Tuesday, February 5, 2008

Guest Post- Why I am bullish on Alberta real estate!

As mentioned in my last post, any bull or bear who is interested in making a guest post to this blog is more than welcome. Of course, your identity will be kept anonymous if you wish to do so. This post was contributed by a poster who particpates on this blog as 'linnaeus'. Contributions are welcome at albertabubble@gmail.com

Let me start off by saying there is no attempt at spin here. I am not a real estate agent. I grew up on the edges of the business since one of the things my father did to support us was house appraisals and he started teaching me how to do it while I was still in elementary school. Eventually I did appraisals on my own.

We currently rent in a gorgeous neighborhood where we can walk or take the bus everywhere. We pay less than fair value because the house is old and not in very good shape. We also own farm land I lease out and am looking at buying more. We are planning to take the income coming off that land and buy a house in Sherwood Park. We are also looking at buying an apartment building in Edmonton (older) and restoring it. That isn’t a money making proposition, the finished development will be a community housing co-op.

I am proud to say I am one of the green fraudsters that carioca canuck rants against. I work hard at trying to reduce my footprint on the earth, recognizing it is still much larger than the world average. However, I am also a small business owner who hopes someday to be a large business owner. I have lived in the sun, on the beach. I hated it. Give me snow and sub zero temperatures any day Brent.

I say all this because based on a long observation of this blog I know most of the responses to this post are going to be negative and a frighteningly high percentage of them will be ad hominem attacks, so I am trying to make all my biases crystal clear up front.

So what is my argument for being bullish on Alberta real estate?

One of the services I have provided almost from the beginning of my business life is reliable forecasts for real estate in various communities throughout western Canada.

In more than thirty years of forecasting real estate I have learned that forecasting is never a simple linear process. I am sure this shows in my posting which tends to consist of various versions of don’t be so sure you know what is going to happen. There are two prime determinants of real estate price. The first is employment. High employment tends to lead to high prices. The second factor is related to employment being people’s expectations for the future. If people are optimistic then prices generally rise. If people are pessimistic prices fall.

I think people in Alberta remain pretty optimistic about the future and employment is at an all time high. Could that change? Of course it could. A deep and prolonged US recession certainly would penalize Alberta’s economy, especially if the Canadian dollar remained at par or above in comparison to the US dollar.

I don’t think it will change. That is because Alberta’s economy is poised to out perform the rest of Canada and the US. Everybody’s economy is slowing. It is just we are maintaining our relative edge over everybody else. That will lead to Albertan’s being relatively optimistic which will keep the wheels turning here.

It doesn’t matter whether you are a CEO or a secretary you make many life decisions based on your sense of optimism and in Alberta the majority of people think the sun is going to rise tomorrow and go right on shining. The CEO’s will continue, by and large to try and raise capital and push forward with development of their business because they think, on average everything is going to be okay. That is just human nature. Ironically, the more optimistic we are, the more our relative advantage is going to grow and the more optimistic we will become. The believe things are better here draws both inter-provincial immigrants and those immigrants will contribute to the on going growth.

Demographics will also play a role in driving Alberta’s economy forward. Baby boomers, of whom there are quite a few in Alberta, will continue to look at second homes in vacation spots. They will also continue to retire. This will lead to labor shortages which will lead to more people moving here.

Greed and stupidity has led to a housing affordability problem. I am not denying that. Housing prices relative to people’s income needs to correct and dramatically. Having crunched all the numbers and spent days debating what the difference in housing purchasing behavior in Edmonton and Calgary means I have concluded that there is going to be a long period of relative stagnation in real estate in both cities (though played out in different ways).

