Sunday, July 29, 2007

Revisiting Fundamentals

Edmonton market has slowed down substantially as the forthcoming numbers will attest. Calgary is holding better for the moment, but we’ll see how it holds in the coming months.

Inventory in both cities is now over 10,000 including the commission free listings. Based on my rough calculations, at the current rate of sales, Edmonton has at least 5 months of inventory and Calgary has around 4 months worth of product.

In Edmonton it’s hard to see ‘Sold’ Signs on listings even months after the listings go up. This is just a couple of months after the Edmonton Journal story that mentioned houses were “Going, going….Gone.”

The new mantra will be “Sitting, Sitting….Trying to Rent, Trying to rent….Rented”

And for once I do agree with Sheldon, that a number of listings have changed from COMFREE to a realtor. I’ve seen it happen in a few places, but I can’t say that the change brought any positive results, yet.

So why is this market imploding? On paper Alberta is doing wonderful, except for perhaps the Natural gas industry. Oil is still at historic highs and barring some catastrophic event, it looks likely that all the oil sands investments are going ahead full steam. People are still moving to Alberta, though not at a vigorous pace seen last year. But net migration is still positive. Interest rates are going up, but nothing major there either. The Alberta story is still intact. Yet, the housing prices have stopped rising. They are falling across the board in Edmonton and in certain product types in Calgary.

I guess that this market has run out of bigger fools. As I’ve harped on numerous occasions in the past, this market got the huge boost based on

  • Low inventory
  • Sudden surge in Demand from real people
  • Dramatic surge in speculator interest who believe that housing prices will increase by at least 30k in 2 months holding period.

Otherwise, is there any reason why on a fundamental basis prices should be so high in Edmonton, Calgary or of all places in Lacombe? It’s all a short term phenomenon that is going to die in the coming months and years. With our without any major ‘shock event’ occurring.

To recapitulate, why I think this market is overpriced:

  • Abundance of land. All cities in Alberta can expand for hundreds of kilometers in all directions. There is no shortage of land. The current increases in prices are purely speculative.
  • Abundance of building materials. The shoe box houses and condos that are built here do not require raw materials that are shipped from across the world. The bulk of raw materials come from our own province and from BC. Timber prices have fallen significantly since the US housing slowdown and this trend is likely to continue.

On the flip side, the primary fundamental reason for the rise in prices is related to the non-availability of cheap labor. As and when that happens, one of the major fundamental factors will have corrected itself and the market is likely to fall.

Of course, other than these fundamental factors, there are other reasons based on the market condition itself. Pretty much all the good news is already priced in to the real estate prices. Every builder and his cow know that there are going to be upgraders built in the area. So does every new ‘investor’. Unaffordability is severe. Price to rent ratios too high.

The bulls and speculators are all holding on hoping for a magic turn around in their favorite season. They are counting on a sudden surge in sales that will reduce the inventory from all time highs in a few months. It may not happen. They should all prepare a plan B.

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