Sunday, September 30, 2007

Alberta Realities

This is my 100th post. Over six months ago, when I started this blog, things were very different from what they are now. Real Estate myths that were firmly entrenched in the psyche of masses, though not completely debunked, but the faith in them has been somewhat shaken. My prediction is that Alberta real estate will become a questionable investment for the masses before the year 2008 is over. Not unlike what’s happening in the US.

Not only is the inventory in both Edmonton and Calgary at all time highs, but the sales volumes are at multi year lows for this time of the year. And while this is happening, there’s a possibility of significant pullback in investment by the industry. They could be bluffing given that their profits have increased over 3 folds in the last 10 years. Or they could be serious, but are merely trying to pin a political reason on spending cuts they would have made in any case.

As mentioned several months ago and repeated by a reader in the previous thread, I believe that for the average Albertan, the prosperity has been primarily due to real estate wealth. Yes, no oil or natural gas money for the masses. Perhaps a job in the oil patch for a few, but for majority, it’s just the boom due to real estate price escalation, not unlike any other bubble city of North America.

How else could one explain, real falling wages in these times? Despite all the hype of high wages in Alberta, the average wage has fallen in the last six years. "Despite the boom Alberta has become the province with the highest percentage of employed clients visiting food banks." Perhaps, they are all spending a good chunk of their money on housing costs.
The other day a friend was looking for a house for rent. The current tenants were leaving Alberta for greener pastures. Where to? Windsor, Ontario. Go figure. They say everything is so expensive here. And of course, the winter isn’t exactly a joke.

Here’s a summary of some of the reasons why I think this bust will be a lot worse than a lot of people think at this point.

-Massive run up in the values in the last 2 years causing significant deviation from long term average values for prairie cities.

-Extreme speculation in real estate market fueled by global credit bubble.

-No geographical constraints on expansion of any major city in Alberta.

-Significant disconnect between renal rates and carrying costs. Most properties are selling for 200 to 300 times the monthly rent.

-Dramatic erosion in affordability due to stagnant incomes and surge in prices.

-Global liquidity crunch making lenders more careful about who they lend the money to.

I think the primary reason anyone would want to live in Calgary or Edmonton is economic. If wages are stagnant, quality of living is poor, infrastructure is dilapidated, hospitals are full and real estate costs are lower only than in Vancouver, why would anyone want to move here? Or those who are already living here would want to continue to live here? Alberta became and still is a play ground of real estate speculators, a lot of whom are about to learn a pretty painful but much needed lesson.

A lot of people are often surprised when the boom becomes bust. This boom will be no different.

Saturday, September 29, 2007

Weekend Open Thread

Thanks to all of you for a wonderful week of useful discussion, informative links in the backdrop of a changed real estate market in Alberta.
Some thoughts for the weekend:
  • The rental market has changed so much that the nouveau 'landlords' are now calling potential tenants for viewings. This is based on first hand experience. Apparently, the 'investors' can't sell or rent these properties. And remember, these are still great times for Alberta, at least on paper.
  • Despite that, fewer people are moving to Alberta and net migration to the province has been way below levels seen last year. Yet, they are still building in both Edmonton and Calgary as if tens of thousands of people will be moving here every month.
  • An interesting theory challenging 'peak oil'.
  • Inventory continues to climb. Comfree in Edmonton has stagnated at around 3100, while MLS continues to grow and is now reaching around 9800. Calgary is pretty much the same with over 12,000 properties for sale.
  • It still makes no sense to buy. Typical properties are selling(or not selling but on sale for!) for 250 to 300 times monthly rents. This is despite the 'massive' increases in rent and other positive factors in Alberta.
  • If you go back just six months and what were discussing here, or to Calgary Contrarian site before that, you'll find that it's playing out pretty much as we had all expected. It's a classic bubble in Alberta, although a more fragile one, as compared to the one in say Vancouver. And it is not unexpected. Prices went up by over 100% in so many cases in less than 2 years. And now when they are falling, a lot of people are shocked. Expect this shock to multiply several folds when the January/Spring/Summer turnaround does not arrive.
  • Why do people call the bears as pessimists? While reading comments on Sheldon's blog, I was characterized as a pessimist. Why is that the case. Is hoping for lower prices being a pessimist. We all are very happy when we experience a drop in prices of things we might buy. As per the Austrian school, prices of goods and services should fall in an economy where sound monetary policy is in place and productivity is improving. Yet, we continue to experience modest central bank created inflation in normal times. But in times such as these, when real estate or other bubbles are created to fuel the economies by injection of consumer spending and debt, the masses are actually robbed of their wealth, with very few people actually even realizing the bigger story. They are too busy participating in the buccaneering of cheap debt, flipping and making money using their 'investing talent'. On the human side of it, a lot of families are still cramped in 30 year old townhouses and they would love to move to better places that are more affordable. Hoping that they can get a better place to live in- Is that pessimissm?
  • Have a wonderful weekend everyone!

