Friday, October 17, 2008

Credit Crisis: The Worst May be Behind Us (for now)

Several indicators, like the TED spread, have now reversed direction this week and are now getting better not worse after hitting ridiculously elevated levels last Friday.

The local media has really glommed onto the idea that house prices have fallen and are falling more.  The facts, which were clear to many of us 2 years ago, become more obvious by the day to the average Vancouverite - house prices got too high and now they need to come back down.  Articles in the Georgia Straight, Vancouver Sun, Province, and Globe and Mail all pointing to further weakness in the local housing market.  It is improbable that there will be any material improvement in this situation for at least 18 months.

Several projects have now hit the skids with the overly ambitious Infinity Project in Surrey making the headlines this week.  More to come on further project cancellations.

I had a nice time off.  What are you seeing out there right now?


Unknown said...

What am I seeing?

Well, I have recently returned to Vancouver after having lived abroad for about 15 years. It was late May of this year that I signed on the dotted line, knowing that i would be taking my current job. Immediately thereupon I (passively) began an apartment search. I've been aware of the Vancouver housing bubble for years and had absolutely no intention of buying.

So, the Craigslist rentals section it was. Here is what I did, and what I've found.

Every day, I would begin by searching the listings for the keyword "downtown." The first time, between 1600 and 1700 hits were returned. (I can't remember the exact number, but I know that it was in the 1600s. Now, of course, that number of hits includes any available listing with the word "downtown" listed anywhere in the advertisement, so it doesn't give a true reflection of the available apartments downtown, but over time it does give a good sense of the trend. And what has the trend demonstrated since late May of this year?

Between late May and early July, the numbers fluctuated between 1650 and 1750. Only in mid-July did the number go above 1800. By mid-August it was above 1900 for the first time. It hit 2000 in about the second week of September.

The number of listings have been climbing almost exponentially since then and hit 3100 today. The rental supply is being vomited out by the specuvestors. Unfortunately, the prices have yet to come down appreciably. Something tells me, though, that mr. market will be teaching these specuvestors a lesson real soon.

jesse said...

j, I confirmed the craigslist claim. Interesting, though many I believe are repeat listings. The logical conclusion still holds regardless.

My uncle used to be a property manager and has said it is more difficult to find tenants in November-February than other times of the year. I expect, should this be true, there may be some panicking as the already small number of buyers waits until spring '09.

Traciatim said...

I don't live in Vancouver, but what I'm seeing in my area is homes being snatched up in really short periods of time. I'm also seeing the CREA stats page showing the YOY increase in average sales price of 20% for my city. Of course this is unsustainable, but I think we're just catching up to the rest of the country since our average home sales price to median family income is still under 3 last time I checked. Also, we have a pile of huge construction projects coming down the pipe, so when all of the construction workers get here things will go good for a while, and then will stagnate for a year or two after they all leave for their next gigs and only the permanent jobs remain.

Strataman said...

traciatum "I'm also seeing the CREA stats page showing the YOY increase in average sales price of 20% for my city"
Question which is entirely relevant where is your city? Otherwise what you say doesn't mean much.

Traciatim said...

Though I don't normally like giving away exactly where I am I'll give you some hints. I'm on the opposite side of the country as Vancouver and my city is sometimes referred to as either the Anus or Armpit of Canada . . . The things going on over the next while are an LNG facility, a possible refinery, a nuclear power plan expansion, a large office space in the downtown core, and a potash mine expansion/new potash mine. All that news has made people want to buy houses before the big rush.

Strataman said...

"Though I don't normally like giving away exactly where I am I'll give you some hints." Why? That's a neat area you live in very historic and beautiful! :-)
Hardly an armpit in my honest opinion, unless it belongs to a fetching lady!

Traciatim said...

It's nice enough I suppose. We do have some great countryside, some amazing coastlines, fairly low unemployment, really reasonable house prices, and a bright future if all of these projects take off.

Some of the downsides are the smells of the refinery and pulp mill, the consistent foggy weather. Though depending on where you are in the city you can avoid both.

I guess my main point was that just because Vancouver, Calgary and Toronto are falling apart because their housing has to return to normal levels doesn't mean everywhere in the country is following along in that slide. You can still buy a fantastic house here for a family in the 150K-200K range, and a modest one for 100K-150K (102K for mine, just over a year ago). Now, I agree that with a population of just over a hundred thousand it's not like we compare to a booming metropolis, but at least the point still stands. Only 5 of the 25 data points on the CREA stats page show declines YOY.

patriotz said...

I guess my main point was that just because Vancouver, Calgary and Toronto are falling apart because their housing has to return to normal levels doesn't mean everywhere in the country is following along in that slide.

No it just means you're behind the curve. As I recall Saskatoon was still rising during the first year of the decline in Alberta. Guess what - it's now falling.

A 20% YOY increase means a subsequent decline, and I don't think you're very far from it. Small cities in sparsely populated provinces are cheap for a reason. And that "R" word is getting louder all the time. It's not different anywhere. I will say in dollar terms you have less downside than Vancouver - who doesn't.

