of the working population. And other than that, there is really nothing that stands out compared to other cities in Canada. All one has to do is look at the skyline downtown and there is not much. Here is a list of Jobs in saskatoon.
Wealthy people moving here
If we look at the type of population growth in 2010 of 7000 people, we find that 3300 were international immigrants, about 2000 were from the birth - death ratio and most of the rest were an influx of aboriginal and young students from rural Saskatchewan. This type of growth has little to no wealth. Net inter provincial migration is near 0. And we know that wealthy boomers in Saskatchewan are the most likely to leave the province out of all the provinces. Saskatoon is not a retirement place like Kelowna where wealthy people tend to move which would inflate the house price to income number.
Conclusion
Whether it is the Demographia report showing Saskatoon severely unaffordable at 4.3. Or the median family income of about $82,000 buying a average family home at $345,000 putting the price to income over 4.2. Or that the average first time buyer in Saskatchewan putting 5% down on an average bungalow would have to put about 50% of their income towards housing and this is not even factoring in their debt load. Or the fact that 50% renting households in 2005 paid 30% of their income towards rent and since then, wages have not kept pace with rent increases. Or the fact that Saskatchewan is leading the pack in the biggest percentage of households with debt service ratio above 40%.( Majority of this is in Saskatoon)
The housing market is clearly not near the historical averages and is not healthy. A higher cost of housing that eats more income is just plain misallocatted capital. And in the long term, once debt exhaustion hits, this will have a big effect on the broad economy. Especially an economy like Saskatoon's that is building the retail service economy to have an even bigger part of the economy than before. Something will have to give and I expect it will be house prices.
Sunday, February 20, 2011
Are most manufacturing jobs gone to China?
It seems like everything is now made in China. And the media report it that way. But is that really true?
The general pattern of development for wealthy nations was a transition from a primary industry based economy to a manufacturing based one, and then to a service based economy. Canada did not escape this pattern - at its (abnormally high World War 2) peak in 1944, manufacturing accounted for 29% of GDP,[20] declining to 15.6% in 2005. As of 2010, manufacturing accounts for 13% of Canada's GDP. As of 2007, manufacturing in Saskatoon accounted for 10.8% of Saskatoon's GDP and employment in manufacturing was 8.3% of total industries in Saskatoon.
This graph shows the decline of manufacturing from 1970 to 2005 in the G7 nations.
Would you be surprised to know that United States manufacturing output was 46 percent more than China's with data from 2009? I am. China’s industries may be booming, but the United States still accounted for 20 percent of the world’s manufacturing output in 2009 — only a hair below its 1990 share of 21 percent. In fact, Americans manufactured more goods in 2009 than the Japanese, Germans, British, and Italians — combined.
The general pattern of development for wealthy nations was a transition from a primary industry based economy to a manufacturing based one, and then to a service based economy. Canada did not escape this pattern - at its (abnormally high World War 2) peak in 1944, manufacturing accounted for 29% of GDP,[20] declining to 15.6% in 2005. As of 2010, manufacturing accounts for 13% of Canada's GDP. As of 2007, manufacturing in Saskatoon accounted for 10.8% of Saskatoon's GDP and employment in manufacturing was 8.3% of total industries in Saskatoon.
This graph shows the decline of manufacturing from 1970 to 2005 in the G7 nations.
Would you be surprised to know that United States manufacturing output was 46 percent more than China's with data from 2009? I am. China’s industries may be booming, but the United States still accounted for 20 percent of the world’s manufacturing output in 2009 — only a hair below its 1990 share of 21 percent. In fact, Americans manufactured more goods in 2009 than the Japanese, Germans, British, and Italians — combined.
A vast amount of “stuff’’ is still made in the USA, albeit not the inexpensive consumer goods that fill the shelves in Target or Walgreens . American factories make fighter jets and air conditioners, automobiles and pharmaceuticals, industrial lathes and semiconductors. Not the sort of things on your weekly shopping list? Maybe not. But that doesn’t change economic reality. They may have “clos[ed] down the textile mill across the railroad tracks.’’ But America’s manufacturing glory is far from a thing of the past.
