Category Archives: Residential

Bringing all back Home- Prospects

Part 4- Prospects

It is always difficult predicting the future at the best of times.  In the world of Donald Trump with the high degree of uncertainty about trade agreements, prognostications are even more precarious. In the previous three parts we have studied the effects of employment, corporate and personal income, and mortgage financing on the residential market. Data shows that the market is holding up exceptionally well under the current circumstances.

Nevertheless storm clouds dot the horizon: (1) rising interest rates; (2) stubbornly high unemployment; (3) the real possibility of an upsurge of laid-off workers running out of severance and Employment Insurance benefits and facing bankruptcy; (4) concerns that a change in fiscal policy by the provincial government may harm the Edmonton housing market; (5) a significant change in inter-provincial out-migration; and (6) a weakening of oil prices leading to further industry lay-offs and corporate bankruptcies. Let’s examine these in turn.

Rising interest rates

The view from the Bank of Canada is highly influenced by Governor Poloz’s tenure at the Export Development Corporation. Although this is overly simplistic, his tenure has been marked by a decline in the value of the Canadian dollar viz-a-viz the greenback since he assumed the post in June 2013. His lens on the Canadian economy is informed by the importance of trade and much of that trade is not only commodities but manufacturing and services. In the Bank’s opening press conference statement accompanying its decision to hold rates steady on 18 January, the central bank highlighted critical headwinds to the Canadian economy arising from the Trump agenda: lower corporate taxes that may reduce Canada’s export competitiveness,  rising interest rates coming north through transmission in bond yields, and thirdly, the relative resilience of the Canadian dollar against the U.S. dollar weakening Canadian competitiveness against third countries.

All things being equal, should the Bank of Canada maintain its stance on interest rates in the face of a Federal Reserve raising short-term rates then the Canadian dollar would likely fall, strengthening  Canada’s exporters’ competitiveness.  Yet this may only offset some of the destructiveness from Trump’s trade policies. Should Canada’s monetary policies and exchange rate policies attract the attention of Washington (competitive devaluation), it is probable that Canadian interest rates and mortgage rates will increase which in turn will depress real estate prices.


There has been an inexorable rise in unemployment in Alberta since May of 2014. The Chart shows both the official rate (unadjusted for seasonality) as well as rates on the duration of unemployment. Unemployment for more than a year was almost unheard of three years ago: today four per cent of the workplace have been unemployed for three months or more.


The Chart below further illustrates the ebbs and flows of members of the labour force who have not been successful in establishing or re-establishing themselves in the job market. There is some positive news at the end of 2016 but it is difficult to evaluate whether the hiring is seasonal or has been affected by the “animal spirits” arising from OPEC’s agreement to restrict output. In short it is too early to tell whether the employment outlook has turned the corner.


Upsurge of EI Claims

Alberta’s unemployment rate has increased dramatically since 2014.  Employment Insurance claims likewise have risen.  The Chart shows initial claims and renewal claims allowed since the beginning of 2012. Throughout 2015 and 2016 there has been a steady rise in initial and renewal claims with monthly variations. In July 2016, over 56,000 claimants were renewed consistent with changes to federal policies recognizing all Alberta as high unemployment region.  This meant the extension of benefits for an extra 20 weeks for long-tenured workers.  In addition an extra five weeks in benefits were accorded to workers in the 15 regions of high unemployment for a maximum of 50 weeks. Although there is room for optimism that initial claims in the past few months have trended downwards, renewals have continued to increase suggesting that permanent, longer-term employment is elusive for many. cansim-2760004-eng-4480011985303638728_31894_image001

Provincial Fiscal Policy

Provincial fiscal policy is unlikely to change materially in 2017 although the upcoming budget will hopefully reveal whether the government is going to attack the deficit or ignore it. The provincial budget is critical for the housing market, particularly in Edmonton where a large part of the workforce is employed in the public sector (public service, provincial agencies, education and health sectors). Provincial policy has been oriented to stabilizing the economy through maintaining services and employment and through its capital spending program.

