Monday, December 31, 2007

Final thoughts for 2007

2007 is coming to an end and before starting the New Year, let’s do a quick assessment of the Alberta Real Estate situation. Let’s start from ground realities. It’s still a lot cheaper to rent than to buy. Our ‘flipper’ friends make it abundantly easy to rent a brand new house/condo at less than half the total cost of ownership.

Take this example:

Rent for $1700 per month (will probably rent for $1500 to good tenants)

“Brand New 1466 sq ft in South Terwillegar, 3 Bedrooms, 2.5 Bathrooms, 6 Applicance, Great Living Room and Dinning Room, with a Double Car Parking pad, located in the much desired, charming neighbourhood of Riverbend, close to all Shopping amenities, Parks and many Walking trails, easy access the 23rd Ave, Whitemud and Anthony Henday, no smoking and no pets, $1700/m plus util, move in any time, call Andy at 780xxx to view.”

Own for $399k.

Brand new 1466 sq ft in South Terwillegar, 3 Bedroom, 2.5 Bathrooms, 6 Applicance, Great Living Room and Dinning Room, Master Bedroom has 4 piece ensuite and walk-in closet with window, Rear Deck & Double Car Parking pad, located in the much desired, charming neighborhood of Riverbend, close to all Shopping amenities, Parks and many Walking trails, easy access the 23rd Ave, Whitemud and Anthony Henday, Immediate Possession, call Andy at xxx to view.

Based on the ‘ancient rules of thumb for real estate investing’, a multiplier of 100 to 150 of the monthly rent gives a reasonable value of the property. Even at the inflated $1700 rent and the upper end of multiplier, the value should be around $250k. There’s nothing ‘crazy’ about this valuation, less than 2 years ago, the same property would sell for around $225k or so.

It’s possible that the rents balloon quite a bit (actually QUITE a bit) to make this property a worthwhile buy.

At a higher level, Edmonton and Calgary have massive inventory for this time of the year. Edmonton will finish this year with around 7500 listings in MLS alone and over 3000 in Comfree. Of course, based on anecdotal evidence and the number of de-listings in the recent months, it’s very likely that we’ll see another ‘tsunami of listings’ in early 2008.

Calgary is no different with close to 7500 properties for sale in MLS alone with around 3000 in WeList.

Here are some points worth remembering:

  • It’s still a lot more expensive to buy than to rent same/similar properties.
  • Current Inventory is very high for this time of the year and will likely increase rapidly in the first few months of 2008.
  • A lot of sellers are counting on a spring rebound that may not occur.
  • At a global level, the credit crunch is taking its toll on the biggest banks and the lenders are becoming more hesitant to write ‘speculative’ mortgages.
  • Even as BOC cuts interest rates, mortgage rates are inching upwards due to a change in the risk appetite of the Canadian banks.
  • Prices are easily off by $50k for a good chunk of properties in Edmonton and Calgary. I was browsing Comfree this morning, and in Edmonton, there are tens of 2 bedroom condos available in the 175 to 250k range. Similar condos were selling in the $225-$300k range a few months ago. But just over 18 months ago, the same condos were selling in the $125k to $150k range.
  • There are around 12000 to 15000 properties currently under construction in Edmonton(pdf) and a similar number in Calgary that will be finished this year and released in the market. A good chunk of these might have been sold, but given the current levels of affordability, it’s very likely that most of these were bought by ‘flippers’ and up-graders.
  • Fewer people are moving to Alberta from other places due to high cost of living and the greatly diminished ‘Alberta Advantage.’
  • Despite the nearly 10 to 15 per cent fall in property prices in the last few months, affordability is still very low(pdf). Very few people can own the median property while earning the median income. It was not like this just until 2 years ago.
  • There are no fundamental reasons for expensive housing in Alberta. There’s plenty of raw material available nearby and almost limitless supply of land. The temporary labor shortage will be alleviated in the coming months and years. When that happens, housing prices will revert to their mean values.

If you are a first time buyer then probably a little bit of waiting will be helpful. It’s a lot cheaper to rent than to buy and of course given the above factors, it’s quite possible that the prices can easily tumble by 20 to 30 per cent in real terms over the next few years. If you are about to commit to a big mortgage (40 years?) and have waited thus far, it won’t hurt to wait for another year.

Finally, please keep the tone of comments civil. Personal attacks and redundant posts diminish the thoughtful contribution of other posters.

My best wishes to all the bulls, bears and bystanders for a healthy, productive and prosperous new year.

UPDATE:

Calgary numbers for December don't look pretty. Going by the old criteria for which we have comparable numbers are easily available, inventory is the highest for any month since late 2004. Sales too are the lowest for any month since November 2004. Thanks for quick compilation of stats Bob!

UPDATE2:

Edmonton numbers apparently look great! Everything is up, as per the numbers here. So this is perhaps the launching pad for a spring rebound. Weirder things have happened. But given the high level of inventory, noticeable reduction in sales volume and the reduction in the price per square foot numbers, I won't bet the house on it.

Wednesday, December 19, 2007

Negative Interprovincial Migration

It's official now. Fewer people moved to Alberta than those who left as per the latest release from Stats Can. Alberta had a negative inter provincial migration of around 3300, the first negative reading since 1994. From the release:

"On the other hand, the main engine of Alberta's demographic growth—interprovincial migration—has lost some of its importance. Alberta, which has led the provinces in population growth for the last few years, has started to lose more people to other regions than it has received.

Over the third quarter, Alberta recorded a net interprovincial migration outflow estimated at 3,300 people. The last time the province recorded a net outflow to other jurisdictions occurred in the fourth quarter of 1994."

It's hard to say if this is a definite pattern, but for the last few quarters, the net inter provincial migration number has been falling. This time it's into the negative territory.
I guess when you combine the second highest housing costs in Canada with high inflation and poor services, there isn't much of Alberta Advantage left.

The billion dollar question though is- If more people are leaving Alberta than coming in, what's going to happen to tens of thousands of properties that are about to be dumped into the market come 2008?

Sunday, December 16, 2007

The Biggest Delusion Revisited

One of the key things that bulls and bears alike must understand is that the recent run up in Alberta real estate prices had little do with the ‘oil economy’ of the province. It was more about real estate frenzy that gripped almost the entire world (Except Germany and Japan). It was more about cheap credit and gullible masses willing to go into massive debts in order to make quick profits. It was also about becoming house poor and getting into massive 40 year amortizations to somehow get into the market and not be priced out forever.

It was also about unscrupulous Realtors and Suzannes getting people to buy dilapidated eighty year old properties on Alberta avenue for $300k.

Not unlike the legions of day traders that were created during the tech bubble of 1999-2000.

Of course, in certain cases, like in Alberta, local supply and demand factors added fuel to fire. And we saw one of the most rampant price appreciation in real estate witnessed in the recent past.

But the market has changed since summer. Prices have been falling for the last several months in Edmonton and Calgary.

Denial is still fervently prevalent and the perma bulls do not hesitate to mock those who question their bullish perspective of "moderate correction is already done and we are set for ‘normal’ appreciation of 6 to 8 per cent till eternity.”

But not without reason. The reason unfortunately, is the same as has been used by all those who have ever bid up the prices of an asset to valuations far beyond its true value. In 2000, tech stocks were the rage because there was a ‘new paradigm’ of tech nirvana that the world had just discovered. For Vancouver, it’s the Olympics and the desire of every mortal to own a million dollar shack in the most beautiful city in the world.

In Regina and Saskatoon, well, the list of compelling reasons begins to shorten. But what was happening in Islamabad Pakistan (a third world country with no democracy and really low quality of living)?

The problem with most Alberta bulls (and those at all other places!) is that they do really believe that they are different. Truly different.

They conveniently forget that the same crappy $250k condos (down a good $50k already from the peak) were selling for around $100k in early 2006. They can weave all the ‘cock and bull’ stories they want to delude themselves, but nothing fundamental changed in the dwelling between 2006 and 2007. Yet the prices doubled.

