Saturday, January 26, 2008

Toxic Alberta

There was a very interesting link left on Sheldon's blog - The 14 part documentary (it's not too long though, each part is 2 to 5 minutes long) on Alberta oil sands and the social and environmental impact it is causing in the Fort McMurray region. Although a lot has been mentioned about the environmental fall out and the side effects of the 'dirty oil', it's the first time I've seen something this graphical and detailed.
If you haven't already seen it, do take the time to watch it-just to broaden your perspective and to see the source of the boom and the cost being paid for it.
As others have mentioned here before, in case a not so oil friendly regime wins power in the US, there could be some interesting implications for our province.

On Realtors

Realtors are commissioned sales people who make their living by selling their services and ‘advice’ to home buyers and sellers. The higher the price of the goods they sell and the higher the volume, the higher their commission. Is there anything complicated in this that people do not understand? If the market volume falls and/or market prices fall who loses the most? You guessed it right. It is Realtors and pretty much everyone else in the real estate value chain. So why do people have any expectation that Realtors or the associations that represent them will put anything but a positive spin on everything. The case of David Lerah and the US real estate associations is all too well known. Do people really believe that CREB, EREB or any of the Realtors talk about on this blog really wish for lower prices or lower sales volumes? No.

They really want higher prices and even higher sales volume. And if I were making my living by providing these services, I’d probably be doing the same thing as well.
Just contrast how things have changed for the real estate business between 2004 and 2007. Sales volumes doubled. Which means double commission. Average sales prices doubled which also means double commission. So obviously, any thoughts of falling sales prices and/or falling sales volume must be an anathema since it clearly hurts their bottom line.

The problem here is that the real estate agencies control the data and since they are the custodians of the data, they can spin the numbers whatever they want, including changing the criteria or representation as they deem fit. We have to keep on referring to Bob’s site or Sheldon’s site because these are the only places where the data is available. If CREB/EREB were to make this data (or forced to make) this data publicly available, life will be a lot easier for everyone.

So here’s what I’d suggest again- look at the numbers from whatever sources you can, and don’t get too much into the commentary and interpretations of those whose occupation is to sell used houses. And don’t count too much on the advice you get here either-Be intelligent and smart, use your critical thinking. For example, if inventory keeps on climbing, prices have to fall, it’s just a matter of time.

Don’t expect a Realtor to say that you should hold off making purchases until a certain time. How will they make a living if they were to pass on such advice? After all, they have mortgages too! :)

I’ve nothing against any Realtor or real estate agencies. They are merely doing their jobs-if it involves pumping the market, creating an urgency to buy, introducing ‘fears of being priced out forever’ or anything else that will increase their commission-they will do it.

The onus is with the layperson to see what’s the best for them and act accordingly.

Finally, have faith in Mr Market. If the propaganda or positive spins could keep prices high, the situation in the US would have been far different.

UPDATE: Came across this nice article on the 'realtor ads' down in the land where real estate always used to go up. So clearly, these guys are the most 'optimistic bunch' with their tactics almost borderline chutzpah.

Thursday, January 17, 2008

10 Reasons why It's a bad time to Buy in Alberta

A lot is happening around us at this time in the financial markets that will probably impact consumer psychology.

But here are some 'micro' level reasons why it’s a bad time to buy in Alberta right now:

1. High levels of inventory and it’s only January. Sales to new listing ratios at close to several year lows.

2. Clear pattern of falling sales and prices.

3. Historically poorest levels of affordability.

4. No shortage of land.

5. No shortage of building materials and falling prices of timber.

6. With impending recession, shortage of labor to ease in a few quarters.

7. Rampant speculation in the market causing significant deviation from the ‘normal prices.’

8. It costs two to three times (or even more) to own a property versus renting it.

9. Negative Interprovincial migration.

10. Potentially significant problems with the economy ahead leading to uncertainty and less than confident prices.

And the wild card, that no one even wants to talk about because of the new era, peak oil, ‘Chindia’ demand and so forth:

11. Oil prices (the last ‘bull argument’) may fall below levels of ‘profitability’. Or Alberta oil might run into some type of environmental issues. Of course, the oil argument is to a very large extent a red herring in the real estate context, but still those going by the following equation may have to think:

Alberta Real Estate Prices = N*Oil Price

For those getting into a 30/35/40 year mortgages to buy an undersized cardboard box that is overpriced by at least 100k, THINK.

Thursday, January 10, 2008

Where are the buyers?

