Friday, June 29, 2007

Weekend Open Thread

Some ideas for discussion:

  • There are 14482 residential units under construction in Edmonton and another 12655 in Calgary as per latest CMHC reports for the two cities. Add about another8000 properties in inventory currently in both cities, and we are probably looking at close to 20,000 properties for Sale by the end of the year. Of course, if the Sales rise significantly, this won't be an issue. But if they don't.....
  • Big Money still being envisioned for Oil Sands Projects. Petro Canada is spending close to a billion dollars on the engineering design phase in the next year or so to get better idea of the costs. At $45 oil, they'll get a measly 8 per cent internal rate of return. At $60 oil, they'll get 12 percent. Now we do know for sure that oil will never see $40 again, but will they even break even if it does?
  • It's the hope, no belief of almost every speculator/investor in Alberta real estate that prices will only moderately correct before they rise again. May be they will. May be they won't.. Will they all start aggressively pricing their $300k renovated condos if the market doesn't turn around next month? We'll see.

A Happy Canada Day to all of you!

Wednesday, June 27, 2007

Why has the market lost steam?

Even they are admitting that market has slowed. It would be interesting to see the spin that is put on these numbers early next month.
We are sitting at close to 8000 properties in both Edmonton and Calgary and seeing noticeable slowdown in sales.
Of course, a simplistic explanation for the slow down would be: it was supposed to as the bears have been saying all along. But this is a new world we live in where there's plenty of cheap credit and enough 'entrepreneurial land lords' willing to use leverage to their advantage and play the real estate market. So given the 'rules' of this new world, where real estate always goes up and 200% increase in last few years is 'normal', why this sudden change?
So far there has been no significant outside event reported. Oil is still close to all time highs. Billions are still flowing into oil sands investments. You can still spot at least a few cars with "Canada's Ocean playground' license plates on streets of Edmonton and Calgary. It still takes a good twenty minutes wait before getting a place in a good restaurant. Sales people at most stores are still rude.
So what has changed?
Has Alberta become too expensive for 'investors' and have they focused their attention to Saskatoon and Winnipeg?
Or is it just a breather before prices begin climbing again?
Or are we already past the peak and are ready for THE correction?
What do you guys think?

Monday, June 25, 2007

View from the Flipper land

I was at an open house hosted by one of my flipper friends this past weekend in Edmonton. I spent quite a bit of time discussing her perspective on the housing market in Edmonton and in Alberta in general. It's the same story and arguments-strong immigration, strong inter provincial migration, upgrader projects, 'investor' interest, plethora of $15/hour jobs….Obviously, it's the same concept-every bubble needs a story and the story in Alberta is vivid and engaging.
I sat with her for more than four hours on Sunday afternoon in anticipation for some potential buyers. Not even one showed up. She says that her realtors are also reporting that they are getting no showings at all. It took her around 60 days to sell her previous property (via a realtor) and she says that's the normal time for selling houses these days. She mentioned that the general perception is that if there is a rate increase, the market is going to fall. If there is no rate increase, then things will probably pick up. Again, this is entirely her perspective and might reflect the views of flippers out there.
Meanwhile, inventory is increasing unabatedly, at least in comfree in Edmonton. There are close to 2100 listings. Last year this time, there were 1859 properties in MLS.
I think we'll end up with close to 10,000 properties for sale by the end of next month.

(sermonizing on)

Finally, a general comment about the chasm between 'us' (bears) and them (bulls) and the comments made about this here and on Bob's blog. Personally, none of this categorization matters to me. As I have mentioned before, I've several flipper friends. I don't have any problems with what they have chosen to do. They are probably unaware of the risks they are taking or have somewhat skewed understanding of risk/reward concept, but they are adults and are (hopefully no mortgage frauds!) doing everything within the legal framework of our country. We should be tolerant of that decision. Let flippers be flippers. Once the flippers are gone and the market begins to correct itself, there will be another species-the knife catchers-that will come into fray. Perhaps when everybody has got tired of real estate and would not want to see the current inventory level in Calgary, that would be the time for true long term real estate investors to come in. Will such a time ever come again? We'll see.

(sermonizing off)

Friday, June 22, 2007

Right, there's no bubble in Edmonton.....

