Saturday, August 11, 2007

Season of Denial

Public mood has changed somewhat due to the extreme volatility in the markets and the consequent measures by the central banks.
And you are less likely to be ridiculed if you talk about the irrational real estate prices in Alberta.
Yet, the general response to Alberta real estate boom is that of denial. No, it can't happen here. We are different. There's no sub prime exposure here. Our economy is rock solid. Oil prices will not fall. Massive investment is being put into our province. We are cheaper than Fort McMurray or Vancouver. Calgary is the Energy super power.
Still, all these and a multitude of other responses reflect an important shift-from ridicule to denial. People can now at least 'imagine' the possibility of serious price declines. And the possibility of such declines that is contemplated in private is denied in public.
Anyone who has been around Alberta for a long time knows the true worth of this place. And how some of the properties that sell for $400k would not fetch even $125k a few years ago.

As I've mentioned (like so many others here and elsewhere), energy boom is just one little story that made the real estate mania more palatable to the masses. The real reason for the boom was the period of easy credit that lasted way longer than it should have. That season of credit expansion has come to an end as hedge funds and big banks scramble to meet their immediate cash needs. Almost anything is possible in this world, but I don't really expect a repeat of stories like those of my flipper friend who bought 11 properties with a $70k income. In fact, he has at least 3 properties in the market (others are still under construction) with $10 to $15k chopped off the prices. Still no takers. I doubt that he's going to be able to sell those properties unless he does something drastic like chopping of the prices by $50k to $75k.
Inventory is continuing to pile up in both Edmonton and Calgary. Edmonton now has 8400 properties in MLS and 2800 in Comfree. That's close to 11,200 properties for sale in a city of less than 1 million.
Calgary has 8000 properties in MLS and around 2000 in Welist. This is happening while the Sales are falling and we are past the peak selling season.
And let's not forget the 'true deniers', who know for sure that things will suddenly brighten up as the plains of Alberta welcome the first coat of snow.
Sales are slow because the sellers have unrealistic price expectations. As the credit market tightens, it will be progressively harder for first time buyers and upgraders to obtain the gazillion thousand loans on median wage. Prices are going to fall, it's just a matter of time.

The rental market has changed as well. There are about 30 to 40% more ads on craigslist rentals for both Edmonton and Calgary. Rentboard has also shown a similar increase. I occasionally put out ads for rental properties in Edmonton and Calgary and I still get responses for ads that were placed over a month ago. Why are they not able to rent properties? The rents are too high.

So both landlords and owners have very high expectations of what their properties in Alberta are worth. They could be right, but I doubt that. There are vacant properties-waiting for good renters and good buyers. I don't think Alberta is churning out jobs to sustain either the rental or real estate prices.
As flippers and speculators find it harder and harder to sell their properties and the season of denial fully blossoms, a lot of them will try to rent their properties. Pretty soon, there will be some competition for good, quality renters resulting in lower rents.
Of course, this is all based on the best case scenario-that oil prices stay high, economy remains robust and there is no global financial upheaval. If something bad happens, well.....
On a different note, our traffic has been increasing almost everyday. We now get close to 700 visitors every day. Thanks for your continued support and effort.

And finally, one little note to our dear friend Al Bundy from Bob Truman's site. You have not been banned from this site. Nobody has ever been or will be banned. Nor do I delete any comments. I used to do that until a month ago for inappropriate language, but I don't do it anymore.
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