Monday, February 26, 2007

The Bear Case-Part 3- The Disappearing Alberta Advantage

As I mentioned in one of my earlier posts, one of the reasons cited by Alberta RE Bulls for the rapid escalation in RE prices is the so called Alberta advantage- a combination of low taxes with less cost of living and high wages that makes Alberta such a desirable place to live in.
Well, here's a news for them- Alberta disadvantage is evaporating into thin air. Probably at the same rate at which the Real Estate bubble is inflating.
Let's ask a fundamental question: Why should a young family move to Alberta when a starter home of 1100 sq ft costs close to $400k and the average family income is no more than $70k?
Or, why should a young family based in Alberta continue to live here despite such high costs of housing?
Gary North, an astute, albeit bearish economic commentator, offers some perspective on this topic for the US market. He suggests such young families to move to Midwest where there are plenty of opportunities and lots of cheap housing. And shun coasts where starter homes have become very expensive.
If young families were to do something similar and shun Alberta, we'll see a drop in prices. We have heard of some stories where in people from Calgary have started moving to Saskatoon (and creating a mini-bubble over there!) in search of affordable housing.
Especially if you are not making a living working directly on the oil patch, is there really an advantage in living here in Alberta? If you work in a non-Oil and Gas industry, what is really the advantage of living in Alberta when it is hard to afford a detached single family home.
I remember the initiatives started by Alberta government and the cities of Edmonton and Calgary to diversify their economic base to avoid an 80s like disaster due to reliance on a single industry. It looks like all their efforts have gone in vain as the boom in a single industry has created factors to drive out pretty much every other industry.
Until a couple of years ago, Alberta used to pitch the 'Alberta advantage' story to companies from other industries-technology, manufacturing and finance etc- to setup offices in the province. With that advantage almost gone, how will the Alberta economy every diversify?
Contrast this with what Texas did in 1980s. From the ashes of the last oil bust emerged an impressive high-tech industry in Dallas, Houston and Austin. But we are still a one trick pony after experiencing the same bust.
And nothing really has changed, we are still the same oil and gas province as we were in the 1980s, this time only more arrogant and even more reliant on Oil Sands.
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