Real Estate buyers in Alberta sure seem to be taking longer than expected vacations. While close to a hundred properties are being listed every day since the beginning of the year, the buyers are simply not showing up. The sales to new listings ratio is sitting at a pitiful 20% in Calgary and below 30% in Edmonton. It's very early days in the new year, but it still makes you wonder.

What could be the reason?

Those who frequent this blog obviously know the answer. Prices are expected to decline. This is what the buyers expect. And you can’t find fault with that. Last year at this time, you just couldn’t keep the buyers contained. There were ‘bands of investors’ , borrowing money from anywhere to get a piece of the action. Then there were those who had seen it all, ‘seen banks go bankrupt’ in the last Alberta bust, but twenty five years hence, they were lining up to be a part of the mania that had engulfed Alberta once again.

Where have all those buyers gone?

Where are the ‘going going gone....’ Signs?

Inventory has resumed its steady climb again and if the sales don't catch up quickly or inventory addition slows down, we could enter the spring season with close to ten thousand properties for sale. That won't be pretty for a lot of 'upgraders' who are renting their 'previous' property while hoping that someone paid for their 'upgrade'. Speculators won't be happy either. And the developers who plan to complete the sales of over ten thousand properties under construction won't be sitting pretty either.

But what is going to cause a rebound in the sales?

Interest rate cuts? But mortgage rates are still climbing.

A decoupled world in which demand from India and China insulates us from a US Recession? But US is our biggest trading partner and the biggest importer oil in the world. So we shouldn't pin too many hopes on decoupling either.

Dollar is still at parity and it's hurting pretty much every export dependent section of our economy.

We already have negative inter provincial migration numbers.

The one bright spot that is keeping expectations (or hopes) high is the oil price. Should anything happen to it, well....(but we know nothing is ever going to happen to it, right).

I think the real estate demand witnessed between fall 2005 and summer 2007 had a huge speculative component in it. Builders, developers and the speculators themselves took that demand to be real. The builders and developers are still building at ferocious pace, not unlike those in the tech industry who based their projections in circa 2000 on demand of years 1999 and 2000. That demand was fueled by the lax investments made by venture capitalists in lame startups. We all know what happened to the tech companies that were counting on such demand. Nortel probably rings a lot of bells to Canadian investors.

Closer to the real estate domain, we know what’s happening in Florida, Arizona and Vegas. It’s hard to say the extent of damage that will be done here in Alberta.

May be the speculators will all show up from somewhere and start bidding up prices again, come spring. After all, the world just got a new source for an unprecedented demand in Oil- the $2500 car unveiled in India that would push crude oil prices to $200.

Thursday, January 3, 2008

Edmonton numbers for December 2007

are out...and as mentioned earlier, don't look too bad.
But, when combined with over 20 per cent decline in sales volume (and a change in the product mix), the price increases are not unexpected.
Since we don't have the 'representative property' available for Edmonton, we have to rely on the less accurate numbers such as overall median and average for different property classes.
This release from EREB didn't have a whole lot of spin and they compared the December 2007 values with the peak values. Even after the December increases, we are closer to December 2006 prices than to the peak prices.
And while the sales are falling in Edmonton, competition amongst realtors is likely to get more intense as a lot of people (including truck drivers) are joining their ranks. Perhaps, this should be shown to all prospective realtors before they think of switching careers.

On a different note, If you are a new reader, please make sure that you read this post, in which I mention the raison'd etre for this blog.
I do not offer any investment advice on this blog. What you read here is merely my opinion and you should take it with a grain of salt, just as you should take the opinion of anyone out there who claims to have a crystal ball (bank economists, real estate agents, real estate association economists, bulls and bears). What this blog offers is a different perspective- a break away from the monotonous tunes of Alberta shining, real estate always goes up etc-and offers opinions that you would generally not find in mainstream media.
If you are a prospective home buyer, you are your best ally. You have to watch for your self interest inasmuch as everyone who is a 'professional' in this trade (realtor, broker, banker, media) is working to promote their own interest, and rightly so. A sales person cannot say that a particular time(or any time?) is not a good time to buy. It's always a good time to buy from the perspective of commissioned agents who make money only when a sale is closed.
Read my earlier post on the real estate food chain for further details on my perspective on this. So treat everyone's opinion with skepticism and do your own research by establishing your goals, priorities, financing and budget before you jump in and make what is likely to be the biggest investment of your lifetime.
Finally, once again, just discuss issues related to real estate only. Write a comment only if it offers something informative or if it furthers discussion.
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