Alberta Bubble

You buy a house for half a million dollars and...

2010-02-03T19:31:00.000-08:00

...one early evening(8 pm) you hear a doorbell. You are surprised to see someone who resembles your neighbor. He asks if the sound of music that he's hearing is coming from your house. You wonder, what sound is it? And then you remember, oh yes, it's your 4 year old who is listening to the nursery rhymes on youtube and hooked up to your 10 year old Philips stereo. You politely say yes...and promise to turn the volume down.
This is not a hypothetical example. A friend of mine who is renting a place in NW Calgary had this exact experience a few days ago. Without getting into the legalities of the situation(was it too much noise, 8 pm late enough etc) and the 'home owners' rights, the question that needs to be asked is- what the heck is going on?
We all know the story of rows of houses getting gutted in Edmonton because there was too small a distance between the homes.
A house that sells for nearly half a million and you have neighbours complaining of noise. And this isn't unruly teenagers doing a late night party, but the sound of nursery rhymes.
Also, these houses don't share any common wall, but the distance between them is no more than a couple of feet. After all, the developers, the city and everyone else needs to account for such massive scarcity of land in Calgary, right?
If this were attached houses, apartments, condos etc, such complaints would be understandable.
But if after spending close to half a million dollars, your little kids can't dance to a nursery rhyme at 8 in the evening at slightly higher volume, you are forced to wonder the entire point of buying a house.
And you recognize that something is seriously wrong with the situation. The bankers, realtors, mortgage brokers and pretty much the entire real industry complex wants to sell overpriced shoe boxes to naive young families and push them into debt subservience for most of their productive lives.
So may be this is a warning to those who are thinking of jumping into the housing market at this stage for lifestyle reasons-that their kids can have room to run around and play-Beware! What you buy might appear a bit spacious than the townhouse or condo you are currently living in, but don't expect a lot of space for yourself or your family. You'll be living in a tight and cramped subdivisions built by greedy developers, rapacious municipalities, voracious bankers and less than truthful realtors, all abetted by the economic policies and framework created by your 'government representatives.'
As for my friend, she is a 'lowly renter.' She'll be looking for a better place once her lease expires in the next few months. She does thank this blog and the commentators that she did not buy. Now imagine what would be her feeling at this stage if she had bought the same house for $483,000 with 10% down and 35 year mortgage. Worse, if most of the neighbors were in the same boat financially.
Happy renting!

Weekend Open Thread

2010-01-22T06:37:00.001-08:00

Retail sales in Canada down sharply in November. Ex-gasoline, sales fell 1 per cent in November. You won't find a glorified mention of this item in the mainstream media.
Why? Because they will be highlighting the other release from StatsCan- the fall in number of EI recipients. Which is a news to be welcomed, if it were not for the real possibility that those falling off the EI rolls are venturing into the territory of self employment or under employment.
Vacancy rates in the office and industrial sector in Alberta have soared. More so in Calgary than in Edmonton so far. But while passing through some of the industrial sections of North East Calgary, there was a glut of industrial space waiting to be leased. This reflects the level of pullback in the primary sector that has driven the prosperity of Alberta over the last decade or so.
What are your observations?

And then they'll say they never saw it coming

2010-01-07T10:35:00.000-08:00

Almost all the 'institutional liars' claim that they never saw the financial crisis coming. In the Canadian context, we were told that there won't be any recession. Prior to that, circa 2007, there was not even a brief mention of a housing bubble anywhere, except at places like this blog.

3 years later, with 5 % reduction in GDP, over half a million jobs lost, real estate values falling by over 10 to 15% from the peak, it seems people seemed to have learnt nothing. 'Real estate investing' is back in vogue and a lot of 'investors' want a piece of the action. Here's an ad in local Calgary classified for a 50 year old apartment building:

Year Built
1957 (est)
Construction
Wood frame
Suite Mix
4 One Bedroom Suites 600 sf +/-
4 Two Bedroom Suites 700 sf +/-
8 Suites Total 5,200 sf +/-
Appliances
8 refrigerators, 8 stoves, 1 washing machine,
1 dryer
Rental Rate Range
One Bedroom - $750 - $875
Two Bedroom - $875 - $950
Comments
• Clean building New roof
• Historically low vacancy

Annual Rent $82,500

Laundry $ 1,800

Gross Income $84,300

Less: Vacancy (1%) $ 843

TOTAL $83,457

EXPENSES

Taxes $ 5,902

Insurance $ 2,400

Utilities $ 7,026

Caretaker $ 2,400

R & M $ 4,800

Misc. $ 1,000

TOTAL $23,528

Net Income $59,929

Price $1,600,000

A cap rate of less than 3.75 per cent with very aggressive occupancy assumptions for a 53 year old wooden building in a boom/bust city of Calgary. Sorry, I forgot we had mastered the business cycle. I won't be surprised if CMHC underwrote the mortgage for this type of loan to a 'smart investor'.

Back in the days of 'Alberta Advantage' a property like this would sell for no more than 30 to 40k per unit.

a note on the moderation of comments-it will be stricter. far more stricter than before. if you post a personal attack, it will be deleted. if you post an insult twice, you will be banned.

The Day of reckoning is coming

2009-12-23T23:40:00.000-08:00

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.

China Bust Scenario

2009-12-18T07:47:00.000-08:00

Is China overheating? An interesting post from Mish. Of great interest should be the video below where in a brand new huge city has been built with the obvious motivation of boosting the GDP numbers. Mal-investments? Who knows?
What happens when the China boom turns to a bust or eventually runs out. For Canada, and even more for Australia, the only growth story has been commodities. Take away Commodities and Canada's financial situation overall becomes a lot more perilous.
Obviously for most Canadians, such a scenario is nearly impossible to imagine. But remember until a few years ago nobody believed that housing prices could fall across the whole country, a la USA. So we are big fans of possible events that could become probable. Whenever the China bubble pops, the ramifications will be felt in the down under and the Great white north.
Leaving aside all other cases such as higher interest rates, CMHC, real estate speculation, this is the real wild card that not too many people want to talk about. Why? Because they don't see it happening.
And pray tell, what's our plan B, should commodities fall?
A couple of more interesting perspectives on Chinese bubbles and GDP calculations.
But such unsalubrious thoughts should not consume us during the Festivus season. Happy holidays to everyone.

Yet another voice on Bubble

2009-12-16T08:23:00.000-08:00

It seems all the contrarians who successfully called the US housing bubble and global credit bubble are somehow feeling remiss in their obligations to their readers by holding back in their perspective on the Canadian real estate.
The latest one to call the Canadian bubble is yet another contrarian-Karl Denninger. He rarely minces words and boldly proclaims what a majority of Canadians will be loathe to admit:

Canada is in for a housing bust WORSE THAN OURS.

And what is his rationale?
Canadian family income as a whole ("families of 2 persons or more") is allegedly $70,000 (approximately.) The average house price? $325,000.
That's a multiple of 4.64, or dramatically into bubble territory (the maximum for affordable housing is roughly 3x, so this is 154% of the maximum!)
It's worse in places like Vancouver - there the ratio is over 10 (!) for single-family homes and about 8x for all residences.
And he concludes by warning:
Beware Canadians..... you can argue over the timing of the outcome here, but if you think the "bad event" won't happen and act on that belief, don't cry when a year or three down the road I start piping up with "I told you so!"

That's too much truth in there to be handled by the mainstream readers. So enjoy the double top formation in Canadian and Alberta real estate prices.

Canadian Housing is a Bubble, says Rosenburg

2009-12-10T07:11:00.000-08:00

One of the better known analysts who is bullish on Canada, the loonie and overall Canadian economy has a somewhat surprising take on the Canadian housing market. Dave asks, if the Canadian market is in a bubble? And the answer is yes, even though he is somewhat more conservative in his estimates of the over valuation.

This adds to the list of commentators (Shilling, Mish, numerous bloggers) whose voices have not yet produced cacophony unpleasant enough for the BOC or the Feds to do anything about it. But if they don't do anything now, they'll have to do something in the next few years.
It's a funny and tragic commentary on the human emotions-most of us will continue to merrily believe "it can't happen to us, until it happens." The bubble has burst in the US, Spain, Ireland, UK and several other parts of the world. But where it hasn't, the unflinching confidence in real estate and 'we are different' thrives.

From today's Breakfast with Dave:

IS THE CANADIAN HOUSING MARKET IN A BUBBLE?

It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.
While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).
In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …

Real estate surge no ‘blip,' TD says

2009-12-01T09:09:00.000-08:00

How do you categorize the definat housing market in face of rising unemployment, continual contraction of the economy, global recession, massive problems in the economy of our largest partner, surging trade deficit and {add your list of other problems with the economy here}? Here are the choices:

a) It's a bubble.

b) It's a bubble on steroids fueled by the greatest fools who have learnt nothing from the real estate debacle in the US, UK, Dubai and several other parts of the world.

c)It's based on strong fundamentals.

If you answered c, you can get a job as an economist with the TD Bank. But seriously, why would you answer it any other way? If you make a good chunk of your money by lending obscene amounts of money riskfree to the greatest fools in many generations, this would seem an appropriate response.

Let's talk a little bit about the fundamentals here, since we haven't dealt with those in a long time. I'll focus on my favorite ones-the ones that use the cost of production model:

-How expensive should land be in a country like Canada where there's no dearth of land? Especially in Alberta where there's usable land. Why are lots in Calgary sub division three to four times as expensive in Texas? New Mexico? Colorado?

I won't even mention the lot sizes here. The newer lots are a fraction of the size of older lots in the same city. I won't dare do a comparison with the US suburbs here. Everything is so much smaller. Because the developers can get away with it, just as retailers, auto makers, cell phone providers and everyone else in our country can get away by milking the sheep-would be Canadian homeowners.

-Why should there be so much difference in cost of construction across different parts of Canada? Yes, excluding the cost of a lot, why does it cost so much more to build a house in Calgary or Vancouver than in say Guelph or Barrie? I won't even venture to do a comparison between the US construction costs and the Canadian ones. We no longer have the problems of 'surging labour costs' as evidenced by the nearly 8% unemployment in Alberta.

What are the real fundamentals behind the house price increases? If you have been reading this blog for a while, you know the answer. And it's a four letter word.

Weekend Open Thread

2009-11-20T07:52:00.000-08:00

Short term rates in the US are negative again. There's certainly the fear of inflation that is about to be unleashed imminently, but for now, TBTB know that there's nothing to be afraid of by getting fully into short term UST.
Here's an interesting perspective on the reflation trade- what if the commodity boom fueled since early spring is not based on solid sustainable demand? The answers won't be pretty for many, but particularly ugly for Canada and Australia.
If CMHC keeps on expanding its balance sheet, will the bubble ever burst in Canadian real estate? Remember, the music went on in the US until mortgage reset based defaults started to hit the collateral quality in a direct way. Assuming the interest rates stay low for at least the short to medium term, what will cause the bubble to be popped in face of all the free money that is being thrown?
Debt is the real enemy. It takes quite a lot of debt to produce any income stream. Be it professional education (medicine, dentistry, law school), small businesses (think of franchises and mom/pop shops) or a vanilla real estate(strip malls, apartment buildings, commercial condos). A friend of mine who was laid off from an oil and gas company late last year has been unsuccessful at finding any work in his engineering profession. He's looking at buying a small fast food type of business. For a small food business(think Subway Sandwich restaurant) that produces barely $100k of free cash per year, the prices are close to $500k. Why? Because there is plenty of debt available. Think of Canadian government's pledge to help small businesses via number of its programs and the BDC. These loans all inflate the prices of underlying assets, just as CMHC based loans make real estate more expensive. Same with student loans. Cost of education keeps on climbing because the government wants to make education affordable. In the process, they are making education more expensive by throwing more debt at everyone. 'Affordable' in the government parlance means- we'll lend you money so that you can afford something done by being debt slaves for the rest of your lives. Not unlike the targets of CMHC. In the US, this has reached a breaking point now with the recent riots in the Universities of California system. The government's solution is simple- keep on increasing prices for homes, education, small businesses and keep on providing more debt. All the government entities do the same task. Instead of making things 'affordable', they make all these things accessible to joe public. At enormous price. And in a nation full of financial illiterates and 'per month payment' champions, accessibility means affordability.

Have a good weekend everyone.

Weekend Open Thread

2009-11-06T06:17:00.000-08:00

Officially double digit unemployment in the USA. Too bad, the unofficial or the other official metrics of unemployment are much higher.
Canada is not doing so badly at a mere 8.6%. But what's this, someone is actually questioning the discrepancy between what StatsCan reports based on household surveys and the official payroll reports. There's a huge gap between the two. The unemployment numbers based on household survey are very volatile for Canada showing huge gains and losses in a short period. Potentially, the higher the layoffs in a month, the more the vigor with which the ex-employees will claim that they are self employed. I'd say that the payroll report is more objective, unless we want to believe that employers are firing employees and then hiring them again pretty soon as consultants.
But I guess none of this should really make any difference to the overall economy. After all, an economy built on speculation in stocks and commodities and selling homes to each other does not require such puritan thoughts as solid employment, savings, fiscal and monetary restraint. I guess everyone will now have more time to attend open houses, visit show homes and become day traders . {Sarcasm}
Have a good weekend everyone.

Growing economy, more jobs and other lies

2009-10-30T08:13:00.000-07:00

Why is it that every contraction in GDP called 'unexpected'? Or every decline in jobs seen through the eyes of economist who never saw it coming?Why do all these economics have to constantly bullish projections? I think I know the answer-they are the cheerleaders for their respective sell side institutions, including the central banks. Here's the headline from Globe and Mail:

Economy contracted slightly in August as gross domestic product fell 0.1 per cent, following flat reading in July, but economists still believe recession over.

Why should anyone listen to these moronic 'economists' when they didn't even see it coming. Some time in future they will all claim that they never saw the housing bust coming.

Two very sobering releases from Stats Can- the Payroll report and the GDP report.

The GDP number takes us back all the way to the fall of 2005 with a total output of around $1170 billion or so. So much for 4 years of growth and the new era of prosperity brought in by the dirty oil and natural gas speculators. The growth is occurring in the same sectors-construction and public sector. One paid by tax payers now and for the other the bill will be coming pretty soon in the form of tax payer supported bailouts.

Too bad, Canada didn't spend anything on stimulus plan. Oops...they did spend around $50 billion, but that wasn't enough to still get us out of recession. Next on agenda-more spending backed by the strength of the Canadian tax payers.

The payroll report is even more sobering -guess why nobody in mainstream media talked about it. More than 110,000 non farm payroll jobs lost in August. If you look at the payroll graphs you'll see that the employment numbers are back to 2007 levels only. But the GDP is back to 2005 levels. So the economy will most likely shed more jobs to produce the same extent of output and maintain similar level of productivity. Or may be most of the employment was generated by the public sector requiring no productivity.

This is all happening when the commodities have not been routed at all-they have merely come down a bit from their all time high prices. What will Canada and Alberta be like, when the commodities do enter their secular bear market? Is there a plan B here, other than continually expanding the balance sheet of CMHC?

Have a good weekend everyone.

And the secret recipe for continued housing strength is...

2009-10-16T18:09:00.000-07:00

CMHC. Or secruitization and mortgages backed by us, the poor Canadian tax payers. CMHC has been given the go ahead to increase its mortgage cap limit to $600 billion by the Federal government. The government has full commitment to just one thing-ensuring that assets bubble don't deflate, no matter what the cost. For stupid $2 to $5 million items and expense items much smaller than that, there's a lot of debate, discussion, media attention and bickering. Yet hundreds of billions are implicitly guaranteed without anyone asking a single question anywhere. Such is the power bankers yield in this day and age.

Just for perspective, this limit is roughly half of our GDP. And when things go south, as they most likely will, what would it do to the Canadian sovereign rating? And deficits? the Loonie? Most of the people would ignore this, as they generally do until it's too late. We are following the footsteps of US just too closely.

The question is-will be lucky and see the bubble pop when the guarantees are mere $600 billion or will we have to wait till we hit a sweet trillion dollars or more?

At least the illusions of the strength of the Canadian banking system and the robustness of our lending practices are intact.

More on Natural Gas

2009-10-13T08:12:00.000-07:00

Our province's economy depends significantly on natural gas prices. More specifically, a strong Alberta economy depends on strong natural gas prices. In the past, many have speculated the ramifications for Alberta if the prices were to enter a sustained downturn.
The recent shale natural gas discoveries are getting noticeable coverage in the mainstream media and many are even speculating that this will solve the perennial US dependence on foreign energy resources.
What do you think?

Deja Vu all over again

2009-10-07T23:57:00.000-07:00

It's getting harder and harder to be a bear. It is as if the laws of common sense have all been rewritten. Less is more, debt is good, you buy houses when you don't have a job and prices rise in recession. The real demand is down, price cuts are rampant and yet inflationary fears are exacerbated by attempts to ward off almost certain deflation. It's harder to actually think rationally about finance, economics and market any more. Natural gas prices go up and down by more than 25 per cent in a single session. US Dollar keeps on falling on account of increasing deficits and loose monetary policy, yet most of the currencies it's declining against (CAD, Euro, INR, JPY etc) are just as fiscally profligate. Decoupling which had barely been buried solidly six feet in the ground just a few months ago is back with a vengeance.
We are closer to an 'economic black hole' perhaps, now that none of the 'old laws' of economics have stopped working any more.
Real estate wars are heating up all over the world. From Delhi to San Diego, it seems a solid resurgence in real estate has taken place. It seems the world is buccaneering again on the dosage of easy availability of money. No lessons from past mistakes have been learned nor any punishments served on those who brought about the pain to the masses. And here we are ready to repeat the show.
Real demand for finished products is down worldwide, yet China is building more capacity to export. China is stockpiling more of commodities, boosting Australia's economy. And this brings back decoupling back into vogue.
Multiple bids were common in 2005, 2005 and 2007. And they are back in the summer and fall of 2009.
What's the end game from this? The central bankers and pretty much all governments have only one faith and ambition- to somehow in someway refuel one global bubble. So far they are having some success.
What do you all think?

Alberta sans Natural Gas

2009-09-28T08:08:00.000-07:00

Those who have spent any time in Alberta know that the province might get all the hype for its conventional oil and oil sands assets, but it is really a natural gas driven province. What would happen if Alberta's natural gas was simply 'priced out' of the market? What would happen to the provincial royalties and the provincial budget that has gotten used to the cushy $7 to $8 prices?
This article in the Globe discusses just that:

Combine that with a technological revolution that has allowed firms to profitably extract shale gas at $4 to $5 per thousand cubic feet, compared with $7 or $8 for new Canadian conventional supplies, and Alberta gas may find itself simply priced out of the market.

...“Canadian plays in general have some challenges because of the higher cost structure and greater distance to market,” EnCana chief executive officer Randy Eresman said this month.

Could Encana's forthcoming splitting might have anything to do with this changed game?

In the article there are a few other critical insights:

“There may well be a ceiling on North American gas prices,” Gary Leach said. “We may be range-bound – at the top end, around $6, $6.50 – and a lot of Alberta natural gas needs prices higher than that.”

“Either they bring down the costs and there will be a larger industry, or the costs remain the same and it will be a much smaller industry,” he said.

But wage deflation in the oil and gas sector is simply impossible? After all, don't Albertans have to pay well over $300k just to get a little shoe box in the middle of prairies?
Too bad, those signing up for 35 year mortgages based on the very recent prosperity of the province might wake up to numerous economic surprises during the different stages of their mortgaged lives.