As I’ve harped ad infinitum in the past, there’s no real reason why the prices should be so high in Alberta, incomes notwithstanding. In free, unregulated markets, cost of production ultimately determines the selling price. All the core ingredients for making a house-land, building materials-except labour are in abundance here. With the weakening in the oil and gas sector, more workers will move towards residential construction, easing the labor pressure. The prices are going to fall as they are now falling in almost all of the US and the UK.

What we witnessed in the world in the last five to six years was a global housing frenzy. We were amongst the last ones to join the party and even though ours was relatively of short duration, we did bid up our houses to near highest levels in the country.

But it is coming to an end. Worldwide. The credit cycle is now contracting. The ABCP problems in Canada haven’t been resolved yet. The Feds can offer all the money to the banks, but there is already a perceptible swing related to risk appetite.


On a different note, thanks to the offer for advertising this blog. Although you are free to go ahead and advertise this blog, I don’t really think there’s any need for doing so. Those who want to make the biggest purchase of their lives without doing any research on the condition of their market should learn it the hard way. A few people do know about this blog: last month this blog had 19,000 visitor sessions.

I do welcome the idea of guest posts from both bulls and bears. So far no bull has taken up the offer of making a convincing bull case. Please mail your post to albertabubble@gmail.com

Have a wonderful Christmas and happy holidays

Tuesday, December 11, 2007

Things are changing and people are now noticing....

I was surprised to read the latest column of Gary Lamphier, normally an Edmonton cheerleader and optimistic writer, in which he paints a not so rosy picture of Alberta economy.
Of course, for the 'bitter renters' frequenting this blog, this would not be anything new. The key things that we have harped on in the last several months are:
  • Fewer people are moving to Alberta. The people who are moving in are mostly temporary labor with no plans of buying any capital goods, leave aside any houses or condos.
  • Except oil sands, there isn't much positive to write about for Alberta's economy. Province's biggest contributor- natural gas industry-is in bad shape with massive under utilization of capacity.
  • Retail sales are flat after accounting for population growth and the highest inflation in our country. Of course, as the home prices fall, expect this to get a lot worse as the home ATM's become useless. Read the post I wrote on this earlier this year on how retail sales are the big driver of Alberta's economy. I think this boom was less about oil sands and more about housing and retail spending, not unlike the boom in the US.

The rental market is changing as well. Pretty much all the big guys in Alberta are offering a free December move in, along with a number of incentives. For all the talk of rapid rent escalation, there's now a desperate need of renters to pay the over sized mortgages of the landlords. Of course, the 20,000 or so multi family units under construction in Edmonton and Calgary will be dumped into these markets by this time next year and it's unlikely to improve the situation.

But for those who are contemplating buying in this market, the real fall hasn't even begun. Properties are still selling for 200 to 300 times their current rents. The rents must rise or the prices must fall. The rents aren't really rising anymore, so we know which way the prices are likely to go.

Of course, the continued problems with more banks in the US is unlikely to change the lending and risk appetite of the mortgage industry. Happy flippers in Western Canada will be in a buying spree come January 2008 and the very short 'bear market' in Alberta housing will be over.

Tuesday, December 4, 2007

Edmonton Prices Tumble....

Finally, a no spin release from EREB, at least in the headline. No more 'stability'. No more balanced market. No more 'reintroduction of prices.'
A plain and simple- Prices 'tumbled' by more than 5.5 % in November. However, they do express their 'surprise' by saying that prices tumbled even though the 'inventory' decreased. Of course, the inventory fell as it always does during this time of the year. But not too much.
Inventory fell by a mere 600 units as compared to October. Not too big a change when you have more than 8600 properties still on the market in the MLS system alone.
The YOY gains appear to be evaporating pretty quickly as well, and the median is up only 10% from last November's values. I expect this to move into negative territory in the next few months.
Prices have now been falling since June. Is this still the best time to buy?
Here's another chance for bulls (speculator, banker, mortgage broker, flipper, used or new house salesperson): Make a cogent case for why anyone should buy in Edmonton now. Also explain why prices will go up next year when we'll enter the new year with at least 8000 listings in MLS , over 3000 in COMFREE and more than 15000 properties coming for sale next year?
Once again, Edmonton is toast.

Thursday, November 29, 2007

View from Ottawa

Just returned from a ten day trip to Ottawa and Mid Atlantic US. Of course, home coming is not always a great experience when you have the worst weather of pretty much all the big Canadian cities.

Ottawa has the highest family income in the country yet prices are roughly 40% lower than those in Edmonton or Calgary. They have pretty strong employment, tones of recreational activities, milder weather, proximity to the US (to get all those cheap US cars, clothing, gas and what not) and bigger Canadian cities (Montreal and Toronto) and an economy that’s diversified (federal government and high tech).

The rental market there is soft, not unlike that of Edmonton in early 2005. Free Ipods with a yearly lease are a common incentive.

We saw an ad by a custom home builder offering homes for $156/sq foot that included a treed one acre lot at a location not too far from Ottawa. Perhaps, a location similar to Morinville. But Morinville, Alberta is so different, and that’s why the cost per square foot here is easily double of the values in Ottawa. Instead of getting a 2000 square foot home on a one acre lot here, you instead get a crappy 800 square foot condo for $275k.


This is not to say that Ottawa is fairly priced. But as compared to Edmonton and Calgary, almost anything would look fairly priced. The market there has been growing at a rate closer to the inflation rate, than to the 50% or so we witnessed during last several years here.


While visiting one of the show homes, the ‘new home salesperson’ told us that they are getting a lot of visitors from Edmonton and all of them were complaining about the high prices in Edmonton.

Just for perspective, home prices were a lot cheaper in Edmonton until about last year. 2004 average Edmonton price was around $179k, compared to Ottawa’s $235k.

But we know what happened after that when the prices in our city rose to around $350k at the peak earlier this year.

As I’ve harped several times in the past, there’s no fundamental reason for prices to be this high in Edmonton or Calgary. Both the cities can expand for hundreds of miles in all directions. There’s no shortage of raw materials. The only constraint-labour-will ease in near future. Of course, in the short term, people can believe in all types of fantastic stories, but in the long term reality eventually sinks in. And it might be painful for a lot of leveraged home owners and speculators in our province.

The price per square foot in Edmonton is a little below $300. It has been falling for the last several months after reaching a high of around $330 in summer. I expect that when all the dust has settled, this number will be cut by half. Or perhaps more. Even then, the prices will be higher than they were at the end of 2005.

I’ll post some observations from New Jersey in my next post.

Finally, thanks for the wonderful participation and commentary by all.


Friday, November 16, 2007

Weekend Open Thread....

Some thoughts for the weekend:

  • We are living in interesting times indeed. On surface, everything seems okay with the Alberta (Canada) market still showing YOY gains. Of course, the MSM conveniently forget to mention how prices have been falling in Alberta for the last several months. That's obviously going to change at some point in the next few months if the 'bubbleheads' are correct and the first YOY declines are registered. But then it will passed on as a mere 5% fall in prices after several years of gains. Statistics....you can make the numbers sing on pretty much any tune you want if you have a musician who is skilled enough.
  • Meanwhile, the hopes for new year rebound are fervent, even though misplaced. My flipper friends have all rented their places (at steep cash flow losses) and will sell them next year when 'market corrects.' It's not hard to understand this hope based on the behavioral pattern (just look at last 10 years or so), but certainly difficult to follow if it's based on some facts of the dismal science that touts supply and demand as its core pillars.
  • Why? Because unless the number of expirations increases very significantly, both Edmonton and Calgary will be entering the new year with over 10,000 properties for sale. That will probably be amongst the highest inventories for January. To put this into perspective, we entered this year with fewer than 3000 properties for Sale in each city.
  • Edmonton inventory hasn't budged much despite a big seasonality factor that should have kicked in by now. Current MLS inventory is over 8800 and COMFREE has a stubbornly high number of 3100 or so.
  • Meanwhile, the biggest money shufflers on the planet, see heightened risks of US recession due to the continued credit problems. But obviously, Alberta is an island of its own. We have oil sands. Credit crunch, no worries. US Recession. Who cares? Rising costs, no hassles.
  • And attempts to sell the Canadian variety of junk are failing miserably. The ABCP market is still frozen and in the last few days drew bids of around 50 cents to dollar. But this is only going to increase the risk appetite of lenders to shelve out more money for buying a 1200 sq ft mansion in North East Edmonton for $400k.
Thanks again for valuable links, comments and other interesting insights.