Friday, February 18, 2011
Why housing bubbles pop
http://www.investopedia.com/articles/07/housing_bubble.asp
Unlike the stock market, where most people understand and accept the risk that stock prices might fall, most people who buy a house don't ever think that the value of their home might decrease."Too often, homeowners make the damaging error of assuming recent price performance will continue into the future without first considering the long-term rates of price appreciation and the potential for mean reversion. The laws of physics state that when any object (which has a density greater than air) is propelled upward, it will return to earth because of the forces of gravity act upon it. The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion.
Prices in the housing market follow this law of mean reversion too - after periods of rapid price appreciation (or depreciation), they revert to where their long-term average rates of appreciation indicate they should be. Home price mean reversion can be rapid or gradual. Home prices might fall (or rise) quickly to a point that puts them back in line with the long-term average, or they might stay constant until the long-term average catches up with them."
A simple and important principle of finance is mean reversion. While housing markets are not as subject to bubbles as some markets, housing bubbles do exist. Long-term averages provide a good indication of where housing prices will eventually end up during periods of rapid appreciation followed by stagnant or falling prices. The same is true for periods of below average price appreciation.
In 1980, Western Canadian cities had their housing bubbles pop and Saskatoon was no exception. In nominal terms, the bust does not seem so bad, but in real terms, it took about 25 years for prices to recover. Currently, the average house price in Saskatoon is about $300,000, if house prices followed inflation since 1980, the average house price would be between $160,000 to $170,000. But we see from this graph that Saskatoon real estate price growth has basically followed outstanding mortgage credit growth in Canada for the past decade.
Unlike the stock market, where most people understand and accept the risk that stock prices might fall, most people who buy a house don't ever think that the value of their home might decrease."Too often, homeowners make the damaging error of assuming recent price performance will continue into the future without first considering the long-term rates of price appreciation and the potential for mean reversion. The laws of physics state that when any object (which has a density greater than air) is propelled upward, it will return to earth because of the forces of gravity act upon it. The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion.
Prices in the housing market follow this law of mean reversion too - after periods of rapid price appreciation (or depreciation), they revert to where their long-term average rates of appreciation indicate they should be. Home price mean reversion can be rapid or gradual. Home prices might fall (or rise) quickly to a point that puts them back in line with the long-term average, or they might stay constant until the long-term average catches up with them."
A simple and important principle of finance is mean reversion. While housing markets are not as subject to bubbles as some markets, housing bubbles do exist. Long-term averages provide a good indication of where housing prices will eventually end up during periods of rapid appreciation followed by stagnant or falling prices. The same is true for periods of below average price appreciation.
Thursday, February 17, 2011
Canada VS United States household outstanding mortgage credit 1980-2008
House prices between Canada and the US have tracked each other quite well in the past. Inflation, population growth, income growth are similar since 1980. And we now find that mortgage credit growth is similar as well.
These two graphs could be twins!
Between 1980 and 1990, outstanding mortgage credit doubled more or less in each country. In 1990-2000, the same thing happened for both countries and then 2000- 2008 outstanding mortgage credit doubled again.
But 2008 sees a divergence from this parallel. Canada has continued growing outstanding mortgage debt while the US has not. In Canada, outstanding mortgage credit was over 1 Trillion in the summer of 2010. While the US deleveraging is the game and outstanding mortgage credit has fallen. ( I don't have exact numbers).
US households were reckless in borrowing, and are now paying for their illusion of wealth that was built upon a pile of debt. What does that mean for Canadian households who have done the same thing but continue to pile up debt?
Think Canada is different from the US and will not experience a housing crash? Not likely with these economic housing measures. But even if Canada was different from the US, it is not different from 1980 ( drop of 15% in house prices) and in 1990 ( another drop of 15%) and we also know that previous housing busts in Canada had stricter lending than now.
Canadian's debt to income hits 150%, credit card debt down, total debt up
From the Financial Post:
A new report suggests the average family debt in Canada has now hit the $100,000 mark.
In addition, says the Vanier Institute of the Family, the debt-to-income ratio measuring household debt against income, is a record 150 per cent.