Do people seriously believe that after such a dramatic spike, prices will only 'correct' and 'stabilize' before resuming their ascend to infinity? There are for sure plenty of believers out
May be Alberta is the new google?
Have a great weekend everyone and my best wishes to all those who are having open houses this weekend. Hopefully, divine intervention won't be required in this part of the world anytime soon (h/t to!

Update: The data was extracted from the horse's mouth, so to speak.

Thursday, June 21, 2007

Is this it?

Perhaps. In Edmonton at least, the prices have fallen by around 14k.
And on the other side, our friend Bob Truman has brought back some memories from the past. Perhaps, he has a point. Last year too, bears were complaining that the sky is going to fall. This year is no different. But I think the biggest problem is that the wolf is sure going to come one day and based on a few casualties reported this month, the wolf (or the bear) just might have arrived!
What do I make of this situation? I'm very surprised with the speed with which prices have deflated in Edmonton. In pretty much all other places, it took a while and followed a pattern of slowing sales growth, build up of inventory and gradual price decreases. But Edmonton market has probably been the craziest of all, going up nearly 100% in last 2 years. So a dramatic fall won't be surprising. And let's not forget, there has been no external event causing this, except for a very mild increase in interest rates. How will this market respond when (heavens forbid), the price of oil were to fall, government spending were to be curtailed....that is if something were to go wrong.
But then, who knows, there are still some 'bigger fools' still lurking in some bus convoys ready to make their first million from the Alberta boom.

Real Estate Food Chain

The first time buyers and home buyers in general should realize that no body is 'working for them'. Almost everyone sitting on top of them is making money out of them. It could really pass on as a healthy eco-system in normal times, but in times of global credit bubble and real estate mania, the ones at the top generally become more exploitative of the others below them.

Some questions that could probably be answered:
Who are the biggest winners if the prices go up? Who loses the most if the prices go up? Can the food chain really survive if the first time borrowers are priced out? What happens if there's an over abundance of real estate agents?

It's too bad that most buyers drink the koolaid concocted by the banks, real estate agents, builders and developers and delivered by the mainstream media.

Wednesday, June 20, 2007

The sheep are still coming to the slaughterhouse....

....named Alberta Real Estate. And they are coming in buses, thanks to the Alberta Real Estate Network.

"On Friday, Campbell will lead a nine-bus tour of 495 members of his Real Estate Investors Network to locations in Edmonton, Sherwood Park, Fort Saskatchewan and the "industrial heartland" area -- with lunch at Josephburg, near Fort Saskatchewan.

About half of the participants are coming from beyond Alberta, including a few from outside Canada, Campbell said. This will be his 12th annual tour of the Edmonton, Calgary or Red Deer areas."

Will they be coming next year? Or the year after that. May be, if they can keep on finding 'investors' 'smarter' than themselves (aka greater fools).

Meanwhile, the wolfs and the bears in the garb of higher inventory, rising unaffordability and higher financing costs are sitting and drooling over their would be prey.

Inventory in the comfree system in Edmonton is now close to 2000 while in MLS it is close to 6000. Calgary has close to 1800 on Welist and over 7200 on MLS.

Monday, June 18, 2007

A view from a few years ago

"Buyers must be well prepared to compete in robust market, according to Royal LePage report
Extreme home buying activity in Edmonton during the first three months of 200x exhausted inventory, produced multiple offer situations and pressured average property prices higher in first quarter 200x over first quarter 200x-1."

"Low unemployment, low rental vacancy rates and strong consumer confidence have been fundamental factors fuelling big ticket purchases in the city," said Ken Shearer, broker/owner, Royal LePage Noralta Real Estate Inc

Does it sound all like 2006? No, x in the above paragraph is not 6, but 2. Yes, in 2002, the real estate story was still the same. It's always a good time to buy a home if you make a living by selling homes. Has anyone ever met a realtor who has advised anyone to not buy property in general (not a specific property, but generally)?

It's amusing to read this press release from 2002. And see how far we have come along in the long 5 years. But those were the dark ages of the world. Before Oil Sands were discovered by the 'investors' and Edmonton had become pretty again, after a long autumn and harsh winter that lasted over 20 years.

Not to cause any intentional grief to the bulls, I wonder if we'll ever go back to those days again?
Will a housing bull market of around 10 years not see a bear market again? Prices will merely stop accelerating and then resume their climb to infinity. I guess not.

As inventory climbs unabatedly in both Calgary and Edmonton, it looks quite likely that the long summer of real estate boom is now cooling off. And autumn in once again knocking on the doors. We'll find out in the next couple of months if we have passed the peak or there's more craziness left.

