Thursday, April 10, 2008

Fantastic Hopes

Spring is here, at least in the real estate context. But the spring hasn’t quite sprung sales wise. Inventory continues to pile up and the pace of new construction is still frantic.
The bulls claim that everything is perfectly fine except for a little ‘inventory problem.’ If only we could get rid of the excessive homes, things will be all fine.
This is not unlike the problems in the US. If only they could get rid of excessive inventory in Phoenix, Miami, California and pretty much most of the US, there will not be a housing crisis.
But the more fundamental questions are never raised, at least in the ‘bull’ or even realist camps. Why do we have such excessive levels of inventory? Did we over build based on speculator driven demand? Did we build assuming tremendous rises in rent? Did we over build based on an unending supply of greater fools? Did ‘investors’ buy properties without really having any understanding of the real estate market and valuations?
It shouldn’t require a lot of effort to figure out answers to these questions.
There was a massive run up in prices in Alberta real estate between Fall 2005 and Summer 2007. This had very little to do with the fundamental factors-‘Alberta Advantage’, oil prices, investments in projects, strong economy, job growth etc. It had almost everything to do with two things- tremendous speculation and easy credit.
The spring is here but the rebound has not arrived. So one of the bulls’ wishes has not been granted by the real estate gods. The next strong wish for the bulls is that the inevitable-a significant drop in prices- will be deferred permanently.
Right now, the mood is still very positive in Alberta. It’s keeping expectations and hopes high for most sellers. I know at least half a dozen ‘landlords of greed’ (including our current landlord), who have chosen not to list their properties this year and decided to rent out their properties, even at the cost of several hundred dollars a month out of their pockets. The reason- expectation of prices recovering to spring 2007 levels. Given a choice between selling their properties for big profits-an easy $100k over original purchase prices-or waiting for this ‘price recovery’ and renting out in the mean time, they are choosing the option of subsidizing the renters in the expectations that the prices will rebound to the all time highs again.
What they don’t realize is the possibility that in real terms prices may never rise to those levels again. Nominally yes, but in real terms, those prices may have been the all time high. Not unlike the loonie touching 1.10 to the US dollar. Not saying it can’t happen again, but anyone who had the opportunity to sell Canadian dollar at that point and did not will have to wait for a long time before the opportunity arises again. Perhaps 97 or 98 cents won’t look too bad for the loonie if we take a long term perspective. The Spring 2007 Alberta real estate prices horse has left the barn and is not coming back.
The match is now on between the fantastic hopes of the sellers and the patience of buyers. Assuming no external shock, slowly and steadily the weight of inventory will bring down the prices. If there's an external shock (lending issues with banks, severe recession, environmental issues with oil sands, commodity price collapse), things will get ugly.
In the meantime, all the bitter renters out there should take advantage of the ‘landlords of greed’ and let them subsidize your rent for at least a year. Patience is an under rated virtue and will be rewarded.

We are almost settled in our new place and postings should become a little more frequent.
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