Wednesday, March 14, 2007

Revisiting the Fundamentals...

As frenzied buyers try really hard not to get priced out forever from the Alberta real estate markets by assuming huge debts, we should ask some basic questions again.
I keep on repeating some of these posts with the basic questions because it is so easy to get confused and lose your judgement and perspective when you are surrounded by the
cacophony of flippers and 'proud' owners. If you refer to the comments here, you will hear the almost deafening noise of Canadians proclaiming 'It's different here'. The US is different. There is no mortgage fraud here. There is no speculation here. Our banks are smarter. Our builders are smarter. And only fools buy Nortel at $120.
This is a contrarian signal saying that the end must be near for Canadian Real Estate, but you never know. This much of positive sentiment often ends abruptly, but it can also go on for a while.
I also saw this the other day at this blog where the blogger was almost trying to convince himself to buy. It is not an unexpected reaction given what is going on in the market in Canada.
They are loudly proclaiming victory before the implications of the melt down in the US have
been fully felt, even within the US. This too is a contrarian sign when long time bears begin to have doubts about their own judgement. I remember that during the equities bubble of late 90s,
long time bears like George Soros capitulated in 1999 and 2000 and entered the tech stocks in a big way. And lost major amounts of money subsequently.
Investing requires discipline-belief in yourself and your investing/moral principles in face of extreme adversity. Contrarians are often ridiculed for their beliefs and investing contrarians are no exception.
Having said this much, here's my stance on the housing market in Alberta, again.
Real Estate in Alberta is overpriced as per pretty much any measure such as

  • Relative historic norms.
  • Earning capacity of Albertans
  • P/E ratios using rental yields.
  • Traditional metrics of real estate valuations (multiple of monthly rent of 100 to 120 times)
Even though there is short term shortage of quality accommodation in several cities in the province, there are hundreds and thousands of vacant condos awaiting further flipping. The flipping will have to stop at some point of time and someone will have to assume the role of 'landlord' and start chasing after tenants and collect rents.

Out of province buyers and new immigrants who are not familiar with 'good' and 'bad' locations of a city are buying the worst homes at worst locations due to the extreme fear of being priced out forever. They don't realize that once this mania ends, they'll be stuck with assets that will simply be illiquid.
They may have to give those away as no body would want to live in those parts of the city.

At the same time, many new 'landlords' and first time buyers are unaware of true costs of ownership. Their decision are being made on the basis of fear and greed and not rational thought. I have seen people who have barely lived in this country for a year go on and buy $250 homes with 5 % down payment. May be their immigrant work ethic will save them from trouble, but did they really have to buy?

So anyone who is about to capitulate, here are some questions you should honestly answer yourself:

Assuming you can discount(no pun intended) the above mentioned valuation reasons , do you really need to buy?
Are you buying because you think you will get rich?
Are you buying because you think you will be priced out forever?
Do you think real estate prices will always keep on increasing?
Do you think the rent for a 2 bedroom apartment in Edmonton and Calgary will hit $2000?
Do you think you might get better opportunities of work by moving to some other place?
Do you think you can create a small business by moving to a much cheaper place?
Do you think you can take a $20k pay cut and move to a cheaper place?'
Does renting really suck so much?
What will be the impact of 10-15% annual rent increases to your bottom line in the next few years?
Do you think assuming a debt of over $300k for 30 years will make you happy?
Do you have skills as a minor 'handyman' to fix problems with the 27 year old townhouse you are about to buy?
Do you have time to shovel all the snow that will be on your driveway and sidewalks?

I think if you answer these questions honestly, your urge to give in and buy will be reduced. Mine sure did :)
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