Tuesday, November 6, 2007

But we are different....

and fiascoes like those at Citibank, Merrill, Goldman and CIBC can't really affect the Alberta market. Or Canada in general. May be because, the chicken haven't come home to roost yet. I guess it's just a matter of time.
A satirical look at the whole mortgage meltdown has become very popular on the net and explains very simply how trillions of dollars were bet on the ability of 'some less than stellar' credit worthy individuals. And wall street partied on for last several years declaring mega bonuses to the bosses down to associates and secretaries.
A year ago if someone had questioned that solvency of one of the biggest banks in the world would become an issue due to mortgage problems, it would have been met with derision and contempt.
Can something similar to this happen in Canada, say a year from now? Can it happen at all? Or are we indeed so different that our flippers who own scores of properties really a lot smarter (or luckier) than their US counterparts. May be. Or our banks are really paragons of 'risk management' and moderation and do/did not venture into the unchartered territories? Only time will tell. But be on the watch out for any potential issues in the Canadian mortgage market as well. And for all those 'jealous renters' who are bubble sitting, don't keep more than $100k in any single account to ensure CIDC coverage. We are different, but the extent of speculation in our markets will become clear only when the music stops.

Closer to home, Edmonton numbers are out, and they are quite bad. Of course, those looking for silver lining and some final straws of strength will find that row houses' average price increased. But for everything else, median and average prices fell, as expected. Edmonton too is coming pretty close to surrendering most of its gains made during 2007. Average and Median prices are somewhere between the February and March levels seen this year. Which means all those who rushed out to buy during March, April, May....until last month are in the red.
And roughly 35% of Edmonton's inventory is vacant, which means the rental deals are going to get sweeter and prices will continue to fall.
Higher oil prices of course mean nothing due to the spectacular performance of the loonie. If government isn't raking a whole lot of royalty more due to higher prices, it's not very likely that industry is fairing any better. And natural gas of course is a different story altogether.

A few years from now when dust has settled, and inventory levels do not generate any curiosity amongst the masses, people will probably be astonished at what some of the Edmonton properties sold for in 2006 and 2007. And how thousands of people were sucked into buying properties at obscene valuations.

Thursday, November 1, 2007

March 2007 prices 'reintroduced' in Calgary?

Thanks as usual to Bob Truman for the stats. We are back to March 2007 levels by pretty much any statistical measure (average, median) for old and new criteria, SFH or condos.
The condo average price seems to be the only aberration to this pattern.

Putting things into perspective, prices have fallen for SFH by a whopping $50k since end of July. That's almost 10% drop in just 3 short months. And as per CREB, July was the best time to buy, as were August, September and most likely October will be. But will any agency that's supposed to protect the interests of its realtor members going to say "please hold on, this isn't the time to buy. Wait for a few months or may be a year and let air fizzle out of this massive speculative bubble.' I very much doubt it would ever happen.


The big questions:
-Are we going to see more falls in the next two months brining the total increase for 2007 to zero (and negative in inflation adjusted terms)?
-If this does indeed happen, are we going to see to see the first YOY decline as early as January 2008?
May be it's going to be a little bit longer.
On that note, here's another poll.

Wednesday, October 24, 2007

When houses don't sell

A friend of mine in the US Midwest bought a house at the peak a couple of years ago, paying close to $300k for a 2500 sq feet home in an excellent location in his city ( contrast that with where we are in Alberta right now ). They are doing pretty well, making combined income of $150k or so. They made a good down payment of around $100k when they bought their house. But of late, my friend hasn't been very happy with his job and says that he sees limited growth prospects with his current employer. Of course, in our past conversations, I've suggested that he relocate to another location for better prospects. He says he would want to do that, but just can't. Why?
Because his house wouldn't sell.

There you have it. The love affair with housing having all but ended in the US, house ownership is again becoming a 'lifestyle' decision . This is not an unfamiliar story to me. I've known several long time Edmonton residents who tried to get out of this place on a few occasions in the past (mid 90s) but couldn't. Why? Their house wouldn't sell.

Now when they say their house wouldn't sell, they really mean that it wouldn't sell for the price they paid for it or perhaps 20% less or more depending on the stage of the real estate cycle.
My friend can probably sell his house for around $250k right now, but that would wipe half of the down payment he made. And he must get an exceptionally good job offer at another place to really compensate for this loss. I doubt he's going to find that so easy.
I don't quite know why he bought this big a house when they really are a DINKS family. These guys are fiscally very savvy and easily save several thousand dollars after paying all their expenses. So the question of ownership brining forced savings is not applicable to them.
I think a lot of people buy houses simply because it has become the 'normal' thing to do. That is people expect that you'll buy a house when you make good money and can afford a down payment. Of course, I never agreed with this approach as it misses out on so many other fundamental factors like:
  • What are your long term goals? Are you working towards them? Is buying an expensive house going to prevent you from fulfilling these goals?
  • Do you like what you are doing work wise? That is do you really like the work you are doing and will be willing to do it for the next 20, 30 or 40 years (depending on the size of the mortgage), primarily for the sake of paying your mortgage?
  • Do you really like the place where you are buying? Or is it just because of the job that you are buying a house? What if you get a better offer at another place? That is, how strong are your ties to the place where you are buying?
  • Does it make senses to buy economically? Is renting a better option? What's the Price/Earning for the property you are planning to buy.
  • Are you comfortable in paying an amount almost equal to the cost of the house over a 25 year period to a bank in interest that did nothing more than creating money out of thin air?
  • Why are we buying a house? Is it for social status? Is it because everyone else in our peer group has? Have we considered all the associated costs?
Of course, people need to ask tens of other questions before going on to make the biggest purchase of their lives. It's funny a lot of people will 'waste' hundreds of hours of their lives clipping coupons and chasing 'better deals' for insignificant purchases but not get fully educated when spending hundreds of thousands of dollars on buying a home. It's sad, but true.
I know at least half a dozen people who have bought during last year or two in Edmonton and Calgary. I suspect they are likely to be long term residents of this province.

Thursday, October 18, 2007

The Lull before the storm

The financial crisis of last several months has apparently been tamed by the collective intervention of central banks. There is little fear, at least on the north of the 49th parallel. Everything appears to be in control. Except, for some candid admissions by the Canadian central bank that our big boys are facing credit squeeze. May be it's to build a case for clipping the wings of the soaring loonie and helping exporters by potentially reducing interest rates in the coming months.
Back in the world of real estate, Inventory is still piling up in both Edmonton and Calgary, despite hundred of listing expirations every week. Edmonton MLS listing count is just a couple of hundred shy of 10,000. Comfree has close to 3200.
The number of rentals is steadily rising too, and rental incentives are back, at least sporadically if not as a rule. Barring some major financial or geopolitical event, I don't expect a panic outbreak in the next month or two. It's possible that something dramatic happens and people get afraid, but this invincibility of real estate investment paradigm was built over a long period of time, at least in Alberta. If prices do not fall for ten consecutive years (1997 to present), it's hard to argue with Pavlovs that the eleventh year can indeed be very different.
A lots of hopes are hanging on January/spring/summer/{your favorite month} market turnaround. And why not? Oil is making record highs and there hasn't been any major investment curtailment announced by any company due to proposed royalty revisions.

