There's an economic meltdown in the US, banks are going nipples north, unemployment seems to be on an unending march upward and ZIRP (Zero Interest Rate Policy) is now reality. The word of the day appears to be deflation (I personally don't think inflation will be a problem over the next 2-3 years ).
One of consequences of the mess in the US, is a relatively strong dollar. Gone are the days of get 3 loonies for two bucks, and it's instead, if you give me 9 dollars US, I might give you 10 loonies today, and maybe less than 9 loonies 6 months from now. I anticipate that the strength in the CAD dollar is likely to continue (while we do have a whole raft of problems ourselves, they do seem proportionately less extreme - for now) over the next year or so, with the loonie likely to flirt with parity yet again. Which brings up an interesting question - what does a strong dollar mean for the Victoria Real Estate market?
I would argue that a strong dollar is likely to reduce demand for Victoria real estate, via three channels.
First, real estate in Victoria for American buyers has become more expensive in terms of US dollars. That lovely Fairfield character conversion (#1 -220 Moss St, 2beds and 2baths) that sold for $455,000 in August 2007, is now listed for $485,000 and had a 2009 assessed value of $418,000. Note it wasn't that long ago that things were going for assessed or less (January and February 2009). So in January, Americans could have likely bought the property for $418,000 CAD, and as of January 2, 2009 could have done so for $345,268 US. Even if the Americans had bought for the fairy tale price of $485,000 CAD ($400,610US) in January, the buyers are now asking $447,073US. That's a 11.6% climb in 7 months.
Secondly, the competition (substitutes for Victoria RE) has gotten relatively cheaper in that same time period. A two-bedroom, 2 bath, house in a nice part of Phoenix (Youngtown, it's mostly retirees - http://www.realestatebook.com/homes/listing/101-538620917/11596-W-Mountain-View-Rd-Youngtown-AZ-85363/) can presently be had for $79,200US with a 30 year fixed mortgage at 6% with payments of $379.88US. As such a Canadian buying the Phoenix property in January would have had to have coughed up $95,884CAD now only has to find $85,919CAD.
Third, a strong dollar is bad for the Canadian economy and bad for Victoria, which relies on tourists. It's likely to push up the local unemployment rate, which should have negative effects on the local RE market.
Monday, August 10, 2009
Hiatus
I must apologize for not posting as of late. I has a bit of a family tragedy (my grandmother, aunt and uncle were all killed in a MVA involving a drunk driver at the end of July in Alberta) and combine it with a family vacation and you've got one long hiatus from blogging.
Now that is passed I hope to post more regularly.
Now that is passed I hope to post more regularly.
Thursday, July 16, 2009
Very Interesting Podcast...
It's a US bloomberg podcast, but it involves some of my favorite economists: Shiller and Roubini....
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vbkEUR2nRKBs.asf
Very interesting questions:
1. How is the housing market different from other markets?
2. Are we looking at a fundamental shift in behaviour - ie. are people going to permanent shift in their savings and consumption?
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vbkEUR2nRKBs.asf
Very interesting questions:
1. How is the housing market different from other markets?
2. Are we looking at a fundamental shift in behaviour - ie. are people going to permanent shift in their savings and consumption?
Monday, July 13, 2009
Case-Shiller Home Price Index and Why it's Wonderful
The Case-Shiller index has been one of the key tools used to illustrate the US housing bubble, and it's deflation. It was developed by two economists, Karl Case and Robert Shiller. If you haven't checked out Mr. Shiller before, he's got some very interesting reads - specifically Irrational Exuberance and recently Animal Spirits.
