Thursday, May 31, 2007

Going Crazy in Saskatoon

While our primary focus here is Alberta real estate, things are going just so crazy right next door in Saskatoon, that we ought to comment.
Just check out this Saskatoon blog and how the prices have been rising there as well. Looks like bidding wars, 50% prices jumps and other 'norms' of a 'bubble' market are fully present.
What does Saskatoon have? Of course, the Saskatoon story will be lots of jobs, uranium mines, hundreds of thousands of acres of farmland and a very mild weather and scores of recreational and cultural activities. And we do know the world will be running out of quality food products as India, China, Brazil and other countries' appetite for food increases. So, prices have to rise even in Moose Jaw as everyone tries to establish a little base in the prairie heart land or lest face famine. And of course, with a population of slightly less than one million and land size bigger than most countries, they are also running out of land.
Anyone who has watched Saskatoon closely in the last couple of years knows that the recent boom is the result of pure play speculation. And this is not unexpected because people will be willing to bid up any asset class so long as there is a plausible story around it and cheap availability of credit.
How will this all end? The chines are trying hard to pop there bubble, but there is no such urgency seen here in Canada.

Tuesday, May 29, 2007

Yes Virginia, we have a bubble in Alberta Real Estate

They may say there's no bubble….
But we do know that stock brokers generally never say that there's a bubble in stock market. Oil companies will never say that oil prices are high. Realtors will never say that real estate is expensive, leave aside in a bubble.
And they are right.
Abby Joseph Cohen, the famous stock market bull said that there is no bubble in NASDAQ in 2000. The now (in) famous Professor Fisher also said in 1929 that "stocks have reached a permanent plateau". Even Greenspan said in 2000 that it's hard to argue against the wisdom of millions of well informed investors.
At different times over the last several centuries, asset bubbles have appeared in different parts of the world. One of my favorite books that documents this is the 'ExtraordinaryPopular delusions and madness of crowds' that illustrates some of the well known delusions of the crowds.
But let's begin from the basics. What is an asset bubble? Here's my understanding: An asset bubble is a significant rise in asset valuations fueled by greed and mass frenzy into buying that asset class. In the post-modern world, it could be due to the ease of availability of credit, lose lending standards, media propaganda and the beliefs that xxx-asset never goes down (xxx could be anything ranging from tulips to real estate in Tanzania).
A bubble does not appear out of nowhere. A bubble is usually preceded by a healthy bull market. The last stage of the bull market gives way to an asset bubble. The defining characteristic of a bubble is the disconnection with the fundamentals.
For example, a two bedroom condo that was selling for less than $100k in March 2005 and renting for around $800 in Edmonton now sells for roughly 3 times that amount. What has changed in two years? Have the rents gone up by 3 times? Has the average rent moved closer to $2400 per month for such an apartment?
Have people's incomes gone up by that much? Exactly what has caused this dramatic jump then? I think it's the massive speculation and 'investor' interest in such properties that has caused such an increase in prices. Every mania needs a story and the oil sands are the Alberta's story.
No doubt Alberta has oil sands. But it also has more land than most countries in the world. And this is soft arable land where you can dig a foundation with a shovel!
And we are around 4 hours away from one of the largest timber producing regions in the world, and the last I checked the timber prices were falling.
There are a few things that should be pretty obvious. There was (and probably still is) strong demand for housing in Alberta. That should have boosted up the prices, but not to the extent that they have gone up. The prices are now disconnected from long term fundamentals-abundance of land, ease of availability of building material and worsening affordability. Also, it looks like the days of cheap credit may be coming to an end with BOC signaling higher interest rates in coming months.
There's just one factor that is holding the prices high at this point and that is the labor shortage. And when the labor shortage eases, a lot of people will discover the extent of builder margins in this market.
And finally, just to let everyone know, I don't have an agenda. I'm bearish on real estate in Alberta, but I'm bearish on pretty much most asset classes across the world. That could range assets as varied as real estate in India to stocks in China.
The problem is that for almost all these markets- real estate in India, stocks in China, real estate in Alberta or Vancouver-there is a plausible story. In India it's the emerging market story harnessing the outsourcing cost advantages. China is the manufacturing superpower of the world and nothing can stop it from growing perpetually at ten percent per annum. Closer to home, of course, there are oil sands and in Vancouver there is the Olympics.
So everyone is different, but still the same. Everyone believes they are different and they are right. But most asset classes at this point are expensive and in that regard they are all the same.