So if the fundamental story is intact, wouldn't the prices resume their ascend to infinity pretty soon? The only problem is that the fundamental theory itself is fundamentally flawed. Yes, oil sands did play a small part. But that's about it. Easy credit, rampant speculation and the global housing mania were the bigger factors in driving up the prices. As and when the public mood changes related to these, the level of oil sands investment incoming to Alberta will be irrelevant. Sometimes it is just astonishing to see the asking prices for very ordinary shoe boxes in Edmonton selling for over $400k. What fundamentals dictate that prices of such houses be so high in area of such vast expanse and copious raw materials? Alas, there are none.
So come the 'favorite month of rebound' and the rebound does not occur, I expect a lot of 'forced landlords' to try and find an exit. May be it will be too late then.
Remainder of 2007 may yet be the best time to sell Alberta real estate for a very long time.

Finally, thanks again for wonderful discussion, information exchange and useful links. I'll be posting more frequently once my work load eases off somewhat.

Thursday, October 11, 2007

More of Same Old....

That is:
So what do all these suggest? Even though there's a realization that the market has changed, the hopes for a turnaround have not vanished. Yet.
That's why a lot of people are still renting out their 'second' or 'investment' properties for short term. In short, the waiting game is in play in Alberta and it is slowly going to cool down the fervency that once was the hallmark of Alberta real estate 'investors'.
Other than that, Seattle, the last bastion of 'real estate always goes up' (in the US) witnessed the first YOY drop and a significant drop in MOM prices in September.

Sorry for the long delay since last post;things have been super crazy at work.

Wednesday, October 3, 2007

Beyond Reason-It's a matter of faith now

I'll not get into the details of numbers of Edmonton or Calgary as they have already been discussed at Bob Truman's and Sheldon's blogs.
I am quite astonished to see the 'shouting match' going on between 'bitter renters' and the happy and prosperous flippers and investors on Shelodon's blog. We now have almost 4 months of data related to Edmonton and each month getting progressively worse than the previous.
Consider the following picture of Edmonton over the last few months:
Tsunami of inventory first hit Edmonton in June, followed by rapid increases in July and August. September still brought close to 1000 properties to the market, though the rate of inventory increase clearly slowed. The median and average prices have been falling across the board all this time. Sales volumes are down to historic lows. Last month was around 50% slower than September 2006 for Sales volume.
Inflow of people has reduced to Edmonton and far fewer people are coming to Alberta recently. Housing construction is still at multi year high and over 15,000 properties will be added within a year's time. Lending standards are tightening. Loonie is trading at near all time highs making a significant dent in industry and government inflows. Industry is threatening with significant investment withdrawals from Alberta if the royalty changes are implemented.
Yet, there are 'bulls' and 'investors' who fervently believe that this will have no impact on real estate price. After the current 'little correction' is over, prices will resume the normal ascend of 5 to 8% come January. Why? How?
The answer is in faith. A lot of sellers have this same belief, that's why a lot of them want short term rentals to carry them through to next spring when this 'correction' will be over. The only question all these sellers need to consider is: What if that does not happen?
What if the price decline accelerates after every month of waiting? What is there's an external economic shock?
If you are a buyer, consider this bull scenario- If the bulls are saying that the prices will rise only 5 to 8% from here on, what's the hurry to buy. By next spring prices will have merely (if at all) recovered to the levels last seen in May this year.
On the other hand, if you go beyond their belief and see what the macro numbers and the real estate fundamentals are telling you, this is probably the worst time to buy. If the prices fall another 10% by next spring, and more after the spring turn around does not materialize, how much will you lose? Especially considering the great rental deals that are available right now.

Finally, why does one argue with a real estate agent about the time to buy? "It's always a great time to buy and build equity." So what if equity is negative for the first 10 years of your 'ownership'.

Sunday, September 30, 2007

Alberta Realities

This is my 100th post. Over six months ago, when I started this blog, things were very different from what they are now. Real Estate myths that were firmly entrenched in the psyche of masses, though not completely debunked, but the faith in them has been somewhat shaken. My prediction is that Alberta real estate will become a questionable investment for the masses before the year 2008 is over. Not unlike what’s happening in the US.

Not only is the inventory in both Edmonton and Calgary at all time highs, but the sales volumes are at multi year lows for this time of the year. And while this is happening, there’s a possibility of significant pullback in investment by the industry. They could be bluffing given that their profits have increased over 3 folds in the last 10 years. Or they could be serious, but are merely trying to pin a political reason on spending cuts they would have made in any case.

As mentioned several months ago and repeated by a reader in the previous thread, I believe that for the average Albertan, the prosperity has been primarily due to real estate wealth. Yes, no oil or natural gas money for the masses. Perhaps a job in the oil patch for a few, but for majority, it’s just the boom due to real estate price escalation, not unlike any other bubble city of North America.

How else could one explain, real falling wages in these times? Despite all the hype of high wages in Alberta, the average wage has fallen in the last six years. "Despite the boom Alberta has become the province with the highest percentage of employed clients visiting food banks." Perhaps, they are all spending a good chunk of their money on housing costs.
The other day a friend was looking for a house for rent. The current tenants were leaving Alberta for greener pastures. Where to? Windsor, Ontario. Go figure. They say everything is so expensive here. And of course, the winter isn’t exactly a joke.

Here’s a summary of some of the reasons why I think this bust will be a lot worse than a lot of people think at this point.

-Massive run up in the values in the last 2 years causing significant deviation from long term average values for prairie cities.

-Extreme speculation in real estate market fueled by global credit bubble.

-No geographical constraints on expansion of any major city in Alberta.

-Significant disconnect between renal rates and carrying costs. Most properties are selling for 200 to 300 times the monthly rent.

-Dramatic erosion in affordability due to stagnant incomes and surge in prices.

-Global liquidity crunch making lenders more careful about who they lend the money to.

I think the primary reason anyone would want to live in Calgary or Edmonton is economic. If wages are stagnant, quality of living is poor, infrastructure is dilapidated, hospitals are full and real estate costs are lower only than in Vancouver, why would anyone want to move here? Or those who are already living here would want to continue to live here? Alberta became and still is a play ground of real estate speculators, a lot of whom are about to learn a pretty painful but much needed lesson.

A lot of people are often surprised when the boom becomes bust. This boom will be no different.

Saturday, September 29, 2007

Weekend Open Thread

Thanks to all of you for a wonderful week of useful discussion, informative links in the backdrop of a changed real estate market in Alberta.
Some thoughts for the weekend:
  • The rental market has changed so much that the nouveau 'landlords' are now calling potential tenants for viewings. This is based on first hand experience. Apparently, the 'investors' can't sell or rent these properties. And remember, these are still great times for Alberta, at least on paper.
  • Despite that, fewer people are moving to Alberta and net migration to the province has been way below levels seen last year. Yet, they are still building in both Edmonton and Calgary as if tens of thousands of people will be moving here every month.
  • An interesting theory challenging 'peak oil'.
  • Inventory continues to climb. Comfree in Edmonton has stagnated at around 3100, while MLS continues to grow and is now reaching around 9800. Calgary is pretty much the same with over 12,000 properties for sale.
  • It still makes no sense to buy. Typical properties are selling(or not selling but on sale for!) for 250 to 300 times monthly rents. This is despite the 'massive' increases in rent and other positive factors in Alberta.
  • If you go back just six months and what were discussing here, or to Calgary Contrarian site before that, you'll find that it's playing out pretty much as we had all expected. It's a classic bubble in Alberta, although a more fragile one, as compared to the one in say Vancouver. And it is not unexpected. Prices went up by over 100% in so many cases in less than 2 years. And now when they are falling, a lot of people are shocked. Expect this shock to multiply several folds when the January/Spring/Summer turnaround does not arrive.
  • Why do people call the bears as pessimists? While reading comments on Sheldon's blog, I was characterized as a pessimist. Why is that the case. Is hoping for lower prices being a pessimist. We all are very happy when we experience a drop in prices of things we might buy. As per the Austrian school, prices of goods and services should fall in an economy where sound monetary policy is in place and productivity is improving. Yet, we continue to experience modest central bank created inflation in normal times. But in times such as these, when real estate or other bubbles are created to fuel the economies by injection of consumer spending and debt, the masses are actually robbed of their wealth, with very few people actually even realizing the bigger story. They are too busy participating in the buccaneering of cheap debt, flipping and making money using their 'investing talent'. On the human side of it, a lot of families are still cramped in 30 year old townhouses and they would love to move to better places that are more affordable. Hoping that they can get a better place to live in- Is that pessimissm?
  • Have a wonderful weekend everyone!