The Province has received several downgrades from rating agencies over the past 18 months.  It is unclear whether the Finance Minister has been persuaded that producing a clear plan to eliminating the deficit is necessary to calm the fears of bond investors and rating agencies. If  Budget 2017 turns to one of restraint, then the housing market in Edmonton will weaken, particularly for new housing starts.

Inter-provincial Migration

Alberta has seen inter-provincial migration turn negative now for three-quarters. Yet Alberta’s youthful population keeps growing as births outpace deaths and international migration has remained positive. The gap has widened but it is still too early to say that the trend will continue, stabilize, or reverse. Adverse economic growth in Saskatchewan and weakness across the country give little incentive for Alberta workers to leave the province. Edmonton has seen strong intra-provincial migration as workers from Grande Prairie, Red Deer and Fort McMurray have moved to the capital in hopes they will find work.cansim-0510017-eng-1570882915841362748_3698_image001

Oil Price Forecast

The sentiment in the oil patch has been optimistic over the past several months as OPEC reached an agreement to reduce production. Industry commentators have cautioned that the past history of such accords suggests many oil producers have an incentive to cheat. Furthermore, U.S. shale producers can bring on production quickly and this potential to ramp up in the world’s largest domestic oil market has suppressed the optimism. In Alberta’s case, the boom carrying the economy over the past decade and a half has been the construction of large oil sands mining and in-situ operations.  The maintenance of these operations has been a cushion to Alberta’s economy, but the real drivers of growth have been the new capital investment dollars going into the Fort McMurray area.

Many commentators, including, it seems, the Canadian Prime Minister, are of the view that oil sands production must be phased out. While the Prime Minister is undoubtedly correct, Alberta’s economy remains perilously dependent on the investment dollars to construct new facilities. Whether the phase out is by 2030 or 2060 really does not matter. The hay days of new mega oil sands investment are gone and gains to the provincial GDP from increased oil sands production will be modest, and will be offset by declines in conventional crude production (absent a new technological revolution in drilling).


The probability of falling real estate prices, given this economic backdrop, is  a real and present danger. Any acceleration in declines in values will stem from  the knock-on effects of a third year of stagnation harming the retail sector (restaurants and retail merchants) and thereby the commercial real estate sectors.  This vulnerability and financial stress will flow into Alberta and national financial institutions. These institutions may decide they can no longer grant debtors’ loan foregiveness causing foreclosures and corporate bankruptcies to rise. During the 1980s it was not until 1984 and 1985 that real estate and financial institutions began to experience severe loan losses. 2017 promises to be another year of stree in the Alberta economy.

Done deal- Calgary Crescent Heights17-6-17 GM

Oversupply gives new home buyers market advantage5-6-17 EJ

Done Deal -Calgary Tuscany3-6-17 GM

Done deal Calgary Crestmont20-5-17 GM

Done Deal Edmonton Grandview13-5-17 GM

Done Deal Edmonton Laurier6-5-17 GM

Real estate prices on the rise3-5-17 EJ

Done Deal Okotoks22-4-17 GM

Home sales on the rise but prices hold the line26-4-17 EJ

House prices in first quarter are flat in Edmonton but soaring in Toronto18-4-17 EJ

Done Deal Canmore15-4-17 GM

Home builders embrace prefab15-4-17 GM

Million-dollar home sales on the rise5-4-17 EJ

Done Deal Calgary Ranchlands1-4-17 GM

Done Deal-South Calgary18-3-17 GM

Done Deal Cedarbrae Calgary11-3-17 GM








Bringing it all back home Part 3


Part 3

Mortgage and Credit availability

Next we turn to the financial aspects of the housing markets. If borrowers are experiencing difficulties in meeting their monthly (or weekly) payments, normally they will approach the creditor and seek to negotiate a type of forbearance agreement.  This can take many forms such as extending the amortization period or increasing the principal of the loan through an equity take out in order to catch up with interest payments (to pay for daily expenses or to pay down more expensive debt such as credit cards).  As the following Chart shows, the chartered banks in Alberta have not slowed down their mortgage

bank-assets-ab_4112_image001granting appreciably in Alberta.  Mortgage loans have grown by about $15 billion in the past 18 months which would support prices for residential properties in Alberta.