Saturday, June 16, 2007

Weekend Open Thread...

Wow! The last condo post was the most popular ever penned on this blog and got the maximum responses and discussion. Your input is very welcome-whether you are bull or bear or neutral. Just keep your messages in a civilized tone and avoid personal attacks.

Some ideas for the weekend:
  • Housing market still on a sizzle. Given that they are comparing YoY prices(May 2007 versus May 2006), it will be quite a while before the sizzle disappears. I suspect it will take at least another eight to nine months before we register a first YoY drop. May be more. Of course, I don't have the chutzpah of market forecasters and I have had egg on my face enough times in the past to make a prediction like this, but I guess it's okay to do that once in a while!
  • In the personal anecdote territory, the man on ground-flipper friend of mine-said that there's a 2 bedroom condo available in downtown Edmonton with almost 50k price drop. The reason-the seller is an international student and now for some reason his visa papers have not come through. And he wants to sell in desperation now. What was the business of an international student buying a condo in Edmonton? We'll find out "who was swimming naked when the tide goes down."
  • Looks like we are talked about a lot but never mentioned in some of the realtor circles. It's too bad they won't name the source. Are they afraid of linking to us? Afraid that people will perhaps get a different perspective? To make things more interesting for our visitors and to give them a view from the 'other side', I'll be linking to the blogs of realtors Sheldon and Bob Truman.
  • I guess this is the story of our society circa 2007. Hard work, savings, rational discussion, solid economic fundamentals, economic value are derided upon and banished as 'socialist', whereas 'get easy rich', 'real estate always goes up', '400k mortgages for shoe boxes', 'condo investments' are considered the hallmarks of 'capitalistic' society. Wow!
  • Have a wonderful weekend everyone.
Update: Bob Truman has a post on his blog welcoming users from this site. Thanks Bob! And yes, I did not say that you called the visitors on this site any of those names. I've removed the reference to that negative post entirely. I have heard good things about you from visitors on this and your blog. Your statistics are much appreciated.

Friday, June 15, 2007

Alberta Real Estate- Driven by oil prices or Interest Rates?

We have all often heard that so long as the oil prices are high, real estate in Alberta will remain solid as steel. I just wanted to check the strength of this argument to see how well it was the case at the time of last boom in Alberta. Of course, the NEP could have played a part in making things worse for Alberta, but it's hard to quantify this number. I'm just going to present some numbers and leave the rest to your interpretation.

Year Crude Oil Price 5 Yr Mortgage Rate Edmonton Avg Price
1979 12.64 11.25 74,453
1980 21.59 13.25 78,914
1981 31.77 15.5 88,624
1982 28.52 18.75 92,313
1983 26.19 13.5 84,785
1984 25.88 12.5 81,941
1985 24.09 12.25 75,769

(Prices are not adjusted for inflation, home prices and interest rates are for January of each year, crude prices are average for each year.)

So a 50% increase in interest rates was good enough to devastate the Edmonton real estate market last time when the prices had not risen so much. Will another 50% jump in interest rates (to say 8 or 9%) do anything to this market?

Tuesday, June 12, 2007

View from the ground...

Condos that were selling for less than 100 k just 2 years ago are now being offered at $335k. Of course, it makes so much sense to 'invest' in these properties. It rents for princely $975 a month. Add on property tax of around $200 per month(may be more based on this new value) and $195 for condo fees, and you'll make a super $580 on investment of $335k. Wow a super 2% return.
But these numbers are for old fashioned, non believers in Alberta economy like me.
But then, I think these are the properties that will fall hard-falling by more than 50% in less than a year- like the ones in Fort Myers Florida.
But we are different. This apartment will soon start renting for over $2500 a month and there won't be any correction in Edmonton. Or, the condo will double in value again to make up for the opportunity costs!

But isn't it possible that this condo sells again for $100k or even less to bring the return on invested capital back to a more reasonable 6% or so?

