Thursday, November 29, 2007

View from Ottawa

Just returned from a ten day trip to Ottawa and Mid Atlantic US. Of course, home coming is not always a great experience when you have the worst weather of pretty much all the big Canadian cities.

Ottawa has the highest family income in the country yet prices are roughly 40% lower than those in Edmonton or Calgary. They have pretty strong employment, tones of recreational activities, milder weather, proximity to the US (to get all those cheap US cars, clothing, gas and what not) and bigger Canadian cities (Montreal and Toronto) and an economy that’s diversified (federal government and high tech).

The rental market there is soft, not unlike that of Edmonton in early 2005. Free Ipods with a yearly lease are a common incentive.

We saw an ad by a custom home builder offering homes for $156/sq foot that included a treed one acre lot at a location not too far from Ottawa. Perhaps, a location similar to Morinville. But Morinville, Alberta is so different, and that’s why the cost per square foot here is easily double of the values in Ottawa. Instead of getting a 2000 square foot home on a one acre lot here, you instead get a crappy 800 square foot condo for $275k.

This is not to say that Ottawa is fairly priced. But as compared to Edmonton and Calgary, almost anything would look fairly priced. The market there has been growing at a rate closer to the inflation rate, than to the 50% or so we witnessed during last several years here.

While visiting one of the show homes, the ‘new home salesperson’ told us that they are getting a lot of visitors from Edmonton and all of them were complaining about the high prices in Edmonton.

Just for perspective, home prices were a lot cheaper in Edmonton until about last year. 2004 average Edmonton price was around $179k, compared to Ottawa’s $235k.

But we know what happened after that when the prices in our city rose to around $350k at the peak earlier this year.

As I’ve harped several times in the past, there’s no fundamental reason for prices to be this high in Edmonton or Calgary. Both the cities can expand for hundreds of miles in all directions. There’s no shortage of raw materials. The only constraint-labour-will ease in near future. Of course, in the short term, people can believe in all types of fantastic stories, but in the long term reality eventually sinks in. And it might be painful for a lot of leveraged home owners and speculators in our province.

The price per square foot in Edmonton is a little below $300. It has been falling for the last several months after reaching a high of around $330 in summer. I expect that when all the dust has settled, this number will be cut by half. Or perhaps more. Even then, the prices will be higher than they were at the end of 2005.

I’ll post some observations from New Jersey in my next post.

Finally, thanks for the wonderful participation and commentary by all.

Friday, November 16, 2007

Weekend Open Thread....

Some thoughts for the weekend:

  • We are living in interesting times indeed. On surface, everything seems okay with the Alberta (Canada) market still showing YOY gains. Of course, the MSM conveniently forget to mention how prices have been falling in Alberta for the last several months. That's obviously going to change at some point in the next few months if the 'bubbleheads' are correct and the first YOY declines are registered. But then it will passed on as a mere 5% fall in prices after several years of gains. can make the numbers sing on pretty much any tune you want if you have a musician who is skilled enough.
  • Meanwhile, the hopes for new year rebound are fervent, even though misplaced. My flipper friends have all rented their places (at steep cash flow losses) and will sell them next year when 'market corrects.' It's not hard to understand this hope based on the behavioral pattern (just look at last 10 years or so), but certainly difficult to follow if it's based on some facts of the dismal science that touts supply and demand as its core pillars.
  • Why? Because unless the number of expirations increases very significantly, both Edmonton and Calgary will be entering the new year with over 10,000 properties for sale. That will probably be amongst the highest inventories for January. To put this into perspective, we entered this year with fewer than 3000 properties for Sale in each city.
  • Edmonton inventory hasn't budged much despite a big seasonality factor that should have kicked in by now. Current MLS inventory is over 8800 and COMFREE has a stubbornly high number of 3100 or so.
  • Meanwhile, the biggest money shufflers on the planet, see heightened risks of US recession due to the continued credit problems. But obviously, Alberta is an island of its own. We have oil sands. Credit crunch, no worries. US Recession. Who cares? Rising costs, no hassles.
  • And attempts to sell the Canadian variety of junk are failing miserably. The ABCP market is still frozen and in the last few days drew bids of around 50 cents to dollar. But this is only going to increase the risk appetite of lenders to shelve out more money for buying a 1200 sq ft mansion in North East Edmonton for $400k.
Thanks again for valuable links, comments and other interesting insights.

Tuesday, November 6, 2007

But we are different....

and fiascoes like those at Citibank, Merrill, Goldman and CIBC can't really affect the Alberta market. Or Canada in general. May be because, the chicken haven't come home to roost yet. I guess it's just a matter of time.
A satirical look at the whole mortgage meltdown has become very popular on the net and explains very simply how trillions of dollars were bet on the ability of 'some less than stellar' credit worthy individuals. And wall street partied on for last several years declaring mega bonuses to the bosses down to associates and secretaries.
A year ago if someone had questioned that solvency of one of the biggest banks in the world would become an issue due to mortgage problems, it would have been met with derision and contempt.
Can something similar to this happen in Canada, say a year from now? Can it happen at all? Or are we indeed so different that our flippers who own scores of properties really a lot smarter (or luckier) than their US counterparts. May be. Or our banks are really paragons of 'risk management' and moderation and do/did not venture into the unchartered territories? Only time will tell. But be on the watch out for any potential issues in the Canadian mortgage market as well. And for all those 'jealous renters' who are bubble sitting, don't keep more than $100k in any single account to ensure CIDC coverage. We are different, but the extent of speculation in our markets will become clear only when the music stops.

Closer to home, Edmonton numbers are out, and they are quite bad. Of course, those looking for silver lining and some final straws of strength will find that row houses' average price increased. But for everything else, median and average prices fell, as expected. Edmonton too is coming pretty close to surrendering most of its gains made during 2007. Average and Median prices are somewhere between the February and March levels seen this year. Which means all those who rushed out to buy during March, April, May....until last month are in the red.
And roughly 35% of Edmonton's inventory is vacant, which means the rental deals are going to get sweeter and prices will continue to fall.
Higher oil prices of course mean nothing due to the spectacular performance of the loonie. If government isn't raking a whole lot of royalty more due to higher prices, it's not very likely that industry is fairing any better. And natural gas of course is a different story altogether.

A few years from now when dust has settled, and inventory levels do not generate any curiosity amongst the masses, people will probably be astonished at what some of the Edmonton properties sold for in 2006 and 2007. And how thousands of people were sucked into buying properties at obscene valuations.

Thursday, November 1, 2007

March 2007 prices 'reintroduced' in Calgary?

Thanks as usual to Bob Truman for the stats. We are back to March 2007 levels by pretty much any statistical measure (average, median) for old and new criteria, SFH or condos.
The condo average price seems to be the only aberration to this pattern.

Putting things into perspective, prices have fallen for SFH by a whopping $50k since end of July. That's almost 10% drop in just 3 short months. And as per CREB, July was the best time to buy, as were August, September and most likely October will be. But will any agency that's supposed to protect the interests of its realtor members going to say "please hold on, this isn't the time to buy. Wait for a few months or may be a year and let air fizzle out of this massive speculative bubble.' I very much doubt it would ever happen.

The big questions:
-Are we going to see more falls in the next two months brining the total increase for 2007 to zero (and negative in inflation adjusted terms)?
-If this does indeed happen, are we going to see to see the first YOY decline as early as January 2008?
May be it's going to be a little bit longer.
On that note, here's another poll.

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