Monday, September 24, 2007

What's happening to the rental market?

Of course, other than the still strongly perceived rental shortage in Edmonton and Calgary.
I keep a good look at the number of rental listings on both craigslist and
Rentboard used to have fewer than 100 listings for Edmonton just until a couple of months ago. Today, that number is over 170. Craigslist had about 40 new rental listings for Edmonton alone just today. Yes, in a single day. This does not prove anything statistically, but clearly, there's a lot of product in the market right now.
Of course, none of this should be unexpected to anyone who knows how this story played out below the 49th parallel, especially in the bubble states of Florida, Arizona etc. Based on the current Edmonton MLS inventory of over 9600 and comfree of around 3100, we have almost 13000 properties for sale. And the desperation is rising, as this 'investor' will take any offer- buy or sell. Perhaps, he or she did not really crunch any numbers before buying this property? Was this bought for cashflow purposes? for retirement? More like- "real estate always goes up and since everyone was buying, I said, what the heck?"
Add to the existing inventory of above 12 or 13k in both Edmonton and Calgary, the roughly equal number of properties that are still under construction, and what do we get? We could have the reintroduction of rental incentives and falling rents. The nouveau 'landlords' have to pay their fifth mortgage one way or the other. Something to partially offset their mortgage costs will be better than nothing.
But of course, this could all turn out wrong, and someone will clear this inventory off very quickly.
But here's the dumb question of the day: If a city in Alberta has over 20,000 properties for sale and most of them are vacant, how many new comers/migrants/immigrants does it take to clear off the inventory? And how many years will it take to do so? And will the builders stop building anything new during that time?

Tuesday, September 18, 2007

Market Review

A lot is happening in the market right now, but it's like the growth of the bamboo tree
and it is still under wraps. The changed nature of real estate market will be perceptible in the masses in the coming months. My flipper friend has already pulled off couple of his properties off the block. He is paying around $1000 from his pocket just to pay the mortgage and property taxes. There are probably thousands of 'investors' like him out there. And all of them fervently hope that the market will turn around in 3, 6 or 12 months. May be it will, but most likely it won't.

Inventory continues to grow in both Edmonton and Calgary. Inventory growth in Edmonton has slowed down though the total inventory is still at an all time high of around 9400 in MLS and 3000 in comfree. At the current rate of sales, that's almost 10 months of product. And that is not a great absorption rate.
Calgary is no better. In fact inventory growth in Calgary is now accelerating and the total inventory has reached an all time high. Look at this chart provided by one of diligent readers:
It's interesting that the 'bulls' talk about market fundamentals and think that the market is going to turn around because we have the all new, oil sands powered Alberta Advantage. Except for the oil sands story, Alberta has nothing at this point, except for an economy that's super charged due to real estate spending. Not unlike BC. Consider the following factors not related to the Alberta real estate market:
  • Natural gas market is dramatically different from the market of a few years ago. Prices are sharply down and the drilling activity is down by a third.
  • Loonie is approaching parity with the dollar, reducing revenues for both the industry and the provincial government.
  • US recession is a possibility though the extent and severity of its impact on Canada will have to be seen.
The buy versus rent option is still hugely in favor of renting. A lot of readers have posted comments doing the analysis of buy versus rent, so I won't get in there again. For the typical property in this market, it costs almost twice to buy than to rent the same property. And this is in a falling market- when a typical property is losing close to $500 every day. Why should anyone buy?
Here's an open challenges to the real estate bulls of Alberta-make a convincing case for buying in the market and I'll post it as a separate post on this blog. Send it to and I'll respect your anonymity if you so desire.
Of course, everyone will be able to comment on it as usual.

