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.
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