Bad Karma- Consequences catch up with you, eventually

2009-09-21T07:54:00.000-07:00

India is now the new diabetes capital of the world. Cases of hyper tension, diabetes and its subsequent consequences are common place here. But the street vendors and high end shops that sell low quality sweet junk and other similar Trans fat full crap are doing bustling business, even in these recessionary times. A local friend of mine has a cousin, who has been diagnosed with end stage renal failure and is expected to undergo a transplant in the next few months.
Yet, few people are concerned. I’m told that 20 years ago end stage renal failure was less common and people used to get worried over such prognosis. But not anymore. There are millions of people who have bee diagnosed with end stage renal failure and other complications that arise from hypertension and diabetes. Yet, both these chronic diseases are taken lightly. Why? If you are wondering what all this has to do with Alberta or Canadian real estate, please bear with me. At the current rate, roughly 1 in 10 people in Delhi have been estimated to be affected with Diabetes. A combination of bad genes, bad diet and lack of exercise has made this disease an epidemic here.

This is as much a social phenomenon as much as it is a public health problem. People are no longer worried about diabetes, hypertension or kidney disease because it’s normal to do so. The consequences- a drastically shortened life span and poor quality of remainder of life are not given much thought.

What does this have to do with Alberta real estate? A lot, in terms of the underlying psychology.
The Western economies have been afflicted with similar diseases. The severe addiction to debt- zero down housing, cars, massive funding for student loans, consumer credit, multiple credit cards-is similar disease. The consequences, which could especially be ‘at some point in future’ are not given a lot of thought. Especially because everybody else around you is doing it. The underlying human psychology is built primarily around ‘fight or flight’-things get our attention only when we see an imminent danger. Deleterious consequences especially that might happen at a time in the not so visible future are generally disregarded as ‘pessimist thinking.’
The sharp rise in housing sales this year in Canada is equivalent to the behavior of a diabetic patient who has been advised by the sane doctors to curtail the carb consumption, yet he increases his insulin dose and goes on a carb eating spree. Because at this very moment he doesn’t see any ill effects other than a few higher than normal medical test numbers. And this is considered ‘normal’ because he sees a lot of people around him doing the same thing. But in the slightly long term (anytime after immediate today), there will be repercussions. More debt today will result in greater pain tomorrow. Slower growth, higher taxes, higher unemployment and more bailouts. All leading up to end stage renal failure which might require a very painful transplant. Unfortunately, we do not know the treatment from this end stage debt bubble collapse.
Too bad, it is very hard to dissociate yourself from the less responsible in the society. We’ll be paying a price for the zero down mortgages, 35 to 40 year amortizations, and continued rise in prices. Even though we were responsible and did think of ramifications of our actions.

On a different note, I’m back in Alberta after spending a few months in India. Blog entries will become more frequent now.

The Pitch From Toronto...

2009-07-22T10:14:00.000-07:00

It seems all of a sudden, hope has been replaced by ardent confidence. In fact, the same old scare tactic is back with a vengeance with a not so subtle mention of 'buy now...or..."
It might be the final hurrah before the ultimate demise, but going by the fervor in the following pitch, it seems a lot of people will get sucked in. A friend of mine who has some interest in condos in the Toronto area sent this mail:

Prices are rising fast. JUNE MLS SALES HIT ANSTONISHING HEIGHTS!

We have been pounding the table since January that all the signs were clearly pointing to a fast real estate recovery in Toronto.

At that time, we were starting to see growth month-over-month in sales, but the “chicken littles” in the media and financial community were still promoting the doomsday scenario with an apocalyptic fervor. My advice had been for buyers to enter the market as soon as possible.

With some leftover motivated fall ’08 sellers and crazy interest rates - it was a great time to buy, a fleeting setback in a rising,long-term, bull real estate marketplace. My prediction was for the real estate market to settle down and start rising again, represented by a strong

seller’s market by fall ‘09. I also indicated that Toronto’s development sites, which buyers have avoided like the plague for the past year, were going to get very busy by the fall. Well, I was 100% correct about all of it, except that the real estate recovery happened a little faster than I predicted back in January. June ’09 MLS sales were nothing short of spectacular. Almost 11,000 (10,955) homes were sold. This represents an all-time high. Keep in mind that June is

typically the 4th or 5th strongest month of the year. We are smack dab in the middle of a seller’s market. Most properties sell in a few days, many with multiple offers. Prices are rising fast. I expect that for the balance of 2009, we are going to see strong numbers. Currently, the time to sell, or number of days on the market, has fallen to an average of 33 days. Chronic inventory shortage exists in most areas.

What is now going to happen is a surge in new development sales. July and August will set the tone for a busy fall when I predict that over 1000 units per month will sell for the next several months. Buyers still have a great opportunity to purchase at rock bottom prices at most of the city’s new sites.

The inventory of ‘leftover’ suites is shrinking. Pricing at all of the city’s developments are going to start to rise. New development prices are currently 10-15% lower than

resale prices. This margin will close to nothing in 3-4 months with the strengthening new development marketplace. I predict that some new developments will be launched

in the fall and several will come to market next spring. It appears to me that our economy in mending quite nicely and by late fall we will be back to business as usual.

Despite what some doomsdayers still predict, the U.S. and the world is in a better place economically. We are now in a recovery mode. By 2010, the negative prognosticators will be

safely trotted back to their dark little holes where they spend the majority of their lives, having enjoyed their fleeting 9 months in the sun. “June ’09 MLS sales were

nothing short of spectacular... Most properties sell in a few days, many with multiple offers.

View from Bangalore

2009-07-07T04:22:00.000-07:00

As I had alluded in the past, the severe cost escalation in pretty much everything in Alberta strongly dissuaded us from expanding our business in Alberta. Even after 20 to 25 per cent fall in housing and real estate prices and significant jump in unemployment, the Alberta advantage has not yet been restored. That is, Alberta advantage for companies that are not dependent on their physical presence in this province. Just 5 years ago, Dell had chosen Edmonton as one of its favored low cost locations. And just 3 years hence, it closed its operations.

So I’ve been visiting India for the last several weeks trying to establish our back office here. Despite all the bullish talk of the Indian economy’s miracles and the sustained 7 to 8% growth for decades to come, the mood here is somber. There is massive overcapacity in pretty much everything. The commercial real estate is massively over built, all in the anticipation of thousands of companies that would want to setup their back office operations here. Not that many companies have not done so or won’t do in the future- it’s just that the actual demand has been way less than the projections. Not unlike the real estate in the US, Spain, UK, China or dare I say, Alberta. The loose credit policies of central banks worldwide have transformed normal economic booms into massive manias. First the technology boom, which was a genuine economic phenomenon was masqueraded as the beginning of a new golden age. It was indeed golden age, but for those who were early to cash out their stock options and for the investment bankers who fooled the public by underwriting crap IPOs. Similarly, the genuine investments in Alberta’ oil sands and energy industry should have resulted in some uptick in the real estate. Instead, the massive credit bubble worldwide created party times for somewhat different constituency this time- home owners, flippers, mortgage brokers and of course the investment bankers.

Back to Bangalore. This place seems over populated, with roughly a quarter of the Canadian population in an area less than a fifth of the GTA. Everything should be in demand here, especially housing. Except for the fact that the current inventory of housing stock is unaffordable to majority of residents, even with generous financing. Software engineers, who were once princes and princesses of the ‘silicon valley of India’ are no longer the most desirable matches in the ‘marriage market.’ Not that the firms here don’t employ hundreds of thousands of such professionals, it’s just that the way too many of these professionals have been trained than there is real work. Once again, over capacity.

We found space in a world class business center at 40% of the rate that was given to customers last year. The reason- a major financial institutions fired its 150 employees who used to work in that office space. The business center is now desperate for any customers, and little fish like us have finally found the ‘value’ we had been seeking all this time.

On the employment front, a few ads on the popular job posting sites have yielded hundreds of resumes. Initial interviews have been fairly positive. If we are successful in hiring good candidates, we’ll be able to get 5 good people at the cost of 1 good equivalent Canadian resource.

We’d have loved to do this in our home province but alas, the Alberta economy has been severely disadvantaged to anything that is non-Energy based. Our competitors have all moved to lower cost locations and if we want to survive, we have no option but to do something similar. We figure that rather than closing down our operations entirely, it's better to remain incorporated in Canada and at least contribute something to the economy here in the form of taxes.

Before the reckless oil sands developments severely impacted all other non-dependent industries in Alberta, the province had a good shot at competing in so many industries. Housing was cheap, labour was skilled, high quality and affordable. A single wage earner making $50k could live a decent life since everything was so cheap. But all that is long gone. Once the inevitable end to resource driven boom occurs (just look at the UK), what will our economy be like? But who has the time to think about 10 or 20 years down the road when the priority for everyone is to milk the current setup for their own benefit? The recent rerun of the housing mania in Alberta and rest of Canada proves that unless it hits people directly, they won't learn anything from it. And that too, if they are really intelligent and observant.

We tried our best to not relocate our business out of the province. But the choice was simple-relocate or perish. Thousands of more businesses in this country will face similar choices in the coming months and years. The answers won’t be very healthy for the long term prosperity of our country. But who has time to think about all this when you can get rich just by buying and selling homes to each other?

Weekend Open Thread

2009-05-29T07:38:00.000-07:00

Happy days are here again....

Loonie up to 91 cents and change. Will we see parity again soon? Who knows. Ontario and Quebec are going to be in more trouble and manufacturing hit again.
Oil up to $66. Are we going to see $100 oil again? Who knows. In any case, we sure seem to be running out of space for holding the excessive oil produced during the last several months.
Up is down, good is bad, bad is great....fundamentals don't matter. Once again. We do know how this ended the last time, but everyone (Banks, Hedgies et.al) is back in the game with a vengeance, supercharged with the massive guarantees given by the governments of the world and inspired by their dedication to do 'good' to the world.
And it's not misplaced. If they can all succeed in restarting the commodities bubble, so many problems will be solved. Like all those unemployed engineers and tradespeople in Alberta can start working on the oil sands again which will help energy companies produce more and generate more tax for the governments at all levels. Never mind the drag higher oil prices will have on the rest of the world and wilt the 'green shoots.' And we seem to have forgotten how the oil bubble ended the last time. But that was all so last year.
The local real estate seems to be doing just fine again. For all those bullish on real estate, the only thing that matters is- but prices are going up and the sales are strong. This is all bolstered by the arguments specific to a locale- oil, weather, diversified economy etc. We all know how this has ended at other places but given we never completely fell down the cliff and miraculously got a lift on our journey downwards has revived many a faltering spirit. May be we are really different here. As many people would say- this is the last chance to get into the Alberta's faltered real estate market. Sigh.

Nortel Building Bought by City of Calgary

2009-05-18T23:02:00.000-07:00

Some of you who are looking at commercial investments in future might have caught this one. The city of Calgary bought the Nortel's calgary campus for around $97 million.
Is it a good value? The city of Calgary assessed the property at around $125 million....so the city is saying that for commercial properties the actual value should be discounted by at least 20 per cent?

And you might notice that I've implemented a new comment system. It will make it much easier to get rid of the trolls and hopefully have a few moderators.

Guest Post: ARE THE CALGARY HERALD & CANWEST CORP ARE PAWNS OF THE "REIC" ?

2009-05-17T14:52:00.000-07:00

This post was submitted by our regular commentator ...."Carioca Canuck". Guest articles are welcome and can be submitted to albertabubble@gmail.com

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This article reflects "my personal views and opinions" and expressed under the charter and its posting here is not a defacto endorsement by the blog owner nor GOOGLE.

Just what is news anyways ?

The collapse of a government, the egregious murder of a citizen by a criminal, the theft of money from a restaurant, the opening of a new neighbourhood business or a school, a proposed increase in civic taxes, transit parking being converted from free for the day to $3.00 a day....etc.....this is what is commonly referred to as news. Hard news. The Calgary Herald, and the other "newspaper" minions of Canwest Corp, in addition to the Canwest GLOBAL TV stations call themselves a news organization, but today, as they have many times in the past, they have crossed the line once again. Using the term "news organization" when describing this company should be taken with a grain of salt, no wait, you're probably going to need a dump truck full when you are done reading.

All over this continent the print media is losing revenue dramatically, companies are collapsing outright, employees are being laid off in record numbers, assets are being sold to fund operations, and that staple core of the print media's revenue, the advertiser, has run for the hills with their wallets firmly in hand, wherein they have found that the greater consumer reach and lower cost of the internet to be to their greater benefit.

So where does this leave The Calgary Herald, other newspapers, it's TV stations and their owners Canwest Corp ? With a .30 cent share price, you guessed it........like many other "news organizations" they are on their death bed in the opinion of some analysts, potentially facing bankruptcy and struggling for revenues. So what is a "news organization" with the power to spread whatever message they wish, as no one controls what they say or print, to do in these tough times whilst trying to stay afloat ? Grow revenues of course !! When I was young, I tried to make a deal with the devil. I said "Satan give me $1MM and a Lamborghini and you can have my soul when I die"........well, I never got the money or the car, so IMHO on that day, the devil did not exist. But today I am of the opinion that there is a devil....and it is the "Real Estate Industrial Complex" or REIC. The REIC is comprised of the media, home builders, real estate sales organizations, lending institutions and the government. So, is Canwest making a deal with this devil, or have they already done so ? Let's see shall we........

In the weekend edition of the Calgary Herald, you will see an abnormally high page count of advertisers from the REIC. The Herald's usual Saturday and Sunday editions which on some days are comprised of 120 + pages have had between 40-50 full pages of RE specific advertising over the last two years. In fact I have commented on this point some 5 + times here on this blog over the same period. Now what is wrong with that you say ? Well, nothing quite frankly, newspapers have to sell advertising to stay in business in order to print the "news". But the wheels at the Calgary Herald have fallen off the wagon some time ago.

Kathy McCormick is one of the real estate writers for the newspaper. I am not going to criticize her personally for the content of her articles, for if she didn't do what she was told to do, she'd probably be pouring coffee for Timmies. Here is her latest scribe, entitled "Dream Within Reach" in which she waxes eloquently about how record low rates, dropping housing prices, etc, etc, you know the story, make it a perfect time for first time buyers to pull the pin and figuratively blow themselves up financially down the road. Read the article closely, and you'll note that the Calgary Herald is going to do a 6 WEEK series on this phenomena !!!! Geesh......I wonder how much that cost the REIC ? Did any of you who read it see the disclaimer "ADVERTISING FEATURE" posted prominently anywhere in the text or heading of this "news" article as well ? Didn't think so. They won't even let us leave comments as that feature has been disabled for this article......ROTFLMAO !!!!

And then you have the eternal "permabull" Calgary Herald writer Marty Hope. He also can't be faulted for what his pen, or keyboard puts forth now can he ? After all, delivering the Herald as an unemployed writer would be most humbling. In the same edition, he gets his turn to glibly inform us of the power of that mysterious naive and clueless milquetoast......the first time home buyer. http://www.calgaryherald.com/business/real-estate/Dream+Within+Reach/1464293/story.html He appeals to them mercilessly, as they are the only group that can save the REIC from total and utter collapse. Again though, you see no "ADVERTISING FEATURE", nor comments section, indicating that this hyperbole must be the gospel truth and is not to be decried by those pesky basement dwelling renters.

Now Derek Sanker from the corporate parent CANWEST "news" service has his turn at bat in the same edition as well. "Paul Anderson and his wife Sue felt like they could only dream of home ownership. Much to their surprise, and after some negotiating, the couple was approved. "I looked at my wife with a tear in my eye and realized I might get a house," says Paul, 42." Please excuse me while I get a towel.......not for the tears, for the puke on my keyboard. Absolutely positively none of these articles are "news" or even "news worthy" in the clearcut journalistic sense of the word......none of them have "ADVERTISING FEATURE" posted cleary, nor a comments section. And here's why........

Mario Toneguzzi ("toneguzzi" is Italian for pile of gibberish) recently posted another "news" article for the Herald about how buyers are coming back into the market and raving about how sales have gone up over last month. Doouuh !! Look at the historical patterns and you'll see that happens every year at this time. Yet in this "news" article they left the comment feature on, and that is where you'll find the most accurate and digestible information about the state of Calgary's real estate decline. But it pisses off the REIC when they do that.......bloody basement dwelling renters again with their opinions.....heh.

So what do you, Bubble Bloggers, have to say about the Calgary Herald and the Canwest GLOBAL news organization ? Are they in bed with the REIC ? At $10,000 + per full page of Calgary Herald advertising is the REIC the only thing keeping them afloat ? While you are formulating your comments which I eagerly await, I will remind you of one thing beforehand. RE/MAX is the sole sponsor of the Canwest/GLOBAL TV evening "news"............

Analysis of New Home Price Index

2009-05-12T06:18:00.000-07:00

While some people are celebrating the spring with the signs of the shoots, bottoming of the real estate market, rebound in oil prices, it could just be another case of triumph of hope over reality. Patience is the name of the game and those who are sitting without any interest in the markets can afford to wait out. There's no urgency. There's no rush.
The fluctuations in median/mean prices of new homes in Edmonton and Calgary could just be noise though the incontrovertible fact is that prices have been falling for almost 2 years now. That is if you bought anytime in 2007 or 2008, you are in the red.
The new home price index in Alberta gives an interesting perspective as it represents a more controlled set of sample space. In the index, they get information from the same representative builders/contractors who sell largely same/similar homes.

"The New Housing Price Index (NHPI) is a monthly series that measures changes over time in the contractors' selling prices of new residential houses, where detailed specifications pertaining to each house remain the same between two consecutive periods."

The new house price Index is down to 230.8 in Calgary from a peak of 248.2 in 2008. The Edmonton index has fallen more rapidly to 213.1 from a peak of 236.2 in 2008. Please not that the monthly peaks could be higher than the values I have as I did not want to give $6 to StatsCan for getting the montly data that should really be freely availalbe. And if that is the case, then the over pricing will be even more spectacular.

Given the humble readings of 137 and 147 for Edmonton and Calgary in 2005, one can easily see the 'bubble' there. From 100 in 1997 to around 150 took over 8 years, yet the index gained another 100 points in less than 3 years. And for all the arguments about increasing population etc, Alberta's population grew just as fast in 1996-2001 than it did between 2001-2006.

Why did the prices rise so much and so fast? For the same reasons it rose in just about all parts of the world. Easy credit. Speculation. 'Real Estate always goes up' mantra.

That game is over now, except in the minds of a few who are invested heavingly in real estate, either via vocation or investments. For us, we are losing our affinity to this province as we don't work in the Energy sector and our small business is taking off in a big way. As and when we decide to expand, we don't want to be based in Alberta for reasons we witnessed in the last few years. So we really have no interst in the market, except as an observer.

On a broader scale, what we are seeing now is a desperate attempt to revive the 'decoupling myth'. That's why the rush to commodities currencies, oil and everything else. OPEC has so far cut about 3 mbpd production and yet we keep on talking about supply constraints. Everyone (banks, hedge funds etc) is trying to play the same old game(lower dollar, higher commodities, rising stocks) because this is the only game they know. But alas! the numbers tell something else. Chinese exports are still falling hard (down 23% YOY) and it seems most of the stimulus China is providing is going into building more new factories even when the power consumption and utilization is all going down in the existing factories. But that's the only thing the Chinese government can do since it doesn't have any banksters to bail out.

Returning to the index of new home prices, if the prices were to keep pace only with inflation of 3% per annum, then we would see price index of roughly 143 or so in both Edmonton and Calgary, last seen in 2005. I recall that several long time investors who bought during mid 90s bust in Alberta sold in 2005 because the market was getting frothy at that time.

For a new home that is now selling at around $400k in Calgary, it's inflation adjusted price based on 1997 base of 100 should be $400*143/236 or around $242k. Remember, 143 is the inflation adjusted index based on an anuual inflation of 3% since 1997.
A similar home in Edmonton should sell for $400*143/213 or around 268k.

Which means, we are not even half way through the declines yet, assuming there's no over swinging of the pendulum to ther other side.

