Canadian Real Estate Still Charging Ahead

The latest statistics show that Canadian residential real estate prices are still charging ahead.

Since last December, the average home across the country has increased by 11.8%, (a 23% rate if annualized) which is phenomenal since our prime rate too has been increasing over that period. Sales volumes too are up, by 3.6% on a year-over-year basis.

The average house price across the country is now $304,328 (about $272,000 USD), which compares to about $231,000 (USD) for America.

Price increases are being led in oil-rich Alberta, which is facing rises of 40% annually. Although prices have seen a dramatic increase, most market commentators say that the Canadian market, overall, isn't as vulnerable to a downturn as the US market, for two reasons:

1. If Alberta is stripped out of the price picture, the average price increase is much more sensible, and
2. Interest rate increases have been subdued here, and our prime rate about 2% below the US prime rate.

JW

The Confused Capitalist

Real estate values still to be knocked down ...

There's an interesting report on the value of housing in America, updated this month. The Global Insights/National City report suggested, based on 21 years of data, that of 317 metropolitan areas around the US, covering 84% of the housing stock, only 88 markets are currently undervalued (by any amount).

Against that, there are some 71 metro markets - covering 39% of the housing stock - that are "extremely over-valued", meaning that the valuations are at least 34% above what their model projects as correct values. The report further notes that as recently as the first quarter of 2004, only three metro markets were "extremely" overvalued.

And for those that think the housing market is due for a rebound (and prices aren't yet statistically showing up as falling much), the report states that the median correction in overvalued markets in the past 21 years is 17% and that it lasts 14 quarters. That's three and a half years folks. To those that like the seemingly cheap valuation metrics of home-builders and development companies, may I suggest .... patience.

In Canada, however, things are different as the good times appear to roll on for as far as the eye can see. Although there's no apparent signs of a real estate bubble here, perhaps some leading edge indicators suggest that a bubble may be in the early stages of forming.

ReMax just reported that sales of high-end luxury houses are booming across the country, with sales volumes up year over year by 31% in Toronto, by 90% in Vancouver, and by 124% in oil-rich Calgary.

Another five or ten years of this, and we might end up in the same boat as the US market is!

JW

The Confused Capitalist

Ring, ring. Ring, ring. (Hello, is anybody there?)

And who says they don't ring a bell at the market top (or close to it)!

I think that the US market is very close to a top for the next several years, and it isn't because stocks are overly expensive. There's been lots of research showing that, relative to recent historical norms, stocks remain at roughly fair value (I'd define fair value as within 10% of its perfect actual value). The PE ratio of the S&P500 at about 18 or 19 isn't something to get alarmed about.

What is, is the rising interest rates. This will drain liquidity from the market as rates will be - I predict - rising far above that foreseen by most commentators today. That's because interest rates aren't just used to control inflation - but to support a weakened currency and attract needed outside financing, when a deficit situation exists when internal lenders no longer buy enough bonds to support the deficit (i.e. the USA today). In two years, I predict that a 30 year fixed mortgage will be in the 8.5% to 10.5% range, between 200 to 400 basis points higher than today.

Secondarily, the downdraft from the real estate market (expect that to be a serious force about 12 months from now), will also drain liquidity from stocks, as some owners of investment or secondary real estate, will partially cash out of the stock market to support their increased real estate loan payments. Others will sell their investment or secondary homes, but with the stock market also in a secular decline, won't redeploy their additional capital (if that exists for them), into the stock market. They'll keep it on the sideline in CDs and other savings intruments that will have relatively attractive yields.

Finally, the yields of savings instruments will continue to become more attractive, and will also compete for cash that recently was almost automatically deployed into the stock market, or real estate.

Real estate and the stock market returns will be well correlated over the next three to five years. Negative returns. Or am I the only one that hears the bell ringing?


JW

The Confused Capitalist

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Canada: What Housing Bubble?

Well, apparently unlike the US housing market, even after a strong five years of house price gains, housing in Canada remains undervalued.

According to recent research by Merrill Lynch economist David Wolf, the Canadian housing market is, on average, undervalued by 10-20%. Mr. Wolf ran his model based on average incomes and the cost of debt, and in only one (Victoria) of the 15 major markets measured, was the housing over-priced - and even then it was just a modest 4%.

To check his model accuracy, he ran current prices and incomes in the major US cities (yes, most were over-priced, according to his model), and also ran it against the frothy 1990 Canadian markets (again, his model suggested they were then, in fact, over-priced).

One of the more surprising findings was that even in oil-rich Alberta - after years of very strong gains - the major cities of Calgary and Edmonton were amongst the most-undervalued cities in Canada.

According to Mr. Wolf, Canadian prices can rise by an average of over 4% annually for the next four years before they'll achieve full value.

In the meantime, those worrying about a Canadian housing bubble can relax ... relax ... relax ... relax ...


JW

The Confused Capitalist

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Canada: Let the Good Times Roll!

Due to the continued strength of the world economy and the need for basic commodities such as oil and metals, Canada's economy moves from strength to strength.

The latest report shows Canadian unemployment down to a generational low of 6.4%, a rate not seen since the mid-1970s. Some places, like oil-rich Alberta whose unemployment rate is only 3.1%, is experiencing a shortage of workers of all sorts, but particularly those whose skills are needed in the oil patch. The average hourly wage in Alberta is now some $21.39 per hour, and expectations are that this will continue to rise.

This economic boom is expected to be continued to be fuelled by proposed investments of up to $25 billion to turn areas near Edmonton into a refinery hub to rival areas along the Gulf Coast of Texas (sans hurricanes of course). Other areas of the province are booming along with the massive incoming investments, to such an extent that even basic service jobs, like those in fast-food restaurants and grocery stores, are going unfilled.

This too is drawing workers from the long-suffering Atlantic provinces, some 3,000 miles distant into the Alberta economy. While young people have for some time left the region in search of employment, now the chance to earn $5,000 weekly is drawing fathers away from their families for extended periods, as they work in oil fields camps for several months, and return quarterly or semi-annually to get re-acquainted with their wives and children.

In other areas where these resources don't play such a large part in the local economies, such as people-rich Ontario, Quebec and the Atlantic provinces, the angst is palpable, as the soaring Canadian dollar has made it more difficult for manufacturing-dense Ontario and Quebec to import into the US market. There has been much hand-wringing over the fate of the manufacturing region of the country and whether Canada will be subject to the so-called "Dutch Disease".

In any case, while there's some local disruption, there's also no doubt that the boom as a whole is a net economic benefit to Canada, and more particularly, to Alberta.

Aside from the obvious stock market plays into the oil and gas sector, and the mining sector, different Alberta-based public companies should enjoy extended periods of super-sized profitability. These would include those involved in the real estate sector. Three such companies include ALberta-based land developers Melcor Developments Ltd., which trades on the Canadian TSX Exchange under the symbol "MRD", and Genesis Land Development Corp. which trades under the symbol "GDC", and the Boardwalk Rental Communities REIT - the largest owner of residential rental suites in Alberta. It too trades on the TSX index, under the symbol "BEI.UN".

Canada - not just a place that cold fronts come from!


JW

The Confused Capitalist