Three of the Big Five report a breakdown in mortgage and business loans in Alberta (TD Bank and the Bank of Montreal do not). Scotiabank, Royal Bank and CIBC do not report their portfolios in a completely consistent manner. The Chart below shows the residential mortgage and the Home Equity Line of Credit (HELOC) portfolios of three major banks operating in Alberta. The principal difference between a regular mortgage and a HELOC is that the latter is also a credit facility which enables the mortgagor to draw up to a maximum amount (typically three-quarters of the assessed value of the mortgaged property) via the use of a chequing account tied to the HELOC.

A major concern of the Canadian banks, and agencies which rate the banks’ debt, is the threat of widespread defaults in Alberta as happened during the 1980s. A proxy for the risk in a bank’s mortgage portfolio is the loan-to-value ratio (LTV) which is a ratio of the loan against the value of the real property. As principal is repaid, in the normal course, the LTV falls.  This predictability can be interrupted as we saw in the 2007-9 financial crisis when the received wisdom that real property always increased in value was shown to be sales management as opposed to sound finance and economics.  The lower the LTV the less risk the bank carries in the event of an unexpected decline in the value of real property.

For sophisticated Canadian banks with millions of customers, lending on real property has become less customer facing and more automated.  The Royal Bank, for example, uses an “automated valuation model” and appraisals when mortgage lending. This automated tool uses estimates of value by reference to “market data” that relies on sales of comparable property and “price trends.”  Drive-by appraisals may also be used.

According to the Bank of Nova Scotia’s annual report to shareholders: “Weak performance in the energy sector is also having a negative impact on Canadian tax revenues and has contributed to softness in Alberta’s housing market. The Bank has taken a number of actions to prudently manage loan exposures in this sector and in related consumer loan segments, and according to the Bank’s stress test scenarios, losses are expected to be manageable” (Scotiabank Annual Report 2016 at page 71). Scotiabank also reported that “retail delinquencies are tracking higher in Alberta. The outstanding loan exposures are primarily secured. The Bank continues to consider the impact of lower energy prices in its ongoing stress testing program. Results continue to be within our risk tolerance” (at page 78).

Likewise, the Bank of Montreal acknowledged “the consumer impact from higher unemployment, which will take longer to recover from and will continue to weigh on the province” (at page 56). In the Royal Bank’s report, a section entitled “forbearance” noted:

“We have specialized groups and formalized policies that direct the management of delinquent or defaulted borrowers. We strive to identify borrowers in financial difficulty early and modify their loan terms in order to maximize collection and to avoid foreclosure, repossession, or other legal remedies. In these circumstances, a borrower may be granted concessions that would not otherwise be considered. Examples of such concessions to retail borrowers may include rate reduction, principal forgiveness, and term extensions. Concessions to wholesale borrowers may include restructuring the agreements, modifying the original terms of the agreement and/or relaxation of covenants. For both retail and wholesale loans, the appropriate remediation techniques are based on the individual borrower’s situation, the bank’s policy and the customer’s willingness and capacity to meet the new arrangement. During 2016, some concessions were made to clients affected by low oil prices, the associated slowdown in Alberta’s economy and the wildfires in Fort McMurray; however, the overall impact of these concessions on our financial results was minimal” (at pages 57-58).


TD in commenting on the bank’s exposure to the oil and gas sector as a whole noted:

“TD had $62.8 billion of consumer and small business outstanding exposure in Alberta, Saskatchewan, and Newfoundland and Labrador as at October 31, 2016, the regions most impacted by lower oil prices. Excluding real estate secured lending, consumer and small business banking drawn exposure represents 2% of the Bank’s total gross loans and acceptances outstanding. The Bank regularly conducts stress testing on its credit portfolios in light of current market conditions. The Bank’s portfolios continue to perform within expectations given the current level and near term outlook for commodity prices in this sector” (at page 30 of the bank’s fourth quarter Management Discussion and Analysis).