Entitlement and Delusions

2009-04-28T06:25:00.001-07:00

The welfare queens and kings of Wall Street have already decided to start partying like it were 2007, never mind the trillions of dollars that have been forced upon taxpayers to keep these toxic dumps afloat. But, the underlying chutzpah at these places is enormous, along with the natural sense of entitlement that accompanies it. So what if we screwed up, so what if our products were garbage, so what if our products add negative value; we are entitled to the compensation, because we need to have the 'best and the brightest.' If this is the cesspool you get by hiring the best and the brightest, I wonder what would mere mediocres have done?

The OPEC ministers sing the same tune saying that a fairly high price of $50 is not good enough and is 'undermining economy.'
The wizards of the government economy in Alberta are not too different either as they are borrowing in the hope that the recession will go away if they wait for long enough. It's the same sense of entitlement- higher commodity prices- irrespective of the the macro economic situation. Well, here's a question. If $50 oil and $3.5 natural gas ain't going to cut it in Alberta, what happens if the prices again halve from here on? Can someone say the definite collapse in the mid east asset markets and Klein style cuts in not too distant future. Natural gas btw, is now down to around $3.2 and likely to fall further. We have been tracking natural gas since January and its slow but steady decline from $5 or more to the present levels. What this is doing to the drilling levels in the province and corporate profits will be discussed in another post.

At a more local level, thousands of 'landlords' are wishing that the recession goes away. They can't/won't/don't reduce the prices that reflect the current market conditions and hope that the prices will bounce back to a level higher than the current values. Again, it's a strong hope and delusion, built on the underlying entitlement of 'higher prices' for 'my real estate holding'.
The economy has changed since 2007. Many companies are talking about a permanent and new 'baseline' for sales, production and consequent growth.
The economy of last few years was a mirage. It ain't coming back, neither are the prices of assets that were used to foment this mirage.
A lot of people, currently on EI and the governments willing to take on more debt will recognize that despite the loads of apparent green shoots that appeared in last few weeks, nothing fundamentally has changed. The economy still stinks, no matter how much perfume is applied to it to make the stench go away. It simply can't be fixed by a culture of entitlement, and believing in the ideas of unfounded hope.
Debt deflation is here and it can't be wished away.

Season of Hope, again

2009-04-20T06:42:00.000-07:00

The warm weather of last few weeks along with the ferocious rallies in equities markets worldwide has germinated what had almost disappeared by the middle of March. Optimism is back, and not lest due to the President who got elected on the message of hope. Optimism and hope are very powerful emotions, especially when there isn't much else available. And they were on vivid display and action during the last month and a half. The calls of 'the bottom' have been getting more vociferous, even if more cantankerous for us.

So what if the world buccaneered in an orgy of debt for 25 years, the magic potion of more debt by the Fed and the treasury cured all the problems in less than 18 months. The credit bubble will unwind in just as short a time and everything will begin their ascent to the end of the universe again. Oil will rise again, and so will other commodity prices. Alberta will blossom again, and this time Fort Mcmurray trailers will sell for $1 million.

And how can we forget the major upswing in home sales across Canada? After all, sales in March have been higher than in Feb and those in April will probably be higher than in March. Notwithstanding the fact that this is as much of certainty as the average temperature going up in these months as compared to previous ones. But since this is the season of hope, no one is supposed to question such basics.

But hope, like greed is a very powerful emotion. It clouds judgement. It diminishes the capabilities of mind to contemplate simple 'what if' scenarios. Not the ones that reinforce your perspective using selective data from the last few years. Scenarios such as- what would happen to Alberta if oil goes back again to sub $30 level for a long time. Or if natural gas goes below $3. Yeah, but we were told that oil will never go below $80.

I was looking at the new MLS site the other day. For some reason, I did not hate it as much as I hated it the first time I used it. I almost liked it a little bit. If we forget the average and median prices for a moment, I think we are back to the levels last seen in April 2006 for many of the property types I used to track. A starter shoe box in Edmonton North is down to around $275k, and unlike in April 2006, there won't be multiple bids raising the price but some aggressive buyers who will ask for 5 to 10 % discount. It's the same story in Calgary. In Calgary, the homes that were selling for(at least listed for $430k) are now going for around $340k, plus the possible discount.

These are not pretty numbers and have got to hurt those who have bought in the last three years. For most of these people, they haven't paid more than 5% of their mortgage and are clearly in the red after accounting for the closing costs etc.

But these are all inconvenient facts. Facts that have the potential to dash hope and cause despair. And anger, frustration and grief. And that is to be avoided at all costs, no matter what the reality. So, the alternate reality world in which only good news happens, and is reported must be created and cherished.

Credit bubble unwind, global deflation, falling employment, falling commodity prices, falling aggregate demand, falling real estate prices, exorbitant prices for shoe boxes, tapped out consumers, massive over capacity, end of 40 year mortgages, heavy over consumption and subsequent lower corporate profits are mere distractions. The world has changed with hope. We can wish the recession away if have strong will power. If we want to it strongly enough. Like the Russian comrades who could wish the fall of the Soviet Union just by believing in the alternate reality.

But we know how that ended.

Employment numbers tell the real story

2009-04-09T07:37:00.000-07:00

...and it's being told in a not so straight forward manner. I find it interesting that the custodians of all the stats of our country have to resort to dubious math such as following:

20 full time jobs lost + 5 part time jobs gained = net loss of 15 jobs.

May be it has always been their way of reporting, but it does not paint the real picture. Part time jobs can't pay for mortgage in PEI, let alone in Calgary.

But of course, this is an attempt to make the headline number all the better and lure the masses into complacency.

Given the above equation, it's very interesting that the first line of the stats can report is this:

"Employment declined by 61,000 in March, all in full-time work."

whereas it should really be: Full time employment declined by 79,000 while part time employment increased by 28000.

Now where in the Statscan report do they mention the 79,000 figure because it represents the real picture. This is not unlike the local real estate boards registering the seasonal uptick in sales volume as new evidence of a booming or balanced market.

Closer home to Alberta, we registered another 20,000 loss in real, full time jobs, about 5000 more than that reported by Stats Can in their commentary. Once again, they add the part time jobs gain to the full time loss and arrive at a reduced figure. Our unemployment is up to 5.8%.

Going forward, expect at least 10 to 12 per cent unemployment nation wide. The repercussions for the real estate industry won't be pretty, as we have said many times in the past.

Have a good long weekened everyone!

GDP back to 2007 level

2009-03-31T06:55:00.001-07:00

It just took 4 months to completely wipe out the 'growth' of last 2 years. January's GDP fell by an annualized 8.4%, taking the total GDP back to the levels last seen in 2006.

Is it possible that we'll undo the growth of the last 7 or 8 years of the debt fueled bubble before this is all over? I wouldn't rule that out?

In other news from closer home, the drilling industry is talking about utilization at levels last seen in the 1980s.
"It's similar to the downturn that we saw in the '80s," said Joe Bruce, chief operating officer at Nabors Canada, one of the biggest drillers in the country. Because of its position in the industry, Nabors expects to run 15 per cent of its fleet during breakup. It is currently at 21 per cent."

"Another conundrum concerns manpower: Faced with the traditional slack spring season, companies must decide how many workers will receive the traditional $140-a-day subsistence pay during annual training. It's a calculation that requires looking into the gloomy future and paring down staff levels to the bare minimum needed."

Wage deflation anyone? High unemployment?
If we are unwinding the excesses of last 8 to 10 years in virtually every domain, how will Alberta's residential and commercial real estate be any different? The bulls will get a chance to make their case in the comments, as usual.

Calgary Deflationary Scenario

2009-03-28T00:03:00.000-07:00

I've been really busy with work and haven't had opportunity to post. This post from RJT deserves more attention as it presents a hypothetical scenario which is now becoming more realistic to a lot of people in Alberta. Before this is all over, expectations of a lot of people will change- annual raises, retention bonuses, competing offers, wage inflation will have become a distant memory. Keep an eye on the natural gas price, if it goes below $3, it will get ugly here.

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For fun, I would like to give a hypothetical example of deflation in action:

Let's take your typical youngish, Calgary engineer. He's been out of school about 4 or 5 years, and so has only ever seen good times, and doesn't have a concept of what "normal" or "recession" is. Let's call him "Radley", just for fun.

Radley, has done very well for a young man. Graduating during good times, he made 65K right out of school. Within 5 years, he got some good raises and perhaps a promotion or two, and is soon earning 120K. Radley thinks this progression is "normal" in a city like Calgary, which is basically immune to the booms and busts of the rest of the world.

Problem is, the bust comes unexpectedly, and everyone around Radley, including his engineering bosses, comfort him by assuring him it is simply a 6 or 12 month lull, before the perma-boom resumes. His boss even gives him a nice big "retention bonus" around Christmas.

But then something happens. The company that Radley works for starts losing contracts, and those that continue to hire the company, are asking for a reduction in price. Company starts with a "hiring freeze". After a few months, the company realizes that the next few years, probably won't look like the past few, and they need to reduce costs to stay in business. The best way to reduce costs is to either lay off engineers. If they need to hire again in a year or two, it is much cheaper to hire a young one for 60K, than one for 120K.

Some engineers get laid off, and look for other work. They can get it, but the problem is it pays them only 80K, instead of the 120K they were used to.

This is deflation in action. It is happening all around.

This actual wage deflation, memory of wage deflation, and fear of wage deflation is what takes all of the heat out of the local RE market. People don't want to over-leverage anymore, even with interest rates at rock bottom. Better to be safe. Better to have savings (not tied up in illiquid assets). Better to live in a smaller house.

It is a fundamental change in the way people act, spend, and behave.

Highest Unemployment in 6 years in Alberta

2009-03-13T06:50:00.000-07:00

A while ago, I wrote a post, titled 5 years undone.
Some people did not appreciate it fully at that time. Perhaps they will now, as the decline in economic activity brought Alberta in tandem with the rest of the country. Unemployment in Feb was up to 5.4 %, the highest level in 6 years. That takes us back to 2003. This is officially 6 years of jobs gone, and we have not even started the real carnage. Double digit unemployment is very likely before the year is out.
While some people can continue to please (or amuse) themselves by looking at slight upticks in the daily or even monthly real estate prices, these numbers still do not reflect the underlying realities such as:

More stringent Lending standards.
Changed Employment picture -Normalcy is being restored in the market, from an 'employees' market to employers market.
Real Estate prices are still very high. If we have unwound to the unemployment levels of 2003, energy prices of 2003, why won't we unwind to real estate prices of 2003?
End of of euphoria. While the central banks are trying hard to inflate another bubble, it may not happen. Japan couldn't re inflate even when they had the good fortune of exporting to countries experiencing two booms (tech and housing) during the last ten years.

Have a good weekend everyone.

Predictions Made on this Blog

2009-03-09T14:15:00.000-07:00

While the markets are doing what many on this blog have been saying for the last two years, it’s a good time to do a quick recap of how we have fared in the last two years on some of the predictions made on this blog:

Don’t buy Alberta Real Estate. The prices have fallen by around $100k for the average property since hitting the peak. That’s a good $800 per month for the next 25 years amortized over 25 years.Expect further weakness here and at least another $1000 per month hit over the next 25 years.
Commodities bust –There was a commodities bubble and it popped. It’s possible that we have not seen the bottom here, despite the steep declines in prices. Copper, Zinc, Uranium and almost every industrial commodity could be further impacted causing problems for Saskatchewan.
Higher Unemployment- This is the unfolding story. With current unemployment levels still too close to ‘full employment’ and service standards in Alberta still reminiscent of $150 oil and $10 natural gas days, a lot of pain has to begin in this area.
Falling Natural Gas- Back in January, I talked about the significance of natural gas to this province. The prices are still falling and we are sub $4 with natural gas. This will impact the profitability of big oil and gas in Calgary and provincial royalties. Back in 2002, natural gas was trading at around $2 or so. If we go there again, it’ll be a big problem.
Falling Loonie-Back in August 2008, when loonie was still trading at mid 90s, I asked, if long USD and short Alberta real estate will be a good trade? So far loonie has fallen by more than 25 per cent from the days of parity and Alberta real estate has lost around 20 per cent or so from the peak. It’s likely that we haven’t seen the end of these trends.Today the loonie closed at 4 year lows of sub 77 cent levels.
Decoupling is a myth- We are more tightly integrated than before, but decoupling has been the core argument of all commodities bulls and inflationists. So far it has been nothing more than a 'theory' like derivatives reduce risk in the financial system.

It’s entirely possible that these trends could change suddenly, but it doesn’t look very likely. This is not an investment advice either. You have to develop your own conviction about your economic worldview. Don’t rely on this blog. Don’t rely on Garth Turner (who incidentally does quite a bit of flip flop on the severity of recession, the $300 oil as soon as the recession ends, and that ‘depression won’t happen), Mish or anybody else. When you try to form your own worldview, don’t rely on the mainstream media and its poster boys. If everybody believes in what Mr Buffett says, it’s possible that his advice is now mainstream and may not reflect the underlying realities.

Your thoughts?

Recession, Oil Prices and Incogurence

2009-03-02T06:12:00.001-08:00

Let's start with the headline of today-the Canadian recession. It's here and is gathering steam. The annualized quarterly number isn't so bad as compared to numbers of other countries, but let's not forget the lag effect. And if you recall, right until the end of October, most people were talking about recession as a 'US problem and not Canadian one.'
But if we were to annualize the December numbers, then our GDP shrank by a whopping 12 per cent. The GDP for November declined by 0.7 per cent. So for the last two months of 2008, the GDP declined by an astounding 10.2 per cent, a pretty bad showing indeed.
But this is a headline you are unlikely to find anywhere in the mainstream media as most people want to believe in the 'We are different', 'we are decoupled', 'our banks are solid' stuff.

M0ving on to oil...
There's something about oil that probably used to be the case with gold. I think several gold bugs are oil bugs now. Garth Turner for example. I like what he writes, at least most of the time, but I'm surprised how he can hold two incongruous viewpoints at the same time. He subscribes to the Peter Schiff hyperinflationary school perhaps.
On one hand he talks about falling economy, a potential depression, falling demand, job losses, massive unemployment and yet in face of that he also talks of $100 oil and a rising stock market. How is that possible? Unless he expects the recession to be short and mild, profits are not rising. And unless job recovery quickly takes hold, there will be a severe demand destruction for oil. The Chindia story is pretty much on hold, if not entirely dead, with Indian economy growing at barely 5 per cent or so in the last quarter. So what will cause a sudden spike in the oil prices? And if oil does indeed rise to $100, then at least one part of Canadian economy will continue to function nicely and that is Alberta. The oilsands investments will resume, the Canadian government and Alberta government's revenue projections won't be so bad and maritimers will flock to Alberta again. Happy days will return to Alberta and the speculators will rejoice once again. But in the face of grimmest economic news in the generation, is it likely to happen? I don't think so.

In similar vein, the oracle of Omaha who seems to be losing his way, says in his annual report that oil prices in $40 or $50 range are too low. Is he just trying to rationalize his purchae of ConocoPhilips? Or is there anything deeper in that statement.
If you recall Mr Buffett visited Albertan Oil Sands in August/September last year. At that time he had remarked (paraphrasing)"You could be the best mining engineer in the world but if you are not sure that oil prices will stay high, then oil sands investments may not be worthwhile."
Again, if thinks $40-$50 oil is not a good price, then why didn't he invest in oil sands? I find that Mr Buffett is now singing the same songs as the mainstream media about inflation, 'cash is trash', 'buy and hold forever', 'stocks are for long run' and so forth. Which is quite a departure from his old days of value investing that was clearly visible during the dot com days.

In other news, the Feburary Calgary Real Estate numbers don't stink too much. Sales, prices, days on market and pretty much all metrics are down with respect to last year.

Thriving in the Recession(Depression)

2009-02-20T20:14:00.000-08:00

The downturn many of us here had predicted, but no one particularly wished for, at least in the schnadenfreude way, is here. The deniers are still in huge numbers, but with every day of falling markets, fall in prices, canceled sales orders, interviews that do not convert and bills that do not get paid, their numbers will dwindle.
One of the good things that came out of this blog was that it prevented at least a handful of people from jumping on the Alberta real estate bandwagon during the last two years.

Having saved yourself of making a stupid blunder then (and assuming you didn’t change course, like a blogger who is mentioned here frequently), what are you doing now?

Here’s what I’m doing?

• Saving lots of money. As usual. Our expenses are fixed at around $3500 a month or so and we make a lot more than that. After taxes, rest is all savings. We plan to continue to do so.
• Continue to diversify the sources of income. We don’t rely only on regular employment income. We have significant business income (two different side businesses) along with interest income. We are always looking to add more streams and make existing ones grow so that our reliance is not great on a single source.
• Keep on tithing. That’s what we will keep on doing, especially in bad times when a lot of people will be in need of help. Of course, it doesn't mean giving money only to your church, but to any non profit that you think is going great work. Or to food banks. Of course, this is a purely selfish thing to do as it saves goblets of cash, come the tax time. If our income increases even in this market, we’ll proportionately increase our contributions to this end.
• Staying fit. The doom and gloom should never be internalized. This is a personal lesson from the dot cum bust era. It should be studied and examined and decisions made accordingly. One of the best ways of remaining positive is by working out regularly. I try to run 5 to 6 miles every day or do some other aerobic exercise for at least one hour. It will hopefully keep me away from the grips of Big Pharma in the latter years. In the short term of course, my energy levels are high, attitude positive and productivity improved.
• Volunteering. And that means doing things beyond writing good blog posts and posting useful links to help people. It means, trying to help other people with your valuable skills and time. And trying to make some difference.
• Not wasting time on TV-I haven't watched TV in a long time. Everytime I travel and see TV programming for a while in a hotel room, I feel so good about the decision of not having cable TV in our home. Not only does it save us several hours in a day, but it also helps us save $50 to $100 in cable TV bill. Plus, it keeps your materialistic desires in check and helps you keep all the propaganda at bay.
• Not Depending on Government Bailouts or Help- Believe in the old fashioned capitalistic way. Watch out for your interests and protect your interests. Do things that make sense to you. Don't get influenced by the mass media.
• Start looking for investment opportunities. This may not be the right time, but the right time will soon arrive. Keeping the cash handy for investments is a good thing, but zeroing in on the asset classes you would like to buy will be helpful too. Whether it’s commercial real estate, apartment buildings, dividend paying ‘boring stocks’, strip malls or anything else, clearly define the criteria by which you will define the investments and establish valuation levels that will make you comfortable, irrespective of the short term market fluctuations. And that will certainly mean looking beyond the valuations in play in the last two decades or so. I’ll post more on this once I have more time.

What are you doing?

Painful Lessons

2009-02-15T07:23:00.000-08:00

In the feel good world of Canadian news, employers have taken a big clue from the politicians. Instead of laying off hundreds or thousands of employers in one go, most employers, at least in Alberta, are laying off people in smaller batches of 30 to 50 every day. Engineering firms are the primary culprit. Others are likely to join them in this 'non sensational', 'feel not too bad' way of laying off people.
I ran into three friends during the last week who work for engineering companies. The story is the same everywhere. EPC companies have vacated 'floors and floor's of engineers who used to work on the energy industry projects. His own concern was, "How would they pay their mortgage?"
Good question. But asked a bit too late.
During the last three years, the overwhelming attitude in Alberta (or indeed worldwide) was that bad times had been defeated forever. Much like those talking about the 'End of History', the idea of conquest of the business cycle proved a bit premature.
In several parts of Alberta, new immigrants or those who recently moved to Alberta, got themselves into huge mortgages, driven by the propaganda of the usual suspects (realtors, realtor associations, banks, mortgage brokers, newspapers etc). Most of these people have not seen even one real business cycle. That is, they have never tasted the pain that usually follows any huge boom. The bigger the boom, usually the bigger the bust is, especially if there were speculative elements built into the boom.
I had first hand experience of this while working in the IT industry during the dot com bust. But that bust was confined to a specific sector of the economy and was 'cured' by the magic potion of cheap credit, which at that time, had already been in good circulation. The central bankers merely increased it dosage to extreme levels and ended up creating a cure far worse than the disease.
Thousands of engineers are in the process of getting laid off in Alberta and lot of these engineers have huge mortgages to pay. These are all well paying jobs, with a good multiplier effect. The pittance of EI will not even cover the basic mortgage for most of these people, increasing the chances of bankruptcy and foreclosure.
Not to mention the case of all speculators who have multiple properties and were so far insulated by the relatively good rental market. The rental market is becoming softer everyday (the layoffs have something to do with it) and will pressure a lot of these speculators.

