View from Bangalore

As I had alluded in the past, the severe cost escalation in pretty much everything in Alberta strongly dissuaded us from expanding our business in Alberta. Even after 20 to 25 per cent fall in housing and real estate prices and significant jump in unemployment, the Alberta advantage has not yet been restored. That is, Alberta advantage for companies that are not dependent on their physical presence in this province. Just 5 years ago, Dell had chosen Edmonton as one of its favored low cost locations. And just 3 years hence, it closed its operations.

So I’ve been visiting India for the last several weeks trying to establish our back office here. Despite all the bullish talk of the Indian economy’s miracles and the sustained 7 to 8% growth for decades to come, the mood here is somber. There is massive overcapacity in pretty much everything. The commercial real estate is massively over built, all in the anticipation of thousands of companies that would want to setup their back office operations here. Not that many companies have not done so or won’t do in the future- it’s just that the actual demand has been way less than the projections. Not unlike the real estate in the US, Spain, UK, China or dare I say, Alberta. The loose credit policies of central banks worldwide have transformed normal economic booms into massive manias. First the technology boom, which was a genuine economic phenomenon was masqueraded as the beginning of a new golden age. It was indeed golden age, but for those who were early to cash out their stock options and for the investment bankers who fooled the public by underwriting crap IPOs. Similarly, the genuine investments in Alberta’ oil sands and energy industry should have resulted in some uptick in the real estate. Instead, the massive credit bubble worldwide created party times for somewhat different constituency this time- home owners, flippers, mortgage brokers and of course the investment bankers.

Back to Bangalore. This place seems over populated, with roughly a quarter of the Canadian population in an area less than a fifth of the GTA. Everything should be in demand here, especially housing. Except for the fact that the current inventory of housing stock is unaffordable to majority of residents, even with generous financing. Software engineers, who were once princes and princesses of the ‘silicon valley of India’ are no longer the most desirable matches in the ‘marriage market.’ Not that the firms here don’t employ hundreds of thousands of such professionals, it’s just that the way too many of these professionals have been trained than there is real work. Once again, over capacity.

We found space in a world class business center at 40% of the rate that was given to customers last year. The reason- a major financial institutions fired its 150 employees who used to work in that office space. The business center is now desperate for any customers, and little fish like us have finally found the ‘value’ we had been seeking all this time.

On the employment front, a few ads on the popular job posting sites have yielded hundreds of resumes. Initial interviews have been fairly positive. If we are successful in hiring good candidates, we’ll be able to get 5 good people at the cost of 1 good equivalent Canadian resource.

We’d have loved to do this in our home province but alas, the Alberta economy has been severely disadvantaged to anything that is non-Energy based. Our competitors have all moved to lower cost locations and if we want to survive, we have no option but to do something similar. We figure that rather than closing down our operations entirely, it's better to remain incorporated in Canada and at least contribute something to the economy here in the form of taxes.

Before the reckless oil sands developments severely impacted all other non-dependent industries in Alberta, the province had a good shot at competing in so many industries. Housing was cheap, labour was skilled, high quality and affordable. A single wage earner making $50k could live a decent life since everything was so cheap. But all that is long gone. Once the inevitable end to resource driven boom occurs (just look at the UK), what will our economy be like? But who has the time to think about 10 or 20 years down the road when the priority for everyone is to milk the current setup for their own benefit? The recent rerun of the housing mania in Alberta and rest of Canada proves that unless it hits people directly, they won't learn anything from it. And that too, if they are really intelligent and observant.

We tried our best to not relocate our business out of the province. But the choice was simple-relocate or perish. Thousands of more businesses in this country will face similar choices in the coming months and years. The answers won’t be very healthy for the long term prosperity of our country. But who has time to think about all this when you can get rich just by buying and selling homes to each other?

Weekend Open Thread

Happy days are here again....

• Loonie up to 91 cents and change. Will we see parity again soon? Who knows. Ontario and Quebec are going to be in more trouble and manufacturing hit again.
  