Traciatim said...

Patriotz, Where are you seeing that Saskatoon s falling, Sept 07 to Sept 08 showed a 23% increase in average sales price and from Aug 08 to Sept 08 increase of over 6%. Sure, they've been pretty level for a while, but I don't see it declining much so far, especially since we're heading in to slow sales months anyway.

As for my city, I doubt we will see that far of a fall. Currently we're at record low unemployment levels and houses are really inexpensive compared to other areas. If the construction and permanent jobs get the unemployment rate even lower I think we will see an influx of people from the smaller towns here and we will see the people that left for the west 10 years ago selling their 350K average houses to buy a 175K average house here (or a 350K McMansion). I figure the next year or two we will see the 15%+ increases YOY, and then it will plateau for a stagnant two years as the construction projects ramp down and then return to it's 2-3% norms. I don't see us falling too much after that, but it all hinges on the work I suppose.

On the other hand, the next 5 years may be pretty nasty to Canada and we could see a great depression 2.0, now new and improved! I guess that's the risks you take when buying a house.

streel said...

Saint John, New Brunswick.........

What do I win????

VancouverGuy said...

What am I seeing in the market?

Supposedly, banks are willing to lend to "high-quality" assets (I'm not in the real estate business, so I don't mean real estate), but of course at lower leverage levels than before.

There are a ton of businesses that have breached covenants and are going to default. Even worse, with lower leverage levels people who had refinancing coming up will not be able to refinance. That's why a lot of share prices are starting to just look like a call option on not going bankrupt. It's because they have way too much debt and cannot possibly refinance, so will likely be taken over by creditors.

I think that's one thing that some people miss when thinking about the market dropping: If leverage was at historically high levels and people cannot refinance their debt, then their share price should be zero. The effect of those businesses on an overall index should be significant if there are enough of them. And those share prices will not recover. If there is no way to refinance at the same levels over the next year, then a lot of businesses whose term financing is coming up will be vaporized.

patriotz said...

Patriotz, Where are you seeing that Saskatoon s falling,

"Saskatoon house prices have started to fall.It's still about 20 per cent higher than it was at the same time last year, but the average sale price of residential property in Saskatoon last month was $292,428, according to new statistics released Friday by the Saskatoon Region Association of Realtors (SRAR).

In June, the average price was $310,386 -- nearly $18,000 higher, according to the SRAR's website.."

Saskatoon house prices fall

It is simply not possible for house prices to rise faster than incomes in the long run, least of all in small cities with unlimited room to expand.

John Collison said...


The Maritime economy is about to tank, despite the fact it lagged well behind the rest of the country in the run up.

Tourism is a huge part of the economy in NB and neighbourhood, and it took a massive hit the last two seasons -- both provincial government stats and empiric evidence back this assertion. In fact I know of 3 people who left Alberta to return home to Nova Scotia and New Brunswick who have since COME BACK to Alberta because things back east were going soft.

The other thing about Have Not Provinces: when recession hits, as it is, Ontario, BC and Alberta produce less cash to send to Manitoba and the Maritimes, and are already chafing.

The Atlantic region ALWAYS (ever since Confederation co-opted and corrupted their economy) suffers more in recessions.

Get out of real estate there NOW, rent, then buy back in (if you still have a job).

Traciatim said...

Patriotz, and now for September it's back up to 297K and change, which makes it look like they've just peaked and these changes are just the leveling off of the average. It could be that sales are just a little slower after the summer months are over and things are turning chilly. It could be the precursor to some drastic declines, or it could be just leveling off; we won't know for a year or so.

The couple salary income for Saskatoon in 2006 was about 76,600, adding 3% per year you get about 81200 for 2008. That puts the average home at 3.6 times median household income, not too far off the 3 times mark.

For Saint John, the income was $68,300, adding 2% per year we hover around 71K for 2008. This puts the average home here at just under 2.3 times median couple income. Seems pretty normal here with possibly some more upside if all of our big projects pan out.

Just for some perspective:
Vancouver 2006: 68,600 @ 3% = 72700, making average home 7.3 times income.

Toronto 2006: 71200, no growth, making the average home 5.1 times income.

Calgary 2006: 90,700 @ 3% = 96200, making the average home 4 times income.

Growth rates and income from Stats Canada and the home prices off the CREA stats page.

Looks to me like Vancouver has to come way down, Toronto will see some down, Calgary will go down a bit, Saskatoon will stagnate a bit, and Saint John I stick by my original assessment (While construction happens great growth, stagnation for a few years, then back to 2-3% as per normal.)

You'd also expect that because people want to live in and around the larger cities that their price/income rations will be higher anyway which I would consider 3-4 normal for a larger city, and then 2-3 pretty normal for a smaller one.

One more thing, Octagonian, where are you seeing stats on the tourism tanking here? From what I've been reading we've been hitting record levels this year. Looking around the city it looks like good things are happening, not tanking like you describe.