In the case of Alberta Treasury Branches, its residential mortgage portfolio has grown from $12.3 billion in June 2013 to $14.7 billion on September 2016.  ATB also participates in CMHC’s mortgage securitization program. At 30 September 2016 $5.33 billion were pledged as collateral to CMHC up from $4.77 billion at 31 March 2016,up from $2.64 billion at 30 June 2014 a doubling in just two years. [1]

Under the ATB Regulation, ATB has the power to enter into credit default swaps with a view to  hedging its geographical credit concentration.  This provision was put in place in 2004.  Section 10.2.3 of the Regulation reads:

“Notwithstanding subsection (1), ATB may enter into credit derivative contracts with financial institutions in Canada that have at least one of the credit ratings referred to in the guidelines referred to in subsection (3) in respect of residential mortgage loans secured by land situated in Canada for the purpose of diversifying
its geographic concentration risk.”

It is not clear that ATB has availed itself of this capacity during the recent downturn or whether management attempted to avail itself of these risk management techniques, but  determined the cost to be prohibitive. (A word search of “credit default swaps” turned up only a reference to the restructured ABCP holdings not residential mortgages.)

Turning to loans past due reported over the last 11 quarters (chart below), we see that arrears are growing and more steadily up to one month and over two months. The total amount reported has almost doubled in nearly three years which is hardly surprising. bank-assets-ab_3674_image001

The other large Alberta based financial institution engaged in residential mortgage lending is SERVUS Credit Union. The chart below illustrates SERVUS’s experience with loan payments past due over that past eight quarters.  Like ATB, SERVUS is seeing more payment arrears which have increased by 64 per cent over the past two years.


Finally, in early December a report by Equifax Canada on Canadian consumer credit trends observed  “Compared to a year ago, the highest delinquency rate increases in the country were found in Alberta, Saskatchewan, and Newfoundland….What we are seeing in Western Canada and Newfoundland would be of more concern if people in the two regions hit hard by the oil bust were also piling on a lot more debt and they are not, especially in Alberta and Saskatchewan.”  The agency reported that the average delinquency rate in Alberta (excluding mortgage debt) had jumped from 1.07 per cent to 1.47 per cent in the third quarter of 2016. Alberta residents continue to hold the highest average level of non-mortgage debt at $27,956   or 1.7 per cent higher than last year.

The recent Transunion report also shows that for non-mortgage debt, delinquency rates are rising. Alberta’s current rate of 3.13 per cent is by far the highest in the country.         bank-assets-ab_6708_image001


In summary, the banking industry continues to lend on the security of real property in Alberta. There is some evidence that individuals are less able to service debt and we are seeing more loans past due. The quotations taken from bank reports might be skeptically regarded as “bank speak” suggesting that everything is under control. Given the continuing challenges facing the provincial economy, it is probable that that banks and provincial lending institutions will be facing the dilemma of acting now before property values plummet to sell foreclosed properties or delaying with the prospect of an avalanche of distressed properties coming on to the market.


[1] ATB has also securitized some of its credit card receivables.  Such transactions provide ATB with a source of liquidity in an environment where deposit-raising has become more difficult for the Crown agent.

Bringing it all back home

Throughout 2016, there has been a nagging question mark at the back of my mind about the state of Alberta’s residential real estate market.  Why has this market held up so well when the economy has suffered two years of recession?  After 18 months of economic contraction, residential real estate has not cratered and housing starts, though at reduced levels, are still fairly strong at about 2,000 units per month. This series investigates firstly whether there is a “crisis” in the residential market, secondly what are the drivers of residential prices; thirdly the financial sources of supply for the housing market, and finally the prospects for 2017.

