Thursday, March 27, 2008

Weekend Open Thread

It isn't Friday yet but we are crazy busy getting ready for our move. I've been meaning to do some posts but didn't have the time. Here's a compressed version of some items of interest that would normally require a full individual post of their own.

- Very early in January, we questioned "Where are the buyers? And the answer given was- they are all sitting in front of their fire places and hiding from the cold weather. That weather is largely gone but the buyers haven't come yet. The question therefore merits repetition. Where are the buyers? It's end of March and so far sales are off by more than 40 percent YOY and barely equal to the Feb 2008 levels. Is this the turn around everyone was counting on? Is rest of the buying season going to be different?

- The more things change, the more they remain the same. Perhaps, the Calgary Builder Association president needs to be given an introduction to the large write offs builders south of the border have had to take due to 'land banking.' But out here, protected by the 'Canadian shield', ridiculous prices paid for land by Calgary builders is touted as one of the reasons why Calgary prices are unlikely to fall. Of course, rising land prices should be one of the primary reasons for rising housing prices in the middle of prairies with unlimited land for hundreds of kilometers in all four directions. But common sense is the first casualty in a mania.

20 months Supply of Condos in Calgary
- I don't know the extent to which Genworth's balance sheet contains toxic sub prime garbage, but they are trying their best to deny that there's any bubble in Calgary condo market. We all know that there's no bubble after all, right. There are only 3000 condos for sale in Calgary and the market has just experienced its first YOY decline in a long time. And there are only 9000 condos under construction in Calgary as of January 2008 as per CMHC Feb 2008 report for Calgary. At the current rate of sales of very optimistic 600 per month, there will be supply of at least 20 months. That's right, there's no bubble. The more important question that everyone should be asking is- just how many 40 year subprime mortgages has Genworth doled out to those making the best investments of their lives. It is quite pathetic that main stream media refuses to do any homework before rehashing the propaganda from the Real Estate marketing machine. It's especially pathetic given the recent happening south of the border. One would expect that if someone is denying that there's a bubble, someone would do some research. But the party must go on otherwise there will be a problem in the food chain.

40 months Supply of Condos in Edmonton
Edmonton is in even worse shape with over 9500 units under construction as of Jan 2008 (as per CMHC Feb 2008 Edmonton report) and current inventory of around 3000. At the current sales of around 300 per month, there will be more than 3 years of supply. But there are no bubbles.

Everyone have a great weekend!

Thursday, March 20, 2008

Inflation or Deflation

The steep fall in commodity prices in last few days, especially for gold and oil was not entirely expected. At least by the inflationists. Is it possible that this is the beginning of the unwinding of the ‘great commodity bubble?’

The simple scenario could play out this way- If we get deflation instead of inflation, commodities are going to fall. It may take a while for them to unwind, but they will fall. How fast and how hard is difficult to say.

On the other hand, commodities will be a good play if inflation or inflation expectations remain high. This has been the primary reason for recent run up in gold, oil and other commodities.

Should the US enter a severe recession, the demand for oil is likely to fall quite a bit (the 3.2 per cent YOY fall is an example). The BRIC economies have been around for a long time and still consume less than the US.

What will happen to the real estate prices here if the only support Alberta prices have got disappears? The answer may not be pretty for some people. Especially those who are leveraged and have huge debts. We are in uncertain times, and no body really knows how things are going to unfold in the coming weeks and months.

What do you think is the oil price above which ‘nothing terrible’ will happen here? What is the threshold below which we could be in the same territory as the last bust?

Tuesday, March 18, 2008

Bitter Renters etc

I was traveling all over North America during the last couple of weeks. Too much stuff going on and too many observations. I will try to post some of these in the coming weeks. But for now, the new blog on the block’ caught my attention. The vehement bitterness along with their gratuitous mentioning of our headquarters. We took offense to the rather dilapidated structure they showed as our headquarters and decided to do something about it.

For now, we have done one thing- we are saying good bye to our current apartment and moving on to a much bigger place.

The ‘bitter renter’ part in me was getting such a sweet deal that we had to take it. We just got a brand new house (2000 square feet) in South Edmonton for a princely $1500 per month. Very similar houses are on sale in the price range of $400 to $450k.

Of course, we'll be paying someone else's mortgage, but I guess it won't be more than half of the mortgage based on the current valuations. Based on our realistic valuation metrics, we'll buy this property if it were selling for between 100 and 150 times monthly rent.

A simple buy versus rent analysis for this property shows that renting will beat 'owning' for 30 years. Feel free to plug your data here in one of the better rent/buy calculators.

Obviously, most renters these days have reasons to ask for a little bitterness- the rental deals are just too sweet.

