Getting behind the real-estate stats

GETTING TECHNICAL There’s more than meets the eye, says Bill Carrigan

have used this space to promote

the inclusion of commodities, or “ hard” assets, such as copper, corn and silver into a portfolio. Hard assets would offer a degree of diversification from the usual collection of “ soft” assets such as Canadian Equity ( large and small cap), U. S. and International Equity, Canadian bonds and T- Bills.

Real estate is a good example of a hard asset that will offer excellent diversification because of its lack of correlation with equities.

This point has not gone unnoticed by two of Canada’s largest asset pools: CDP Capital ( the Caisse de dépôt et placement du Québec) manages one of the 10 largest real- estate portfolios in the world; and last year OMERS ( Ontario Municipal Employees Retirement System) held 10.8 per cent of its $ 36.2 billion portfolio in real estate. The problem with real estate is its poor liquidity compared with equities

Iand commodities or futures contracts that can be sold in seconds. News flash: 7,000 Plus! September Home Sales Break Record.

It appears that the current “hot” housing market is still alive and well, according to the Toronto Real Estate Board. In a recent publication the president states the Toronto Real Estate market continued “ its record breaking ways” in September, with 7,326 sales through the Toronto MLS system. The September sales figure is up 11 per cent over last September ( 6,588 sales) and with 66,480 sales year-to-date, 2005 is within a single percentage point of the 2004 nine-month total ( 66,668). The president went on to note that prices strengthened considerably in September, with the average rising 5 per cent to $ 338,267 over the August figure of $323,255. In addition, the year- to- date average of $ 335,267 is up 7 per cent over 2004.

I can see the president is not a student of technical analysis. Can you spot the “ technical” problem with all those bullish observations? It has to do with the price ( average price) and sales ( transactions or volume) relationship. We know the 12- month rate- ofchange of the September sales is 11 per cent. We are not told the 12- month rate- of- change of the September- toSeptember price change. The president has cleverly skipped the data by giving us a year- to- date price average: up 7 per cent over 2004. So now we are comparing apples to oranges. To further confuse the sales analysis we are given the one- month August- toSeptember price change but not the Augustto- September sales change. The reality is that while the onemonth August- to- September price was up, the August-to- September sales were down. Also while the 12- month rate- of- change of the September- toSeptember sales number was ahead by 11 per cent, the 12-month rate-ofchange of the price number was up only 5.4 per cent. Even worse, the one- month AugusttoSeptember price advance of 4.6 per cent was accompanied by a bearish 2.3 per cent drop in sales. A technician wants to see a big volume ( sales) increase accompanied by a big price increase in order to “ confirm” the advance. Our chart this week plots the monthly closes of the average GTA single- family home price as supplied by the Toronto Real Estate Board above unit sales OnBalance. The On- Balance unit sales represent the cumulative monthly sales, or transactions adjusted for monthly price changes.

In a healthy uptrend in prices, we need the sales or volume On- Balance to also trend upward.

In early 2004 we saw some negative divergence when the price hit a new high and the sales On- Balance peaked at the prior 2003 peak.

In early 2005, we saw negative divergence for a second time when the price hit another new high and the sales On- Balance peaked at the prior 2004 peak.

This negative technical condition suggests the big September rebound could be a sucker rally or a “ bull trap,” wherein bullish investors are trapped when prices turn lower.

I have placed a horizontal line on the price plot to identify a support level that is currently in the $ 324,000 price range.

In order for the bulls to have the upper hand ( a seller’s market) we need to hold at this level. If over the next few months we fall under the $ 315,000 level, the bears get the upper hand and we revert back to a buyer’s market. No flipping allowed. Bill Carrigan is an independent stock-market analyst. His Getting Technical column appears Sunday. He can be reached at www.gettingtechnical. on the Internet.