Sunday, June 10, 2007

Alberta Real Estate 'Truths'

1. Real Estate always goes up.
2. Buy now or you'll be priced out forever.
3. Alberta market which has gone up almost 300% in several cases in the last 3 years will not go down from the current levels. The worst case scenario is that it will go down by 10% or so and then stagnate before starting its upward march.
4. We are running out of land in Alberta. Not all types of land, but affordable, residential land.
5. Oil prices will never go below $50 again.
6. The dramatic surge in the prices in the last few years was a result of robust fundamentals that merely brought Edmonton and Calgary in line with prices in other 'big cities' such as Toronto and Vancouver.
7. Alberta is different as we have oil sands and our real estate prices should reflect that.
8. There is no speculation in Alberta market. The majority of buyers are buying their primary residences, either for the first time or upgrading. May be some wealthy Boomers are buying their second/third vacation homes.
9. Everyone wants to live in Alberta, or at least get the $12/hour jobs offered here in plethora.
10. Interest rate hikes or US recession are unlikely to have any impact on Alberta economy. Even Chinese recession is unlikely to slow down the Alberta boom.
11. The current dramatic increase in inventory is a result of usual summer slow down in Sales and is merely reflecting a return to the 'regular' and more balanced market in which buyers have more choice. Prices will rise with a vengeance by autumn and continue their march to infinity thereafter.
12. Increase in housing prices is great for a locale. Lots of companies will have trememdous interest in opening offices here once employers realize that they won't have to pay any wages to their employees but can pay them in the form of 'assignments' on latest condo projects in Airdrie or Fort Saskatchewan. Just look at start ups and other companies around Route 128 in Massachusetts and how it has been flourishing since the dot com bubble burst and the real estate bubble inflated.

Please add any other 'truths' that you might have heard from the main stream media, your flipper friends and neighbors, real estate agents, bank managers, loan brokers builders or other variants of perma real estate bulls.

Friday, June 8, 2007

Weekend Open Thread...

Thanks for a wonderful week of discussion and comments.
Lots of things happening around us.
  • Mortgage rates rising
  • May be due to specter of overall global tightening.
  • Luxury car sales booming in Edmonton, fueled by (cough, cough) those in "Land Development, Construction...." "Business is booming. They're in things like land development, construction...In some cases business has doubled, tripled. They had an $80,000 car and now they're buying maybe a $160,000, or $200,000 car."
  • Inventory is still climbing, at least in comfree Edmonton. Up by more than 100 properties in less than 3 days.
  • Environmental concerns about 'dirty oil' in Alberta (thanks to marvinmee for tip)
  • So we have something interesting going on here- higher inventory, poor affordability, rising interest rates, serious environmental concerns about the core story of this bubble. Would it all translate into something of epic proportions like the last time? Or would the global central bank driven credit bubble get reinflated and address all those concerns. Stay tuned.

Wednesday, June 6, 2007

Have we passed the Peak?

It's a hard question. Given the worldwide craziness in so many asset classes, it is hard to find fault with 'investors' in Alberta who are trying to have a little bit of fun with the easy money that's copiously available. May be they'll keep on buying at higher prices in the hope of selling it at higher prices still. A lot of people still believe that Alberta will run out of land and millions of people will relocate to Alberta in the next few years.

Of course, long term students of the markets know that the time to buy is before everybody else buys it. And the time to sell is before everybody sells. We get panic buying if everyone wants to buy at the same time (like in 2006) or everyone wants to sell at the same time(would it be 2007 or later?).

I was reading Jim Rogers' Investment Biker and found a very interesting passage that is a very astute observation on all markets. In the context of Alberta real estate at present time it is particularly applicable. This would be old hat to any serious investor, but it's hard to see it in practice these days.

.....From Investment Biker pp 123

This is how markets work. Something, a stock, land, or some other store of value, will bump along at a stable price. Eventually something changes the supply demand balance. The price starts going up because people realize "Hey, they have got a new product" or "The railroad is coming through Smithtown." The price goes up for legitimate and sound reasons.
There comes a time, though, when people buy land in Smithtown only because its price is going up. At that point, my mother calls me and says, "I want to buy some acres," or "I want to buy this stock."
"Why mother?"
"Well, Jim, it's tripled over the past year," she says in a tone that reminds me of the one Tabitha reserves for calling me a dodo-head.
"That's not the way you're supposed to do it," I say. "You don't buy it because it's tripled. You buy before it's tripled."
But this is what happens. People see the price going up and know that here is the gravy train that's going to make them rich. The newspaper will have stories about Joe and Sally, how they are now rich because they bought all this land or few shares of stock in the coal mine. The price now goes up because the price is going up.
This stock or these acres become vastly overpriced. The smart guys who bought early, who bought because their family had lived in Smithtown for a hundred years, they start selling. They realize that this is becoming unsound. It turns out it's not economical to put yet another General Motors factory here, so new people don't buy land. The demand tapers off. For sound economic reasons the price starts coming down....

