Saturday, February 2, 2008

January Numbers and other thoughts

We are experiencing the best of the times in this province. Looking around, there are signs of prosperity. Everybody is happily employed or has the best shot they ever had at getting some jobs. Some people have high paying jobs. Lending is still pretty lax and people are still getting their HELOCs based on elevated values of their ‘residential portfolios.’

Yet, the houses are not selling at the pace witnessed in 2005, 2006 or 2007. The sales to listings ratio is close to the lowest levels in many years in both Calgary and Edmonton.

Perhaps, we are slightly past the best of the times in this province.

While the media and the usual suspects are trying desperately to make a trend of an almost statistical aberration in the change in median prices (average isn't the favorite of creb itself), the reality is that if you are a home owner trying to sell your property, you have to wait for a long time to sell your property, if you are able to sell it.

There’s nothing unexpected here.

I won’t spend too much time dissecting the numbers here because it has already been done and also because it’s easy to paint the numbers as ‘half full’ or 'half empty', based on your market perspective. There's nothing conclusive yet that the bubble is deflating.

However, as honest 'students' of markets and not paid shills or 'professional' salespeople , we can look at trends and try to draw some conclusions from them.

The most important trend that hasn’t changed at all is that of continuously rising inventory and falling sales.

As per old criteria, Calgary had only 3500 or so properties for sale in January 2007 and there were over 2631 sales. A hot market.

This year, at month end, Calgary had over 8093 properties and only 1800 sales. That's almost 4.5 months of inventory and it's only January. This is without counting properties on WeList or other FSBO channels.

The price movements do not adequately reflect what the sellers are experiencing as expressed in the days of market statistic.

One of the most unusual things about the Alberta bubble has been the rapidity with which the prices rose and then the abruptness with which the prices began to fall. Even in the worst bubble markets in the US, prices did not double in less than two years. So Alberta is indeed very different from almost any other market, with the exception of perhaps Saskatoon (where Alberta equity locusts went to buy the cheap houses), that we saw price declines on the first sign of major inventory build up. The typical behavior has been inventory build up accompanied by slowing sales ultimately leading to price declines.

But the peak we reached in Alberta was so precipitous that the early declines occurred with severe rapidity, not unlike the fall of NASDAQ from its peak reached in spring of 2000. By early autumn 2000, NASDAQ had almost recovered to over 80 per cent of its peak.

The important questions are- How will things proceed from here?

Alberta market can play out in two different ways. First one, if there’s an 'oil sands shock.' And by that, I mean the sole economic engine powering Alberta’s growth-the oil sands-is adversely impacted by some event. I’m fully aware of the overall lack of correlation between oil prices and real estate, but Alberta which used to be 1 trick pony (Energy sector comprising oil and natural gas) has now become only a half trick pony (oil sands). May be some day natural gas prices will rise and we’ll have a full trick pony again, but we don’t know when that is going to happen. There isn’t much to speak of in terms of diversification of Alberta’s economy and even though energy sector contributes around 30 per cent to our provincial GDP, it is the sector from which every other sector drives its growth. Even the ‘technology companies’ based in Alberta are based on oil and gas sector! No wonder then, if energy sector goes down, Alberta goes bust. The 'shock event' could be of environmental, economic or political nature. If that happens, things will become pretty bad and we’ll probably have to look back at the Alberta of early 80s or the Detroit of today to see how an area that’s dependent on a half trick pony fares when that pony falls ill. Let’s hope and pray that nothing of this sort happens for it will be immensely painful for everyone around. We haven’t diversified a single bit and the unplanned growth only goes on to kill the feeble attempts made at diversification when the energy sector is roaring.

The second scenario, the more likely one, is that there’s no major ‘oil sands shock’ and things just begin to implode-like we have been witnessing since last summer. As mentioned earlier, we still have the best of the times in the province, yet people are not lining up to buy homes. Last year, when the prices were this high, there were multiple bids and the ‘investors’ just couldn’t get enough of Alberta’s real estate. Prices are roughly at the same level that we saw in early 2007 and yet there’s no frenzy to buy. The factors fundamental to Alberta’s real estate are at work. It’s still a lot cheaper to rent a place than to buy it. A house selling for over $400k is easily available on rent for around $1600 to $1800.

We have been looking at renting a bigger place for ourselves and the last few days we have been checking out places for rent. We have been to over a dozen places and every single house was bought either as an investment property or as a consequence of an upgrade. It’s anecdotal, but it clearly indicates a lot of speculative activity and multiple ownership. Speculation that was (and still is in some places) a global phenomenon. In places as far away as Southern tip of New Zealand, to the bustling cities of china, suburbs of Indian metros, resorts and villas in Spain, flats in the UK, condos in Miami, houses in Phoenix and closer home in Vancouver, Victoria and Saskatoon, it has been the same story. Funded by lax lending standards, abetted by the almost non-existent checks and balances in the financial systems, fueled by the ‘getting something for nothing’ mentality of the crowds and the greed of almost everyone involved in the real estate value chain, we saw a massive real estate bubble globally. Yet, every place has its story to cover up the sordid tale of speculative mania. So you don’t need oil sands or anything else to be a part of this frenzy.

What we saw in Alberta, more so than in any other place was a massive ‘hoarding’ of residential product. Hoarding that deprived families a chance of owning a home and improving their quality of life. Hoarding that will prevent stronger migration to this province. Hoarding that prevents a genuine diversification of the province’s economy and ultimately leads to a less than stellar future and extreme dependence on a single industry.

The number of properties under construction is still close to an all time high and they are still building more. The rental market is also getting pretty competitive but there’s no fear or desperation yet. People still have jobs so properties are still getting rented out, even at a monthly loss.

So, is it possible that a spring rebound can occur? Weirder things have happened. Nobody can figure the mysteries of Mr. Market. But based on the inventory levels, falling sales pattern, the extent of speculative activity and the ongoing credit cycle contraction, it doesn’t look likely.

Once again, this is not meant to be a prediction. Make your decisions based on your critical abilities and knowing fully well that you are making a 25/30/40 year commitment to live in frozen tundra (sorry couldn’t resist this after the weather of last 10 days). If you are professionals not dependent on the energy sector, there are better and warmer options out there!

I’m busier than usual and if anyone (bull or bear) would like to write a guest post, please feel free to drop a line to me at

Finally, a request to everyone to keep the tone civil and arguments logical. Remember, this is a forum to give bulls and bears 'equal opportunity' to make their case and present their side of the story without making any personal insults or ad hominem attacks. It will give the readers a good chance to make decisions without having to scroll through scores of meaningless diatribes and flame wars.

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