Until a few decades ago, people's hands would tremble before they committed themselves to a 20 or 25 year long mortgage. Now, it's just become a no brainer activity and an absolute essential thing to do as most people try to keep up with Joneses.
The real meaning of paying $2000 to $3000 to your banking masters, no matter what-rain or shine, health or sickness,good times or bad, strong economy or weak, fruitful employment or despairs of unemployment- over a really long period of time has been lost. For people have forgotten that the borrower is a slave to the lender. When times are good, not too many borrowers recognize this (Even though more than half of their pay cheque goes on to pay the interest over their deprecating assets such as cars and houses), but when the pay cheque stops, the reality begins to sink in. Too bad, in this day and age, you have to be a heretic to not have a mortgage when you can easily afford to.
The real estate complex has been incredibly successful at luring people by all means- fear, deceit, greed and specious economic reasoning. Buy now or be priced out. Smart people buy houses. Renting is throwing money away. Houses have appreciated at over 7 per cent per annum since the dawn of civilization.
As job losses mount and foreclosures increase and new employment opportunities continue to dwindle, a whole generation of people is about to get painful lesson on the basics of economics. That those in the media lie. Realtors lie. Bankers lie, cheat and swindle. They lie because they are in the business of selling their services and lying comes as a part of their training.
If you- the individual or the family-does not take care of affairs on your own by being economically literate and proactive, you will keep on getting painful lessons.
Once this fresh generation of 'suckers' get their lessons, speculation in real estate will freeze for a decade or more. Until the next generation of freshly minted (by immigration, emigration or from our glorious education system) 'suckers' is ready to take their place and the story begins again.

Weekend Open Thread

2009-02-06T05:35:00.000-08:00

As almost every realist knows, unemployment situation is getting grimmer by the day worldwide. Specifically in Canada, we shed over 129,000 jobs last month. That's a huge number. More than the specific economic damage these numbers do to the economy of the region, the bigger damage is done to the psychology of the consumer who will put off purchasing big ticket items, heck even small items. The regions west of Thunder Bay seem to be holding on the best so far. But for how long? Once the gravity of global slowdown is fully priced in to the commodity markets, the bust here will rival that of the manfucating towns of the Central Canada or even worse.
The US fared far better than us on Per capita basis, losing 'only' 598,000 jobs. This way we have lost more than twice the number of jobs than the US last month.
The Official Unemployment rates in both Canada and the US are at 7.6%. How quickly have we caught up with our southern neighbour. I can't help but reminiscence the conversation I had with Honda Car Dealership Manager a few months ago when she said, "But this is an American problem. Our economy is strong here." Hopefully by now she has waken up to the reality that few are insulated from this global slowdown and by every characteristic this looks like a totally different beast. Much different than any other recession most people have seen in their lives.
What is the way out? People are waking up to the reality that almost everyone whose opinion they thought they could trust, has been lying to them. The elected demagogues, real estate agents, central bankers, economists, company CEOs, mainstream media and almost anyone with any shred of authority. Before this is all over, people will trust themselves more than they trusted 'Suzzanne' or their friendly neighborhood mortgage broker.
We need to watch out for ourselves. It's a very simple thought, but too many people have forgotten what it means to take care of their own affairs. A little paranoia is not bad, as Andy Grove used to say 'Only the Paranoid Survive.'
We need to excel at our own jobs so that in a globalized workforce environment, we can offer more value while in Canada than those in other parts of the world. This is most relevant for the 'information workers', that is all those whose jobs can be taken offshore with a click of mouse. We need to have huge savings so that we can ride out the downturns in a better way, without expecting too much from the government. To give you some perspective, some of my friends save over 75% of their net income. They do make comfortable six figure incomes, but I think it's got more to do with the attitude towards savings than with the specific dollar amounts that people make.
Almost every idiot urging you to go out and spend is doing so to promote their agenda. Real value and real economic activity is created by real savings and not by debt. We have had almost no savings in this part of the world for the last decade or so. Wtihout real savings, there cannot be meaningful investments and no real job growth. Speculation driven investments in commodities and real estate disappear sooner or later leaving very few real jobs. But I doubt if too many people in the right places will suddenly develop an urge to do anything about this. Instead, they will push people to take on more debt, annihilate more of their savings on bad home upgrade projects and push them further into perpetual wage slavery, albeit at wage rates with an equilibrium point determined by third world level wages.
Talking about the specifics of Alberta real estates seems almost a detail in the midst of the global turmoil. The prices of almost everything are way too high across the province. They will fall. Unemployment will rise and so will the foreclousres. Those buying at this time either 'must buy' (not sure who they are) or they are incredibly naive. Or they still have faith in what the Bank of Canada governor who believes in magical second quarter turaround. May be in next life, due to accumlated bad karma, Mark will be born as a realtor association economist that believes in a perpetual second half rebound.
And while, the economy is going to hell, bankers are fleecing billions and potentially trillions in dollars from the tax payers, Canadian are expressing outrage at a 60 year old woman giving birth to twins. No wonder fleecing the masses is trivial-it's too easy to distract people from the real issues! In 21st century, it's more than bread and circus- it's bread, circus and drama!
Have a good weekend everyone.

Thoughts on the Budget

2009-01-27T21:55:00.000-08:00

The budget is out and there is nothing meaningful there. Opportunity to cut taxes substantially or even send some stimulus checks that are commonplace in the US and heck even in Alberta, at least in circa 2005 has been squandered. Keynes would have been delighted had he been alive today at the tremendous following his works are getting worldwide. Canada will issue over 85 billion in debt to finance this increased spending. So much for the 'better fiscal shape' of Canada. And the consequent prospects for rise in the loonie. I think deficits will be even worse than the current projections as the full magnitude of commodities collapse trickles down to the various sectors of the Canadian economy and the government tax and royalty revenues.

In addition to the above, at tax payers expense, the government will buy more of toxic garbage, this time not confined to only homes but securities backed by used Hummers and Dodge Durangos.

It’s clear that the only trick known to the government worldwide is the one taught to them by the bankers and that is-credit is everything.

There’s no point of putting money directly into people’s pockets even as hundreds of billions are given to bail out inefficient and corrupt bankers.

And by the looks of it, I doubt very many people are going to be impressed by the little tax cuts that are offered.

Looking at the budget, all I see is future tax increases for our progeny while we get little if any benefits out of it.

Your thoughts?

Weekend Canadian Delusion Edition

2009-01-23T07:00:00.000-08:00

This morning while perusing some Canadian news, I come across a headline "Home Depot buys its way out of project." Sure, bad times mean such decision are likely. But this is what I find instead as an explanation:

"Home Depot's decision is further proof some Canadian retailers are paying a high price for the economic woes south of the border, some observers said.

"They're (Home Depot Canada) definitely getting pressure from their U.S. parent just because things are so bad in the U.S.," said Michael McLarney, editor and publisher of the Canadian online home improvement retail magazine, Hardlines.

Are these guys for real? Don't they still see any problems with Canadian economy? When will they admit Canada is for twice the pain as the US.

Continuing on the topic of bigger pain, I think Canada experienced two bubbles while most other first world economies (Except say Australia and New Zealand) experienced just one. Our first bubble was the housing bubble and our second bubble was the commodity bubble. Which is why we are likely to be hit twice as hard in terms of falling employment exacerbated by falling commodity prices leading to further problems with the housing market.
The symptoms of deflation are here in Canada: "Canadian consumer prices fell a third consecutive month for only the second time since 1931 as energy prices plunged, giving policy makers room to lower interest rates to revive the world’s eighth-largest economy." They still believe in the infallibility of the central bankers and their ability to cut rates and force the economy out of the mess. The falling loonie will give some encouragement to Canadian 'inflationists' but purely Canadian items such as housing and wages will continue to fall further. A friend of mine in IT recruitment said that she has change a sea change in the attitude of lot of job seekers since November.
Your thoughts?

Who could have thought this? Suncor making loss

2009-01-20T07:41:00.000-08:00

It's probably an aberration as the prices plunged a lot faster than they had time to adjust their cost base. But it doesn't' bode well for Capital spending that a lot of Edmonton and Fort McMurray bulls had their expectations tied to.

The board this month approved a revised 2009 capital spending program of C$3 billion, with about one-third of that for “growth projects” and the remainder for the “base business,” Suncor said in the statement. An October plan had targeted spending of C$6 billion this year, 21 percent less than in 2008.

And as we have said numerous times in the past, clinging to historical highs is stupid. Suncor CEO admits,

“I think there’re some people hanging on to the history of it rather than the go-forward basis,” George said during the call.

What's the plan B for Alberta's future prosperity?

Weekend Open Thread

2009-01-17T08:03:00.000-08:00

Based on the amount of spam left on previous thread by someone not too happy with the existence of this blog, it seems the blog is still serving a purpose. I've been incredibly busy with a few project deadlines and will resume posting more frequently soon.
I'm working on getting a better comments system in place so that the spammers' IP Addresses will be banned and publicly posted on this blog.
Just as I've mentioned a number of times in the past, as soon as resource revenues fall, there's going to be a big trouble with provincial government employment levels. The big guys are finally admitting it and we know it won't end happily. The funny thing is that nobody questions how the governemnt was able to generate massive surpluses a few years ago with oil prices at $35 and now the same governemnt is going to be solidly in red at the same prices of oil. Perhaps the natural gas prices are the factor but they haven't admitted it yet.
Have a good weekend.

Few will escape this unscathed

2009-01-14T09:18:00.000-08:00

Residents of Alberta island, especially those with strong vested interests in high commodity and real estate prices are about to wake up to a harsh reality. The falling prices of oil were affecting the future prosperity and project based construction and engineering employment. But now there’s another potentially dangerous animal circling on top of Alberta economy-falling natural gas prices.

A lot of people don’t pay much attention to natural gas prices, but they are the bread and butter of the province, especially of big corporate in Calgary and the provincial government royalties. Oil royalties are merely a drop in bucket as compared to what the Alberta government collects from natural gas (by a factor of 6).

Today natural gas prices fell to 2 year lows of around $5. Should the natural gas prices fall further, as they just might in face of severe demand contraction, there will be massive further fallout from this in provincial government and corporate employment levels in the province.

Natural gas business is the cash cow for most businesses in the province while oil sands was the future growth business.

The growth business is now in dumpster and the cash cow will likely come under severe duress. There’s no way this will have a happy ending for the provincial economy.

Right now it’s hard to find a sector of economy that is booming or even going steady, bankruptcy specialists excepted.

If worldwide demand continues to fall across the board as it has, there’s no one that will escape unscathed.

Despite a significant fall in the oil prices, there was a noticeable decline in consumption of gasoline in the first week of this year. Unemployed people don't take skiing trips , take extended vacations or go for frequent shopping trips to the mall. Those who are fearful of losing their jobs show similar behavior.

Everything ranging from dental hygienists to entertainers will feel the pinch of this slowdown. A lot of demand of everything in last several years was just as fictitious as the NINJA loans and demand for virtually everything is falling apart worldwide. In face of this, Canada’s (and Australia, Brazil, New Zealand’s ) economy cannot remain insulated.

It wouldn’t take a genius to figure out what a further collapse in commodity prices will do to Canadian economy and Alberta real estate.

Those who are contemplating buying in this environment at ridiculously inflated prices will have severe cases of post purchase dissonance for many years.

Weekend Open Thread

2009-01-09T06:11:00.000-08:00

Some thread starters:

NFP in the US is bad, but could have been worse. Still the year ended with an unemployment of 7.2 per cent. Very few except those on the 'lunatic fringe' had predicted such a high rate by the end of 2008. It's very likely that we'll see 2009 end pretty close to double digit unemployment in the US.
Closer home, the unemployment jumped here as well, with the biggest fall in construction activity. The quintessential migratory worker to Alberta- single male in early 20s-will soon find Alberta to be too expensive, too cold and with too few job opportunities in an area of his expertise. Result: falling demand for rental units, putting further pressure on residential prices.
From the same report, Alberta recorded the largest loss of full time positions (-16000). Alberta still has the lowest unemployment rate in the country but one must wonder for how long. I guess some of us had it right when we saw the commodity bust coming. This is only going to increase foreclosures and make rentals even cheaper.
It should be little surprise that with all the negative news firmly getting entrenched in the minds of consumers, sales have ground to a halt in Calgary and Edmonton. People fearful for their jobs and prospects don't buy overpriced shoe boxes. Especially when they have to pay part of it from their pockets in the form of higher down payment.
And coming from the 'heard from friends' section, layoffs are affecting Calgary's engineering workers. Jacob's, Colt, Bantrel and others. Most mining projects have been delayed by six to 9 months and a severely truncated workforce is keeping the projects alive so that if the oil prices do bounce back (another on the wish list of most Albertans), the projects can be brought back online quickly. So much for the 'long term' and strategic thinking of the Alberta Energy companies. You can go through the entries in this blog and see what a lot of Alberta RE bulls had to say about the energy sector- this time they are doing things differently. And short term price fluctuations don't impact the long term, 'peak oil' driven perspective these companies have taken. But guess what, all that stuff amounts to zilch when it costs $60 to produce something and you can only get $40 for it in the market. The economically unviable operation will soon cease to exist no matter what the company's 'long term plan' says.
And in another return to fundamentals, a quick perusal of Kijiji shows asking rents are falling steeply and based on my personal responses to some of the ads, most of the 'landlords' have come down from their high horses. You can negotiate rents down by upto 10 or 15% off from the asking prices. And falling rents don't make the underlying properties more attractive.
Another variety of salesmen is having a good time selling the fix for the forthcoming gloomy conditions. But despite what you read here on this blog, I'm not afraid of the gloom and doom that is being used to sell some of the 'life saving' things. If one has spent certain amount of time in Africa or the poorer parts of Asia, what is being termed as 'catastrophic' in Canada will be taken as business as usual. Power failures are common there and so is a lack of potable water and sewage. But life goes on. People live and are happy. And the same is the case with this recession, severe recession or depression. There will be pain, unemployment and other problems. But our system in Canada, with all its flaws, is still amongst the best in the world and will prove to be a lot more resilient than some think.
Have a great weekend.

Five years undone

2008-12-19T08:49:00.000-08:00

Readers of Bill Booner’s daily missive will recognize a term that he widely used during last five years or so. He used to call the boom as a ‘crack boom.’ A boom in which nothing useful was created but everything was merely an illusion. Just like an eastern scripture says, ‘all that is visible is illusory.’ There was illusion of wealth and prosperity.Of achievement and triumph. Of mastering the business cycle by artificial setting of interest rates by a committee.

And now with oil falling below $35, we have undone almost 4.5 years of speculative and artificial demand of a product that would have made Alberta and Canada the Energy superpower of the world. Demand that was fostered by free credit, rampant speculation and excessive greed. Demand that disappeared as soon as the Hummers were repossessed, the McMansions foreclosed and factories closed down in China.

Too bad, that in one stroke OPEC agreed to reduce the oil production by the entire projected supply of the Oil Sands (by 2020).

This morning sitting in my office with a windchill of -35 outside, I am just wondering how could so many people around the world have been so naïve. The naiveté varied across cultures, continents and locales, based on some sort of fundamental underlying belief that ‘we are different.’ The 'weather in California', 'oil sands in Alberta', ‘Olympics in Vancouver’, ‘Microsoft/Boeing Economy of Seattle’, ‘BRIC magic of Mumbai’, ‘Manufacturing prowess of China’, ‘Financial juggernaut of London’….the list is endless. Every city had its own way of overpowering reason and common sense.

And now, we have to confront reality.

The consequences won’t be pretty. As most of Canada and several parts of the US go through a major cold weather streak, I can’t help but think what would have happened to natural gas prices if this were year 2005 or 2007. But then, until the ‘master thieves of universe’ started placing massive bets in the commodity markets on 50 to 1 leveraged funds, periods of massive spikes and volatility in prices were few and far between. Peak oil was merely an interesting theory and not a call to action for the doomsday crowd. Yet, a good majority of people who believed in a housing bubble did not believe there was a commodity bubble. Or bubble in oil and gas.

The entire Alberta Government and the oil and gas chieftains of Calgary or Houston did not believe that oil prices will fall again. But time and again, the unbridled optimism of investors and market participants is undone by Mr Market. This time is no different. Many on this blog ridiculed me for being a pessimist and believer in gloom and doom. Reflecting on this, I think I had been too optimistic for I did not know the extent of corruption, fraud and deceit in the underlying financial economy.

The reality of Alberta’s economy is that it is entirely dependent on the Energy sector. Once the energy sector slows down, as it is now, everything else will follow. Foreclosures, lay offs, bankruptcies will all rise leading to the prairie land version of rust belt. At least until the next wave of liquidity lifts the sunken boats of commodities. And the coming months and years will illustrate how inane the claims of diversified Alberta economy were.And perhaps for next few decades people will think numerous times before spending half a million dollars on a tiny shoe box.

Happy holidays to everyone.

Weekend Open Thread

2008-12-05T05:54:00.000-08:00

I woke up this morning to hear not so positive news on so many fronts. The chicken are coming home to roost now and the years of credit excesses, leverage, denial, 'Greenspan Put' and speculation are clearly hurting the mainstream economies both in Canada and the US.

US unemployment rose by over a whopping half a million. Worst since 1982. Bye Bye Goldilocks economy. Bye Bye quick recovery.
Canadian unemployment rose by 77,000, a much worse number than the US if we account for population.
The West is fairing better at this time, but it's only a matter of time. Layoffs are occurring at GE, Jacobs etc and the full effect of the ensuing commodity bust is only starting to getting felt.
Oil is at $43 and more importantly natural gas is below $6. A fall to $25 and $4 will kill the economy of West in a replay of 1982. But 1982 will look like a picnic as compared to what's unfolding right now. Just for perspective, the 1982 recession was 18 months long. This recession is already 12 months old and until recently leading economists did not even admit that there was a recession. And Canada is only in a 'technical recession' as per our esteemed leaders. Expect things to get much worse on the employment front with a double digit unemployment rate a very real possibility.
With manufacturing tanking and the commodities bust about to show its ramifications, what's going to happen to the real estate? Not a very pretty picture.
The bust is here. It can't be wished away and most readers of this blog knew what was coming. Yet a few delusional ones bought and even had the chutzpah to lure others into buying by making specious arguments. With a grim employment picture, it won't take much convincing to anyone to put off buying homes. Or will it? When people have sleepless nights before signing on the mortgage papers and committing themselves to a debt for 25 years, we'll know the market has become normal.
Finally, the loonie is down to 77 cents and change. The true companion of $25 oil would be a 65 cents loonie. So much for the collapse of USD.
And here's a little bit of humour on this otherwise gloomy news day(from Calculated Risk blog comment post):

Lawrence Livermore Laboratories has discovered the heaviest element yet known to science. The new element, Governmentium (symbol=Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Since Governmentium has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. A tiny amount of Governmentium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete. Governmentium has a normal half-life of 2 to 6 years. It does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places.

Have a great weekend everyone.

What will Oil and Gas Bust do to Alberta real estate?