Part 1

Real estate markets, generally speaking,  meet the test of “perfectly competitive markets.”  Perfect competition means 1) a large number of buyers and sellers; 2) all buyers and sellers know all prices and attributes of the products being sold; 3) products are homogeneous- that is they can be substituted for one another; 4) no barriers to entry or exit;  5) well-defined property rights -in other words no ambiguity in the contracting process; 6) each participant is a price taker; 7) buyers are rational (utility maximizers);  8) sellers seek to maximize their profits; and 9) no transaction costs.

Image result for Homes for sale in AlbertaOne can see from the list above that the conditions of a perfectly competitive market need to be relaxed. For example, buying or selling a house involves paying significant commissions to transact a sale (real estate agents and lawyers). Certainly other conditions are not satisfied such as full information and the presence of dominant players (both agents and development companies and builders).

Building starts Before exploring the key drivers for the housing market, let’s go back to the premise that the housing market has been resilient.  The first chart illustrates a downward trend of housing starts over the past four years with a peak in June 2014 (ironically as oil prices began their descent).  The chart shows a clear delineation between housing markets in 2015 and 2016.  By 2016, new housing starts were reflecting a general slowdown. However the levels were still about 20,000-25,000 per annum-not the recessionary levels seen in the period of July 1983 to April 1991 which saw only two months where starts reached over 1,000 per month. Still, according to CMHC’s Market Outlook for [calgary-cmhc-outlook-fall-2016 ] released last fall, housing starts in 2017 and 2018 are expected to be on par with 2015 and the unsold inventories of single detached homes are below the 10-year average. However, unsold condo units have tripled over the past year and in the first eight months of 2016, 76 per cent of units were absorbed at completion,
compared to 91 per cent during the same period in 2015. This will create stress in the construction, development, and finance sectors. Forecasts in the Calgary report are all premised on the hope that “oil prices will improve.”chart-in-microsoft-word_7405_image001

A crucial difference between then and now is that interest rates are significantly lower today (Over 10 per cent versus under 5 per cent).

Housing Prices As far as resale prices are concerned, prices, according to the Teranet-National Bank National Housing Index™ , have fallen slightly over the past year.[1] In Calgary house prices persisted in their rise from the commencement of the oil price rout  in June 2014 to peak at 188.35 in October 2014, then approximated the same level the following September.  hpi_12_23_2016nov-2016_21458_image001In Edmonton prices peaked in May 2015 at 184.24 and have remained remarkably stable declining to 180.34 in November 2016.  In a similar vein, the Calgary index was 180.99 in November 2016. Indeed the Index for both centres is eerily flat over the past year. It is as if the market has been frozen for a year with sellers and buyers remaining on the sidelines. But this is not the case since the number of observations in the data series has not fallen dramatically in either city.

As the next chart shows the number of observations have increased.  This may be due to the nature of the index that requires at least two sales of the same property to be included in the Index’s calculation. Naturally over time, more properties will be included in the index.hpi_12_23_2016nov-2016_30438_image001

Another source of relevant information is the monthly information published by the Calgary and Edmonton Real Estate Boards. Year to date listings (to November) in Edmonton have fallen somewhat from the previous year and sales and the dollar value are down from the peak in 2014.  The month-end inventory for November 2016 is the highest in the past five years signaling that sellers are not prepared to sell significantly below their offer price. The value of year-to-date sales in 2016 was $6.4 billion compared with $6.9 billion in 2015 and $7.6 billion in 2014 ($ 6.5 billion- 2013; $5.8 billion- 2012). Thus, the market is experiencing a downturn but this is yet to be reflected in a material decline in selling price.[2]

The Calgary Real Estate Board reports sales activity in the Census Metropolitan Area in 2015 and 2016 below the 10-year average.[3]  Inventory levels are trending higher while house prices have fallen 15 per cent from their peak in late 2014.  While these numbers portend a shake-out in the market, they are not (yet) signs of a deep recession as experienced in the 1980s with mortgagors walking away from their homes since they had no equity left.