• Oil up to $66. Are we going to see $100 oil again? Who knows. In any case, we sure seem to be running out of space for holding the excessive oil produced during the last several months.
  
• Up is down, good is bad, bad is great....fundamentals don't matter. Once again. We do know how this ended the last time, but everyone (Banks, Hedgies et.al) is back in the game with a vengeance, supercharged with the massive guarantees given by the governments of the world and inspired by their dedication to do 'good' to the world.
  
• And it's not misplaced. If they can all succeed in restarting the commodities bubble, so many problems will be solved. Like all those unemployed engineers and tradespeople in Alberta can start working on the oil sands again which will help energy companies produce more and generate more tax for the governments at all levels. Never mind the drag higher oil prices will have on the rest of the world and wilt the 'green shoots.' And we seem to have forgotten how the oil bubble ended the last time. But that was all so last year.
  
• The local real estate seems to be doing just fine again. For all those bullish on real estate, the only thing that matters is- but prices are going up and the sales are strong. This is all bolstered by the arguments specific to a locale- oil, weather, diversified economy etc. We all know how this has ended at other places but given we never completely fell down the cliff and miraculously got a lift on our journey downwards has revived many a faltering spirit. May be we are really different here. As many people would say- this is the last chance to get into the Alberta's faltered real estate market. Sigh.

Nortel Building Bought by City of Calgary

Some of you who are looking at commercial investments in future might have caught this one. The city of Calgary bought the Nortel's calgary campus for around $97 million.
Is it a good value? The city of Calgary assessed the property at around $125 million....so the city is saying that for commercial properties the actual value should be discounted by at least 20 per cent?

And you might notice that I've implemented a new comment system. It will make it much easier to get rid of the trolls and hopefully have a few moderators.

Guest Post: ARE THE CALGARY HERALD & CANWEST CORP ARE PAWNS OF THE "REIC" ?

This post was submitted by our regular commentator ...."Carioca Canuck". Guest articles are welcome and can be submitted to albertabubble@gmail.com

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This article reflects "my personal views and opinions" and expressed under the charter and its posting here is not a defacto endorsement by the blog owner nor GOOGLE.



Just what is news anyways ?

The collapse of a government, the egregious murder of a citizen by a criminal, the theft of money from a restaurant, the opening of a new neighbourhood business or a school, a proposed increase in civic taxes, transit parking being converted from free for the day to $3.00 a day....etc.....this is what is commonly referred to as news. Hard news. The Calgary Herald, and the other "newspaper" minions of Canwest Corp, in addition to the Canwest GLOBAL TV stations call themselves a news organization, but today, as they have many times in the past, they have crossed the line once again. Using the term "news organization" when describing this company should be taken with a grain of salt, no wait, you're probably going to need a dump truck full when you are done reading.

All over this continent the print media is losing revenue dramatically, companies are collapsing outright, employees are being laid off in record numbers, assets are being sold to fund operations, and that staple core of the print media's revenue, the advertiser, has run for the hills with their wallets firmly in hand, wherein they have found that the greater consumer reach and lower cost of the internet to be to their greater benefit.

So where does this leave The Calgary Herald, other newspapers, it's TV stations and their owners Canwest Corp ? With a .30 cent share price, you guessed it........like many other "news organizations" they are on their death bed in the opinion of some analysts, potentially facing bankruptcy and struggling for revenues. So what is a "news organization" with the power to spread whatever message they wish, as no one controls what they say or print, to do in these tough times whilst trying to stay afloat ? Grow revenues of course !! When I was young, I tried to make a deal with the devil. I said "Satan give me $1MM and a Lamborghini and you can have my soul when I die"........well, I never got the money or the car, so IMHO on that day, the devil did not exist. But today I am of the opinion that there is a devil....and it is the "Real Estate Industrial Complex" or REIC. The REIC is comprised of the media, home builders, real estate sales organizations, lending institutions and the government. So, is Canwest making a deal with this devil, or have they already done so ? Let's see shall we........