2008-12-04T10:17:00.000-08:00

Several months ago, there was a poll on this blog that talked about the ramifications of lower oil prices on Alberta. The consensus then was that anything below $50 would be bad. If $50 were bad, what would $25 oil do to Alberta? And what will be the impact of $3 or $4 natural gas?
Many educated commentators on this blog have long made the case that the Alberta real estate boom had less to do with the commodity prices but more with the rampant construction activity and easy credit/speculation.
But we can't deny that at least there was some component of the increased demand from people who moved to Alberta in search of work. Now that it looks an oil and gas bust is a fairly probable if not likely event, what will happen to all the new Albertans who moved here just for jobs? They will likely move to places (in east or west) that have somewhat more diversified economies.
I've a few friends who moved to Calgary in EPC companies from all over Canada during the last few years. The EPC companies (Colt, Jacobs etc) recruited massively in the last few years in anticipation of the hundreds of billions of oil sands spending that everyone was counting on. With almost all the upgraders now canceled or indefinitely delayed and the spectre of $25 oil seriously threatening mining projects in Fort Mcmurray, I expect massive layoffs in EPC sector soon.
And that is just the start. Even though there are still lots of jobs in Calgary, almost everything in province is built around oil and gas. We have discussed in the past how our half trick pony energy industry manages to kill everything in the boom years that is developed during the bust years.

If the commodity bust really unfolds as I am afraid it will, expect the following:

Sharp fall in provincial government resource revenue (this will be impacted more by natural gas prices) leading to fall in government spending, hiring freezes and potential layoffs in government. Let's hope it won't be 1992 all over again for government employees.
Very few oil sands projects will continue to produce leading to sharp fall in profitability of oil and gas sector and consequent retrenchment of workforce.
Since everything in Alberta is built around the energy industry, everyone ranging from accounting firms to staffing agencies will be impacted.
A sharp slowdown in construction employment sending the transitory labour force home.
Rental vacancies climbing and reaching 10 per cent or more.
Flippers, speculators and others in the same genre who have been saved so far by a strong rental market will start hemorrhaging cash and will run to exits.
Start of noticeable foreclosure activity in Alberta at this stage.
Combination of layoffs, falling employment, tighter credit, foreclosure will pull the prices further down.
And the vicious cycle will continue.

Of course, this is not a chronological forecast of things that are about to unfold but a likely scenario that can play out in several different ways but will most likely feature most of above mentioned items.

In most of the posts in the past, I avoided making a case for collapsing values in Alberta real estate based on the fundamental economic factors. But the dreadful bust scenario is now knocking on the doors of Alberta and the last few years of greed, speculation, excesses, lack of public policy will only exacerbate the problems.
It looks like the fat lady has sung on Alberta's most recent boom.

Anyone who is thinking of buying at this time is either too rich or too stupid.

Is the beginning of the second leg down in prices?

2008-12-02T10:24:00.000-08:00

Residential Sales plummeted across the board in Edmonton and Calgary last month. The first drop in prices last summer was preceded by a sharp contraction in sales volumes from the bubble level sales.

While condos in both Edmonton and Calgary saw a sharp drop in prices, an across the board massive drop in value hasn’t occurred yet. Like a ten per cent fall in SFH values in Calgary or Edmonton in a month.

With the psychologically important oil prices below $50 and environmental pressures mounting in the face of an ultra liberal government, oil sands might not be the saviour of Alberta Real Estate after all.

If sales fall further in December from the levels seen last year, it’s possible that we are now going to see the second leg down for the real estate prices. And if the macro economic picture and commodity bust unfolds as I’m afraid it might, the spring bounce that so many sellers and realtors are counting on (yet again) will be more ephemeral than a mayfly.

How much will you pay for your next house?

2008-11-27T11:24:00.001-08:00

Garth has an interesting post on becoming a property vulture. One of the reasons we stayed away from buying a house was the arrogant attitude of builders, realtors and pretty much everyone else in the real estate food chain. Hopefully, the last 15 months will have given them some idea of what's about to come. But certainly, by the time we reach a bottom in terms of economic activity, housing, commodity prices and morale, almost everyone in this country will begin to treat their customers with respect.

Moving on to the main point of the post, the most important question that one must ask is-what is the fair value of house? How much will you pay for the house?
As I've mentioned in a couple of posts last year, the following metrics will be of help:

Cost per square feet. I think $100/sq feet is a very reasonable number. Accordingly, for the links that bearclaw posted for 1700 sq ft properties, they will be fairly priced in the $175k range. Some might find the price outlandish, but for me it's merely the representation of a cookie cutter shoe box on a tiny lot in the middle of prairie with harsh winters, half trick economy and no recreation other than a big mall.
Price to Rent Ratio. The old school fair value of a property was 100 times monthly rent. Assuming the current rental rate of this property at $1700 , it values the property at around $170k. But given the current level of elevated rents, the actual rent in the not so great times might be only $1300. So based on this metric, the fair value will be $130k.
Cashflow positive etc. A lot of 'investors' buy properties based on this metric. I'm not a huge fan of this method.
Historical values. Some say 2002 prices will never return to Edmonton. Perhaps. But to get a true sense of 'normal times', we must go back to the years when Edmonton used to be associated more with 'block heaters' and 'rednecks' than prosperity and oil sands. 2002 is a good year for making that comparison. Economy had started getting out of the gutter of late 1990s bust and things were beginning to sell. Builders were selling fairly priced homes that were affordable and had good quality. A friend of mine bought a similar home (to the ones shown above) in 2001 for around $165k in south Edmonton. You could buy similar homes in the $160-$190k price range until 2004. And then the caravan trips began.
Buy versus rent metric. Don't use the calculators provided by the realtor organizations. The best ones I've seen is from NYT and using the calculator.

You can guess that the time for me to buy is quite a bit away. I won't rush into buying inasmuch as even if prices don't fall beyond a certain point, they are likely to languish there for a while.
For most people a house purchase will be the biggest purchase they make in their lives. Most people unfortunately, spend too little time on this. They won't haggle, negotiate or simply walk away from the purchase. And the consequences of such nonchalance are seen in years and decades ahead.

Your thoughts?

$50 Oil is here....

2008-11-20T05:42:00.000-08:00

and is very likely to overshoot on the downside. Is $40 or even $30 possible. Why not? If 3 months ago anyone questioned that oil could go below $60, he or she was termed fool, like several posters here. Too bad people have such short memories. Even the champions of doom and gloom such as Garth Turner buys into 'higher long term energy costs' while we are in an ocean of deflation. But just yesterday, the DOT reported that the number of miles driven has fallen by around 5 per cent in the US in September. People are now saying, "anytime you drive your vehicle and it's not for work, you are wasting money." Ouch. With the prospect of a multi year bust and double digit unemployment, where is the demand for oil going to come from? The Chindia bull is dead for the moment, but who knows.
In the mean time, our province faces more fundamental problems- What will Alberta do once the oil sands engine is cold? Not much. All the diversification attempts have come to a naught with a merciless exodus given to all non oil and gas companies. Intutit, Dell, TD Call Center and many more have left the province(or even Canada).
Now that the bubble inflated by artificial supply of credit and fake demand for worldwide commodities has burst, are we going to revert to our core competency of selling cheap manufactured goods to the US, attracting US tourists based on a 70 cent loonie and handing out film tax credits? It should not be outside the realm of possiblitiy. It was after all only 4 short years ago that Dell when opening its Edmonton location even refused to pay for training its new recruits. Such was the state of desperation for new jobs in Edmonton. Any big corporation will now be extremely reluctant to take advantage of massive unemployment and cheap loonie anywhere in Alberta after our success in driving out most non-energy companies out of here. And for that, the primary reason was wage inflation driven by high cost of living created primarily by the high cost of housing. Perhaps Alberta government should do something about reining in the speculation in Real estate based on subsidized mortgage products.

Welcome to the New World

2008-11-17T23:14:00.000-08:00

We are back after spending a week in the US. The US has changed quite a bit since our last visit almost a year ago. From waitresses in Manchester, New Hampshire who offered suggestions on getting special combo deals for breakfast as ‘every cent counts’, to the sales clerks in Wrentham, MA who hugged me to buy lots of things on the Veteran days sales, it seems like the deflation reflected only in the asset prices so far has finally found its way into consumer items as well. Hotels have become a lot cheaper as well. We stayed in decent Holiday Inn and Mariott rooms for less than $70. Of course, unlike most Canadian hotels, these were large, nicely furnished rooms with flat screen TVs and included breakfast. In booming West though, you only get a roof over your head for this much price, that is if you are lucky.

A retail sales associate in Nashua mall checked on me at least three times to make sure I found what I was looking for. Obviously, with low sales volumes, everybody is scared of losing their job. And what better way to ensure job security than actually doing what you are paid for! What a novel concept. I don’t really recall sales reps being this good in the last ten years. Of course, Albertans are still living in their fantasy land and the nonchalance of sales reps is still very conspicuous in almost every place where I shop. While taking the delivery of my Accord I casually asked the sales manager if their sales were declining and she remarked, “Yeah, there’s a little slow down, as some people see all this gloom in the US and get worried. But it’s their economy and not Canadian economy!”
Of course, she will be learning some painful lessons in economics and firmly grasp that ‘we are all dependent on the US economy’ the coming months as oil prices drop below $50 in the coming weeks and months.
A friend of mine who has family in India says things are getting gloomier there by the day. Perusal of the economic press there talks about major reduction in workforce, fall in real estate, stocks and pretty much every other asset class.
Remember the decoupling theory? Nobody wants to talk about it anymore. It is in graveyard along with the titans of Wall street. It was the ray of hope for the world after the US housing bust, even though the entire world’s growth was piggybacked on the insatiable US (and perhaps other first world) consumers. Remember India was going to save Alberta. And China too. Now that these countries are looking for their own saviors, who is going to save Alberta? Yes, the OPEC production cuts. But didn't we have the second largest reserves in the world? Can't we do something about it? I guess almost every oil company is going to do something about it and the answer won't be to the liking of anyone whose fortunes are tied to high oil prices.

When I look back at things, I could never have imagined they would get this bad. I thought the biggest swindlers and crooks on Wall Street still had everything in control. But I guess with TARP firmly showing up on their balance sheets, they couldn’t care less for the fate of the main street or the rest of the world.

In the coming months and years(hope not), those who possess cash will be in a lot better shape than those who don't. The inflationary period characterized by too much money chasing too few goods (houses, stocks, oil, cars, labour, art work, RVs, boats, carry trade currencies) is definitely over. In the new world, cold cash will rein supreme and those who possess it will have the upper hand over those who have no cash but possess too much of stuff (stocks, cars, houses, debt, art work, RVs, boats etc). The latter group unfortunately represents bulk of world’s population today (exceptions in some parts of Europe, Asia etc).
Too bad nobody in Canada will wake anyone up on what’s about to be unleashed on everyone pretty soon-government hiring cuts, tax hikes (GST going back to 7%, when?), budget deficits, falling loonie, house prices cut in half, high unemployment….
After all, it's only today that the economists in the US have managed to agree that the US is in a recession. So much for the foresight and wisdom of the dismal scientists.
The list is long and painful. Only those who were characterized as the doom and gloomers (including yours truly) who have had nothing but cash in their account for the last several years have been proven right. Not that I’m happy about it.

How did we get here? And where do we go from here?

2008-11-08T07:30:00.000-08:00

Things have changed so much since this blog was started in February 2007. There was euphoria in the markets at that time. The housing bubble in the US had burst, but the sheer magnitude of the devastation it would unleash, as well as its ramifications on the rest of the world had not been anticipated by most observers. Only those in the 'borderline insanity' category had the prognosis of the disease whose symptoms are now becoming visible.

The disease was easy credit abetted by the viruses of greed, speculation, leverage, stupidity, lax regulation, hubris and ignorance. In almost every asset class in almost every part of the world, there was an asset bubble. From the trailer homes in Fort McMurray to the art market in Eastern Europe, from the high end apartments in Bombay to the stocks in China. Easy credit of last twenty years gave high hopes and ‘can’t go wrong with xyz’ mentality to almost everyone. There was 'death of risk.' Even know, despite all that has transpired, morons are dime a dozen, who want to borrow and invest in Canadian stocks.

The period of easy credit is over. And so is the period of feigning low risk by absurd mathematical models created by armies of glorified economists. When I try to put a perspective on the massive oil sands related investments that had been planned for Alberta, I see that they were fueled more by the easy credit and low risk environment than by any fundamental factors. Most readers are familiar with Warren Buffett’s comments (paraphrased) on oil sands that ‘you could be the best mining engineer in the world, but if you are not sure that the price of oil would be in the $120 range, oil sands may not be the best investment.’ Of course, the temporary high prices speciously bolstered by the doomsday scenarios (but fundamentally caused by speculation and leverage) gave enough reasons to almost all underwriters to finance the billions of dollars of projects easily. As the price of oil comes down further, oil sands will be get hit twice as hard inasmuch as they are very high risk investments (environmental, economic, currency) amortized over very long periods. In easy credit environment such investments could be financed easily but in tougher environment where cash is the most precious thing anyone wants to possess, such projects become akin to financing etoys.com in year 2001. Not impossible (there are always some fools around), but very hard. I trust bulls in Alberta and Canada have at least that much intelligence to figure out the ramifications of significantly depleted oil sands investments on the province, the loonie and Canada as a whole.

Cash really will be the king, as I have tried to mention numerous times in the past. Deflation really is strengthening its hold and there’s nothing central banks can do about it. The sins of past have to be absolved for; and the time to do that has arrived. You just can’t weasel your way out of the bad karmas of credit orgy so easily.

Being early in the deflationary bust cycle is one common mistake most people will make. Yesterday, even I committed such a mistake. No, I didn’t buy a house, but I did buy a new car. I thought I was getting a great deal-Almost $5k off the sticker price of a Honda Accord. But giving up almost $25k in cold cash from savings account did not feel very good. But my rationalization was that my old civic is almost ten years old now and hasn’t been reliable. And I needed to reward myself (yeah, the same North American malaise that leads to the current mess)…Perhaps, I will look at my Accord whenever the temptation of buying a house comes to me in the next few years.

Now the mainstream media is catching up with the sea of negative news that was predicted here and at so many other blogs. Pretty soon, it will be self reinforcing cycle. An economy that is driven 70% by consumption will feel the pain when people stop buying cars and houses, reduce their vacations, minimize eating out, stop buying expensive clothes and desert the malls. Businesses will start laying off people and the anti-goldilocks economy will be at work. Businesses dependent on retail companies (IT, Human Resources staffing etc) will cut down their investments and hiring, making things even worse. And all this while the central banks have interest rates at zero.

Yet, all this is necessary for the revitalization of the economy. The inefficient and diseased corporate hierarchies of North America and much of the first world need cleansing. The FIRE based economies of First World need real savings, real production and real wages.

The coming bust will be a hard one. Unemployment will be high, bankruptcies will soar. A lot of generation X and Y kids will learn painful but much needed lessons. By the time this is all over, savings in bank accounts will not be derided upon.

I’m flying to Boston for a week long vacation to escape from everything for a while. Have a great weekend.

No Subprime in Canada yet Sales Plummet in Calgary

2008-11-03T08:28:00.001-08:00

I've been very busy last week or so....this post from 'rjt' puts things into clear perspective:

If you read my posts over the past couple of months, I predicted that the end of 40 year mortgages and zero down mortgages would create a major gap in buyers. I figured that since 40% of mortgages originated in Calgary in 2007 were the 0-down, 40 year variety, when these went a way, sales would drop substantially.

Well, the numbers are out, and while there are other factors in play, it appears that sales volume did fall off a cliff in Oct 2008.

Sales Volume (old criteria of combined SFH and Condo, from BT’s site)

Oct 2001: 1821
Oct 2002: 1930
Oct 2003: 2021
Oct 2004: 2135
Oct 2005: 2584
Oct 2006: 2122
Oct 2007: 1944
Oct 2008: 1442

How about days inventory?
- This is calculated based on month end inventory from BTs site, divided by monthly sales, multiplied by 30

Oct 2001: 101
Oct 2002: 95
Oct 2003: 121
Oct 2004: 100
Oct 2005: 46
Oct 2006: 96
Oct 2007: 154
Oct 2008: 226

Look at Days Inventory over this year. Impressive October!

Oct-07: 154
Nov-07: 148
Dec-07: 148
Jan-08: 134
Feb-08: 131
Mar-08: 148
Apr-08: 162
May-08: 171
Jun-08: 159
Jul-08: 160
Aug-08: 167
Sep-08: 161
Oct-08: 226

A huge number in October 2008, way above anything we’ve seen in Calgary since at least Jan 1999, which is where my data set begins. The second closest month had days inventory of 171 (May 2008).

People, disregard the spin from the media about a “balanced market” and “normalization” and all those other bullsh-t sales pitches. If you are in the market for a house, make sure to low-ball big time, as you are likely the only potential buyer by a mile.

More of the same?

2008-10-27T05:49:00.000-07:00

What has changed since last week? Not much I guess. In our 'super power island', things are crawling to a halt in terms of sales, at least in Calgary. There is now 7 months of inventory for SFH in Calgary as per CREB ticker. This is perhaps the highest since the deflation of this bubble began.
Not unexpected at this time of the year, but it's likely to be worse than previous years if you account for the short term boost that the days before the end of 'subprime lending' gave to the sales.
The important thing is that even with oil at around $60 and natural gas a little over $6, no major bad news has hit Alberta yet in terms of lay offs and the employment picture. But for how long? People are still confident that they will ride through this storm unaffected. Perhaps the Canadian smugness will save them.
In other parts of the world, Aussie dollar has taken a brutal hit and is down all the way to 60 cents. At this point, the currency markets are pointing to something other than inflation for the world economy and it begins with a capital D. Can our loonie go to 65 cents or so?

Weekend Open Thread

2008-10-24T06:33:00.000-07:00

Doesn't look like a happy Friday for the markets.

Terrible day in India with Sensex down by a whopping 10 per cent. What was the second country after China who we were counting on so much for the perpetual $120 price of oil?
Doesn't look like a promising start for the North American markets, but anything can happen. What was it, don't fight the fed or whatever....
Loonie below 79 cents....Over 33% of those who took the poll here said loonie could tumble in the below 75 cents range. It looks very likely it will happen. Just for record my cash position is 40 per cent in USD and more than half of our income is in USD as well.
The cartel armies are trying desperately to keep their massive cash flows intact. Looks like they are failing as oil is touching $63.
The moral of the fiascoes we have witnessed since 1998: Don't trust the economists. Don't trust the political leaders. Don't trust the bankers. Don't trust CNBC, Jim Cramer, Globe and Mail, Financial Post or Mainstream Media. They are the tools by which sheeple are led for shearing. Don't trust the lawyers. Don't trust realtors. Don't trust mortgage lenders. Don't even trust bloggers here or anywhere else. Most have no clue. Appeal to Authority is for losers. Trust yourself. Even though most on this blog already do this, form your own well reasoned opinions. Study the markets. Study Austrian economics. Save money. Spend only when necessesary to reduce your footprint on the world. If it doesn't make sense, don't invest. Cash is not trash. It's the old fashioned way (before the fiat currency and free lending for all reared its ugly head), rather the only way to make investments to fuel growth. Enough for today. It's all captured in the cartoon below:

Have a great weekend.

The Princes of Alberta Island are now running scared....

2008-10-23T05:13:00.000-07:00

as Suncor cuts its spending by a third. Yes, a whopping third.
“Our aim is to ensure we are living within our means during a time of market uncertainty, while also making the strategic spending decisions that will allow us to continue our growth path,” Suncor chief executive officer Rick George said in a news release.

Living within our means, how relevant and appropriate. Expect something similar from all the oil sands majors, minors and the expectants. Consumer spending will be the next shoe to drop in a big way even as the falling loonie makes big tickets purchases even more expensive. And the signs of it are clearly imprinted in the August Sales report.

"Alberta was the only province in the country in August to register an annual decline in retail sales."

Any specific reason? I think it's got everything to do with the MEW(or the house ATM or the home equity loans). Alberta was the only province to have registered an YOY decline by August this year and we can see how phony the 'growth story' was. It was never the oil money as we had been clamoring but the retail spending and construction money. Very much like in other parts of the world.

This can't bode well for the $400k shoe boxes in the prairie land, on either side of Lloydminister.