(Investment Biker, pp 123)

If you replace Smithtown with Alberta (Calgary, Edmonton, Red Deer) and railroad with Oil Sands, you'll see that it's perfect bubble market description. A lot of people bought in 2005 and 2006 simply because the prices were going up. They would not look at any fundamentals at all.
But may be those who have lived here for a long time know that may be Edmonton or Calgary isn't worth this price after all. Could that be the reason that we saw such a spike in the inventory? That people think this is as good as it's going to get in a long time and it's probably best to sell it. We won't know for sure. But if inventory does keep on growing at the pace it has the past month for a couple of months, we'll know for sure.

Sunday, June 3, 2007

Inventory Rising....and desperation begining

What do you make out of a Realtor press release that begins like this:
"Pessimistic market watchers are peering into the future for any sign of a market slowdown in Edmonton. According to the REALTORS® Association of Edmonton the market remains buoyant with a billion dollars worth of residential sales in May."

So is this the denial stage. Already? And going by the tenor of comments and the ad hominem attacks, it is looking like that. But I'll try to be very rational here. And look at the numbers and fundamentals. And may be an occasional shot at humor.

Let's look at the numbers. First Edmonton.
Inventory seems to have increased quite a bit. We are now close to 5000 on MLS alone. The Sales to listings has fallen to 59%. And the rule of thumb is that anywhere between in 40 to 60% is now a neutral market.
On comfree, there are over 1600 properties listed. And it looks like things are not moving at all in the comfree world.
Just to put things into perspective, last May there were only 1847 properties listed on MLS while comfree had 774.

Now to Calgary. There was quite a bit of stuff added onto the market last month. There are now around 6400 properties on sale on MLS alone. Add around 2000 from comfree and WeList and we have some choice. The Sales were actually down by 2% from last May. The sales to listings ratio is now below 60%, making Calgary a neutral buyer.
So are we at an inflexion point? May be. But you can never underestimate the 'buying power' of masses in a mania.
I'll further crunch these numbers in coming days.

p.s. Texas population increased by 12.7% between 2000 and 2006.
Alberta population increased by 10.6% between 2001 and 2006.
So you see, Texas should have seen even bigger boom than Alberta. Yeah, it's another failed attempt at humor from my side.

Update: As usual, the MSM cheerleaders are out in full swing. Obviously, they will be the last ones to see the import of rise in inventory and how things are sitting for much longer. I wonder why does anyone complain about the existence of this blog when all that anyone sees out there is roads to riches and the housing boom that will take the prices to infinity.

Saturday, June 2, 2007

Alberta versus Texas

Cost of a starter home in Edmonton or Calgary-$400k.
Cost of a starter home in Austin Texas - $120k
Does anyone even remember the days when housing was pretty much in the same range in Alberta. I do.

But Alberta is of course very different now as we have oil sands.

And oil sands somehow reduce the free available land for housing developments, as per a number of bullish Alberta investors. The impact can go as far as thousand kilometers away from the oil sands fields causing drastic reduction in available land in Edmonton, Red Deer and Calgary and beyond. Oil Sands also tend to reduce the availability of timber from our neighboring province inasmuch as the days of cheap natural gas used to extract the oil sands are coming to an end and pretty soon they'll have to get 'medieval' and start burning all this wood for extracting the oil from sands.
And we don't have any illegal hispanic workers from Mexico doing our work dirt cheap.
Also, what does Texas know about culture? Alberta is the home of biggest rodeo on the planet and nothing really can compete with it.
And in terms of economic prowess, what is Texas as compared to Alberta. It would only be a measly economy just about the size of Canada. It only has around 110 companies in the Fortune 1000 list as compared to an incomparable 4 or 5 in Alberta.
And income taxes in Texas are so high as compared to those in Alberta. Ours are only 10% while they have a high of zero percent.

So you see, things are very different in Alberta that bump up our prices by more than 3 times the prices in Texas.

I have tried very hard to come out with the above fundamental explanation for the phenomenon. I think it will help restore some 'balance' a lot of people have complained about that his blog is lacking.
Have a good weekend everyone and try to stay cool on this hot day!
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