It will be interesting to see how things will unfold in the coming months with rising interest rates and loads of inventory coming to the market with poor affordability. And this is with oil still above $60.

Monday, May 28, 2007

View from the West Coast....

I was away the last few days due to work and visiting Vancouver and the Vancouver Islands. That they are 'building like crazy' in the Vancouver Island would be an understatement. I was in Victoria four years ago and everything was dead there at that time(much like in Edmonton). Two years ago, things had improved somewhat, but it was still pretty much the same. This time, it looked like it was Alberta!
'Now Hiring' signs appearing everywhere, KFC offering $11/hour as the starting wage, construction workers wanted ads on radios, dozens of condo building cranes, scores of new restaurants and 'tea bars' and all other artifacts of a boom.
What does Victoria really have? Oil Sands? Natural Gas? Uranium? It sure has darn good weather as compared to rest of Canada(if you can say rain is better than snow) and the belief that everyone in the world wants to live there.
It would be obvious to anyone that the economy in Vancouver islands is currently powered by real estate and construction. New construction jobs, home equity lines of credit and their multiplier effect.

Of course Alberta is different. We have oil sands. So our boom is unlikely to be influenced by any real estate only frenzy. I guess only time will tell if Alberta boom was driven more by construction and real estate spending than by the oil sands investments.

One of the things I realized in Victoria was how everything looked cheaper there. Good Thai food at the best restaurant cost at least 25% less than in Edmonton. Gas was the same price too. There is normally a 15 to 20 cent difference in the prices between Alberta and BC, but this time, there was no difference. One can't help but sense some sort of 'gouging' occurring in so many of Alberta markets, not only in real estate.

If nothing else really happens, may be the Alberta bubble will deflate on its own when people start moving away from here. Two years ago, it would have been fatuous to compare costs of living between Edmonton and Victoria. Right now, Alberta advantage has all but disappeared and you can actually get pretty close cost of living numbers between Edmonton and Victoria. And we have not even started comparing Edmonton and Calgary to Toronto, Montreal and Ottawa. Alberta may end up as a victim of its own success.

In the mean time, inventory has been climbing at a frenzied pace in both Edmonton and Calgary. Calgary's inventory is now above 6000 in the MLS system plus at least 1500 to 2000 in the other systems (welist and comfree) .

In Edmonton, I don't have the MLS numbers, but the comfree numbers that I track have gone up from around 1000 to 1600 in this month alone. MLS should not be too different. We'll see the official release in the next few days.

Tuesday, May 22, 2007


Mainstream media in Canada has been indefatigably telling us that we are different from the US. They have sub-prime problems, we don't. They have large speculative elements present in the market and we don't. They have flippers and we don't. That is they have bubble and we don't. And Alberta is of course totally different inasmuch as we have oil sands. The current market movement is based on solid fundamentals and there is no mania.
I met with a couple of flipper friends (too bad, I've so many of them!) this past weekend. One of them has twelve properties. He spent some time explaining his holding structure and how he has managed to acquire so many properties. He is fresh in workforce and probably makes close to $70k from his job. Right now, he has maxed out all forms of debt possibly accessible to him. He has maxed out his credit cards, lines of credit, his wife's line of credit, home equity lines of credit and pretty much every other source. He was seeking some temporary financing for a few of his properties because he is afraid that his last mortgage may not get approved for a property that is becoming ready for possession. He is willing to pay up to 25% annual interest rate for short term financing. Yes 25% for buying a property. His lifestyle is not modest; he is on a spending spree with new furniture, new big car and expensive vacations. He is probably happy because on paper he is close to half a million dollars within a few years of starting work. Based on his description of people around him, I just cannot believe that he is alone. There are probably hundreds, perhaps thousands of 'risk takers' like him at play in the Alberta market. I can 'analyze' his situation, but I leave any interpretations to you. There is obviously no speculation in this market. Yeah, right.
Another friend of mine, who used to regret until late last year for buying a house has suddenly changed her tune. She was actually trying to persuade me to buy a house, or be priced out forever. Until last year, she would complain how she was happy in a modest two bedroom condo and how the home expenses were depriving her of the additional spending. And she actually believes that we are running out of land in Alberta. She is now seriously looking to take advantage of the newly found wealth in her house by buying another property. Her previous experience in real estate is zero. I don't think she has actually seen a complete business cycle. Most certainly not a commodity price driven business cycle, especially the Alberta flavor.
Expecting something by doing nothing is the economic zeitgeist these days. Most of the recent entrants to the market have taken the 'Fort McMurray investment', 'Oil Sands developments' and everything else related to this boom to their heart. Plus Alberta market has now been growing non-stop for the last twelve years or so. And twelve years is almost an eternity for the instant gratification seeking Generation X and Y.
I don't know when the end to this boom will come. The craziness has been going on in so many countries (India, China) and so many domains (commodities, online advertising, private equity) for so many years that it's about time we got a correction. Chinese stock market has tripled in the last 18 months.
But no one in Alberta seems to care. The party is going on for the time being.
May be in a very long time, I do want to enjoy a little bit of schadenfreude.