Right now, the loonie is in a free fall and so are oil prices. The other 'kings of the world', Goldman et.al are chopping their workforce by 10 per cent....I think this is just the first step in cuts that will deep, prolonged and painful.

I consider myself to be bearish, but the rapid rate of fall of crude oil, stocks, loonie and everything other than USD has shocked even me. But I can't say there were no warnings.

The Falling Loonie

2008-10-21T06:17:00.000-07:00

is making new multi-year lows today....can't help but mention my call again to move the cash to USD. Canadians overall are going to feel really bad about the fall in loonie as pretty much all their assets have taken a significant beating on the world stage. The only saving grace is that we are doing better than the Australian dollar whose dollar has fallen more precipitously than ours.

To put things into perspective, from the days of parity:

those in cash are down about 17 per cent in USD terms.
those in TSX are down by about 35 per cent in CAD leading to a total USD decline of (.83*.65) around 46 per cent.
Those in Alberta real estate are down by about 20 per cent in CAD leading to a total decline of (.83*.8) around 33.5 per cent.

What will this do the Canadian consumer confidence? Not a whole lot of good. People will begin to feel poorer as months go by. The Canadian retailers can resume the blatant gouging without having to do any token service of bringing down the prices.

Most export businesses will be happy with this in as much as their revenue side will be intact(of course the slowdown in the US is the other impact, along with demand destruction for the oil patch) but their cost base just plummetted by a whopping 20 per cent or so. One of the big challenges of Canadian economic policy was just cured by markets in 15 days.

Where do you think the loonie is headed?

Weekend Open Thread

2008-10-17T00:06:00.000-07:00

Some discussion starters:
-And why not begin with the favorite of both bulls and bears- the price of oil. Some in the deflation camp are talking of $40 oil, the price that was considered 'good' just 4 years ago.
-Some 'financial wizards', in their tradition of 'cash is trash', are arguing that if you keep money in bank account, you would have lost roughly 15 per cent of purchasing power in terms of US Dollar. That's true, assuming one did not convert to USD and used the ATB protection, but even if someone didn't convert to USD, those in straight cash have fared so much better than those in any other asset class over the last 15 month period. TSX is down by 35 per cent or so, Alberta real estate by 15 to 25 per cent, oil is almost half of its peak value...and cash is well, still the same, so long as you are within Canada.
-The Greater Fool as applied to the stock market bubbles.
-Edmonton SFHs and condos have erased all the gains made during 2007 (plus more). It took around 15 months (Aug 2007 to October 2007) to give up the gains of 7 months (Jan to July 2007). Does it mean that we can be back to 2005 prices in 2 years? Or could it be even sooner, given the commodity bust, credit crunch, potential job losess and otherwise tough economic climate? We'll find out....

And finally:
- While imitation is the sincerest form of flattery, I am not too pleased with excessive usage of exclamation marks in my writings. Now some people do like their exclamation points, I'm not one of those. The imitator of 'Gloria White' on other blogs, should note that.

Have a great weekened everyone.

No Banker Left Behind

2008-10-14T06:19:00.000-07:00

Happy days are here again....let's go out and buy some more toxic garbage. The first $25 billion was merely the prelude.
Too bad, in the garb of 'regulatory arbitrage', the sound Canadian banks will be 'bailed out' for the maximum possible impact. The Canadian federal debt is a little south of $500 billion. These guarantees alone are going to be worth $225 billion.

In this cold harsh world where free markets hurt so much, No banker should be left behind.

In a strict free market environment, the insolvent financial system in much of North America and Europe would have ceased to exist in its present form. Instead, it's being nourished and nurtured in ICU at enormous cost to the taxpayers. Mish describes it best as:

The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

And now that every country is willing to do 'whatever it takes' to help their elite class of bankers, Canada will be forced to up the ante as well. Otherwise, the 'regulatory arbitrage' will come into play and capital will flow away away from Canadian banks.

Please do go out and vote and try to make whatever difference one vote will make.

Weekend Open Thread

2008-10-09T22:52:00.000-07:00

Update: So much for only talking about buying back mortgages. They are now buying $25 billion worth of garbage to ease 'liquidity' concerns. Too bad that our 'pride' and 'faith' in our financial system will lead us down. No debate, no policy discussions. At least in the US they ran through a charade of democratic process. Not here....the hockey season has started for sure.

Brent crude below $80. How long before we see $60, or dare we say $50 oil?

Roubini warning of ‘severe global depression’ if radical measures are not taken. Too often government actions only exacerbate the problems. I think the train of pleasing the markets by rate cuts and simple fiscal measures has long left.

Loonie continues to plummet and is now going at a princely 85 cents. Days of rejoicing in Ontario won’t be too far, provided there is too much demand left in the US to keep the factories in Ontario running.

Canadian banks are safest ones in the world, but based on similar surveys, so were Lehman Brothers and WaMU. And if everything is well with Canadian banks, what’s the need for ‘Paulson style’ recapitalization using the CMHC as the buyer of last resort? There’s bound to be lot of toxic garbage on the books of these banks. After all, someone lent to all the ‘property barons’ of Alberta, BC, Ontario and Saskatchewan during the ‘last commodity boom’ (if I may take the liberty of calling an end to the boom, or am I too early?). So how will this work? Apparently, the exchange program will work the same way as in the plan of Dr Evil himself- the AAA rated CMHC bonds (which we discussed a while ago here) will be swapped for the 40 year NINJA variety loans (read an anecdotal example here- international students in Edmonton buying $300k condos) so that the banks’ balance sheets are strengthened and lending to Canadians is not impacted. As if we really need more debt to buy overpriced condos, twentieth iPod and the third gas guzzling SUV in five years or take the cruises to the Caribbean.

And on a personal note, we have not bought anything on credit since recognizing the perils of buying on debt when we bought our first new car ten years ago. And we are still driving it. And we will positively pay all cash for our house as soon as sanity returns to the markets (like it is returning to stock markets).

As and when the markets begin to bottom, there’ll be some great opportunities for those who have a fat savings account at ATB. I don’t know when this will occur, but that day will arrive eventually.
And finally, a happy Thanksgiving to all of you-bulls, bears, readers, optimists, pessimists and realists. Good health and strong families are way more important than material wealth. Let's count our blessings and get ready for another down week (not)!

What Now?

2008-10-09T14:14:00.000-07:00

I’m not a big fan of doomsday scenarios, but what has transpired in last week is nothing less than astonishing. The markets worldwide are in free fall. Loonie just lost 10 cents in a week (my call of going into USD was pretty good I think). The shine is about to wear off of the strength of the Canadian economy. The commodities will fall further and could push Western Canada into a deep slump. Ironically, Eastern Canada could benefit again in the backdrop of a weaker loonie. This scenario is increasingly likely to play out as the deflationary forces strengthen their grip on world economy and hapless central bankers and debt ridden governments and consumers watch the show like meek spectators.

Master Card recently recorded a 9.5 per cent fall in US gasoline sales in September 2008 versus last year’s numbers. Canadian sales held up a little better and were down only 5.4 per cent in August. I won't be surprised if sales fall further off in the coming months. October is likely to be worse. People who have just taken a 50 per cent of more haircut on their 401k and RRSP’s won’t exactly be jumping out to vacations and burn gasoline in gas guzzlers. Don’t expect Asia to be savior either-Japan is falling into its gazillionth recession in the last 20 years, China is slowing down and India isn’t fairing too nicely either.
As unemployment rises further in the US (some people are forecasting a double digit unemployment rate by the time everything settles), there will be further reduction in gasoline and commodity demand. This demand destruction will outstrip any, if at all, demand increases from the emerging economies.

The big questions are- if the clock rewinds to 2004 in terms of asset prices, commodity prices and job opportunities are you sufficiently prepared? Can anyone even imagine another bust in Alberta when most of the people around you are drowning in debt and falsely insulated by the 'home equity' gains. Or by the illusion of 'secure jobs' in the Oil/Gas industries and pretty much everything else that services it. I can't think of any industry that will pick up the slack employment wise if Oil and Gas sector fizzles again. The government depends too much on the tax and royalty revenues that basically stem from the oil and gas industry.
Too bad that Alberta manages to kill all the diversification that occurs during the bust years in less than 3 years of a boom…

Central Banks are Panicking....

2008-10-08T05:06:00.000-07:00

...and have cut interest rates almost in every part of the world. In US, Canada, EU, BOE, China (and every other Banana Republic) has cut interest rates by half a point. Too bad Japan can't join the party. The ammunition of interest rate cuts is now seriously depleted, at least in the US. The big question is-what if the markets shrug this off as it becomes aware of the enemy. Sure you could get a dead cat bounce, but it doesn't change anything fundamentally. Consumers that can't buy any more houses (except in Alberta perhaps), banks that don't trust each others and an enemy that is as cold as the Hannibal.

"A Depression doesn't run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality."

Meanwhile, let's enjoy the last few days of easy credit flow in Canada before the faucet dries up.

Monday Market Turmoil

2008-10-06T05:45:00.000-07:00

Despite the biggest boondoggle of this century getting passed quickly and becoming law, world financial markets are tumbling. Nikkei down 4.5 per cent. Indian stocks down by almost 6 per cent. Oil below $90 (who could have thought that?). A lot of people were speculating that Fed would cut again, but when you have so few bullets left in your armor, you do not want to waste them every time the markets fall by 5 per cent in a day. The days of Greenspan put were so good....
But finally it looks like Fed has found its match or better still. And that is deflation.
If global deflation does materialize, it will be very painful for everyone, but especially for those who carry debt. Commodities will be hit hard.
The last thing you should want to do is get into a zero down 40 year mortgage, but a lot of people seem determined to lend to people who can't save even $20k for their down payment. Yes, we don't have sub-prime in Canada.

Deflationary Week

2008-10-04T07:04:00.000-07:00

The WSJ has a very interesting graphic on how various investments did in the last week. It was massive wealth destruction across various asset classes.

We can safely add the TSX and Canadian dollars to the asset classes that were mauled quite badly.

The most common opinion out there is that the bail out package is inflationary. But a few people, including those from the Austrian school say that the bailout package is of very small scope as compared to the massive deflationary spiral that has been unleashed by the global credit contraction.

And while those who called for oil prices to fall below $80 or so were called lunatics just a few months ago, Merrill Lynch has now released a forecast for $50 oil if the global recession materializes.

Alberta Real Estate bulls and 'Fundamentals are strong in Canada' proponents had better be prepared to handle the destruction of their favorite underlying factors(commodity boom).

People are mad as hell....

2008-10-02T11:32:00.000-07:00

...and they are showing it. On the momentous occasion of another attempted bailout in the house, a couple of clips that behoove the situation.

In other news, commodity bust is enjoying eating the TSX gains made during last few years. Are we back to 2005 yet?
While the gloom and doom spreads around us, remember that we'll be presented with some great once in a generation opportunities in the coming months and years. Stay put in cash (preferably at ATB) and when everyone is running for covers, it will be time to buy. But we are far from it in Alberta real estate yet.

Global Demand Slowdown

2008-10-01T05:48:00.000-07:00

...is happening at a fast pace. Canada has been one of the biggest beneficiaries of the boom in China, India and other fast growing emerging economies. But it looks like something is finally beginning to give in after years (or decades) of relentless growth.
Here's an interesting link on how Chinese importers are defaulting on Iron Ore purchases from India:
"Our exports are in deep red as there is no demand from China," said Rahul Baldota, president of the Federation of Indian Mineral Industries and managing director of miner MSPL Ltd.
Exports in the first half of September dropped to 1.99 million tonnes from 2.7 million tonnes in the same period last year.

FT is also reporting on the same item as well.

At least a few in Canada are taking notice of this:

That may sound like a manageable slowdown, but if China's economy hits any serious roadblocks, it won't take long for Canadian investors to start feeling the pain, given that nearly half of the benchmark S&P/TSX composite index is made up of resource stocks.

Island of Alberta should remain intact in the financial maelstrom though. Just ask any realtor or mortgage broker trying to lure the 'greatest fools' into a 0 down 40 year mortgage.

They are a persistent bunch....

2008-09-30T05:51:00.000-07:00

No matter, where you look at. From the realtors in Calgary, to Edmonton to fraudsters on Wall Street and Washington. Their sole aim is to make their commission, earn their profits and separate the masses from their money by getting them deeper into debt.
Now they are planning an unprecedented vote in the Senate and Mr Bush is going to address the nation yet again talking about how we are inches away from Armageddon.
And while they are it, they might also include a rehashed form of 'Suzzane Researched this' with 'Paulson/Bernanke researched this':

These are truly uncertain times and most certainly not a time when you pile up several hundred thousands of debt. But what's this, the Canadian GDP actually grew by 0.7 per cent due to higher energy costs, so everything is going great. The island looks fortified. Even though every major collapse in the US is creating a chink in the armour of the Canadian Financial system.

Weekend Open Thread

2008-09-26T06:52:00.000-07:00

Sorry for no posting during the week. Some discussion starters:
- Merrill says what we have all known for last several years and says Canadian housing is overvalued by quite a bit. Scotiabank, fully aware of the mortgage junk it has loaded in its balance sheet during the last several years, denies it vehemently. Most Canadians, in our great tradition of smugness agree.
-From, "but Canada is an Island" category, SunLife says it has just a quarter of billion dollars of exposure to Wamu bonds.
-A personal anecdote: I think we are light years away from any fear or panic, even in the US. A friend of mine who just got a job with WAMU(yes, this is a different epoch, companies about to go bankrupt are hiring. After all, what's a small overhead like employee salary when you have spent billions in gambling over housing prices) bought a huge $600k home in Seattle with just 5% down(Yes, countrywide is still making these loans, which means they are still selling more rope to hang themselves with).
I strongly advised him not to do so given the precarious state of WAMU and the Seattle housing market which has to go down quite a bit. I talked to him last night to see if he was okay after the WAMU seizure but he wasn't even aware of it. When I told him, he was overjoyed that WAMU was "bought". I guess before this is all over, people will be once again afraid, something that has eluded the credit drunkards.

Your thoughts....

Weekend Open Thread

2008-09-18T07:25:00.001-07:00

Some discussion starters:

* Joining the legendary list of countries such as Pakistan, China and more recently the UK, the US bans short selling of all financial stocks. Way to go. Free markets at work.
* Theories of financial terrorism are floating around to legitimize the case for banning short selling. Big Picture guy has a discussion on this. Of course, we know that patriotism is the last refuge of the scoundrel and it's very likely that quite a lot of people will actually buy this. Mission accomplished.
* As a further add on to the Credit Union guarantees of Alberta, the key point to remember is that the guarantee is all backed by the Government of Alberta, perhaps the most solvent government in the western world (after Norway and Alaska perhaps?). So let's say ATB goes under then Alberta Government will step in and make up for the losses of around $22 billion in deposits(Annual Report pdf). And that should be relatively easier to fix than for Canadian government to try and make up for the loss of over $250 billion dollars in deposit for a typical Big 5 Canadian bank.
* [rant on]The cardinal rule of the game is- don't fight the bankers. It's not don't fight the fed, it's not don't fight the government but don't fight the bankers. Bankers will typically get whatever they want by flexing their muscle and exercising their clout over the who's who of the world.Will this mean there won't be any recession? Will this mean there won't be any major spike in unemployment? The certain thing is that the bankers will be bailed out no matter what the consequences. There's no leadership left anywhere in the world to stand up and protect the interest of the little guy. Not even pretensions. [/rant off]

And the safest place to place your money is....

2008-09-18T07:25:00.000-07:00

....any credit union in Alberta. Of course, the one that's backed by the Credit Union Deposit Guarantee Corporation.

Despite the innocent appearances, what’s going on in the hidden balance sheets of the Big 5 and other Canadian banks is all unknown. We didn’t know anything was wrong with the Canadian banks last year until the ABCP fiasco emerged. We won’t know the implications of the CDS contracts the Canadian banks have written until a big counter party blows up.
So it’s better to be safe than sorry and rather than chasing a 100 basis points yield advantage by picking up your bank, it makes more sense to move to a safer place.
That safe haven is the Credit Unions of Alberta.
They will insure all your deposits, yes there’s no $100k limit as imposed by CDIC. And if you want to diversify into US Dollars, that is covered as well in the insurance.
Of course, the Alberta Credit Union Deposit Insurance is backed by the Alberta Government.

From the site:

Is this guarantee the same as the banks' $100,000 insurance?

This guarantee is more extensive than the banks' insurance. All deposit amounts are fully guaranteed and include accrued interest to the date of payout. Deposit amounts include chequing and savings accounts, RRSP deposits, RRIF deposits, foreign currency deposits, and term deposits, including those with terms exceeding five years.

So I’m moving pretty much all of my US Dollars savings from TD to ATB.

Impact on Alberta Island Continues....

2008-09-17T06:50:00.000-07:00

As Petro Canada tries to talk itself out of Oil Sands project.
The other day I was a reading a post somewhere that the recent fall in prices shouldn't impact most energy companies inasmuch as they base their investment decisions over long terms- 20 years or more. And then I suddenly wondered the giant rush to develop oil sands- an energy inefficient, economically risky and environmentally unfriendly way to make oil. All based on expectation that the prices will remain in high double digits or triple digits from here to infinity.

And since most new oil sands projects are based on the same expectations that Calgary condo projects are, the inimitable Warren Buffett in his recent visit to Fort McMurray said:
"Because you could be the world's greatest mining engineer, but if you were wrong about the price of oil in a big way, it would negate all that knowledge."

"So I can tell you that ... if you had $120 oil from now till, you know, 50 years from now, that the tar sands would work out very well. But I don't know the answer to that."

Finally, "The stage is set for Petrocan to walk away from this project. There are any number of deeper-pocketed, more visionary energy companies that will make $14-billion-plus bets on the 50-year potential of the oil sands. If control of Fort Hills comes up for grabs, watch EnCana, Canadian Natural Resources, Suncor or one of the foreign energy giants to step up."

Make that a $21 billion project (new cost), seriously impaired credit markets, slowing or contracting global economy, falling energy prices and we'll see how many brave company boards exist out there to venture into such a project.

Credit Destruction

2008-09-15T04:23:00.000-07:00

…is here and in full force. It’s most certainly a deflationary event. The credit markets' tale of wanton and greed of last couple of decades is now ending with a bang and I’m not sure if we have reached the grand finale. Oil is already below $100, peak oil, China etc notwithstanding.
Not incidentally, China, which was growing at a blistering pace of over 10 per cent growth for the last gazillion years has eased its interest rates for the first time.
If we witness wealth and credit destruction of historic proportions, expect commodities to tumble to unimaginably low levels. Most financial institutions in the world have their balance sheets seriously impaired and the banks fighting for their survival don't make loans on overvalued, deprecating assets (aka housing).
If you think the housing sector is about to recover in the US and Canada will escape unscathed, wake up.
Enough said on this early Monday morning. A lot more influential people around the world will chip in much more valuable stuff.
Your comments?

The Joys of Economic Modeling

2008-09-09T22:54:00.000-07:00

A physicist, an engineer and an economist go for a job interview. The interviewer, not in a mood to use lots of his gray cells, asks a simple question to each of the candidate. He asks, “What is the sum of 2 and 2?”
The physicist snaps immediately: exactly 4.
The engineer thinks for a while and says, 4 with may be 2 per cent margin of error.
Then comes the economist's turn. When asked the same question, he responds, “What do you want it to be?”

So goes the old joke about the nature of dismal science. Forecasting of any type is inherently risky, but when it is applied in the realm of social sciences it can be self serving.

