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.
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