In Edmonton we are seeing a search for value on the part of buyers. There is a tight clumping around the median price. That median is slowly sliding lower for sfh and rising slightly for condos but in both cases price per square foot is falling. Many sellers are responding by letting their houses delist and buyers are responding by adopting a wait and see attitude. Inventory is rising but only slightly. Completed deals tend to be on properties that offer value relative to what the market was doing six months ago. This has all the hall marks of a long flat line in prices that one day will again meet the long term trend lines for housing affordability. It is in no way a bust and quality is still finding buyers. Statistically this is very different from what happened in Florida or Arizona. The market is, however, over built with many new properties coming on line. This over build will lead to a more pronounced drop in price per square foot and probably median prices in the short term. Rents remain at about half of comparable mortgages and while average asking rents are going up so are vacancy rates. Commercial real state development has, after a very brief spurt, all but petered out again.

Simply put, stagnant status quo is the order of the day in Edmonton. This is a blue collar town and a deeply conservative one in terms of fiscal thinking. While things are stagnant there is very little panic. Over time inflation will bring us back to earth.

In Calgary a more interesting picture is emerging. Commercial real estate development, despite a huge over build goes racing ahead. Median and average prices are both going up. This is because completed sales, while few, tend to be clumped in the upper percentiles of real estate value. Relatively little low end real estate is moving. This is all typical of a market that is susceptible to significant short term correction. In other words, Calgary may be on the edge of a collapse in value, a crash, a bust. New listings are high, delistings are low, sales are very slow and the rich are selling out. It looks a lot like Arizona and Florida.

Why then am I bullish on real estate? First of all you don’t buy real estate, or shouldn’t, to resell it tomorrow. It is a long term hold, a place to live in, to call your own, or to use as a vacation getaway. It can also be an investment, particularly if you are a landlord. At the moment I wouldn’t be buying property to rent in either Edmonton or Calgary and neither would any other shrewd business person, the return would be awful, especially in comparison to the return. I am looking at buying a house to live in as I said above. However, if you bought a house more than two years ago and are renting it out I can’t imagine any reason you wouldn’t be happy right now.

That is because no matter how bad the depths of a recession, even a depression reach several decades from now Alberta’s economy will be back here on this mountain top. In the meantime the mountain will have grown and be higher than ever. This is because we won’t be a half trick pony, not a one trick pony either but one of the world’s most dynamic and diversified economies.

I am a devotee of the concept of peak oil. We are going to run out one day. The closer we get the more valuable the tar sands are. However, much more importantly the more valuable Alberta’s other resources become. We have coal which can be burned clean if we want to invest the money. We have sun, we have wind and already we are exploiting these resources in small ways, ways that will grow over time. Most importantly we sit on, and most people don’t know this, vast geo-thermal reserves. Under the ground in Alberta is enough power to fuel the entire world. Then there are gigantic iron deposits, and other non-precious metals the energy under the ground in Alberta could be used to turn that into steel and other products. There is a large uranium resource available in Alberta if we decided we wanted to exploit nuclear energy. Our forests are a resource we could rebuild, renew, and manage for many centuries to come as a stable economic engine. Agriculture keeps reinventing itself and will in time learn how to get by without current petrochemical inputs and it is here I think Alberta will become a leader in energy efficiency.

What I am trying to say is increasingly we live in a world of high energy inputs and Alberta has the energy. This is indisputable. We need to manage it smarter and learn to avoid these outrageous booms and busts. We need to figure out how to develop it while protecting the environment. These are not impossible targets. Humans have an amazing capacity to learn and adapt.

Bluntly but, the future belongs to Alberta, unless we really screw it up. As long as we aren’t total morons in the long term real estate in Alberta will re-engage the long term trend lines and then slightly outperform it. What happens in the short term is quite another matter.

I think there are so many people in Alberta who purchased housing when it was affordable that the 80,000 property owners that will be feeling the pinch can’t drive the price down to the levels of the late 1990s, there just aren’t enough of them, and even some of those will struggle through. Is it going to be pretty? No. Is it going to be catastrophic? I very much doubt it. Will real estate ultimately rebound? Absolutely.

blog comments powered by Disqus
Real Estate Blogs - Blog Top Sites