Of course, this perambulatory text was required before trying to question some of the “research” published by the UBC school of Business.
There are generally very few problems with the models used in forecasting or in pricing based models. The models are generally borrowed from the domain of physical sciences and the underlying "math" of these models is solid. The problems are usually with the assumptions behind these models.
No wonder, it was the contribution of similar simplistic and infallible modeling that has left the US financial system almost bankrupt. Stupid is as stupid does. Especially when making important assumptions.
Most financial institutions priced their mortgage securities based on the assumption that real estate always goes up. And they gently added an appreciation factor of 4 or 5 per cent in all their calculations. Of course, prices go up, until they don’t.
And that’s precisely the mechanism you use to come out with ridiculous statements such as Vancouver being over priced by a mere 11 per cent and Edmonton actually being under priced by 8 per cent as mentioned in this study.
Vancouver, is the mother of all bubbles and we’ll see how far it’s going to fall when everything is said and done.
But this whole paper is just a glorified buy versus rent calculator designed to appeal to authority. There’s nothing interesting there- just a simple formula with unreliable data, with no references to data collection techniques or sample space. We don't know for example, how many data points were analyzed when collecting rent information. How many ads were actually verified for accuracy on craigslist or Kijiji? Did they actually call the advertisers? Did they negotiate the rates? One would expect some rigour or explanation on data collection when an academic paper is published.
But this study isn't meant for publication in a peer reviewed journal. It's designed to get the greatest of all fools who have somehow managed to so far resist the temptation to buy.
Rather than wasting 20 minutes or so on this paper, prospective buyers will be better served if they use this intuitive and simple buy versus rent calculator from NYT.

The Real Estate complex in this country knows that things are falling apart pretty much all across the Canada and they are trying their level best to contain the impending crisis. This "academic work" is too feeble an attempt and unlikely to convince anyone but severely delusional.

Freddie/Fannie.....Can it happen here?

2008-09-07T21:13:00.000-07:00

Two years ago the very thought that Freddie/Fannie would be "socialized" in the capitalistic paragon of the world would have been ridiculed. So at the risk, of inviting ridicule, I wonder, can something similar happen here? I've not had the time to dig deeper into the financial details of CMHC, but they are doing quite a bit of heavy lifting (around $120 billion in Canada Mortgage bonds) in terms of guaranteeing mortgages with a rather thin capital base (less than $7 billion in equity).
But in Canada no mid Sunday morning bail outs will be necessary, should we experience anything remotely resembling the rout in the US housing markets. After all, "CMHC’s Guarantee of Canada Mortgage Bonds carries the full faith and credit of Canada, and constitutes a direct, unconditional obligation of Canada."

Here is a video in celebration of the 'socialization' (heads bankers win, tails taxpayers lose) of our southern neighbour...

Back to School Sale-35 Per Cent off in Calgary

2008-08-22T07:05:00.000-07:00

As you might have noted in the Daily stats. We have heard several stories of people getting more than 20 per cent off properties of interest to them. But 35 per cent means either the property was seriously over priced or the seller was pretty desperate. Or could it be an error like the ones you find in the Sears catalog?
But in any case, August 2007 was a slow month, yet this month is likely to be slower still, at least in Calgary with approximate monthly sales of 1175.
No spring rush, no summer rush, no bottom and the Sale has just started.
The markets will be good to those who wait for the right time to buy.

Is this a good trade-Long USD, Short Alberta Real Estate?

2008-08-13T09:24:00.000-07:00

The loonie has fallen by more than 15 per cent from its top that was reached last November. Alberta real estate prices have fallen by an almost similar amount since reaching their peak last summer. I expect that loonie and the Alberta real estate prices will continue to fall for a while.

So for all those ‘bitter renters’ who have been saving their money and putting it in GIC or some other investment vehicle, would the following trade be a good idea:

- Convert your GIC into USD and wait for loonie to fall further.

- In the mean time, the Alberta real estate prices are likely to fall as well.So while there is no explicit 'shorting' of Alberta real estate, the waiting itself is good enough to get the benefits.

Of course, I was so consumed by other things that I didn’t have time to do the conversion of any of my Canadian dollars into US dollars in the days of parity and beyond. The net result will be a possible double gain.

Of course, the above will go against the conventional wisdom that says US dollar is toast et.al.

But our currency is strongly tied to the price of crude and in face of clear demand destruction and recession in pretty much the entire developed world, the prices could tumble even further in the short to medium term.

Of course, with conversion to USD, you’ll likely earn less interest rates and lose the CDIC insurance benefits.

What do you think?

The Long Term View

2008-08-07T09:04:00.000-07:00

I’ve been enjoying the beautiful weather for last few weeks and haven’t been too tempted to sit in front of computer and do a fresh post. I realize a lot of readers would like to see postings more frequently, but I’m somewhat burnt out from a lot of over work during the last couple of years. So more frequent postings would be to my liking as well, but I’m spending more time recuperating and spending rest of the time on doing my work. I’d like to keep this blog going as much as you all want.

Coming to the real estate market in Alberta, so far not much different than what was predicted here on this blog has happened. Sales are slow, prices are gradually falling. There was no spring or summer rush. A lot of people are still paying more than one mortgage. The strong rental market is covering a good part of most ‘investor’s’ second/third/ multiple mortgage payment. Marketing gimmicks(h/t to one of the readers) are in full force but are yielding minimal results. The shoe boxes in Edmonton area are officially advertised for less than $300k. Last year these were at around $350k.

I won't spend time discussing the stats-they have been covered in detail on the realtor blogs. Instead, let's spend some time on the bigger, more fundamental questions. The ones that not too many 'investors' like to ask these days.

As we have mentioned earlier as well, the strong Alberta economy is really a function of construction growth and spending, more than the energy sector per se. And a number of stories in the recent past suggest that we are past the prime spending on construction, at least in this cycle.

On the commodity side, it looks like a bust is in the makings, the price of crude oil and other commodities having fallen by more than 20 per cent in the last few weeks. Should we go to levels below $60 (yeah, it’s a preposterous idea. But until it happened, real estate prices had never fallen in the entire US since the Great Depression) , it will raise some more serious questions, along with the perennial environmental issues, for the big oil contemplating oil sands investment.

But even if price of oil were to remain high for the foreseeable future, the big question is- What would happen once the construction boom runs its course? What would happen once all the oil sands projects are in production? Process industry typically doesn’t generate huge continuous employment like manufacturing industry does. What will fuel the employment growth five years from now? Ten years from now? I am fully aware of the perils of making forecasts, especially for what may happen ten years down the road, but asking some fundamental questions will be a good exercise. Especially those who are about to take a 35 year mortgage.

We have almost close to zero diversification and whatever diversification was done during the period between last bust to about three years ago has come to a naught. A lot of non energy companies have moved away from Alberta (and Canada) due to higher dollar and tight labour market. Those who bought or are still buying overpriced cardboard boxes on minimal down payment and 35 or 40 year amortizations need to consider this seriously.

A look at Windsor Ontario or Detroit will be instructive. Ten years ago it would have been hard to believe that Windsor Ontario would face the downturn it faces now. But this is what happens when an economy is singularly dependent on an industry.

As I’ve harped on so many occasions in the past, based on fundamental valuation metrics (availability of land, prices of raw materials), the current prices in Alberta are totally out of whack. As and when the labour market softens, there will be further downward pressure on the building cost pushing the costs down.

Those looking to buy at this point will do themselves a favor if they were to wait for at least one more year.

Canada Wakes up....Is it too late?

2008-07-09T13:46:00.000-07:00

As posted in the comments section(h/t to bad) and noted at other places, the Canadian government has finally woken up and is trying to do away with the 40 year mortgages, as well as the zero down mortgages that are backed by the government (via CMHC and others). They'll also enforce more rigorous documentation standards.

They specifically mention that this is being done to "reduce the risk of a U.S.-style housing bubble developing in Canada." If you ever wanted a classic example of reactionary measure taken by bureaucrats, this could be it. The time to do this was in 2005 and 2006 when the mad rush was already reaching its zenith in Alberta and BC. Or even in 2007 when the frenzy was near its peak in Saskatoon/Regina. But in 2006, they were cheer leading the 'affordability paradigm' and passing laws to provide 40 year mortgages with zero down payment.

And while they abetted the bubble by offering these products, they are going to help deflate the bubble by eliminating some of these products from their offerings.
I'm pretty sure that this is only going to reduce the pool of buyers that could have otherwise obtained financing on on overpriced Edmonton condo using zero down, no document, 35 year term with credit score of 550.

How much impact will this have on Sales in Alberta? And to prices?

Frog and Scorpion

2008-06-30T12:02:00.000-07:00

It is difficult to get a man to understand something when his salary depends upon his not understanding it" - Upton Sinclair

And yet, people expect realtors to give a ‘fair’, ‘balanced’ or unbiased perspective on the current market situation. It just can’t happen. It’s not unlike the old fable of Frog and Scorpion. No matter what the ‘realtor’ says, his or her motive is only one- to make the sale. And you can’t blame them. To not sell would mean to go out and look for another calling. So beware of the advice you get from those whose only interest is to sell more houses for commission.

On the market front, things are going almost as per the expectations. Demand and supply effect is now showing up in the statistical metrics for prices. Prices have resumed their fall once again, at least in Calgary and in Edmonton condos. Even though almost anyone on street could attest that prices through out 2008 have been lower than in last few months of 2007.

After all, what would you expect with inventory close to all time highs, anemic sales volumes, rising inflation and banks about to unleash a wave of interest rate hikes?

For those who are planning to buy, there's just one advice- WAIT. Renting is still a lot cheaper than buying and prices are expected to decline to get them in line with the historical trends. Read through the posts and comments on this blog and other places as well to make a well informed decision. Remember, mainstream media will mostly rehash the press releases of the realtors without an iota of original research or analysis.

My apologies for the less than frequent posting, but I’ve been busy with a new project and taking time off to enjoy the weather.

Inflationary Scenario

2008-06-10T16:16:00.000-07:00

Quite a lot has happened in macro economic world since I wrote the ‘deflationary scenario’. While there are still quite a number of deflationary proponents holding there ground, the mainstream economists and pretty much all the central banks are getting perturbed over rising commodity prices. And for once, their words have some meaning as demonstrated by Bank of Canada holding interest rates steady, increasing the probability of rate increases in future. Just a couple of months ago such a scenario would have been unthinkable amidst all the talk of the global credit crunch.

Clearly, Central bankers in Canada, UK and the US are afraid of 1930s style deflation, but they are also not comfortable with the 1970s style stagflation. I guess they are stuck at a Morton’s fork point- raising rates will further worsen the housing market and create problems but keeping status quo will further raise prices making things much worse for them.

The implications will not be salubrious for the health of Alberta and Canadian real estate. Inventory is at highest levels ever seen, sales at levels close to the lowest levels for this time of the year. Meanwhile, new product is still coming to the market at a pace far faster than markets can absorb. Meanwhile, the nouveau landlords are learning some painful lessons on the 'joys of becoming a landlord.'

One of the scenarios that was often discussed on this blog was a disruption in the oil sands development in Alberta (environmental issues, commodity bubble bust etc) leading to a significant deterioration in the Alberta real estate market. The inflationary scenario, if it bears fruition, will lead to a direct impact on the real estate market. It could make properties that are ‘barely breaking even’, bleed cash profusely. As interest rates go up, a lot of speculators and double property holders who are somehow holding on to their properties in anticipation of a rebound of prices to Spring 2007 levels will likely capitulate.

Rising interest rates could expedite the widespread decline that has been so far avoided.

How likely do you think is a rise in interest rates?

Back to Fundamentals

2008-05-22T19:43:00.000-07:00

I've been silently watching the "blog drama" that has been going on for the last few days. I really have nothing to say on it, except that everyone should be polite and when not in agreement, respectfully disagreeable.

Also, there were some false 'spam flags' on this blog causing it to be locked out. That's why there were no new postings in the last few days. And google blogger takes its own sweet time to manually review the blog(over a week in this case). Perhaps a lot of people clicked on the 'report objectionable' button at the top of this blog! There are may be quite a few people who want this blog to be shut down.

Closer to the real topic, inventory is gradually inching upwards while the statistical measures (median, 'special case median' etc) have moved slightly downwards. But bulls are still clinging to their original stories of "we’ve reached a permanently high plateau of prices." Or perhaps, according to them the current prices are entirely in line with fundamentals. That is fundamentals of the 'high energy prices', 'recession in Ontario', 'real estate always goes up' variety.

I came across this very valuable study from OECD that compares Canadian real estate prices to the real fundamentals-yes, the stories without the price of oil or weather in them-the price to rent ratio and price to income ratios.

Here's the link to the actual data

(http://www.oecd.org/dataoecd/6/5/2483894.xls)

It only goes back to 2006, but it should tell us a lot about the state of the market inasmuch as we do know how things were like in early part of 2007.

It doesn’t focus exclusively on Alberta, but on Canada as a whole.

Price to rent wise, Canada as a whole is only slightly better than the biggest bubble places of all-Spain. We are far worse than the UK or even the much maligned US.

Of course, as mentioned numerous times, the real estate game is that of patience. That is if you are not a get rich quick speculator spoilt by the markets of last few years. Reversion to mean is a common place occurrence in all markets, and it will happen one way or the other- either prices will drop or prices will stagnate for a long time to erode all the gains of last several years.

Okay, the market kind of sucks, but how about some spin!

2008-05-01T18:32:00.000-07:00

If you enjoy the headlines at the realtor sites, you'll probably not like the one I've used.
But I guess when your bread and butter depends on making an earnings by selling homes, you've got to master the art of seeing the positive in the sea of negative news.

So what if we have inventory that's close to all time high and it's only the end of April.
So what if have sales that are amongst the lowest in the last several years.
So what if we have the key benchmark price used by EREB and CREB down noticeably since last year.
So what if at the peak of buying season we have got dismal sales to new listings ratio.
....
We will still hold on to our fantastic interpretations of data. Because it suits us.
We cannot possibly go on and say with a straight to all the people who bought at the peak last year that real estate always goes up.
We made big suckers out of all of you (and ourselves included, after all we strongly believe in consuming "our own dog food") and it was great while it lasted.
We don't really know what's going to happen and we are running quite scared.

Is housing influenza infecting Calgary?

2008-04-27T07:44:00.000-07:00

No, no and No, as per this Calgary Herald article. Of course, MSM is losing its relevance with every passing day and such senseless rehashing of REIC perspective will only hasten their demise.

“I don't see a lot of price decline on a year-over-year basis in Calgary. I think we're still a pretty healthy economy and still a pretty healthy housing market," says Legge.

By which metric, one has to wonder. Median prices. Down. Average Prices. Down. Median price for condos, down? Pick any metric and it is down YOY.
Can they actually find a property that has increased in value since last summer?
All I see is a glut of inventory and a lot of reductions in prices.

Someone has to tell them that it wasn't the healthy economy that drove prices to stratosphere. It was the worldwide credit bubble abetted by the local tales of 'we are different here' that drove prices this high.

The other perma bulls are still throwing their wild predictions:
“And in the long-term, real estate here looks great, says Campbell, adding year-over-year average house price gains in Calgary should be in the 11 per cent range this year.”

Obviously, in the days of easy credit, liar loans and speculation driven mania all such predictions hold true. But when it costs 2 to 4 times the rent to buy, the average income can’t afford the average house, there’s a gluttony of inventory and houses are still being built like it's 2005 and credit markets are tightening worldwide, it's an act of desperation to make such statements.

Why do all real estate stories have the happy ending of perpetual 5 to 10 per cent annual increases? Are such increases a divine revelation? Why is there such a belief in this? Such patterns have been repeated at numerous other places in a lot of different eras. Especially, when they all believed that their city or locale was different.

On a different note, It’s been quite a while since I wrote the last post. I’ve been busy with numerous usual things, but I’ve been impacted by a few serious illnesses in my close circle of friends and family. That distracted me quite a bit from the real estate stuff and made me prioritize a few things. Yes, real estate is important, money is important, too much debt is bad, 40 year mortgages are bad; but poor health is worse than all these. Warm weather will hopefully come sometime this year, so when it does arrive, do take the time to go out and enjoy some outdoor activities that you like. Quality time with family and good health are two things that should be at the top of our priorities, certainly way higher than blogging, for both bulls and bears.

Fantastic Hopes

2008-04-10T00:36:00.000-07:00

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.

Weekend Open Thread

2008-03-27T18:04:00.000-07:00

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!

Inflation or Deflation

2008-03-20T06:55:00.000-07:00

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?

Bitter Renters etc

2008-03-18T08:31:00.000-07:00

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.

Intuit moving its head office

2008-03-08T07:34:00.000-08:00

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.

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

2008-03-01T05:36:00.000-08:00

...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.

Where do we go from here?

2008-02-23T17:10:00.000-08:00

Last year housing prices kept on marching upwards despite rising inventory. The trend continued until the middle of summer when prices stopped climbing- the basic supply and demand variables starting to take their toll.

Are we seeing a repetition of this pattern? Perhaps we are. Despite sharply higher inventory, the commonly tracked average/median prices have been inching upwards. But it’s not unexpected and most certainly not unseen in other bubble markets, especially south of the border. Prices continued climbing upwards even as inventory continued to balloon in places like Phoenix, San Diego and of course Florida. The commonly given reason for this phenomenon is the smaller number of transactions occurring at the lower end of the market, thus pushing both median and average numbers higher. It certainly sound plausible.

We are close to the end of February and sales are off by around 40 per cent as compared to last year. Sales are certainly running slower than they were in 2006 or 2005. Yet the inventory in both Calgary and Edmonton is nearing all time highs. And this is February only. What will happen when we are past the peak selling season but not the peak listing season. That is how high will the inventory be in September of October? Can we say 15000 in Calgary and Edmonton, excluding the sale by owner listings?

If we were to hit that number, then it would be a massive glut of listings that would be chasing a small pool of buyers. 19000 listings (15000 plus about 4000 in sales by owner) for cities of size of Edmonton and Calgary (around 1 million population each) would mean roughly a house for sale for every 50 people. That’s right. 1 house for Sale for every 50 people. Is it going to happen? Of course, predicting future is fraught with perils but just observing the seasonal rise in listings along with the sheer number of projects that are completing in this time frame makes it likely that we’ll hit these numbers or go beyond.

The important question that we must ask is- why are so few sellers stepping ahead to buy? Have we run out of demand? With Alberta’s economy still perceived to be the strongest in North America, why are we not seeing another mad rush to get into the market? Have people recognized that the prices have further to fall? Is it because the massive surge in demands were simply 'borrowed' from pool of buyers who were not yet ready to buy but bought in any case using creative financing and 40 year amortizations (subprime anyone)?

You would expect the mainstream media to ask some of these questions. Instead, they are busy regurgitating the press releases of realtors who tout the ‘wonderful investment’ that Alberta real estate has been. Too bad that masses don’t seem to understand the difference between ‘has been’ and ‘will be’ when it comes to investing (or any other trends really). Alberta was a great investment when you could buy ‘condos’ in apartment building for less than $20k a piece around 10 years ago. Of course, talking of real estate was considered asinine by the masses at that time. As late as 2005, you could pay a reasonable 100 to 125 times rent and buy almost any property across the province. And then, the craziest escalation in prices began. The same $20k condos were 'refurbished' and sold for over $200k to the believers of 'buy now or be priced out forever' crowd.

On this blog, we try to venture into the territory where the mainstream media hazards not to. For their bread and butter comes from the advertisers who rely so much on keeping the prices high and transaction volume higher still. The fundamentals haven’t changed much. We have rapidly rising inventory and falling sales as compared to levels attained in last several years.

Typical properties in both Edmonton and Calgary have fallen by at least $50k since last summer. The bubble is deflating right in front of our eyes but a lot of people are still claiming that it’s all rosy. They can’t afford to say anything otherwise.

First time buyers should exercise caution and do their research- is buying at this time really the best thing? Could you save $50k, $100k or even more if you waited for a year or two?

