Tuesday, February 27, 2007

The Bear Case-Part 4- It's Different Here

I remember an ad from Fidelity (or some other mutual fund provider) during fall 2000 that had a punchline something like: 'Ladies and gentlemen, yes It's different this time...'
The real estate equivalent for this has to be 'It's different here'. Of course Alberta is different. Just as BC, Ontario and NewFoundland are. Each place has its own set of advantages and disadvantages.
But 'it's different here' can become a really scary proposition after a few years into the bull market. Nobody has denied any arguments that were made in the 'bull case for Alberta Real Estate'. The problem occurs when the fundamentals no longer play a role in the valuations. Yes there are jobs in Alberta, but a majority of those are low end and trade jobs that will barely allow a low end dilapidated condo affordability.
Vancouver has seen even worse mania than we are seeing in Alberta because 'it is different down there'. They have mountains, beaches, world class skiing, restaurants, diversity, robust resource driven economy and much more. And everyone in the world wants to live there.
What does Albert have. At this point Alberta has jobs. And long winters. And crumbling infrastructure. And a massively polluting oil sands industry.
In some of the comments previously made, some one said that $100 oil is a possibility. But $100 oil is as much of a possibility as $30 is. Not everyone will agree with it, but I've never been a huge fan of price forecasting. The bottom line is- there are major oil sands projects currently underway and I've not heard of any new investments planned or any reductions in the proposed investments. So unless something major happens, oil sands projects will continue/increase production for the foreseeable future. But I think all that 'good news' has already been priced by the market in the prices.
Interestingly, Oil was close to its highest point in the last couple of decades during Fall 2005. But real estate prices in Alberta were about 40 % lower. So we can't really say that if oil goes to $100, Alberta real estate will go up by another 50%. It can, but in the past, this has not been the clear cut relationship.
So yes, Alberta is different that it has some solid economic things going for it, but after a while the solid economic numbers do not matter. Just as Yahoo could have been a great stock at $20 in 2000, it simply did not make any sense to own it at $300. Similarly, a starter condo might make sense at $150,000 in Edmonton but not at $300,000.

One of my favorite books on investments is Extraordinary Popular Delusions and the Madness of Crowds
Based on numerous examples in this book, the lessons that I have learnt are that people will believe whatever they want to believe. And if there are a sufficient number of people who believe in something- no matter howsoever absurd it is-many others will easily join them.And this is one of the fundamental ways in which markets (a social phenomenon) are different from physical sciences where fundamentals always remain true. As physicist Richard Feynman used to say "Nature cannot be fooled". But markets can be 'fooled' in that the 'fundamentals' and the market realities can be divorced for a very long time.

If a sufficient number of people are willing to believe that it is different here in Alberta and real estate always goes up, it could go on for a very long time.
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