Saturday, May 19, 2007

Fundamentals, no way. It's fear, greed and speculation

A lot of people may not agree, but this is what I firmly believe has been going on in the Alberta market since late 2005. Check out this coverage of 'market madness' from Edmonton Journal. It corroborates my own experience with a few 'investor' friends.
A friend who owns around ten properties in Edmonton and area will be buying another one by using some very creative financing (so much for we are different here etc). Why is he still buying? Does he think the market is going crazy? You bet. But he still keeps buying. On what basis does he enter a bidding war and routinely pays $5 to $20k over the list price. What calculations or fundamentals drive his decision making? Greed. And that a few people around him made several millions in land and property deals.
Those who think there has been little speculation in Alberta market will wake up to the harsh realities of 20 somethings buried deeply in debt and holding a dozen properties bought at market peak.
Why do prices go up by 100% or even more in less than a year? Despite the dramatic horror rental stories, I don't think the rents have gone up by more than 10 to 15% on average in the last year.
So what is driving the market.? What is causing people to buy 1000 sq feet 40 year shacks for $400k in very ordinary neighborhoods in Edmonton? Fear and Greed.
This market is totally disconnected with fundamentals. Immigration, Migration, jobs, oil boom were all the factors that contributed to the bull market that lasted till around 2005. Now it's pure play speculation. Not unlike NASDAQ during 1999 and 2000. At that time too, we had all the world changing 'Internet', dot coms, mobile revolution, software and what not. But like all frenzies, that market ran out of steam and died. To the extent that seven years after the peak (more than 5000), it is still selling for less than half of the peak value(less than 2500).
Those buying at this time have no experience or desire to be landlords. In fact, seasoned landlords know that this is not the time to buy.
Despite this, we get the classic contrarian signal these days from MSM and almost everyone else that we are not in a bubble. Of course, the accomplices will not disagree.
How long will this madness last? How will it end?

Thanks to all of you for your comments and insight. Just a reminder to stay civil in your comments and focus on the idea rather than the person.

Tuesday, May 15, 2007

Affordability revisited...

I've a friend working in the engineering industry who recently moved from Australia. He's a sharp guy and has quickly found a job in Edmonton. He is making close to $100k. In Australia, he used to own his own 'little' big place-around 2600 sq ft and he could easily afford that as it cost around AUD$280k or so. He made close to $100k there too, so he effectively paid 2.8 times his gross income.
I sometimes ask him why he moved here. I don't really know why anyone would want to move from sunny beaches and warm weather to Alberta. But, life works upon us in mysterious ways and we can do funny things in life.
So right now he is looking to buy a place. What can he get for $280k in Edmonton? There's quite a lot of stuff available here. Ranging from this one bedroom condo in downtown to this townhouse on the south side.
Oil boom, demands, jobs and all that are all fine. But the fundamental question still remains: Is there a scarcity of any raw materials that go in a house? There is almost a limitless supply of land in Alberta, given our tiny population. There's no scarcity of timber either. The only thing in short supply at the moment is construction labour.
What will happen when this shortage eases? Will our long term prices fall more in line with those of Texas? Will Edmonton and Calgary become as (in) expensive as Houston where average prices are around $200k?

I have another friend that works as an IT recruiter. Last week she said that at least two people declined to move to Edmonton citing higher housing costs. And they were living in Toronto. These are people who make decent wages ($40 to $50/hour) and from a long term perspective should be attracted by Alberta.
The average housing price is now inching towards $400k. That would require at least $100k in annual income for a traditional mortgage with good down payment. Will there be any first time buyers around to buy this stuff?

