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.

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