At any rate, the index removes the problem associated with comparing an Apple (a 2 bedroom house) with an Orange (a 4 bedroom house) that results from merely looking at the average or median house price index. It does this by using resales data to form price pairs over time which can then be used to look at movements in price. As an example, 150 Robertson Street is sold for $150,000 in March of 2000, it is then resold for $200,000 in March of 2003. This forms 1 price pair and 1 data point for a Case-Shiller Index, over 3 years the price rose 33% so March 2003 relative to March 2000 for this property is 1.33. As an example, lets say that there are 5 other properties that are also resold in the same time period in the same area (bought March 2000, resold March 2003) that have increased in value by 25%, 43%, 10%, 32% and 18%. As such the Case-Shiller index for March of 2003 relative to March 2000 would be (1.33+1.25+1.43+1.10+1.32+1.18)/6 = 1.26 saying that on average property values have increased by 26% over the 2000 to 2003 time period. This is probably an over simplification, but it does get around some of the problems associated with looking at the average, when the average likely contains some pretty significant changes in the mix of properties being sold.
Now if only I could get my hands on some sale pair data to calculate a Case-Shiller index for Victoria, if only we had such a data-set available!!!! Oh wait we do (BC Assessment I believer), if only it was in a more accessible format.
At any rate, the index removes the problem associated with comparing an Apple (a 2 bedroom house) with an Orange (a 4 bedroom house) that results from merely looking at the average or median house price index. It does this by using resales data to form price pairs over time which can then be used to look at movements in price. As an example, 150 Robertson Street is sold for $150,000 in March of 2000, it is then resold for $200,000 in March of 2003. This forms 1 price pair and 1 data point for a Case-Shiller Index, over 3 years the price rose 33% so March 2003 relative to March 2000 for this property is 1.33. As an example, lets say that there are 5 other properties that are also resold in the same time period in the same area (bought March 2000, resold March 2003) that have increased in value by 25%, 43%, 10%, 32% and 18%. As such the Case-Shiller index for March of 2003 relative to March 2000 would be (1.33+1.25+1.43+1.10+1.32+1.18)/6 = 1.26 saying that on average property values have increased by 26% over the 2000 to 2003 time period. This is probably an over simplification, but it does get around some of the problems associated with looking at the average, when the average likely contains some pretty significant changes in the mix of properties being sold.
Now if only I could get my hands on some sale pair data to calculate a Case-Shiller index for Victoria, if only we had such a data-set available!!!! Oh wait we do (BC Assessment I believer), if only it was in a more accessible format.
Thursday, July 9, 2009
The Debt Dance
I vaguely remember the economic strain my father faced as a young farmer in the early eighties in Alberta. It’s more the feeling of the situation that I recall than the situation itself, as I was born in the late 70’s. High interest rates and a few poor years of crops forced him out of farming, and eventually took its toll on his young family. My parents divorced while I was just starting elementary school. I remember the aftermath of the divorce, my mother stretching every penny she could, my father returning to school for retraining and eventually my mother returning to school to also retrain. While both of my parents succeeded in finishing their training and securing stable well-paid employment, it wasn’t until the end of the eighties before my father was back on track and my mother didn’t finish her degree until 1994. They put themselves through school with student loans that needed to be repaid. I graduated high school in 1996, there was no money for university from my parents, and their prosperity has been a relatively recent phenomenon. I had no sense of entitlement to a good life, I knew that if I wanted to succeed it would have to be on my own terms as a result of my own efforts. I also knew I could avoid many of the errors my parents had made.
My parents had too much debt. It may not have been too much debt when they bought the farm, but it quickly turned into too much debt when interest rates rose to absurd levels in the early 80’s. The amounts needed to service the loans and feed the family quickly exceeded their income, my mother got a job waitressing, but soon that money was also fully consumed by the need to service the loans, at absurd interest rates. There was little in the way of savings to fall back on to ride out the rough patch. A few more bad twists, and there was little they could do to stop themselves from losing the farm. There was no bailing out. The farm was foreclosed on, and our family had to move.
RULE 1: Have savings to ride out a rough patch, ideally 6 months of living expenses in a relatively liquid format. Look at your monthly payments, multiply them by 6, have that amount in your bank account or accessible to you on short notice at all times.