In the weekend edition of the Calgary Herald, you will see an abnormally high page count of advertisers from the REIC. The Herald's usual Saturday and Sunday editions which on some days are comprised of 120 + pages have had between 40-50 full pages of RE specific advertising over the last two years. In fact I have commented on this point some 5 + times here on this blog over the same period. Now what is wrong with that you say ? Well, nothing quite frankly, newspapers have to sell advertising to stay in business in order to print the "news". But the wheels at the Calgary Herald have fallen off the wagon some time ago.

Kathy McCormick is one of the real estate writers for the newspaper. I am not going to criticize her personally for the content of her articles, for if she didn't do what she was told to do, she'd probably be pouring coffee for Timmies. Here is her latest scribe, entitled "Dream Within Reach" in which she waxes eloquently about how record low rates, dropping housing prices, etc, etc, you know the story, make it a perfect time for first time buyers to pull the pin and figuratively blow themselves up financially down the road. Read the article closely, and you'll note that the Calgary Herald is going to do a 6 WEEK series on this phenomena !!!! Geesh......I wonder how much that cost the REIC ? Did any of you who read it see the disclaimer "ADVERTISING FEATURE" posted prominently anywhere in the text or heading of this "news" article as well ? Didn't think so. They won't even let us leave comments as that feature has been disabled for this article......ROTFLMAO !!!!

And then you have the eternal "permabull" Calgary Herald writer Marty Hope. He also can't be faulted for what his pen, or keyboard puts forth now can he ? After all, delivering the Herald as an unemployed writer would be most humbling. In the same edition, he gets his turn to glibly inform us of the power of that mysterious naive and clueless milquetoast......the first time home buyer. http://www.calgaryherald.com/business/real-estate/Dream+Within+Reach/1464293/story.html He appeals to them mercilessly, as they are the only group that can save the REIC from total and utter collapse. Again though, you see no "ADVERTISING FEATURE", nor comments section, indicating that this hyperbole must be the gospel truth and is not to be decried by those pesky basement dwelling renters.

Now Derek Sanker from the corporate parent CANWEST "news" service has his turn at bat in the same edition as well. "Paul Anderson and his wife Sue felt like they could only dream of home ownership. Much to their surprise, and after some negotiating, the couple was approved. "I looked at my wife with a tear in my eye and realized I might get a house," says Paul, 42." Please excuse me while I get a towel.......not for the tears, for the puke on my keyboard. Absolutely positively none of these articles are "news" or even "news worthy" in the clearcut journalistic sense of the word......none of them have "ADVERTISING FEATURE" posted cleary, nor a comments section. And here's why........

Mario Toneguzzi ("toneguzzi" is Italian for pile of gibberish) recently posted another "news" article for the Herald about how buyers are coming back into the market and raving about how sales have gone up over last month. Doouuh !! Look at the historical patterns and you'll see that happens every year at this time. Yet in this "news" article they left the comment feature on, and that is where you'll find the most accurate and digestible information about the state of Calgary's real estate decline. But it pisses off the REIC when they do that.......bloody basement dwelling renters again with their opinions.....heh.

So what do you, Bubble Bloggers, have to say about the Calgary Herald and the Canwest GLOBAL news organization ? Are they in bed with the REIC ? At $10,000 + per full page of Calgary Herald advertising is the REIC the only thing keeping them afloat ? While you are formulating your comments which I eagerly await, I will remind you of one thing beforehand. RE/MAX is the sole sponsor of the Canwest/GLOBAL TV evening "news"............

Analysis of New Home Price Index

While some people are celebrating the spring with the signs of the shoots, bottoming of the real estate market, rebound in oil prices, it could just be another case of triumph of hope over reality. Patience is the name of the game and those who are sitting without any interest in the markets can afford to wait out. There's no urgency. There's no rush.
The fluctuations in median/mean prices of new homes in Edmonton and Calgary could just be noise though the incontrovertible fact is that prices have been falling for almost 2 years now. That is if you bought anytime in 2007 or 2008, you are in the red.
The new home price index in Alberta gives an interesting perspective as it represents a more controlled set of sample space. In the index, they get information from the same representative builders/contractors who sell largely same/similar homes.