The Institute says in 1990, average family debt stood at $56,800, with a debt-to-income ratio of 93 per cent.
Just as the debt ratio has climbed, the savings rate has slid downward.
__________________________________________________________________________________
TransUnion's quarterly analysis of Canadian credit trends found that total debt per consumer (excluding mortgage) for the nation increased to $25,709 in the fourth quarter of 2010, up 2.2 percent from the third quarter of 2010 ($25,163). Though total debt generally rises in the fourth quarter because of holiday shopping, among other things, TransUnion found that credit card debt actually declined nearly 3 percent during this period. Conversely, lines of credit, revolving loans and installment loans all showed marked increases in the quarter.
Total debt per consumer (excluding mortgage) has increased 5.6 percent in the last year (25,709 in Q4 2010 from $24,346 in Q4 2009). All Canadian provinces have experienced year-over-year increases in total debt per consumer.
A new report suggests the average family debt in Canada has now hit the $100,000 mark.
In addition, says the Vanier Institute of the Family, the debt-to-income ratio measuring household debt against income, is a record 150 per cent.
The Institute says in 1990, average family debt stood at $56,800, with a debt-to-income ratio of 93 per cent.
Just as the debt ratio has climbed, the savings rate has slid downward.
__________________________________________________________________________________
TransUnion's quarterly analysis of Canadian credit trends found that total debt per consumer (excluding mortgage) for the nation increased to $25,709 in the fourth quarter of 2010, up 2.2 percent from the third quarter of 2010 ($25,163). Though total debt generally rises in the fourth quarter because of holiday shopping, among other things, TransUnion found that credit card debt actually declined nearly 3 percent during this period. Conversely, lines of credit, revolving loans and installment loans all showed marked increases in the quarter.
Total debt per consumer (excluding mortgage) has increased 5.6 percent in the last year (25,709 in Q4 2010 from $24,346 in Q4 2009). All Canadian provinces have experienced year-over-year increases in total debt per consumer.
Wednesday, February 16, 2011
Tuesday, February 15, 2011
More on the Saskatoon Median Household Income
A couple weeks ago the Demographia report came out which showed that Saskatoon had seriously unaffordable house prices. The median house price of $277,000 was divided by the median household income of $63,000 and Saskatoon ended up at 4.3. Affordable housing is deemed at 3 or less.
There was some debate on where the median household income was derived from as there are not many concrete sources from stats can. The median family income was at $77,000 in 2008 but that does not include persons not in census families which was $24,000. Many people believe median household income is higher than $63,000.
I did come up with chart on Canadian households that showed in 2006 family households comprised of 70% of all households while one person households ( persons not in census families) comprised of 27%.
So if we accept that Saskatoon follows the Canadian average, maybe we can come up with a number for the Saskatoon median household income. $77,000 x 70% gives us 53.9 plus $24,000 x 27% gives us 6.48. This equals 60.38, add in the unrelated persons household takes us to 61.5. So the median household income in 2008 for Saskatoon is $61,500? Maybe, maybe not.
With the market crash in 2008-09, higher unemployment and the crashing of interest rates, it is conceivable that median household income has not moved up much, even with wage increases of 4% per year in Saskatoon. People on fixed income and a higher unemployment rate (2008 it was 3.9%, now 5.3%) would lead to a smaller growth rate in total income.
Hope this helps.
There was some debate on where the median household income was derived from as there are not many concrete sources from stats can. The median family income was at $77,000 in 2008 but that does not include persons not in census families which was $24,000. Many people believe median household income is higher than $63,000.
I did come up with chart on Canadian households that showed in 2006 family households comprised of 70% of all households while one person households ( persons not in census families) comprised of 27%.
With the market crash in 2008-09, higher unemployment and the crashing of interest rates, it is conceivable that median household income has not moved up much, even with wage increases of 4% per year in Saskatoon. People on fixed income and a higher unemployment rate (2008 it was 3.9%, now 5.3%) would lead to a smaller growth rate in total income.
Hope this helps.