RENT/Mortgage: $2000
Car & Gas: $ 800
Utilities: $ 200
Food: $ 600
Other Debts: $ 200
TOTAL: $3800
Rainy-day Savings needed: $22,800
RULE 2: Pay high interest debt off first
Note, if your monthly living expenses are low, then you can get by with less in terms of a rainy-day fund. For example the other debts in this case were $0 and the car and gas was $400 as the car payment was eliminated, then the rainy day fund could be $3,600 less ($19,200). One of the best ways to reduce monthly expenses is to eliminate or reduce debts. I would suggest that once a sufficient rainy day fund is established, monies over and above what are needed should be spent on reducing debt, with the highest interest debt being the first to be paid off. Once the debt is managed, the savings can begin.
RULE 3: Don’t let the monthly payments fool you
Remember that every last penny of money borrowed must be repaid with interest. Sure the payments may be ‘affordable’ but do you really want to buy something for more than the sticker price? Let’s assume that you want to buy a car. You can buy a used car for $10,000 with your savings. Or you can lease a new car for $5,000 deposit and $5,000 down and $500 per month for 39 months with a $23,500 buy out. I know these are two very different things – one is an old car and one is a new car but let’s see who is in a better financial position at the end of the 39 months. Let’s assume that the resale value of the $10,000 car is $6,000 at the end of the 39 months. We’ll also assume that the person who buys the car outright saves $500 per month earning 3% interest, and that the person will use this money to buy another car outright at the end of 39 months.
At the end of the 39 months the leasor can either walk away from the car and get their $5,000 deposit back or pay another $18,500 to purchase the car. If the leasor buys the car (assuming additional financing is not needed), then he/she will have paid $48,000 for the car over the 39 month period. If the leasor does not buy the car they have $5,000 in the bank, but no car.
On the other hand the car purchaser has $26,455.46 available for the purchase of his or her next car. If he or she has a friend who is just getting out of their lease he/she can buy out the lease for $23,500 and still have nearly $3,000 in the bank.
My parents had too much debt. It may not have been too much debt when they bought the farm, but it quickly turned into too much debt when interest rates rose to absurd levels in the early 80’s. The amounts needed to service the loans and feed the family quickly exceeded their income, my mother got a job waitressing, but soon that money was also fully consumed by the need to service the loans, at absurd interest rates. There was little in the way of savings to fall back on to ride out the rough patch. A few more bad twists, and there was little they could do to stop themselves from losing the farm. There was no bailing out. The farm was foreclosed on, and our family had to move.
RULE 1: Have savings to ride out a rough patch, ideally 6 months of living expenses in a relatively liquid format. Look at your monthly payments, multiply them by 6, have that amount in your bank account or accessible to you on short notice at all times.
RENT/Mortgage: $2000
Car & Gas: $ 800
Utilities: $ 200
Food: $ 600
Other Debts: $ 200
TOTAL: $3800
Rainy-day Savings needed: $22,800
RULE 2: Pay high interest debt off first
Note, if your monthly living expenses are low, then you can get by with less in terms of a rainy-day fund. For example the other debts in this case were $0 and the car and gas was $400 as the car payment was eliminated, then the rainy day fund could be $3,600 less ($19,200). One of the best ways to reduce monthly expenses is to eliminate or reduce debts. I would suggest that once a sufficient rainy day fund is established, monies over and above what are needed should be spent on reducing debt, with the highest interest debt being the first to be paid off. Once the debt is managed, the savings can begin.
RULE 3: Don’t let the monthly payments fool you
Remember that every last penny of money borrowed must be repaid with interest. Sure the payments may be ‘affordable’ but do you really want to buy something for more than the sticker price? Let’s assume that you want to buy a car. You can buy a used car for $10,000 with your savings. Or you can lease a new car for $5,000 deposit and $5,000 down and $500 per month for 39 months with a $23,500 buy out. I know these are two very different things – one is an old car and one is a new car but let’s see who is in a better financial position at the end of the 39 months. Let’s assume that the resale value of the $10,000 car is $6,000 at the end of the 39 months. We’ll also assume that the person who buys the car outright saves $500 per month earning 3% interest, and that the person will use this money to buy another car outright at the end of 39 months.
At the end of the 39 months the leasor can either walk away from the car and get their $5,000 deposit back or pay another $18,500 to purchase the car. If the leasor buys the car (assuming additional financing is not needed), then he/she will have paid $48,000 for the car over the 39 month period. If the leasor does not buy the car they have $5,000 in the bank, but no car.