"The New Housing Price Index (NHPI) is a monthly series that measures changes over time in the contractors' selling prices of new residential houses, where detailed specifications pertaining to each house remain the same between two consecutive periods."

The new house price Index is down to 230.8 in Calgary from a peak of 248.2 in 2008. The Edmonton index has fallen more rapidly to 213.1 from a peak of 236.2 in 2008. Please not that the monthly peaks could be higher than the values I have as I did not want to give $6 to StatsCan for getting the montly data that should really be freely availalbe. And if that is the case, then the over pricing will be even more spectacular.

Given the humble readings of 137 and 147 for Edmonton and Calgary in 2005, one can easily see the 'bubble' there. From 100 in 1997 to around 150 took over 8 years, yet the index gained another 100 points in less than 3 years. And for all the arguments about increasing population etc, Alberta's population grew just as fast in 1996-2001 than it did between 2001-2006.

Why did the prices rise so much and so fast? For the same reasons it rose in just about all parts of the world. Easy credit. Speculation. 'Real Estate always goes up' mantra.

That game is over now, except in the minds of a few who are invested heavingly in real estate, either via vocation or investments. For us, we are losing our affinity to this province as we don't work in the Energy sector and our small business is taking off in a big way. As and when we decide to expand, we don't want to be based in Alberta for reasons we witnessed in the last few years. So we really have no interst in the market, except as an observer.

On a broader scale, what we are seeing now is a desperate attempt to revive the 'decoupling myth'. That's why the rush to commodities currencies, oil and everything else. OPEC has so far cut about 3 mbpd production and yet we keep on talking about supply constraints. Everyone (banks, hedge funds etc) is trying to play the same old game(lower dollar, higher commodities, rising stocks) because this is the only game they know. But alas! the numbers tell something else. Chinese exports are still falling hard (down 23% YOY) and it seems most of the stimulus China is providing is going into building more new factories even when the power consumption and utilization is all going down in the existing factories. But that's the only thing the Chinese government can do since it doesn't have any banksters to bail out.

Returning to the index of new home prices, if the prices were to keep pace only with inflation of 3% per annum, then we would see price index of roughly 143 or so in both Edmonton and Calgary, last seen in 2005. I recall that several long time investors who bought during mid 90s bust in Alberta sold in 2005 because the market was getting frothy at that time.

For a new home that is now selling at around $400k in Calgary, it's inflation adjusted price based on 1997 base of 100 should be $400*143/236 or around $242k. Remember, 143 is the inflation adjusted index based on an anuual inflation of 3% since 1997.
A similar home in Edmonton should sell for $400*143/213 or around 268k.

Which means, we are not even half way through the declines yet, assuming there's no over swinging of the pendulum to ther other side.

Entitlement and Delusions

The welfare queens and kings of Wall Street have already decided to start partying like it were 2007, never mind the trillions of dollars that have been forced upon taxpayers to keep these toxic dumps afloat. But, the underlying chutzpah at these places is enormous, along with the natural sense of entitlement that accompanies it. So what if we screwed up, so what if our products were garbage, so what if our products add negative value; we are entitled to the compensation, because we need to have the 'best and the brightest.' If this is the cesspool you get by hiring the best and the brightest, I wonder what would mere mediocres have done?

The OPEC ministers sing the same tune saying that a fairly high price of $50 is not good enough and is 'undermining economy.'
The wizards of the government economy in Alberta are not too different either as they are borrowing in the hope that the recession will go away if they wait for long enough. It's the same sense of entitlement- higher commodity prices- irrespective of the the macro economic situation. Well, here's a question. If $50 oil and $3.5 natural gas ain't going to cut it in Alberta, what happens if the prices again halve from here on? Can someone say the definite collapse in the mid east asset markets and Klein style cuts in not too distant future. Natural gas btw, is now down to around $3.2 and likely to fall further. We have been tracking natural gas since January and its slow but steady decline from $5 or more to the present levels. What this is doing to the drilling levels in the province and corporate profits will be discussed in another post.