Sunday, February 13, 2011
Saskatoon housing bubble charts to study
By now, we should all know that house values need to follow inflation and wages for long term sustainable growth and any deviation is always corrected in the long term. For anybody that says that Saskatoon was undervalued, they are wrong as Saskatoon's house prices were a true reflection of wages pre 2005. You don't measure one housing market like Saskatoon with Calgary's or someplace else. You can only compare a housing market with itself. So that is why historical data is always key.
Here a some charts to study:
The last housing bubble in the West ( except Vancouver mid 90's) was in the 1980. It took about 25 years for prices to recover in real terms for Saskatoon home values. And our present day bubble blows the doors off the last one.
This is where the wheels of Saskatoon's housing bubble will come off. In this affordability graph, an average first time buyer with 5% down would need to spend 50% of their income just to buy a average bungalow in Saskatchewan. Hooray for Regina, as they skew Saskatchewan's number down, as things are not as bad there as in Saskatoon. With a rise in 1% of the qualifying rate and the length of amortization going from 35 to 30 years, the amount that can be borrowed drops 16% for an income of $70,000. We have seen data that shows that first time buyers are drying up and once a market prices out first time buyers, the ponzi collapses.
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Here a some charts to study:
The last housing bubble in the West ( except Vancouver mid 90's) was in the 1980. It took about 25 years for prices to recover in real terms for Saskatoon home values. And our present day bubble blows the doors off the last one.
Thursday, February 10, 2011
Renting in Saskatoon's real estate bubble
We all know that the average house price in Saskatoon has not gone up because of wages and other economic housing measures show a huge housing bubble in Saskatoon, even bigger than the Saskatoon housing bust of 1981. But how has the rental market been affected?
Monthly rents have increased from $500 a month in 1997 to $905 a month in 2009 but the biggest increase in monthly rents was between 2006 and 2009, where a 2 bedroom apartment rose from $608 a month to $905, an increase of 49%.
In 2005, 50% of all rental households paid more than 30% of their monthly income towards rent. Affordable housing is when a household pays 30% or less of their income towards housing each month. So rents at that time period, were a reflection of wages and anybody that tells you that rental prices were undervalued at that time are wrong. So the rise in rents would be justified if wages have increased about 50% for people that rented since 2005.
Since 1997, the weekly wage in Saskatchewan has increased from $503 to $830 which is an increase of 65%. From 2005, the Saskatchewan average weekly wage increased from $643. This is an increase of 29%. But demographic groups that rent, usually have lower income gains compared to higher incomes, so the average is skewed by higher incomes. The increase of rental household income is closer to 20% in that time period.
So we have a rental bubble. Rents definitely have not followed wages for renting households. Add to the fact that manyinvestors speculators bought housing at the peak hoping to flip but are now stuck with renting the units at exorbitant costs to try and make up the short fall has added pressure to households that rent. With innovative subprime programs across the country encouraging home ownership, it is of no wonder why home ownership in Canada keeps climbing.
Is this the Saskatoon Advantage?
Monthly rents have increased from $500 a month in 1997 to $905 a month in 2009 but the biggest increase in monthly rents was between 2006 and 2009, where a 2 bedroom apartment rose from $608 a month to $905, an increase of 49%.
In 2005, 50% of all rental households paid more than 30% of their monthly income towards rent. Affordable housing is when a household pays 30% or less of their income towards housing each month. So rents at that time period, were a reflection of wages and anybody that tells you that rental prices were undervalued at that time are wrong. So the rise in rents would be justified if wages have increased about 50% for people that rented since 2005.
Since 1997, the weekly wage in Saskatchewan has increased from $503 to $830 which is an increase of 65%. From 2005, the Saskatchewan average weekly wage increased from $643. This is an increase of 29%. But demographic groups that rent, usually have lower income gains compared to higher incomes, so the average is skewed by higher incomes. The increase of rental household income is closer to 20% in that time period.
So we have a rental bubble. Rents definitely have not followed wages for renting households. Add to the fact that many
The housing bubble is so big that wages do not justify rents and rents do not justify house prices. So the disconnect between wages and house prices is quite pronounced.
( Just a side note: the rents that published by CMHC are from apartment buildings and do not cover condo's or houses that have experienced a huge surge in rents. These units and homes that are being rented out are completely out of whack from rental household incomes in Saskatoon. Saskatoon is on par and may have even exceeded places like Calgary when it comes to house rental prices.)