Tuesday, September 11, 2007

The waiting game is on

Not much going on, except for the same old....unrealistic expectations of sellers and nouveau landlords. Speculators and flippers would like to believe that they can ask for whatever they want so long as they can show a positive net worth contribution from their real estate holdings. Mark to market will be a slow painful process, both for speculators and bubble-sitters.
The mood on the street has changed. People are now talking of the 'old days' and unrealistic expectations. I've even heard from some people that 'this was coming!' I expect the chorus of 'I told you sos' to only get louder with every passing day that inventory rises in Calgary and Edmonton. Calgary is slowly approaching five months of inventory for single family homes while Edmonton is approaching the seven to eight months supply. Thousands of new condos and homes will be introduced into the market every month for at least another year.
I know a couple of people whose 'investment' properties will be ready this month. They booked these for 'investment' purposes last year. Now the day of reckoning has arrived for a lot of such people. These properties will need a buyer or a renter. At the prices they are asking for, they may find neither. But I doubt there are too many people who can pay multiple mortgages without getting hit financially hard. Especially when the average home is losing close to $500 per day in Alberta.
But all hope isn't dead yet. The expectations of a turn around later this year or early next year are still very high. Perhaps there will be a dead cat bounce for a month or two and pull in some more suckers into the real estate investment club.
Sorry for the less frequent posting. I'd like to post more often, but I've been crazy busy with work.

Thursday, September 6, 2007

What are these guys smoking?

...When they write things like this:
He compared home prices to rents, saw "little evidence of speculation" and found a "very low" risk of an Edmonton housing bubble.
Yes, this comes from one of the biggest if not the biggest beneficieries of high housing prices TD Bank: Economist Carl Gomez, at TD Financial Group, in the latest issue of his quarterly Housing Bubble Watch, has written that "Edmonton still remains the second most affordable" large Canadian city in which to own a home.
Oh really. How about Ottawa? Or Winnipeg? Or even a suburb of Toronto? May be Halifax isn't a big city either.
As had been strongly desired by the usual suspects, the media is going all the way to make everyone feel good. Yeah, the prices are down but so what, we are still up 27% YOY. Well just wait for a few months and the YOY will become just as useless.
But here's my take. You can go on and sugar coat whatever statistics you want for the masses. Ultimately, everyone is going to realize the true value of a shoe box home in the middle of prairie is not remotely close to $400k. They are all trying hard to bring the last set of suckers in who will get into $400k debt for a 30 year old bunglow for the rest of their lives living in a city with 2 month summer.

Wednesday, September 5, 2007

Edmonton is toast, Calgary is almost there....

...but the season of denial still continues. Despite record low sales, record high inventories, noticeable fall in prices, a lot of people still want to believe that this is a healthy, normal market. Wow!
And the seasonal trends witnessed during the last several years will return, despite the clear global liquidity crunch, an enervated oil and gas sector, clear signs of job cuts in the US and an overall change in the mood in the financial markets.
Why? Because we are in the very late phase of a bubble in which tales of stupidity woven by the 'vested interests' (media, banks, real estate agents, brokers etc) were taken to heart by thousands of speculators and 'investors' who could not see any problems with 50 to 100 percent YOY appreciations.
It's a theoretical possibility that someone will wave her magical wand and clear the still burgeoning inventory from Edmonton and Calgary in the next few months and give the much needed spring rally. I don't suspect it's going to happen though.
The fundamentals are totally aligned against this market yet both sellers and newbie landlords have totally unrealistic expectations from towns in the middle of vast prairie land.
But one cannot blame these real estate 'investors'. The real estate market bubbles take years to build and years to unwind. Unlike the stock market or commodity market bubbles which can wind and unwind more rapidly. Even more fundamentally, the 'mark to market' process for real estate is much slower and arbitrary.
After all, nobody can force someone to say that their property has fallen by 20%. People can continue to have delusions about their real estate wealth for long times after the paper wealth has disappeared. And this unfortunately prolongs a market turn around. Not that we are anywhere near that situation in my opinion.
Price declines will continue as lending standards tighten and the realization of a changed marked drives 'investors' and first time buyers away. There will still be plenty of knife catchers around though who will find that a detached 1200 shoe box in Edmonton has fallen by 25% and costs a mere $330k.
The shroud of secrecy around the monthly numbers will be lifted today and we'll get some more data to play around with. And I do like the idea of someone becoming a real estate agent for the sake of numbers. It's funny that in year 2007, a lot of organizations in our country still take pride in exercising authority by withholding information. I'm willing to chip in $100 to anyone who volunteers to become a realtor for the sake of giving us the daily/monthly numbers.
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