At a more local level, thousands of 'landlords' are wishing that the recession goes away. They can't/won't/don't reduce the prices that reflect the current market conditions and hope that the prices will bounce back to a level higher than the current values. Again, it's a strong hope and delusion, built on the underlying entitlement of 'higher prices' for 'my real estate holding'.
The economy has changed since 2007. Many companies are talking about a permanent and new 'baseline' for sales, production and consequent growth.
The economy of last few years was a mirage. It ain't coming back, neither are the prices of assets that were used to foment this mirage.
A lot of people, currently on EI and the governments willing to take on more debt will recognize that despite the loads of apparent green shoots that appeared in last few weeks, nothing fundamentally has changed. The economy still stinks, no matter how much perfume is applied to it to make the stench go away. It simply can't be fixed by a culture of entitlement, and believing in the ideas of unfounded hope.
Debt deflation is here and it can't be wished away.

Season of Hope, again

The warm weather of last few weeks along with the ferocious rallies in equities markets worldwide has germinated what had almost disappeared by the middle of March. Optimism is back, and not lest due to the President who got elected on the message of hope. Optimism and hope are very powerful emotions, especially when there isn't much else available. And they were on vivid display and action during the last month and a half. The calls of 'the bottom' have been getting more vociferous, even if more cantankerous for us. 

So what if the world buccaneered in an orgy of debt for 25 years, the  magic potion of more debt by the Fed and the treasury cured all the problems in less than 18 months. The credit bubble will unwind in just as short a time and everything will begin their ascent to the end of the universe again. Oil will rise again, and so will other commodity prices. Alberta will blossom again, and this time Fort Mcmurray trailers will sell for $1 million. 

And how can we forget the major upswing in home sales across Canada? After all, sales in March have been higher than in Feb and those in April will probably be higher than in March. Notwithstanding the fact that this is as much of certainty as the average temperature going up in these months as compared to previous ones. But since this is the season of hope, no one is supposed to question such basics. 

But hope, like greed is a very powerful emotion. It clouds judgement. It diminishes the capabilities of mind to contemplate simple 'what if' scenarios. Not the ones that reinforce your perspective using selective data from the last few years.  Scenarios such as- what would happen to Alberta if oil goes back again to sub $30 level for a long time. Or if natural gas goes below  $3. Yeah, but we were told that oil  will never go below $80. 

I was looking at the new MLS site the  other day. For some reason, I did not hate it as much as I hated it the first time I used it. I almost liked it a little bit. If we forget the average and median prices for a moment, I think we are back to the levels last seen in April  2006 for many of the property types I used to track. A starter shoe box in Edmonton North is down to around $275k, and unlike in April 2006, there won't be multiple bids raising the price but some aggressive buyers who will ask for 5 to 10 % discount. It's the same story in Calgary. In Calgary, the homes that were selling for(at least  listed for $430k) are now going for around $340k, plus the  possible discount. 

These are not pretty numbers and have got to hurt those who have bought in  the last three years.  For most of these people, they haven't paid more than 5% of their mortgage and  are clearly in the red after accounting for the closing costs etc.

But these are all inconvenient facts. Facts that have the potential to dash hope and cause despair. And anger, frustration and grief. And that is to be avoided at all costs, no matter what the reality. So, the alternate reality world in which only good news happens, and is reported must be created and cherished. 

Credit bubble unwind, global deflation, falling employment, falling commodity prices, falling aggregate demand, falling real estate prices, exorbitant prices for shoe boxes, tapped out consumers, massive over capacity, end of 40 year mortgages, heavy over consumption and subsequent lower corporate profits are mere distractions. The world has changed with hope. We can wish the recession away if have strong will power. If we want to it strongly enough. Like the Russian comrades who could wish the fall of the Soviet Union just by believing in the alternate reality.  

But we know how that ended.