This boom or whatever you want to call it has forced many renters and recent buyers to run to the food bank just to make ends meet
In Saskatoon, individual client use of the food bank has increased 25.15 per cent from September 2009. The number of households assisted has increased by 27.66 per cent in the same time period.
Is this the Saskatoon Advantage?
Wednesday, February 9, 2011
TD report shows the financial vulnerability of households across the Country
TD has come out with a report on financial vulnerability of households across the Country.
Based on our analysis, we find that households in British Columbia, Alberta, Ontario and Saskatchewan are the most vulnerable.
risks related to household finances have been rising broadly across all regions over the past few years, as households have responded to extremely favourable borrowing conditions. With higher interest rates on the horizon set to boost the cost of servicing debt, this upward trend in vulnerability is almost certain to continue over the next 1-2 years. Saskatchewan
Next in line we have Saskatchewan. This province registers on the radar screen for the speed at which it has caught up to other provinces in terms of vulnerability. It was only 2006 when Saskatchewan recorded the lowest vulnerability index among the provinces. Since 2007, however, households have been taking advantage of low interest rates and a relatively strong economic backdrop to borrow and build up their asset bases. Debt levels remain relatively low in the province – a reflection in part of the strong income gains that were recorded in lockstep in recent years. In fact, at 116%, the debt-to-income ratio remains some 20-45 percentage points lower than in British Columbia, Alberta and Ontario. While debt levels might not be excessive, other sub-components place household financial positions in Saskatchewan in a less favourable light. In particular, Saskatchewan debt holders shell out almost as much of their monthly income to servicing their debt as those in Ontario and Alberta.
Moreover, the share of vulnerable households is currently higher than in all other regions.
A couple of things I noticed, Saskatchewan has the biggest percentage growth of debt to income since 1999, and 9.5% of all households are vulnerable. The debt to income was at 116 for Saskatchewan, while they showed Canada's at 127. Recently, stats can has said that number is at 148. TD does notice this as this was a survey of 12,000 respondents across Canada. Is it possible that Saskatchewan's debt to income is closer to 135? Saskatchewan's credit bubble has only mushroomed since 2006, so who knows. But we do know that with interest rate increases there will be more households that could be in trouble. 10% may not seem like alot of households, but if we look at the American experience and we see it was only a small percentage of households that were vulnerable that started the snowball effect of a collapsing housing market.
Based on our analysis, we find that households in British Columbia, Alberta, Ontario and Saskatchewan are the most vulnerable.
risks related to household finances have been rising broadly across all regions over the past few years, as households have responded to extremely favourable borrowing conditions. With higher interest rates on the horizon set to boost the cost of servicing debt, this upward trend in vulnerability is almost certain to continue over the next 1-2 years. Saskatchewan
Next in line we have Saskatchewan. This province registers on the radar screen for the speed at which it has caught up to other provinces in terms of vulnerability. It was only 2006 when Saskatchewan recorded the lowest vulnerability index among the provinces. Since 2007, however, households have been taking advantage of low interest rates and a relatively strong economic backdrop to borrow and build up their asset bases. Debt levels remain relatively low in the province – a reflection in part of the strong income gains that were recorded in lockstep in recent years. In fact, at 116%, the debt-to-income ratio remains some 20-45 percentage points lower than in British Columbia, Alberta and Ontario. While debt levels might not be excessive, other sub-components place household financial positions in Saskatchewan in a less favourable light. In particular, Saskatchewan debt holders shell out almost as much of their monthly income to servicing their debt as those in Ontario and Alberta.
Moreover, the share of vulnerable households is currently higher than in all other regions.
A couple of things I noticed, Saskatchewan has the biggest percentage growth of debt to income since 1999, and 9.5% of all households are vulnerable. The debt to income was at 116 for Saskatchewan, while they showed Canada's at 127. Recently, stats can has said that number is at 148. TD does notice this as this was a survey of 12,000 respondents across Canada. Is it possible that Saskatchewan's debt to income is closer to 135? Saskatchewan's credit bubble has only mushroomed since 2006, so who knows. But we do know that with interest rate increases there will be more households that could be in trouble. 10% may not seem like alot of households, but if we look at the American experience and we see it was only a small percentage of households that were vulnerable that started the snowball effect of a collapsing housing market.