Monday, September 24, 2007

What's happening to the rental market?

Of course, other than the still strongly perceived rental shortage in Edmonton and Calgary.
I keep a good look at the number of rental listings on both craigslist and rentboard.ca.
Rentboard used to have fewer than 100 listings for Edmonton just until a couple of months ago. Today, that number is over 170. Craigslist had about 40 new rental listings for Edmonton alone just today. Yes, in a single day. This does not prove anything statistically, but clearly, there's a lot of product in the market right now.
Of course, none of this should be unexpected to anyone who knows how this story played out below the 49th parallel, especially in the bubble states of Florida, Arizona etc. Based on the current Edmonton MLS inventory of over 9600 and comfree of around 3100, we have almost 13000 properties for sale. And the desperation is rising, as this 'investor' will take any offer- buy or sell. Perhaps, he or she did not really crunch any numbers before buying this property? Was this bought for cashflow purposes? for retirement? More like- "real estate always goes up and since everyone was buying, I said, what the heck?"
Add to the existing inventory of above 12 or 13k in both Edmonton and Calgary, the roughly equal number of properties that are still under construction, and what do we get? We could have the reintroduction of rental incentives and falling rents. The nouveau 'landlords' have to pay their fifth mortgage one way or the other. Something to partially offset their mortgage costs will be better than nothing.
But of course, this could all turn out wrong, and someone will clear this inventory off very quickly.
But here's the dumb question of the day: If a city in Alberta has over 20,000 properties for sale and most of them are vacant, how many new comers/migrants/immigrants does it take to clear off the inventory? And how many years will it take to do so? And will the builders stop building anything new during that time?

Tuesday, September 18, 2007

Market Review

A lot is happening in the market right now, but it's like the growth of the bamboo tree
and it is still under wraps. The changed nature of real estate market will be perceptible in the masses in the coming months. My flipper friend has already pulled off couple of his properties off the block. He is paying around $1000 from his pocket just to pay the mortgage and property taxes. There are probably thousands of 'investors' like him out there. And all of them fervently hope that the market will turn around in 3, 6 or 12 months. May be it will, but most likely it won't.

Inventory continues to grow in both Edmonton and Calgary. Inventory growth in Edmonton has slowed down though the total inventory is still at an all time high of around 9400 in MLS and 3000 in comfree. At the current rate of sales, that's almost 10 months of product. And that is not a great absorption rate.
Calgary is no better. In fact inventory growth in Calgary is now accelerating and the total inventory has reached an all time high. Look at this chart provided by one of diligent readers:
It's interesting that the 'bulls' talk about market fundamentals and think that the market is going to turn around because we have the all new, oil sands powered Alberta Advantage. Except for the oil sands story, Alberta has nothing at this point, except for an economy that's super charged due to real estate spending. Not unlike BC. Consider the following factors not related to the Alberta real estate market:
  • Natural gas market is dramatically different from the market of a few years ago. Prices are sharply down and the drilling activity is down by a third.
  • Loonie is approaching parity with the dollar, reducing revenues for both the industry and the provincial government.
  • US recession is a possibility though the extent and severity of its impact on Canada will have to be seen.
The buy versus rent option is still hugely in favor of renting. A lot of readers have posted comments doing the analysis of buy versus rent, so I won't get in there again. For the typical property in this market, it costs almost twice to buy than to rent the same property. And this is in a falling market- when a typical property is losing close to $500 every day. Why should anyone buy?
Here's an open challenges to the real estate bulls of Alberta-make a convincing case for buying in the market and I'll post it as a separate post on this blog. Send it to albertabubbleblog@gmail.com and I'll respect your anonymity if you so desire.
Of course, everyone will be able to comment on it as usual.

Tuesday, September 11, 2007

The waiting game is on

Not much going on, except for the same old....unrealistic expectations of sellers and nouveau landlords. Speculators and flippers would like to believe that they can ask for whatever they want so long as they can show a positive net worth contribution from their real estate holdings. Mark to market will be a slow painful process, both for speculators and bubble-sitters.
The mood on the street has changed. People are now talking of the 'old days' and unrealistic expectations. I've even heard from some people that 'this was coming!' I expect the chorus of 'I told you sos' to only get louder with every passing day that inventory rises in Calgary and Edmonton. Calgary is slowly approaching five months of inventory for single family homes while Edmonton is approaching the seven to eight months supply. Thousands of new condos and homes will be introduced into the market every month for at least another year.
I know a couple of people whose 'investment' properties will be ready this month. They booked these for 'investment' purposes last year. Now the day of reckoning has arrived for a lot of such people. These properties will need a buyer or a renter. At the prices they are asking for, they may find neither. But I doubt there are too many people who can pay multiple mortgages without getting hit financially hard. Especially when the average home is losing close to $500 per day in Alberta.
But all hope isn't dead yet. The expectations of a turn around later this year or early next year are still very high. Perhaps there will be a dead cat bounce for a month or two and pull in some more suckers into the real estate investment club.
Sorry for the less frequent posting. I'd like to post more often, but I've been crazy busy with work.

Thursday, September 6, 2007

What are these guys smoking?

...When they write things like this:
He compared home prices to rents, saw "little evidence of speculation" and found a "very low" risk of an Edmonton housing bubble.
Yes, this comes from one of the biggest if not the biggest beneficieries of high housing prices TD Bank: Economist Carl Gomez, at TD Financial Group, in the latest issue of his quarterly Housing Bubble Watch, has written that "Edmonton still remains the second most affordable" large Canadian city in which to own a home.
Oh really. How about Ottawa? Or Winnipeg? Or even a suburb of Toronto? May be Halifax isn't a big city either.
As had been strongly desired by the usual suspects, the media is going all the way to make everyone feel good. Yeah, the prices are down but so what, we are still up 27% YOY. Well just wait for a few months and the YOY will become just as useless.
But here's my take. You can go on and sugar coat whatever statistics you want for the masses. Ultimately, everyone is going to realize the true value of a shoe box home in the middle of prairie is not remotely close to $400k. They are all trying hard to bring the last set of suckers in who will get into $400k debt for a 30 year old bunglow for the rest of their lives living in a city with 2 month summer.

Wednesday, September 5, 2007

Edmonton is toast, Calgary is almost there....

...but the season of denial still continues. Despite record low sales, record high inventories, noticeable fall in prices, a lot of people still want to believe that this is a healthy, normal market. Wow!
And the seasonal trends witnessed during the last several years will return, despite the clear global liquidity crunch, an enervated oil and gas sector, clear signs of job cuts in the US and an overall change in the mood in the financial markets.
Why? Because we are in the very late phase of a bubble in which tales of stupidity woven by the 'vested interests' (media, banks, real estate agents, brokers etc) were taken to heart by thousands of speculators and 'investors' who could not see any problems with 50 to 100 percent YOY appreciations.
It's a theoretical possibility that someone will wave her magical wand and clear the still burgeoning inventory from Edmonton and Calgary in the next few months and give the much needed spring rally. I don't suspect it's going to happen though.
The fundamentals are totally aligned against this market yet both sellers and newbie landlords have totally unrealistic expectations from towns in the middle of vast prairie land.
But one cannot blame these real estate 'investors'. The real estate market bubbles take years to build and years to unwind. Unlike the stock market or commodity market bubbles which can wind and unwind more rapidly. Even more fundamentally, the 'mark to market' process for real estate is much slower and arbitrary.
After all, nobody can force someone to say that their property has fallen by 20%. People can continue to have delusions about their real estate wealth for long times after the paper wealth has disappeared. And this unfortunately prolongs a market turn around. Not that we are anywhere near that situation in my opinion.
Price declines will continue as lending standards tighten and the realization of a changed marked drives 'investors' and first time buyers away. There will still be plenty of knife catchers around though who will find that a detached 1200 shoe box in Edmonton has fallen by 25% and costs a mere $330k.
The shroud of secrecy around the monthly numbers will be lifted today and we'll get some more data to play around with. And I do like the idea of someone becoming a real estate agent for the sake of numbers. It's funny that in year 2007, a lot of organizations in our country still take pride in exercising authority by withholding information. I'm willing to chip in $100 to anyone who volunteers to become a realtor for the sake of giving us the daily/monthly numbers.

