Thursday, April 5, 2007

March Numbers and some fundamentals

New highs for both Edmonton and Calgary.
Starting with Edmonton numbers first.
Average price in Edmonton is now up to $325k, slightly up from February value of $321k. Average SFD in Edmonton is now close to $400k, up almost $25k from last month. Condos witnessed a slight decline. Inventory has almost doubled since last summer to 2574 (2120 for February).
Calgary SFD is now $463k. The overall average is now $415k.

What do I make of these numbers? The basic question is- who will afford housing at these prices? How many people can buy $400k starter homes?And $250k condo in Edmonton and $325k condo in Calgary?

Of course, Edmonton can become as expensive as Calgary. But can Calgary become as expensive as Vancouver? A lot of 'investors' could be counting on that.

At these prices, Calgary is more expensive than Toronto and Edmonton is almost approaching the Toronto prices. Also, for some perspective, both Houston and Dallas have average prices the same as the pre-boom Alberta prices. Below $200k.

From a fundamental perspective the question is: Why have prices almost doubled in the last two years in both Edmonton and Calgary? I realize there are the usual 'supply/demand' and other economic theory answers to explain the short term movement of prices, but there is more at play when people are buying something for the long terms (5 to 35 years horizon).
My questions are:

Is there a shortage of land that can be developed in both Edmonton and Calgary?
Have the prices of raw materials really doubled?
Has labour cost really doubled?

Other than these factors above, Edmonton and Calgary are not world class cities by any stretch of imagination. Except for during periods of oil boom, both cities have slow growth and poorly diversified economies, very few jobs, limited city based attractions, poor international connectivity (air travel etc) and generally very little to do. I don't want to start a debate on the Battle of Alberta, but Calgary has more to do(mountains) than Edmonton(yes, there's a mall here) and that's probably the reason for its traditionally higher prices. The reputation of Edmonton as Deadmonton is well earned.
I'm highlighting these factors because most of the people are not thinking about any of these things when they are taking a 35 year mortgage to buy a $300k bungalow on Alberta Avenue in Edmonton.
And if for some reason, an unexpected drop in oil prices occurs, or if there is an unfavorable oil sands regulation due to environmental concerns, what will support these prices? West Edmonton mall alone is not good enough to keep people in Edmonton. Yes, there is lure of mountains in Calgary, but it may not be enough.

And to all those practice, my best wishes for the Easter long weekend. All others have a nice holiday.
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