Tuesday, February 8, 2011
9.2%: Annual Growth for a Saskatoon House Over the Past Decade
House prices in Canada increased by almost 7 per cent a year since 2000, according to a ReMax survey, as tight inventories helped drive prices higher across the country.
* “Western Canada experienced some of the highest rates of return for real estate over the 11-year period. While values in Regina posted the greatest percentage increase (9.56 per cent), Edmonton, (9.25 per cent), Saskatoon (9.2 per cent), Winnipeg (9.01 per cent), Kelowna (8.42 per cent), Greater Vancouver (7.8 per cent), Calgary (7.7 per cent) and Victoria (7.59 per cent) all outperformed the national average.
From the Great Housing Bubble:
"Since 1890 houses have appreciated at 0.7% over the general rate of inflation. Over the long term house values are tied to incomes because most people buy houses with mortgages for which they must qualify based on their income. Inflation keeps pace with wage growth because people will bid up the prices of goods and services with their available income. Therefore, over the long term house prices, wages and inflation all move in concert. There are short-term fluctuations in this relationship due to variations in financing terms, migration patterns, employment, local limits on construction and irrational exuberance, but any such deviations from the mean will be corrected over time by market forces. As an investment, houses serve as a hedge against the corrosive effect of inflation, but over the long term appreciation much in excess of the general rate of inflation is not possible. In this regard, houses are little better than savings accounts as an asset class, and they are inferior to stocks or bonds in the long term."
With inflation totaling about 23% in Saskatoon since 2000, we can see the disconnect in house prices. A disconnect in house prices is also called a bubble.
Since is what happens when prices rise faster than the underlying fundamentals.
With inflation totaling about 23% in Saskatoon since 2000, we can see the disconnect in house prices. A disconnect in house prices is also called a bubble.
Monday, February 7, 2011
Rising interest rates and new mortgage rules: Double whammy to housing
TD and CIBC raised their 5 year fixed rate mortgages to 5.44%, up from 5.19% today, the other big banks are expected to follow suit Tuesday.
"The recent yield spike coincides with a skyrocketing equity market that is fuelled by soaring energy and resource prices. The higher these prices rise, the more likely it is that investors will move their money out of fixed-income securities and into stocks, which sends bond yields higher."
Mr. Tal expects five year-bond rates to jump by another 50 or 60 basis points over the next year, pulling mortgage rates up with them.
Mr. Alexander has a similar forecast. He sees bond yields rising by about 65 basis points before the end of the year and expects that the Bank of Canada will raise rates by 100 basis points, causing variable-rate mortgages to rise by one percentage point.
Interest rates are going up along with food, energy and we also see that Commodities are on a roll.
The qualifying rate at the moment is 5.19%, it could go past 6% by December if these guys are right.
With the drop from 35 to 30 years in mortgage amortizations, the amount that can be borrowed drops on average 7%. With a rise in the qualifying rate from 5.19% to 6.19%, the amount that can be borrowed drops by 10%.
With an income of $70,000 and 5% down, a buyer can get a mortgage for $280,000 at a qualifying rate of 5.19% over 35 years. Change the qualifying rate to 6.19% and an amortization to 30 years and the amount that can be borrowed is $237,000.
A drop of 16% in what people can borrow for a house.
A drop of 16% in what people can borrow for a house.
It is always a good time to buy or sell. Or buy and sell. Or buy and buy.
Sunday, February 6, 2011
The trigger to bust the housing bubble: Consumer Sentiment
Most economic measures of the Canadian and Saskatoon housing markets are showing bubble valuations. 2 reports in the last couple of weeks show that housing is seriously unaffordable in Saskatoon and a 25%-35% drop in house values may happen in Canada.
Some of the valuations are worse than the US housing market at their peak and much of Canadian debt levels are worse from previous housing busts in 81 and 90. So what would trigger the popping of the bubble?