 Rental markets

The next chart illustraImage result for Apartment rentals in Albertates the vacancy rates for rental housing in Alberta, Calgary and Edmonton from  1992 to 2015. In CMHC’s outlook prepared in the fall of 2016 (after 30 September 2016), the federal agency made headlines when it reported that the

vacancy rate in 2016 was eight per cent, (the highest level in 25 years) and would fall to 7.5 per cent in 2017 and to average 6.5 per cent in 2018.[4] Rental rates are forecast to fall from about $1300 per month for a two bedroom apartment to $1260 in 2017.

cmhc-rental-v2_10831_image001Edmonton CMA’s vacancy rate was estimated at 7.1 per cent in October 2016.[5]  The rise in vacancy has been driven by “elevated construction of rental units over the past three years.”  The growth of construction was particularly pronounced outside the City of Edmonton.

In 2016 the Edmonton rental market experienced an annual turnover rate of 35.8 per cent. Turnover rates were highest in newer complexes with higher rents, suggesting strong tenant motivations to move to save money.  In 2013, vacancy rates in Edmonton were just over 1.2 per cent falling from a 4.5 per cent in 2009. Rental rates were down by about 3.5 per cent in 2016 compared with 2015.

So is there a housing crisis?  The short answer is no.  Prices have held up surprisingly well and there has not been a collapse in the new supply of housing. However we should not be complacent for three main reasons: 1) interest rates are rising and even increases of one per cent means mortgage payment increases of 15 to 40 per cent; 2) aggregate incomes to incur more debt and to service debt will continue to fall as income support programs and severance payments run out and as more full-time jobs are replaced by part-time employment or “contract” work; and 3) rental rates are falling suggesting a balance in favour of renters as more supply becomes available and as disposable incomes fall.





[1] The Index is unique in that it uses a methodology of paired housing sales. “The Teranet – National Bank House Price Index™ is estimated by tracking the observed or registered home prices over time. Properties with at least two sales are required in the calculations. Such a “sales pair” measures the increase or decrease of the property value in the period between the sales in a linear fashion. The fundamental assumption of the constant level quality of each property makes possible the index calculation but imposes difficulties in selecting (or filtering) those properties that satisfy it. This difficulty arises from the lack of information about the property, and only the amount of price fluctuations versus time may provide an indication on possible changes in the physical characteristics of the property or non-arms-length transaction. Such properties may not be included in the estimation process. For the Teranet – National Bank House Price Index™, all properties that have been sold at least twice are considered in the calculation of the index; this is known as the repeat sales methodology. Properties that are affected by endogenous factors are not considered in the estimation. These factors may include: a) non-arms-length sale, b) change of type of property, for example after renovations, c) data error, and d) high turnover frequency (biannual or higher).”

[2]  p. 19.

[3] CREB Calgary Regional Housing Market Statistics, November 2016, p. 8.




Housing prices remain relatively stable despite significant job losses.  New housing permits have fallen but not precipitously which is surprising given the ongoing job losses.

Below is a chart that shows the number of building permits issued for Alberta dwellings since 1970.  This monthly chart shows seasonal volatility.  The plunge in permits from the late 1980s to the early 2000s is evident as well as the booms in the early 1970s and the early 2000s.

Building permits_2977_image001

Source: Statistics Canada- Table 026-0001 Building permits, residential values and number of units, by type of dwelling, monthly(1) Only municipalities that issue permits.












Fallout from a tumbling market16-10-16 GM





Calgary home sales slide to decade low2-3-16 GM

Housing Prices hold

Calgary buyers play guessing game7-5-16 GM

Condo sales in May 3-6-16 EJ

Housing prices holding, but more hit market4-6-16 EJ

Housing starts fall in March16-4-16 EJ

Oil slump dampens Calgary housing market23-4-16 GM

Done Deal-Tuscany Calgary18-6-16 GM

Real estate sales in Edmonton down in June, prices stay level9-7-17 EJ

Done deal Calgary Copperpond Road9-7-16 GM

Done Deal27-8-16 GM

City home prices holding steady3-9-16 EJtable1_en_calgary_w_16850_image001


cansim-0260006-eng-4460464401008249672Building permits_5491_image001

Edmonton House prices steadyHigh loan to income mortgages8-7-16 GM