On the other hand the car purchaser has $26,455.46 available for the purchase of his or her next car. If he or she has a friend who is just getting out of their lease he/she can buy out the lease for $23,500 and still have nearly $3,000 in the bank.
Wednesday, July 8, 2009
Other Blogs and Economists I'm Addicted to Reading
Just a glimpse into those other economists that tend to influence my thinking on matters:
Economist's View
http://economistsview.typepad.com/economistsview/
It has a really great post (posted July 7, 2009, 11:29AM) entitled "What Caused the Housing Bubble?" It reflects on quite nicely the non-rationality of markets and the results that follow.
Calculated RISK
http://www.calculatedriskblog.com/
Really great almost real-time information all sorts of interesting stuff about how bad stuff is.
Paul Krugman - NY Times
http://krugman.blogs.nytimes.com/
An economist who seems to get it.
and to balance Krugman out there's Greg Mankiw
http://gregmankiw.blogspot.com/
And of course I would be remiss if I forgot to mention Garth Turner at Greater Fool
(http://www.greaterfool.ca/) and
HouseHuntVictoria
(http://househuntvictoria.blogspot.com/).
Economist's View
http://economistsview.typepad.com/economistsview/
It has a really great post (posted July 7, 2009, 11:29AM) entitled "What Caused the Housing Bubble?" It reflects on quite nicely the non-rationality of markets and the results that follow.
Calculated RISK
http://www.calculatedriskblog.com/
Really great almost real-time information all sorts of interesting stuff about how bad stuff is.
Paul Krugman - NY Times
http://krugman.blogs.nytimes.com/
An economist who seems to get it.
and to balance Krugman out there's Greg Mankiw
http://gregmankiw.blogspot.com/
And of course I would be remiss if I forgot to mention Garth Turner at Greater Fool
(http://www.greaterfool.ca/) and
HouseHuntVictoria
(http://househuntvictoria.blogspot.com/).
Better Data - Specifically Better Housing Price Indexes for Canada
As an economist, one of the basic principles is that in order for markets to work properly (ie. for the price to be set appropriately in response to supply and demand), there must be well-informed buyers and equally well-informed sellers (there must be symetry about what is known about being bought and sold). Ideally, markets operate in a world of 'complete information' as well. One of the reasons, I believe the Victoria real-estate market is in a massive bubble of historic proportions is the lack of complete and symetric information. Put simply sellers know more than buyers, and there seems to be a lack of reliable information about the market on which to make decisions. This allows the market to behave in ways that can't otherwise be explained (like paying way more for something than it would cost to rent the same place)...
Larry MacDonald over at Canadian Business Online (www.canadianbusiness.com) shares my deep seated sense that better information on the Canadian housing market is needed in his article entitled: Wanted better house-price indexes
"We might want to order up a huge grain of salt to go with the latest housing stats released by the Canadian Real Estate Association (CREA). Actually, we may want to get a truck load of the stuff from a salt mine somewhere.
In a June 15 press release, CREA announced that the average price for a house sold on the Multiple Listing Service (MLS) shot up to a record high of $319,757 in May. “Over the past four months, the national MLS residential average price has recovered 16.4% from the low in January,” added CREA in its press release.
This data does not gel with other data series on the economy and housing market. Last checked, Canada was still in recession: the unemployment rate in May rose to an 11-year high of 8.4%. Since the recession began 11 months ago, Canada has lost over 360,000 jobs — with more than 10% of that total coming in May. Hmmm … how can house prices spike so much when so many people are losing their jobs or can’t find work?
Meanwhile, other measures of Canadian house prices are showing declines. The Teranet–National Bank National Composite House Price Index dropped 5.8% during the 12 months to March. And, according to Statistics Canada, selling prices for new homes fell 3% over the 12 months to April (the sharpest deceleration in new home prices since the recession of the early 1990s).
The problem with using average prices in the housing market, as mentioned in my blog, is the failure to compare apples with apples and oranges with oranges. In each period, the average price is calculated from a different mix of houses. There will be differences in the proportion of houses by dwelling space, style, number of bedrooms, lot size, region, and a variety of other characteristics.