Some say that in order for housing to drop, there would need to be massive jobs lost and with the recent report of employment growth in Canada,(+69,000 jobs) that will not be happening anytime soon.
Housing activity accounts for 20% of Canadian GDP. The last time that occurred was during the last housing bubble in the early 90's.
And if we look at what sectors have rebounded from their pre 2008 levels, housing is up there with consumer and government spending.
Much of Canada's growth in jobs since 2008 is of the result of Government spending and housing related activities. Definitely unsustainable over the long term.
Many people believe rising interest rates, or tougher mortgage rules will pop the housing bubble. These will be contributing factors to popping it, but it won't be the main reason.
The unwinding of the housing bubble will be the same thing that wound it up in the first place: Consumer sentiment. Think back to 2005-2006. Interest rates were already low for quite some time. Jobs in Saskatoon were actually down year over year by 3,800 in the spring of 2006. Mortgage rules were not drastically changing at one single time. But consumer sentiment about real estate was ramping up. Through out the whole world, real estate was seen as the new dotcom boom without the bust. Bidding wars for homes erupted around the globe that launched house values skyward. People felt and in Saskatoon still feel that real estate is the best and safest investment ever.
But what most people fail to realize is that real estate is an asset that is highly leveraged. With more and more people getting into too much debt, sentiment is starting to shift that real estate is not what they are being told. Real estate bought at the wrong time is a huge drag on wealth. Just look south or to the dozens of other countries that are trying to live after burst housing busts. Or just find someone who bought at the wrong time in previous Canadian housing busts with crushing debt.
Some of the valuations are worse than the US housing market at their peak and much of Canadian debt levels are worse from previous housing busts in 81 and 90. So what would trigger the popping of the bubble?
Some say that in order for housing to drop, there would need to be massive jobs lost and with the recent report of employment growth in Canada,(+69,000 jobs) that will not be happening anytime soon.
Housing activity accounts for 20% of Canadian GDP. The last time that occurred was during the last housing bubble in the early 90's.
And if we look at what sectors have rebounded from their pre 2008 levels, housing is up there with consumer and government spending.
Much of Canada's growth in jobs since 2008 is of the result of Government spending and housing related activities. Definitely unsustainable over the long term.
Many people believe rising interest rates, or tougher mortgage rules will pop the housing bubble. These will be contributing factors to popping it, but it won't be the main reason.
The unwinding of the housing bubble will be the same thing that wound it up in the first place: Consumer sentiment. Think back to 2005-2006. Interest rates were already low for quite some time. Jobs in Saskatoon were actually down year over year by 3,800 in the spring of 2006. Mortgage rules were not drastically changing at one single time. But consumer sentiment about real estate was ramping up. Through out the whole world, real estate was seen as the new dotcom boom without the bust. Bidding wars for homes erupted around the globe that launched house values skyward. People felt and in Saskatoon still feel that real estate is the best and safest investment ever.
But what most people fail to realize is that real estate is an asset that is highly leveraged. With more and more people getting into too much debt, sentiment is starting to shift that real estate is not what they are being told. Real estate bought at the wrong time is a huge drag on wealth. Just look south or to the dozens of other countries that are trying to live after burst housing busts. Or just find someone who bought at the wrong time in previous Canadian housing busts with crushing debt.
From the Capital Economics Report
"So far this has not deterred homebuyers from paying high prices relative to their income. This optimism might be due to the expectation that house price gains would outweigh the additional costs of repaying larger mortgage loans. Some homebuyers may also simply not understand the size of the long-term burden of mortgage debt that they are taking on. But as and when homebuyers reassess these risks, prices could fall sharply."
Here is how a real estate performs relative to other assets classes over the long term.
Rising interest rates, new mortgage rules, debt levels, demographics, etc will all play a factor in the busting of the housing bubble. But consumer sentiment was what launched house values up and consumer sentiment will be what crashes houses values down. Once consumer sentiment has shifted and people see that the housing bubble has busted, they will not be trusting the MSM or the banks or the realtors that misled them but they will be looking at the people who called the bubble. And the people who called the bubble do not have many nice things to say about housing bubbles.
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