Thursday, August 30, 2007

Weekend Open Thread....

Thanks for a nice week of comments and discussion. Since things have been getting too personal and stories of 'this blog' and the 'other blog' are now taking too much time, I'd mention my perspective on this:
  • It looks like a lot of folks are taking things too personally and responding in a way that's not 'too classy'. Well, all I can say (and this is from a 'bitter renter'), chill out! It's just business. Or may be not. For me, despite the home having all the appeal and all that, I try best not to let the nesting instincts overpower the financial and career priorities. I know a lot of people get attached to their 'homes' or their 'investments', but a disciplined investor avoids such tendencies. Emotional attachment to assets is 'sinful' in not only the religious way, but also in the way of a disciplined investor. As I've mentioned here a number of times, this blog and my observations of the Alberta real estate market are merely a learning exercise. And may be a bit of community service by providing a forum for discussing ideas that are(or were) otherwise ridiculed by the masses.
  • A lot of people have talked about the 'vested interests' of 'anonymous bloggers'. Of course, I've a vested interest. And my interest is to learn about markets and develop further understanding of the real estate industry. May be later on, once the era of cheap credit is over and financial sense begins to prevail, I might consider investing in real estate. The learning from this blog and observations of Alberta market will be very helpful when I'm ready to make such a move. In the meantime, should you ask your bloggers/realtors about their vested interest, other than of course the fat commission they make from the hard work they do in selling your homes? Something like how many properties they own as investors and if they are likely to incur any significant losses if the real estate market goes south. I know it's a touchy issue and that's why I've never commented on these before, but I think there's been a lot of talk about the 'vested' interests. We've never bought anything in Alberta so far because our long term goals do not include living here. Simple as that. If it gets too expensive, we'll just pack our bags and leave. Thankfully, our livelihood is not dependent on the price of oil.
  • One more time, there's no need to take anything personal here. Some people make money, others lose. Those who lose money gain experience and learnings for later. May be some people who did not buy in 2004 and 2005 realize that they could have bought something when things were cheaper. Perhaps, those who bought in 2006 and 2007 will realize that renting didn't suck so much after all. In any case, in the bigger scheme of life and things, it should be a small factor. But when you are over extended and highly leveraged, it's easy to develop bitterness and anger towards those who don't necessarily share your perspective.
  • By now you must be tired of all this sermonizing. So I would just stop even though I want to keep on writing.
  • The month end is upon us and we'll have the numbers for August available next week. What are your predictions for Edmonton and Calgary for August?
  • As someone suggested, where do you think the Edmonton and Calgary markets will be in a year from now? Please take this poll:



  • Have a terrific long weekend everyone and enjoy the last week or two of our ephemeral summer.

Tuesday, August 28, 2007

Reality sinking in.....

Somewhat, if not entirely....
First, today's Edmonton Sun mentioning on their cover page what we have been saying here for a few months. Edmonton is toast. The official MLS inventory is now over 9000 and although no sales numbers are available, they can't be great. Or we would have heard from someone....and anecdotal evidence strongly suggests otherwise. I've seen nothing sold in downtown Edmonton even though now listings continue to pile up, although the rate of increase has definitely slowed.
My take on the prices is simple- they are too high for this city. Tar sands, upgraders, cultural mecca, plethora of recreational activities and 'the most beautiful city on the face of earth' notwithstanding. If Edmonton Sun is openly talking about $40k reduction in home prices, how do you expect someone who bought in May this year-about the very peak-to react? Almost half of the down payment gone?
Or what's it going to do the balance sheet of ATB?
They believe that everything is going to be okay for them, as they have very limited sub-prime exposure. Where did we hear it the last time? Somewhere around 600 kms south of Edmonton.
They say "ATB mortgages do not exceed 90 per cent of appraised value." This has to be a really funny statement. First, what is the appraised value? Appraised by who? Greedy flippers? Or avaricious mortgage brokers interested in boosting their commission?
And secondly appraised at what time? May 2007? Or some other date.
But they are still a provincial crown corporation and they'll get bailed out of all the mess. No matter how bad they screw up.
And 'We are very different' Calgary has shown a very significant drop in the prices. The average price is down by $17k. May be Calgary isn't so different after all. The median, which has been falling for three consecutive months, fell by another $5k this month. But none of this will matter to anyone in Calgary as Calgary is just 800 kms south of the 'biggest resource discovery' ever made by humans. And only 300 kms south of the biggest refining/upgrading projects to be ever built. So what if Edmonton is toast. Calgary has mountains and it even had the Olympic games once. It's more like Vancouver, no a lot better than Vancouver because it has a stronger economy. So prices can't really fall here, just as they can't in Vancouver.

Thanks all for a wonderful week of discussion and useful links and tips (the links in this post are all fixed now).

Thursday, August 23, 2007

Weekend Open Thread....

Thanks for a week of nice discussion. Some thoughts for the weekend:
  • One of the chief defining characteristic of the real estate boom of the last several years has been the claim of each bubble city that 'we are different.' The most recent city to get afflicted by this characterization is Calgary. Bob Truman even changed the title of his most recent post to reflect that his blog focuses on 'we are different-Calgary' and not Edmonton. May be Calgary is different. But most likely it isn't. Vancouver, Victoria, Seattle...all have had this categorization for a while. I did not have enough time to research on this, but can anyone find any significant intervals (at least 6 months to year long) in the last 50 years when there was a divergence in the Edmonton and Calgary prices. That is Edmonton prices going south while Calgary prices going up. Or vice versa.
  • Inventory continues to pile up in Edmonton. MLS is close to 9000 and Comfree close to 3000.
  • Both the average and median prices for SFH and Condos are falling, as per the excellent statistics compiled by Bob Truman. If the price trend for August holds, we'll go all the way back to the prices seen in early spring. Inventory is around 8300 in MLS alone, and slowly catching up to the Edmonton levels.
  • There's been a noticeable surge in rental vacancy ads in Edmonton and Calgary. The ads that I placed over 2 months ago still get responses.
  • There's a bullish group of people in pretty much every major city in Alberta that is counting on a magical turn around this fall. But they are not alone. Alberta government is reporting sharp drop in oil sands land lease sales and revenue is down by over 60%. Last year's hysteria is slowly dying down. But, hopes of September turn around are alive: "The pace of land sales could pick up in September, FirstEnergy Capital Corp. said in a report earlier this month."

Monday, August 20, 2007

Noticeable price declines are here in Edmonton

Despite denials about the fundamentally changed nature of the market, the view from ground reflects something that we've all talked about here for months.

Take this example of a detached SFH in Ellerslie crossings. I distinctly recall viewing such places back in 2003. They were selling for around $175k (but on the west side of Edmonton). As late as February 2006, I remember visiting one of very similar show homes. The builder's agent said, "Price are going up very rapidly in Edmonton because of the very low vacancy in Calgary. Companies are now going to start shifting their head offices to Edmonton and that's why there's this sudden increase in prices." At that time, a similar home was selling for $225k. Of course, it was hard at that time to come out with any rational explanation for price increases and this was at least plausible. Of course, in the bigger back drop of speculators, flippers, 'real estate always goes up crowd', realtors, bankers and the main stream media, such excuses were superfluous. Of course, the world, or Alberta at least, as we know all changed somewhere around Feb-March 2006 when one of the biggest buying frenzies in Canada ensued in Edmonton.

Fast forward to June this year: this type of property would not be sold for less than $400k.

Two and a half months later, this property is selling for $360k. I doubt that the sellers would refuse a no-condition all cash offer of anywhere between $340k or $350k. May be some people will find it an attractive price, especially those who are contemplating paying anywhere between $250 to $300k for 2 bedroom condos in the same vicinity.