Wednesday, May 9, 2007

Interesting Times....

Just a couple of interesting pictures that are probably the sign of these times. kind of contradictory, but we are living in interesting times.

Affordability is of course the biggest problem for Alberta real estate. But the good mortgage doctors admitting it themselves? And what's their magic potion- interest only loans (not sure if we are there yet), 40 year terms (very likely) or government subsidies for buyers? Who knows.

And yet, we have this:

Outside a newly built condo complex in West Edmonton (yes, close to the biggest mall in the Universe). How many for sales can you count? See the first comment for the answer!

And while all this is going on, here's a very nice example of disparity between the present (rent) and future(own) takes on the real estate market. Right in downtown, a newly built condo selling for around $340k and renting for a princely $1200.

And what is this blasphemous talk of rent reduction?
There are thousands of highly paid jobs getting created in Edmonton that can easily support rents of $2000 per month. Right?

And I can't really believe, this is the 49th post for this blog. Thanks all for your wonderful support. Would you like to see anything special for the 50th post?

Saturday, May 5, 2007

Weekend Open Thread...

Some thoughts and observations:

-Are the big upgrader projects-yes the story behind this boom-getting serious second thoughts from Big Oil? And this is occurring when prices are still north of $60.
-One can actually feel the massive rise in inventory in Edmonton as you move around the city. The number of private sale signs and the realtor signs have gone up quite a bit. And just based on anecdotes, a few flippers who bought 2 downtown condos for around $250k last year have been so far unsuccessful in selling them for more than $300k.
-Looks like rent controls just might be required. There have been just too many cases of 80 year old grannies seeing $1000 rent increases. After all, during the last oil boom, there were rent controls in place. Notwithstanding the long term impact of rent controls, I just find it amusing that in a country where there's healthcare access is considered a fundamental right, a basic necessity such as shelter can be left to 'market forces'. My problem is not with market forces, in which I firmly believe, but the selective usage of 'market forces'.
We don't have very much of competition in Banking, Telecom, Dairy Industry, Chicken Farming, Book Retailing and a number of other industries. I'm almost tired of hearing 'market forces' at work in the case of rental market, but no 'market forces' are apparently needed for any of the above industries.
I guess the reality is that people hardly matter. Those with the biggest and most powerful lobbies can sway things their way. Such is the nature of modern democracy. Sorry for this slightly off topic rant.

Have a great weekend everyone.

Thursday, May 3, 2007

April Numbers are out...

And they paint an interesting picture. Prices have gone up, but in what should be busiest month of the year, the sales have gone only modestly up in Edmonton and have actually gone down by 11% in Calgary relative to March 2007.
Sales down and prices up with higher inventory is usually the first sign of an approaching 'inflexion point'. If this trend continues for a few months, price rise nothwithstanding, we could see a top in the coming months.
Based on what I've personally heard from a few of my flipper friends and read about some would be buyers, not too many people are expecting any more magical increases. Even regualr Joe owner is talking about "who can afford this stuff anymore". This could be a classic contrarian signal as well. If too many people start expecting prices to fall or stabalize, it may not actually happen.
Long term Albertans have heard of, if not totally cognizant of the risks involved with Alberta real estate. Who can forget the nadir of last cycle when townhomes used to sell for $45000 (yeah the same ones that sell for close to $300k now). Or that there are absolutely no jobs when the commodity cycle turns the other way round. Such people could be flippers or long term holders of such properties, but they would not go on and buy for the fear of getting priced out. You need totally different breed of people for that to occur. Recent immigrants and those moving from other province comprise this group. They have only seen one side of Alberta and they don't even know that there's another side. That's why they are buying starter homes for $400k in the not so great locations in Edmonton and Calgary. Just like the kids fresh out of college making $70k during dot com boom thought that you don't have to work to make such a wage!

Should there be a 'risk premium' built into Alberta real estate to allow for these events? Just like there's a risk premiumbuilt into junk bonds- Great yields, but a higher potential for default. It's great to compare Edmonton and Calgary with Toronto and other big cities, but those other cities are usually not one trick ponies. In case one sector goes down, others keep on going.

Sorry for the not so frequent posting during last month. I've been going through a major repriortization of things in my life at this point and have been consumed with a number of other things. And to answer one of the comments, I don't have any plans of shutting down this blog.
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