Tuesday, August 26, 2008

A 1 year lag

CREA likes to say: “"The Canadian real estate market, while cooling, is still much different than the U.S. market”

Actually, it really isn’t…

Using CREA data in a crude way, it appears that as of June 2008, we are lagging the US by about 1 year and 2 months. This is consistent with the lag of June 2007. In late 2007/early 2008, we were lagging by a little more (1.5 years) due perhaps to the effect of the commodity bubble on the West.

In July 2008, the lag appears to have shrunk once again to 1 year and 2 months as some of the effect of the commodity bubble appears to be coming out of the Alberta market.

I know that this is not apples to apples, since CREA reports average sales price and Case/Schiller reports a number based on the “repeat sales pricing technique”

However, here goes. If we continue to lag the US by about 1 year and 3 months (I have added a month, in case July was a bit of an extreme), this is where we go for the next year or so.

Back of Envelope Calculations

Canadian Date CREA YoY US Similar Date (Case/Schiller) Lag
Jun-07 10.40% Apr-06 1 year, 2 months
Dec-07 8.10% Jun-06 1 year, 6 months
Mar-08 4.00% Sep-06 1 year, 6 months
Jun-08 0.40% Jan-07 1 year, 5 months
Jul-08 -3.60% May-07 1 year, 2 months
Sep-08 -3.90%? Jun-07 1 year, 3 months
Dec-08 -5.50%? Sep-07 1 year, 3 months
Mar-09 -9.70%? Dec-07 1 year, 3 months
Jun-09 -15.30%? Mar-08 1 year, 3 months


This is not a prediction but merely something to watch. However, for the remaining months of 2008, this is probably a decent estimate of where we go. In fact, it could be conservative if the following effects hit the Canadian housing market this fall:

TSX has a sharp selloff this fall (as I expect)
Commodity prices are now in a bear market (as I expect)
Banks will tighten lending this fall, especially once the October 15th deadline passes
Psychology will change as the “boom is over” become accepted by the masses

I suspect that we go to -6% YoY conservatively by December 2008 and perhaps as low as -9% YoY. For 2009, I don’t know about -15.3% by June 2009 as that will depend on how things play out in the economy and financial markets. I wouldn’t rule it out however!

Friday, August 15, 2008

Down 3.6% in July

"The question is no longer will Canadian house prices drop but whether they will sink to levels seen in the United States where some markets have watched home prices crumble by as much as 30% in the last year."
Financial Post, Gary Marr, August 15, 2008. "Alberta leads national drop in home prices"

Well said...Only problem is just a few months ago, we were hearing tales of a slowdown to 5% growth in 2008 (from 11% in 2007). This is the first time that the FP or G&M (to my recollection) has stated unequivocally that Canadian housing prices will fall. The mainstream media just keeps repeating the doggie do-do that the CREA/real estate people and the banks keep spouting.

July 2008: The average sales price declined 3.6% YoY. As bearish as I am on housing, even I didn't expect that bad a number!

CREA is trying to spin away:

In June, it was only 4 of 25 markets going negative (Calgary and Edmonton included) going negative. The number was skewed....

In July, now you can add Vancouver to the list. Toronto is quite close now at 1.5%. Windsor is now negative.

Listen to CREA spin furiously :
" Even though average prices continue to post year-over-year gains in most major markets...the decline was the result of fewer sales compared to a year ago in the four most expensive major markets in Canada – Vancouver, Victoria, Calgary and Toronto."

Hmm, the four most expensive major markets in Canada had fewer sales. Yes, mathematically that would skew the average price downward as you lose more higher prices sales in your mix.

BUT...Is it not concerning to see the #1 and #3 cities (Tor/Van) have fewer sales and go negative in inflation adjusted (real) terms. The other 3 rich cities in Canada (Calgary, Edmonton, Victoria) go negative and/or fewer sales.

How many major cities are there in Canada not affected by this housing crash developing.

Let's start from West to East with all cities over 1 million:

1) Vancouver: From BMO "However, the drop in July spread to a few more cities, including the previously untouchable Vancouver market."
Vancouver is the Michael Jordan of housing markets. Sales down 44%!!
2) Calgary: Negative (big time)
3) Edmonton: Negative (big time)
4) Toronto: slowly sales/barely up (1.5%)
5) Ottawa: holding up so far
6) Montreal:
holding up so far (new high in average price)

I don't know about Ottawa, but I live in Montreal. Everything happens with a lag here. We've been spared some of the worst recently with some provincial income tax cuts and a strong aerospace sector. Plus, culturally we are a little insulated from what goes on in the ROC, but it gets here eventually.

I would expect to see all 6 major Canadian cities negative YoY by year end. I would expect to see Calgary, Edmonton, Vancouver and Toronto all negative by October latest.


What are the hot areas in terms of price increases?

Saskatchewan and Newfoundland/Labrador (ie commodity bubble land). With the upcoming commodity implosion and housing bubbles in those areas, look for them to follow Calgary and Edmonton's lead. Saskatchewan is already having huge drops in sales volume and anecdotal reports report that much of the increase was due to investment buying, much of it from Alberta. Potash stock price is a good proxy for Saskatchewan's economy. I don't have a position in Potash currently but I have shorted it recently and I think it is reminiscent of JDSU back in 2000.


One last spin by CREA's economists:
"Based on what happened in the first half of the year, CREA’s market analysis shows a record national average residential MLS® price by the end of 2008, but with a much more modest increase than was recorded in 2007."

Translation: instead of 5% growth for 2008 (down from 11% in 2007), we are now projecting to go to get back to postive (ie +0.1%) by December.