In particular, when there are a higher number of sales from regions with more expensive homes, the CREA index will signal an increase in price simply due to this shift in the mix of houses. This, indeed, is what has happened in recent months: sales in high-priced cities such as Calgary and Vancouver are rising more quickly than elsewhere and distorting the CREA index.
CREA does footnote this problem in its press releases. But why even bother calculating such a faulty indicator and reporting the results as a lead item in monthly press releases? Why not headline a less biased measure?
That would be an index like the one produced by Teranet and National Bank. Launched about six months ago, it does a much better job isolating pure price change by using the “repeat sales” approach.
Just prior to its release, TD Financial Group released a study of house prices in Canada, lamenting distortions in measurement. One of its recommendations was that “Canada needs a repeat sales home price index.” They got their wish when the Teranet-National Bank index came out shortly afterward.
In the United States, indexes based on the repeat-sales formula are now mainly used. Of note is the S&P/Case-Shiller Home Price Index.
It would seem to be time for Canada to follow suit.
By the way, the S&P/Case-Shiller Home Price Index also doesn’t jibe very well with CREA’s house price stats. It is showing a drop of 18.7% over the 12 months to March and a 2.8% drop from February to March."
Larry MacDonald over at Canadian Business Online (www.canadianbusiness.com) shares my deep seated sense that better information on the Canadian housing market is needed in his article entitled: Wanted better house-price indexes
"We might want to order up a huge grain of salt to go with the latest housing stats released by the Canadian Real Estate Association (CREA). Actually, we may want to get a truck load of the stuff from a salt mine somewhere.
In a June 15 press release, CREA announced that the average price for a house sold on the Multiple Listing Service (MLS) shot up to a record high of $319,757 in May. “Over the past four months, the national MLS residential average price has recovered 16.4% from the low in January,” added CREA in its press release.
This data does not gel with other data series on the economy and housing market. Last checked, Canada was still in recession: the unemployment rate in May rose to an 11-year high of 8.4%. Since the recession began 11 months ago, Canada has lost over 360,000 jobs — with more than 10% of that total coming in May. Hmmm … how can house prices spike so much when so many people are losing their jobs or can’t find work?
Meanwhile, other measures of Canadian house prices are showing declines. The Teranet–National Bank National Composite House Price Index dropped 5.8% during the 12 months to March. And, according to Statistics Canada, selling prices for new homes fell 3% over the 12 months to April (the sharpest deceleration in new home prices since the recession of the early 1990s).
The problem with using average prices in the housing market, as mentioned in my blog, is the failure to compare apples with apples and oranges with oranges. In each period, the average price is calculated from a different mix of houses. There will be differences in the proportion of houses by dwelling space, style, number of bedrooms, lot size, region, and a variety of other characteristics.
In particular, when there are a higher number of sales from regions with more expensive homes, the CREA index will signal an increase in price simply due to this shift in the mix of houses. This, indeed, is what has happened in recent months: sales in high-priced cities such as Calgary and Vancouver are rising more quickly than elsewhere and distorting the CREA index.
CREA does footnote this problem in its press releases. But why even bother calculating such a faulty indicator and reporting the results as a lead item in monthly press releases? Why not headline a less biased measure?
That would be an index like the one produced by Teranet and National Bank. Launched about six months ago, it does a much better job isolating pure price change by using the “repeat sales” approach.
Just prior to its release, TD Financial Group released a study of house prices in Canada, lamenting distortions in measurement. One of its recommendations was that “Canada needs a repeat sales home price index.” They got their wish when the Teranet-National Bank index came out shortly afterward.
In the United States, indexes based on the repeat-sales formula are now mainly used. Of note is the S&P/Case-Shiller Home Price Index.
It would seem to be time for Canada to follow suit.
By the way, the S&P/Case-Shiller Home Price Index also doesn’t jibe very well with CREA’s house price stats. It is showing a drop of 18.7% over the 12 months to March and a 2.8% drop from February to March."
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