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.
blog comments powered by Disqus
Real Estate Blogs - Blog Top Sites