Wednesday, December 23, 2009

The Day of reckoning is coming

Here’s something to ponder on the Christmas eve: Alberta finally has seen negative inter provincial immigration (something we did mention several quarters ago as a distinct possibility). We have also seen the mortgages in Alberta that are in arrears (pdf) rising to the highest levels in years. We also have a fairly high level of unemployment, both official and the invisible ones (those who are off the EI rolls).
The economy grew in October but only because utilities were slightly costlier and the realtors and mortgage brokers found some bigger fools who seem to learn nothing from other peoples' miseries(US bubble, Albertans who bought at peak who are still under water etc). Despite that we are still meandering somewhere in late 2005 GDP level territory. And given the population increases since then, we are certainly doing a lot worse than a lot of special interest groups would like you to believe.

So all in all, the "solid fundamentals" that drove the Alberta's real estate market during 2005-2007, have all but vanished. Just to recollect, remember all the arguments from that era:

  • People are moving in droves to Alberta.
  • There are plenty of jobs.
  • There's Alberta Advantage.

Yet, the prices keep on rising in late 2009. Which means, there must be some other factors at work. Like the factors we discussed way back in 2007 - speculation fueled by cheap credit and abetted by CMHC. And nothing else. Nothing is more important to the health of real estate market than the availability of cheap and accessible credit. And accessibility sure means NINJA loans, government underwriting, lax conformance to solid rules of lending.
Jobs don't matter. We have seen that. Negative inter provincial immigration doesn't matter. We just saw that in this quarter. Overall shrinking economy doesn't matter. We saw that this quarter.
But credit matters only until it stops mattering. Sooner or later something will give in.

The Honourable finance minister, having woken up woken up to the reality of a real estate bubble and the devastating aftermath it might unleash when it bursts, is contemplating changes to the CMHC's requirements.

That this bubble will collapse is a mathematical and financial certainty. Will it collapse under its own weight, like it had started doing last summer, or will it be done by exogenous forces?
Will 2010 be the year when bond vigilantes finally wake up? Will the bond market really live up to its reputation as the scariest thing?

For all the renters who have managed to save goblets of cash, don't forget to share your good fortune with those in need around you. Happy Holidays to all of you.
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