Saturday, March 8, 2008

Intuit moving its head office

First it was Dell, then TD and now it is Intuit.

The crown jewel of software development in Edmonton- Intuit Canada-is shifting its head office to Toronto. No prizes for guessing the reason-it’s too hard to find talent here and too hard to sell Edmonton to potential employees from east and rest of the world.

"It used to be one of our big sellers that people could come out and start a family here, but the cost of living is working against us now."

A recruiter friend of mine says that it used to be an easy sell to bring someone from Halifax or Toronto- same or better wages and lower cost of living.

Now one part of the story has changed drastically-same or somewhat better wages but much higher cost of living. Of course, higher cost of living is predominately higher cost for housing. For both renting and owning.

Higher wages and higher cost of living together would not be such a deadly combination (Bay Area, NYC, London etc come to mind) if the city had something more to offer (Edmonton especially). Other than 9 month long winter, a huge mall, river valley, the 14 animal zoo, four glass pyramids and 400 kms separation from mountains, the city doesn’t offer much.

Edmonton used to be a good place-for all its worth-when things were not berserk here. Rampant inflation and exorbitant cost of housing is deterring companies in ICT industry to continue to operate here.

All along the ‘bust’ years of Alberta economy (mid 80s to until early 2000s), the Alberta and the municipal government tried hard to diversify the provincial economy. Information and Communication Technology industry, along with bio technology and life sciences were the focus area.

It’s too bad that every time an energy boom arrives, it causes a ‘bust’ in all industries other than energy. And when the commodity cycle turns, there’s nothing left to counterbalance the energy industry weakening. So Alberta really experiences two busts-the commodity bust and the bust experienced during the boom years caused by the exodus of non-energy related businesses.

It’s hard to predict whether there will be another bust in Alberta, but if it does happen, there won’t be too many diversified employers available to pick up the slack.

Despite attempts by Alberta government and the city of Edmonton to attract high quality workforce, it will remain an uphill task. Initiatives such as this will help, but will only go so far. What this city needs is something substantial to retain the young professionals and/or cheaper cost of living to make up for its lack of ‘everything else.’

In other ‘non-news’, the current edition of Edmonton comfree is a sight to behold. It is perhaps the thickest comfree ever produced with over 186 page and each page has around 20 properties. With very tepid sales for this time of the year, I wonder if they'll need to produce a hardcover edition of comfree pretty soon!

Have a terrific weekend everyone.

Saturday, March 1, 2008

Wow! Prices are rising and it's time to buy again...

...if we go by the conclusions of the usual suspects. Btw, Bob you are doing a great job in providing the numbers and it's all much appreciated, even though we may not agree with your conclusions!
Bob writes a list of reasons why the prices are going up- Here's a list of reasons given:

1. We're just pulling these numbers from thin air, and they don't make sense when you do that.
2. Buyers are insane.
3. Buyers haven't found out about the bubble blog.
4. Calgarians have too much oil money to throw around.
5. We want to be different from the U.S.
6. We could be in danger of having year-over-year price decreases next month, so we're happily paying more for houses to avoid that embarrassing scenario.
7. People have a lot of confidence in Calgary's future. Justified or not.
8. With the rise in prices over the past three years, affordability has been eroded, and that may account for the lower sales.

Well Bob, I'll make things easier for you-there's perhaps another reason and it's called a change in Sales Mix. That is, possibly, there were fewer lower end properties sold and more sold at the higher level. Such a scenario would easily push up the median and average prices even though the prices did not actually rise for the typical property.

This is clearly illustrated in the Edmonton numbers where we see falling $/sq ft numbers for SFH and stagnant for condos. Despite this, the median and average prices for both Condos and SFHs actually rose.
So while Edmonton prices have risen, its most likely due to a change in sales mix and most likely not due to the start of another buying frenzy.

Of course, affordability is a valid point, but it has been valid point for quite a while. Affordability was certainly lower in March, April, May, June, July and August 2007, yet the sales were a lot higher. And whatever happened to the 40 year mortgages with zero down?

The big number is of course the massive fall in Sales. Comparing sales to 7 year old numbers is just a statistical convenience- why not compare to a 20 year average and show that 2007 sales were stronger than a 20 year average (if at all)?

So despite the spin, the reality is quite different-
  • Sales volumes are at multi year low for this time of the year.
  • Inventory levels are at all time high for this time of year and near all time highs.
  • Sales to new listing ratios are at lowest levels for this time of the year, perhaps closer to all time lows for this metric for this month of the year.
Last summer, prices kept on rising for a while despite the massive surge in inventory. So while it's entirely possible that the market turns around from here and we attain new highs(never underestimate the potential for market irrationality) this summer, it's quite unlikely given the massive inventory levels and new listings rapidly being added.
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