The question is: what's it going to do the condo/townhouses that are selling for over $300k to $330k just a few blocks from this place?

Friday, August 17, 2007

Weekend Open Thread...

Thanks for a wonderful week of discussion. This week has been the busiest for this blog with over 800 visitors averaging per day.

Some items worth discussion:
  • Edmonton Comfree inventory up to 2800. MLS is over 8600.
  • Calgary MLS is over 8000. WeList is over 2300.
  • Fed apparently panicking, two days after saying that there's no panic. Consequently, the stocks and oil prices jump. It's a strange world we live in. Fed is panicking because things are getting weaker and the market are rejoicing that rates will now be lower. So much reminiscent of the 2000-2001 behavior.
  • Are interest rates going to go lower? Will that lead to reinvigoration of real estate in Alberta?
  • Toronto real estate prices are down because "people are on cottage and so on..." Are these guys so lousy and hopeless that they can't come out with a better excuse than a school boy's "My dog ate my homework...." excuse.

Monday, August 13, 2007

Edmonton overvalued by 30%?

Well, given the recent turmoil in the markets and the sunny day forecasts by numerous banks and financial institutions in the past, should we really trust the Merrill Lynch study that says Edmonton is over valued by 30%?
May be 30% is the right number, but given the lack of actual link to the study and the basis on which they define the 'true value', it's a tough call.
Just for a little perspective, visit this site of an Edmonton realtor. For some reason she has properties from 3 or 4 years ago still listed at the then selling prices. Look at some of the prices. 1500 sq feet Semi-detached homes selling for less than $150k. Even going as far back as 2005 and early 2006.
It's just amazing how people tend to lose perspective on where things were just a year ago. Or two years ago, never mind going any further back. Here's a refresher on the Edmonton home prices again:



Will prices fall by 30%? Perhaps. Will they not fall at all and only remain the same for the next 10 years and let inflation do the trick? It's a possibility. Will they go back to the levels seen in 2005 or 2004? Why not?
Does the above graph provide any answer on how hard the fall can be?

Saturday, August 11, 2007

Season of Denial

Public mood has changed somewhat due to the extreme volatility in the markets and the consequent measures by the central banks.
And you are less likely to be ridiculed if you talk about the irrational real estate prices in Alberta.
Yet, the general response to Alberta real estate boom is that of denial. No, it can't happen here. We are different. There's no sub prime exposure here. Our economy is rock solid. Oil prices will not fall. Massive investment is being put into our province. We are cheaper than Fort McMurray or Vancouver. Calgary is the Energy super power.
Still, all these and a multitude of other responses reflect an important shift-from ridicule to denial. People can now at least 'imagine' the possibility of serious price declines. And the possibility of such declines that is contemplated in private is denied in public.
Anyone who has been around Alberta for a long time knows the true worth of this place. And how some of the properties that sell for $400k would not fetch even $125k a few years ago.

As I've mentioned (like so many others here and elsewhere), energy boom is just one little story that made the real estate mania more palatable to the masses. The real reason for the boom was the period of easy credit that lasted way longer than it should have. That season of credit expansion has come to an end as hedge funds and big banks scramble to meet their immediate cash needs. Almost anything is possible in this world, but I don't really expect a repeat of stories like those of my flipper friend who bought 11 properties with a $70k income. In fact, he has at least 3 properties in the market (others are still under construction) with $10 to $15k chopped off the prices. Still no takers. I doubt that he's going to be able to sell those properties unless he does something drastic like chopping of the prices by $50k to $75k.
Inventory is continuing to pile up in both Edmonton and Calgary. Edmonton now has 8400 properties in MLS and 2800 in Comfree. That's close to 11,200 properties for sale in a city of less than 1 million.
Calgary has 8000 properties in MLS and around 2000 in Welist. This is happening while the Sales are falling and we are past the peak selling season.
And let's not forget the 'true deniers', who know for sure that things will suddenly brighten up as the plains of Alberta welcome the first coat of snow.
Sales are slow because the sellers have unrealistic price expectations. As the credit market tightens, it will be progressively harder for first time buyers and upgraders to obtain the gazillion thousand loans on median wage. Prices are going to fall, it's just a matter of time.

The rental market has changed as well. There are about 30 to 40% more ads on craigslist rentals for both Edmonton and Calgary. Rentboard has also shown a similar increase. I occasionally put out ads for rental properties in Edmonton and Calgary and I still get responses for ads that were placed over a month ago. Why are they not able to rent properties? The rents are too high.

So both landlords and owners have very high expectations of what their properties in Alberta are worth. They could be right, but I doubt that. There are vacant properties-waiting for good renters and good buyers. I don't think Alberta is churning out jobs to sustain either the rental or real estate prices.
As flippers and speculators find it harder and harder to sell their properties and the season of denial fully blossoms, a lot of them will try to rent their properties. Pretty soon, there will be some competition for good, quality renters resulting in lower rents.
Of course, this is all based on the best case scenario-that oil prices stay high, economy remains robust and there is no global financial upheaval. If something bad happens, well.....
On a different note, our traffic has been increasing almost everyday. We now get close to 700 visitors every day. Thanks for your continued support and effort.

And finally, one little note to our dear friend Al Bundy from Bob Truman's site. You have not been banned from this site. Nobody has ever been or will be banned. Nor do I delete any comments. I used to do that until a month ago for inappropriate language, but I don't do it anymore.

Wednesday, August 8, 2007

Why are comfree and MLS so divegent in Edmonton?

Comfree in Edmonton reported much lower sales level in Edmonton, just as MLS. There were only 277 sales in July as compared to 454 in July 2006. This is quite a plunge in sales volume.
This is not the whole news though. Comfree also reported a significant slide in average prices with prices falling to
$373,600 from $391,300 in June. They don't report the median prices so we can't assess how the median prices changed. I can't help but wonder if EREB is going to quietly publish an update on average prices.
But total inventory is up to 2696. Which means Comfree now has roughly 10 months of product at the current rate of sales. Despite all the denials, things have changed significantly in Edmonton.




Tuesday, August 7, 2007

Edmonton is sinking fast.....

... despite the futile attempt by the EREB and realtors to hide behind the average price. Anyone with even little understanding of stats knows that median represents the typical item in a sample of items a lot better than the average. Yet, average is still used by a lot of agencies to report their numbers, like the EREB or CREB. Of course, it helps them hide the weakness in their markets.
Sales are at a 5 year low in Edmonton. Inventory is at an all time high of 8183. The median SFH prices are down 2 months in a row (that is the making of a trend if not decisive). EREB doesn't report on the median condo or median combined price. Too bad that they won't publish raw data for anyone with interest to do further number crunching. Indeed, these agencies are living in the dark ages of technology when it takes them 8 days just to compile simple sales numbers.

At least they are admitting that "The housing market is changing rapidly right now..."

Is the average price rise going to convince sellers and buyers that things are all hunky dory? Or are some people really going to smell some nasty things coming to the Edmonton market. With almost 6 months of inventory (and rising) only in the MLS, I don't expect things to magically turn around. After all, it looks like this ship is now sinking and it's not easy to rescue such a giant sinking ship....

Wednesday, August 1, 2007

Prelim Numbers

Thanks to Bob Truman for the numbers.
So median prices down across the board and condo prices down for 2 months in a row. And 2 months down is generally a trend unless you are a perma bull. Still, Calgary is holding on a lot better than Edmonton.
Edmonton has at least 6 months of inventory (some economist said 9 months) at over 8000 MLS and 2600 Comfree. Too bad, some of the recent acquisitions in the oil sector have discounted the Alberta Advantage entirely. As per Marathon Oil:
"Capital costs to refine an incremental 80,000 barrels per day of heavy sour crude at the Detroit refinery will be less than half the investment needed to build an equivalent capacity upgrader in Alberta."

