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!

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