My take:

  • Expect to see negative numbers the rest of the year
  • Expect Toronto to go negative soon. When the mainstream media (based primarily in Toronto) gets this, expect to see a flood of housing doom articles. While the doom will be correct, it will be about years late.
  • Expect Ottawa and Montreal to participate in the housing crash by year end
  • Expect to see negative numbers worsen with an occasional upward blip (similar to a bear market rally in the stock market- ie nothing goes down in a straight line)
  • Expect to see bottom calling on these inevitable blips
  • Expect to see a negative 6-9% by year end



Monday, August 11, 2008

Double Bubble: Housing and Commodities

In Canada, there was a double bubble: A housing bubble and a commodity bubble.

The commodity bubble was worldwide, started by supply concerns and growing demand, especially in the BRIC countries. The more commodities went higher, the stronger the Canadian economy, particularly out West.

The housing bubble was driven by pent up demand from a relatively weak period (1990s), record low interest rates post 9/11, investor preference for hard assets (after the stock market bubble of 2000).

As with all trends that continue for a long time, these fundamental drivers inevitably drive up prices and then speculation takes over, driving prices even higher.

The mania can last for years and convince even skeptics that they were wrong. The final blowoff usually involves even the bears throwing in the towel. Then the mania finally exhausts itself, and prices come down. At first, it is just a healthy correction and prices can even rebound briefly, but at some point, it becomes clear that the mania is over. The bubble is popped.

Both bubbles drove up asset prices which allowed Canadians to feel richer, spend more and take on more debt than they would have otherwise. Expect the mainstream media to talk about this after the fact (ie in 2009).

I believe that we are now at the point where the double bubble is letting air out. June housing was down year over year (-0.4%). We could get an upward bounce for a month or two, but the trend is now down for the first time in many years.

Oil and most commodities were trashed in July and August (along with the TSX). Many of their long term trends still appear to be upward at this point, but their parabolic charts look broken. I expect a sharp "snapper" rally over the next few days and weeks, but few if any commodities will hit new highs. And then this fall, look for most commodities to break down again, once it is clear to even the bulls that this was more than a healthy correction.

The bursting of the Double Bubble in Canada will trash the Canadian economy in late 2008 into 2009. If we are in recession already, I expect it to get much worse. We had a nice 15 year boom (1992-2007). It is crazy to think that we can just get through this in a few months or a year.

Friday, August 8, 2008

Stormy Summer 2008: What's the Winter Outlook?

For those of us in Quebec and Ontario, the weather this summer has been incredibly stormy with little in the way of real summer weather.

1) The economy has been just as stormy with the news today that the economy "unexpectedly" (you'll keep hearing that a lot) shed 55,000 jobs and even worse, the private sector shed 95,000 jobs. The worst loss since 1991 (hmm, where have we talked about that year before?).

2) May GDP was "unexpectedly" negative.

3) June housing was negative.

4) Today, the Canadian dollar went below 94 cents, it worst week since 1971!

Have I depressed you enough? Unfortunately, the situation is what it is. Better to accept it and plan accordingly, I believe. There will be a recovery and a new bull market one day and I believe that it is better to preserve capital and pay down debt now.

Let me address the four points above, none of which should surprise (the few) readers of this blog:

1 & 2) Despite believing for over a year that Canada was headed to recession (please see my February posting)

The 1990/91 recession and the slow growth that followed were incredibly brutal. Canada had a very rough time and our economy underperformed most of the G7 during that fairly mild US recession. In 1990, we had 10% real interest rates, a housing bubble bursting, a transition to free trade, enormous budget deficits and the introduction of the GST. On a relative basis (to the US), we won't underperform this time. The only problem is that this time, I believe the US is in for a much longer and deeper recession. Overall, I don't think that this one will be as bad as 90/91 but given all the possibilities inherent in the biggest credit crunch in many generations, nothing can be ruled out.

As for unemployment, this report looks like a catch-up for all the positive months thus far this month. Perhaps July's losses were overstated (and earlier months were overstated) but as I said back in April things changed big-time in spring in the job market in my neck of the woods.

The economy is likely in recession in GDP terms. To all this "jibba jabbah" talk that GDP doesn't measure price changes : what happens when commodity prices sink (as they did this week)? The effects of the commodity mini-crash this past month or so have yet to filter through the economy. Unemployment will rise. Don't buy the fact that the unemployment rate went down in July.

3) If 55,000 jobs were eliminated, that could not have helped housing in July. Expect the numbers to worsen on their own. Throw in a recession and plunging commodity prices in the areas that are still hot (Sask, Nfld)...yikes. The only wild card is that demand is likely to pick up ahead of the October 15th deadline for curtailing "overprime" loans.

4) I wrote back on April 1st:

I think that the Canadian dollar will likely fall to 92-94 cents over the coming months...
Now that we are at 93-94, we probably get a short term bounce as the loonie is incredibly oversold. I sold some small US dollar money market holdings back into Canadian today but I think that given how easy the loonie fell this week, the downside needs to be revised lower. Have to do the research on this (I was waiting for this target to be hit, and the speed of the decline this week from 97 did not leave me time for this). Gut feeling is we go still lower (upper 80s to 90) as commodities continue to implode, but first we bounce.

Winter Outlook:

Markets remain choppy for August into mid September. Commodities bounce a little mid/late August and sell off again in early September. US and world markets peak in mid August, pull back in late August, rally into mid September to test August highs.

Then we plunge into mid November as the credit crunch really takes hold, the US economy plunges and recession is accepted by all. There is a chance that we get a slew of bank failures at the same time and systemic risk becomes a concern.

Canadian, US and European economies in recession or hard landings. I plan on conserving capital and shorting at opportune times.

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