What will happen to the gazillion dollar real estate plans of Edmonton if a few other companies follow suit? For the moment though, the water cooler talk hasn't been about the falling real estat prices. I guess the second month down in a row will probably have some people whispering about the changing real estate market.
Anecdotally, I've seen only two listings with Sold signs in downtown Edmonton from amongst hundreds.
We'll get the actual sales numbers in a few days. Stay tuned.

Sunday, July 29, 2007

Revisiting Fundamentals

Edmonton market has slowed down substantially as the forthcoming numbers will attest. Calgary is holding better for the moment, but we’ll see how it holds in the coming months.

Inventory in both cities is now over 10,000 including the commission free listings. Based on my rough calculations, at the current rate of sales, Edmonton has at least 5 months of inventory and Calgary has around 4 months worth of product.

In Edmonton it’s hard to see ‘Sold’ Signs on listings even months after the listings go up. This is just a couple of months after the Edmonton Journal story that mentioned houses were “Going, going….Gone.”

The new mantra will be “Sitting, Sitting….Trying to Rent, Trying to rent….Rented”

And for once I do agree with Sheldon, that a number of listings have changed from COMFREE to a realtor. I’ve seen it happen in a few places, but I can’t say that the change brought any positive results, yet.

So why is this market imploding? On paper Alberta is doing wonderful, except for perhaps the Natural gas industry. Oil is still at historic highs and barring some catastrophic event, it looks likely that all the oil sands investments are going ahead full steam. People are still moving to Alberta, though not at a vigorous pace seen last year. But net migration is still positive. Interest rates are going up, but nothing major there either. The Alberta story is still intact. Yet, the housing prices have stopped rising. They are falling across the board in Edmonton and in certain product types in Calgary.

I guess that this market has run out of bigger fools. As I’ve harped on numerous occasions in the past, this market got the huge boost based on

  • Low inventory
  • Sudden surge in Demand from real people
  • Dramatic surge in speculator interest who believe that housing prices will increase by at least 30k in 2 months holding period.

Otherwise, is there any reason why on a fundamental basis prices should be so high in Edmonton, Calgary or of all places in Lacombe? It’s all a short term phenomenon that is going to die in the coming months and years. With our without any major ‘shock event’ occurring.

To recapitulate, why I think this market is overpriced:

  • Abundance of land. All cities in Alberta can expand for hundreds of kilometers in all directions. There is no shortage of land. The current increases in prices are purely speculative.
  • Abundance of building materials. The shoe box houses and condos that are built here do not require raw materials that are shipped from across the world. The bulk of raw materials come from our own province and from BC. Timber prices have fallen significantly since the US housing slowdown and this trend is likely to continue.

On the flip side, the primary fundamental reason for the rise in prices is related to the non-availability of cheap labor. As and when that happens, one of the major fundamental factors will have corrected itself and the market is likely to fall.

Of course, other than these fundamental factors, there are other reasons based on the market condition itself. Pretty much all the good news is already priced in to the real estate prices. Every builder and his cow know that there are going to be upgraders built in the area. So does every new ‘investor’. Unaffordability is severe. Price to rent ratios too high.

The bulls and speculators are all holding on hoping for a magic turn around in their favorite season. They are counting on a sudden surge in sales that will reduce the inventory from all time highs in a few months. It may not happen. They should all prepare a plan B.


Wednesday, July 25, 2007

What's the real inventory in Edmonton?

Shelodon's blog says it is 6720. I'm not sure if that is the correct number. Another fully automated search location (that will remain anonymous here) reports inventory at 5056 Residential, 2772 condos and 10751 total (including commercial). So total inventory is over 7800 just with MLS.
And then there's comfree with inventory of close to 2600. The total takes the inventory level in Edmonton to over 10,500.
No doubt that number is unnerving to many. When will the Edmonton real estate board change their criteria for inventory calculation?

Saturday, July 21, 2007

What's the market like?

A couple of friends who think that I know something about the real estate market in Alberta are seeking my advice. They of course don't know that I write this blog. One of these guys had a nice mid sized home in Edmonton and he booked another one last year. And since prices were all going up, he wisely decided not to sell either one. Of course, he doesn't want to hold both the properties and wants to sell his newer house. And he's now getting a little bit nervous as almost everyone is getting aware of the sheer vastness of inventory in Edmonton. As of today, there are over 7500 properties (apartments and condos) listed on MLS and over 2500 on Comfree. That's 10,000 properties available and I'm pretty sure this is not the peak yet. A lot of new product is going to be coming in the market soon that will further inflate the inventory. And I know a whole lot of such people, including professional flippers and 'chance investors' who hold a lot of these homes and condos. And it looks like they are all planning to exit at the same time.

The Calgary crowd on the other hand looks more confident even though almost every third or fourth post on WeList.com has a price reduction. Almost everyone is counting on the magical recovery that always happens once summer is over. But it will take only one exception to rain on the parade and make life harder for a lot of people who are counting on the turnaround later this year.

And it looks like, a few people are claiming that we are past the peak in natural gas production in Alberta. If that is indeed the case, it bodes bad for Alberta and Edmonton in particular. Natural gas is the biggest source of royalty to the province and once it begins to decline, there is not going to be any replacement for it. Oil Sands is all good in polluting our province and generating immediate jobs, but over long term, the province will not collect more than a buck or two per barrel of oil produced. And lower provincial revenue will lead to lower spending and all the downstream consequences.

So it looks like a lot of people are still clinging to the Alberta bullish story despite:

  • Rising Interest Rates
  • Severe unaffordability
  • Rising dollar impacting both provincial treasury and energy sector profitability
  • Reduced net immigration to the province.
  • Massive inventory at this time of the year.
  • Significant number of new completions going to increase inventory further.
  • Distinct possibility of US recession.
Your thoughts?

Thursday, July 19, 2007

No fear yet.....

In either Edmonton or Calgary. This condo in downtown Edmonton is a case in point. I don't have any previous links to this property, but this property is on sale for $400k.
An exactly same unit sold in the same building for less than $350k a few weeks ago. So it looks like the flippers are all alive, kicking, expecting very well from their 'risk' and counting on $50k jump in condo prices in less than 15 days. May be they are right. It will happen yet again. But it looks increasingly hard, especially in face of over 2500 properties listed just on comfree.
If we follow the classic bubble deflation cycle which has the following stages:

-Ridicule
-Denial
-Concern
-Fear/Panic
-Near hatred of asset class

then we are somewhere in the ridicule and denial stage.'Investors' are still buying in the hopes of a magical turn around after summer.

Tuesday, July 17, 2007

Which one will fall harder- Edmonton or Calgary?

Just returned from a two day trip to Calgary. I spent quite a bit of time in the North East area and downtown. One thing was immediately obvious-there are lots of listings in Calgary as compared to a few months ago, but in terms of 'feeling the quantity of inventory', Edmonton is way ahead. The numbers roughly support that, but as you walk in downtown Edmonton, it's not uncommon to see upto 10 condos for sales in a complex. Such sights were rare in Calgary.
So may be the rush to list the market hasn't hit Calgary....yet.
I met a couple of old acquaintances who recently ventured into the field of real estate and related industries. One of these guys used to drive a truck. He has recently got his real estate license. Another gal who used to run a pizza shop got the license for becoming a mortgage broker. She reckons earnings of around $1500 per $300k loan. She has to sell just five or six a month to make decent money. Although I should not have asked her this question, but I did ask- Will the bank keep the mortgage on its own balance sheet or will that be packaged into some exotic derivative product. "What????", was her response.
When truck drivers and pizza shop owners are leaving their current vocation in pursuit of easy real estate money, can we say the end is near?
Returning to Edmonton, I couldn't help but notice how filthy this city is. Even though Calgary isn't really the greatest of cities, in comparison to Edmonton, there's a 'night and day difference.' Even after discounting the proximity to the mountains factor. The only nice area in Edmonton is the river valley. And yet, the pace of residential construction in Edmonton is breath taking and the prices so high.
Many moons later when the dust has settled, Edmonton will have fallen quite a bit more than Calgary.
 
Real Estate Blogs - Blog Top Sites