Here's a quick poll for the projected peak inventory of 2008:

Weekend Open Thread

2008-02-14T20:01:00.000-08:00

Please post links, comments and other relevant thoughts. Some contributions from my side:

The blog is almost one year old now. Thanks for your support and valuable comments. Hopefully we have saved at least a few people from seeking advice from the new 'Aunt Abby' about 'approaches to deal with falling prices if you bought last year'. I suspect that in the not so distant future, the readership of such columns will be expanded to include buyers from year 2006.
'Shoe box' starter homes in Edmonton suburbs are now selling for less than $300k. Of course, it would have been preposterous to even suggest such a price last year. My take is that these homes are overpriced by at least 50 per cent. So over time, either the rents will have to rise quite a bit, prices have to fall or inflation has to do the work. We can probably get a clue from how things are going in the US-a simple and steep decline across most of the US.
The typical $300-$400k property has lost close to $50k or so, if it has sold, from the peak prices. Of course, the median and average numbers are fairly close to this, but some properties have done worse than others. Have you seen anything in particular? The two bedroom condo that was mentioned last July has shed around $20k and has still not sold. Perhaps, it needs to go below $300k to get some more interest.

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

2008-02-05T16:41:00.000-08:00

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.

January Numbers and other thoughts

2008-02-02T20:47:00.000-08:00

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 albertabubble@gmail.com.

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.

Toxic Alberta

2008-01-26T23:04:00.000-08:00

There was a very interesting link left on Sheldon's blog - The 14 part documentary (it's not too long though, each part is 2 to 5 minutes long) on Alberta oil sands and the social and environmental impact it is causing in the Fort McMurray region. Although a lot has been mentioned about the environmental fall out and the side effects of the 'dirty oil', it's the first time I've seen something this graphical and detailed.
If you haven't already seen it, do take the time to watch it-just to broaden your perspective and to see the source of the boom and the cost being paid for it.
As others have mentioned here before, in case a not so oil friendly regime wins power in the US, there could be some interesting implications for our province.

On Realtors

2008-01-26T10:46:00.000-08:00

Realtors are commissioned sales people who make their living by selling their services and ‘advice’ to home buyers and sellers. The higher the price of the goods they sell and the higher the volume, the higher their commission. Is there anything complicated in this that people do not understand? If the market volume falls and/or market prices fall who loses the most? You guessed it right. It is Realtors and pretty much everyone else in the real estate value chain. So why do people have any expectation that Realtors or the associations that represent them will put anything but a positive spin on everything. The case of David Lerah and the US real estate associations is all too well known. Do people really believe that CREB, EREB or any of the Realtors talk about on this blog really wish for lower prices or lower sales volumes? No.

They really want higher prices and even higher sales volume. And if I were making my living by providing these services, I’d probably be doing the same thing as well.
Just contrast how things have changed for the real estate business between 2004 and 2007. Sales volumes doubled. Which means double commission. Average sales prices doubled which also means double commission. So obviously, any thoughts of falling sales prices and/or falling sales volume must be an anathema since it clearly hurts their bottom line.

The problem here is that the real estate agencies control the data and since they are the custodians of the data, they can spin the numbers whatever they want, including changing the criteria or representation as they deem fit. We have to keep on referring to Bob’s site or Sheldon’s site because these are the only places where the data is available. If CREB/EREB were to make this data (or forced to make) this data publicly available, life will be a lot easier for everyone.

So here’s what I’d suggest again- look at the numbers from whatever sources you can, and don’t get too much into the commentary and interpretations of those whose occupation is to sell used houses. And don’t count too much on the advice you get here either-Be intelligent and smart, use your critical thinking. For example, if inventory keeps on climbing, prices have to fall, it’s just a matter of time.

Don’t expect a Realtor to say that you should hold off making purchases until a certain time. How will they make a living if they were to pass on such advice? After all, they have mortgages too! :)

I’ve nothing against any Realtor or real estate agencies. They are merely doing their jobs-if it involves pumping the market, creating an urgency to buy, introducing ‘fears of being priced out forever’ or anything else that will increase their commission-they will do it.

The onus is with the layperson to see what’s the best for them and act accordingly.

Finally, have faith in Mr Market. If the propaganda or positive spins could keep prices high, the situation in the US would have been far different.

UPDATE: Came across this nice article on the 'realtor ads' down in the land where real estate always used to go up. So clearly, these guys are the most 'optimistic bunch' with their tactics almost borderline chutzpah.

10 Reasons why It's a bad time to Buy in Alberta

2008-01-17T10:19:00.000-08:00

A lot is happening around us at this time in the financial markets that will probably impact consumer psychology.

But here are some 'micro' level reasons why it’s a bad time to buy in Alberta right now:

1. High levels of inventory and it’s only January. Sales to new listing ratios at close to several year lows.

2. Clear pattern of falling sales and prices.

3. Historically poorest levels of affordability.

4. No shortage of land.

5. No shortage of building materials and falling prices of timber.

6. With impending recession, shortage of labor to ease in a few quarters.

7. Rampant speculation in the market causing significant deviation from the ‘normal prices.’

8. It costs two to three times (or even more) to own a property versus renting it.

9. Negative Interprovincial migration.

10. Potentially significant problems with the economy ahead leading to uncertainty and less than confident prices.

And the wild card, that no one even wants to talk about because of the new era, peak oil, ‘Chindia’ demand and so forth:

11. Oil prices (the last ‘bull argument’) may fall below levels of ‘profitability’. Or Alberta oil might run into some type of environmental issues. Of course, the oil argument is to a very large extent a red herring in the real estate context, but still those going by the following equation may have to think:

Alberta Real Estate Prices = N*Oil Price

For those getting into a 30/35/40 year mortgages to buy an undersized cardboard box that is overpriced by at least 100k, THINK.

Where are the buyers?

2008-01-10T20:55:00.000-08:00

Real Estate buyers in Alberta sure seem to be taking longer than expected vacations. While close to a hundred properties are being listed every day since the beginning of the year, the buyers are simply not showing up. The sales to new listings ratio is sitting at a pitiful 20% in Calgary and below 30% in Edmonton. It's very early days in the new year, but it still makes you wonder.

What could be the reason?

Those who frequent this blog obviously know the answer. Prices are expected to decline. This is what the buyers expect. And you can’t find fault with that. Last year at this time, you just couldn’t keep the buyers contained. There were ‘bands of investors’ , borrowing money from anywhere to get a piece of the action. Then there were those who had seen it all, ‘seen banks go bankrupt’ in the last Alberta bust, but twenty five years hence, they were lining up to be a part of the mania that had engulfed Alberta once again.

Where have all those buyers gone?

Where are the ‘going going gone....’ Signs?

Inventory has resumed its steady climb again and if the sales don't catch up quickly or inventory addition slows down, we could enter the spring season with close to ten thousand properties for sale. That won't be pretty for a lot of 'upgraders' who are renting their 'previous' property while hoping that someone paid for their 'upgrade'. Speculators won't be happy either. And the developers who plan to complete the sales of over ten thousand properties under construction won't be sitting pretty either.

But what is going to cause a rebound in the sales?

Interest rate cuts? But mortgage rates are still climbing.

A decoupled world in which demand from India and China insulates us from a US Recession? But US is our biggest trading partner and the biggest importer oil in the world. So we shouldn't pin too many hopes on decoupling either.

Dollar is still at parity and it's hurting pretty much every export dependent section of our economy.

We already have negative inter provincial migration numbers.

The one bright spot that is keeping expectations (or hopes) high is the oil price. Should anything happen to it, well....(but we know nothing is ever going to happen to it, right).

I think the real estate demand witnessed between fall 2005 and summer 2007 had a huge speculative component in it. Builders, developers and the speculators themselves took that demand to be real. The builders and developers are still building at ferocious pace, not unlike those in the tech industry who based their projections in circa 2000 on demand of years 1999 and 2000. That demand was fueled by the lax investments made by venture capitalists in lame startups. We all know what happened to the tech companies that were counting on such demand. Nortel probably rings a lot of bells to Canadian investors.

Closer to the real estate domain, we know what’s happening in Florida, Arizona and Vegas. It’s hard to say the extent of damage that will be done here in Alberta.

May be the speculators will all show up from somewhere and start bidding up prices again, come spring. After all, the world just got a new source for an unprecedented demand in Oil- the $2500 car unveiled in India that would push crude oil prices to $200.

Edmonton numbers for December 2007

2008-01-03T21:13:00.000-08:00

are out...and as mentioned earlier, don't look too bad.
But, when combined with over 20 per cent decline in sales volume (and a change in the product mix), the price increases are not unexpected.
Since we don't have the 'representative property' available for Edmonton, we have to rely on the less accurate numbers such as overall median and average for different property classes.
This release from EREB didn't have a whole lot of spin and they compared the December 2007 values with the peak values. Even after the December increases, we are closer to December 2006 prices than to the peak prices.
And while the sales are falling in Edmonton, competition amongst realtors is likely to get more intense as a lot of people (including truck drivers) are joining their ranks. Perhaps, this should be shown to all prospective realtors before they think of switching careers.

On a different note, If you are a new reader, please make sure that you read this post, in which I mention the raison'd etre for this blog.
I do not offer any investment advice on this blog. What you read here is merely my opinion and you should take it with a grain of salt, just as you should take the opinion of anyone out there who claims to have a crystal ball (bank economists, real estate agents, real estate association economists, bulls and bears). What this blog offers is a different perspective- a break away from the monotonous tunes of Alberta shining, real estate always goes up etc-and offers opinions that you would generally not find in mainstream media.
If you are a prospective home buyer, you are your best ally. You have to watch for your self interest inasmuch as everyone who is a 'professional' in this trade (realtor, broker, banker, media) is working to promote their own interest, and rightly so. A sales person cannot say that a particular time(or any time?) is not a good time to buy. It's always a good time to buy from the perspective of commissioned agents who make money only when a sale is closed.
Read my earlier post on the real estate food chain for further details on my perspective on this. So treat everyone's opinion with skepticism and do your own research by establishing your goals, priorities, financing and budget before you jump in and make what is likely to be the biggest investment of your lifetime.
Finally, once again, just discuss issues related to real estate only. Write a comment only if it offers something informative or if it furthers discussion.

Final thoughts for 2007

2007-12-31T10:10:00.000-08:00

2007 is coming to an end and before starting the New Year, let’s do a quick assessment of the Alberta Real Estate situation. Let’s start from ground realities. It’s still a lot cheaper to rent than to buy. Our ‘flipper’ friends make it abundantly easy to rent a brand new house/condo at less than half the total cost of ownership.

Take this example:

Rent for $1700 per month (will probably rent for $1500 to good tenants)

“Brand New 1466 sq ft in South Terwillegar, 3 Bedrooms, 2.5 Bathrooms, 6 Applicance, Great Living Room and Dinning Room, with a Double Car Parking pad, located in the much desired, charming neighbourhood of Riverbend, close to all Shopping amenities, Parks and many Walking trails, easy access the 23rd Ave, Whitemud and Anthony Henday, no smoking and no pets, $1700/m plus util, move in any time, call Andy at 780xxx to view.”

Own for $399k.

Brand new 1466 sq ft in South Terwillegar, 3 Bedroom, 2.5 Bathrooms, 6 Applicance, Great Living Room and Dinning Room, Master Bedroom has 4 piece ensuite and walk-in closet with window, Rear Deck & Double Car Parking pad, located in the much desired, charming neighborhood of Riverbend, close to all Shopping amenities, Parks and many Walking trails, easy access the 23rd Ave, Whitemud and Anthony Henday, Immediate Possession, call Andy at xxx to view.

Based on the ‘ancient rules of thumb for real estate investing’, a multiplier of 100 to 150 of the monthly rent gives a reasonable value of the property. Even at the inflated $1700 rent and the upper end of multiplier, the value should be around $250k. There’s nothing ‘crazy’ about this valuation, less than 2 years ago, the same property would sell for around $225k or so.

It’s possible that the rents balloon quite a bit (actually QUITE a bit) to make this property a worthwhile buy.

At a higher level, Edmonton and Calgary have massive inventory for this time of the year. Edmonton will finish this year with around 7500 listings in MLS alone and over 3000 in Comfree. Of course, based on anecdotal evidence and the number of de-listings in the recent months, it’s very likely that we’ll see another ‘tsunami of listings’ in early 2008.

Calgary is no different with close to 7500 properties for sale in MLS alone with around 3000 in WeList.

Here are some points worth remembering:

It’s still a lot more expensive to buy than to rent same/similar properties.
Current Inventory is very high for this time of the year and will likely increase rapidly in the first few months of 2008.
A lot of sellers are counting on a spring rebound that may not occur.
At a global level, the credit crunch is taking its toll on the biggest banks and the lenders are becoming more hesitant to write ‘speculative’ mortgages.
Even as BOC cuts interest rates, mortgage rates are inching upwards due to a change in the risk appetite of the Canadian banks.
Prices are easily off by $50k for a good chunk of properties in Edmonton and Calgary. I was browsing Comfree this morning, and in Edmonton, there are tens of 2 bedroom condos available in the 175 to 250k range. Similar condos were selling in the $225-$300k range a few months ago. But just over 18 months ago, the same condos were selling in the $125k to $150k range.
There are around 12000 to 15000 properties currently under construction in Edmonton(pdf) and a similar number in Calgary that will be finished this year and released in the market. A good chunk of these might have been sold, but given the current levels of affordability, it’s very likely that most of these were bought by ‘flippers’ and up-graders.
Fewer people are moving to Alberta from other places due to high cost of living and the greatly diminished ‘Alberta Advantage.’
Despite the nearly 10 to 15 per cent fall in property prices in the last few months, affordability is still very low(pdf). Very few people can own the median property while earning the median income. It was not like this just until 2 years ago.
There are no fundamental reasons for expensive housing in Alberta. There’s plenty of raw material available nearby and almost limitless supply of land. The temporary labor shortage will be alleviated in the coming months and years. When that happens, housing prices will revert to their mean values.

If you are a first time buyer then probably a little bit of waiting will be helpful. It’s a lot cheaper to rent than to buy and of course given the above factors, it’s quite possible that the prices can easily tumble by 20 to 30 per cent in real terms over the next few years. If you are about to commit to a big mortgage (40 years?) and have waited thus far, it won’t hurt to wait for another year.

Finally, please keep the tone of comments civil. Personal attacks and redundant posts diminish the thoughtful contribution of other posters.

My best wishes to all the bulls, bears and bystanders for a healthy, productive and prosperous new year.

UPDATE:

Calgary numbers for December don't look pretty. Going by the old criteria for which we have comparable numbers are easily available, inventory is the highest for any month since late 2004. Sales too are the lowest for any month since November 2004. Thanks for quick compilation of stats Bob!

UPDATE2:

Edmonton numbers apparently look great! Everything is up, as per the numbers here. So this is perhaps the launching pad for a spring rebound. Weirder things have happened. But given the high level of inventory, noticeable reduction in sales volume and the reduction in the price per square foot numbers, I won't bet the house on it.

Negative Interprovincial Migration

2007-12-19T09:01:00.000-08:00

It's official now. Fewer people moved to Alberta than those who left as per the latest release from Stats Can. Alberta had a negative inter provincial migration of around 3300, the first negative reading since 1994. From the release:

"On the other hand, the main engine of Alberta's demographic growth—interprovincial migration—has lost some of its importance. Alberta, which has led the provinces in population growth for the last few years, has started to lose more people to other regions than it has received.

Over the third quarter, Alberta recorded a net interprovincial migration outflow estimated at 3,300 people. The last time the province recorded a net outflow to other jurisdictions occurred in the fourth quarter of 1994."

It's hard to say if this is a definite pattern, but for the last few quarters, the net inter provincial migration number has been falling. This time it's into the negative territory.
I guess when you combine the second highest housing costs in Canada with high inflation and poor services, there isn't much of Alberta Advantage left.

The billion dollar question though is- If more people are leaving Alberta than coming in, what's going to happen to tens of thousands of properties that are about to be dumped into the market come 2008?

The Biggest Delusion Revisited

2007-12-16T18:14:00.000-08:00

One of the key things that bulls and bears alike must understand is that the recent run up in Alberta real estate prices had little do with the ‘oil economy’ of the province. It was more about real estate frenzy that gripped almost the entire world (Except Germany and Japan). It was more about cheap credit and gullible masses willing to go into massive debts in order to make quick profits. It was also about becoming house poor and getting into massive 40 year amortizations to somehow get into the market and not be priced out forever.

It was also about unscrupulous Realtors and Suzannes getting people to buy dilapidated eighty year old properties on Alberta avenue for $300k.

Not unlike the legions of day traders that were created during the tech bubble of 1999-2000.

Of course, in certain cases, like in Alberta, local supply and demand factors added fuel to fire. And we saw one of the most rampant price appreciation in real estate witnessed in the recent past.

But the market has changed since summer. Prices have been falling for the last several months in Edmonton and Calgary.

Denial is still fervently prevalent and the perma bulls do not hesitate to mock those who question their bullish perspective of "moderate correction is already done and we are set for ‘normal’ appreciation of 6 to 8 per cent till eternity.”

But not without reason. The reason unfortunately, is the same as has been used by all those who have ever bid up the prices of an asset to valuations far beyond its true value. In 2000, tech stocks were the rage because there was a ‘new paradigm’ of tech nirvana that the world had just discovered. For Vancouver, it’s the Olympics and the desire of every mortal to own a million dollar shack in the most beautiful city in the world.

In Regina and Saskatoon, well, the list of compelling reasons begins to shorten. But what was happening in Islamabad Pakistan (a third world country with no democracy and really low quality of living)?

The problem with most Alberta bulls (and those at all other places!) is that they do really believe that they are different. Truly different.

They conveniently forget that the same crappy $250k condos (down a good $50k already from the peak) were selling for around $100k in early 2006. They can weave all the ‘cock and bull’ stories they want to delude themselves, but nothing fundamental changed in the dwelling between 2006 and 2007. Yet the prices doubled.

As I’ve harped ad infinitum in the past, there’s no real reason why the prices should be so high in Alberta, incomes notwithstanding. In free, unregulated markets, cost of production ultimately determines the selling price. All the core ingredients for making a house-land, building materials-except labour are in abundance here. With the weakening in the oil and gas sector, more workers will move towards residential construction, easing the labor pressure. The prices are going to fall as they are now falling in almost all of the US and the UK.

What we witnessed in the world in the last five to six years was a global housing frenzy. We were amongst the last ones to join the party and even though ours was relatively of short duration, we did bid up our houses to near highest levels in the country.

But it is coming to an end. Worldwide. The credit cycle is now contracting. The ABCP problems in Canada haven’t been resolved yet. The Feds can offer all the money to the banks, but there is already a perceptible swing related to risk appetite.

On a different note, thanks to the offer for advertising this blog. Although you are free to go ahead and advertise this blog, I don’t really think there’s any need for doing so. Those who want to make the biggest purchase of their lives without doing any research on the condition of their market should learn it the hard way. A few people do know about this blog: last month this blog had 19,000 visitor sessions.

I do welcome the idea of guest posts from both bulls and bears. So far no bull has taken up the offer of making a convincing bull case. Please mail your post to albertabubble@gmail.com

Have a wonderful Christmas and happy holidays

Things are changing and people are now noticing....

2007-12-11T10:27:00.001-08:00

I was surprised to read the latest column of Gary Lamphier, normally an Edmonton cheerleader and optimistic writer, in which he paints a not so rosy picture of Alberta economy.
Of course, for the 'bitter renters' frequenting this blog, this would not be anything new. The key things that we have harped on in the last several months are:

Fewer people are moving to Alberta. The people who are moving in are mostly temporary labor with no plans of buying any capital goods, leave aside any houses or condos.
Except oil sands, there isn't much positive to write about for Alberta's economy. Province's biggest contributor- natural gas industry-is in bad shape with massive under utilization of capacity.
Retail sales are flat after accounting for population growth and the highest inflation in our country. Of course, as the home prices fall, expect this to get a lot worse as the home ATM's become useless. Read the post I wrote on this earlier this year on how retail sales are the big driver of Alberta's economy. I think this boom was less about oil sands and more about housing and retail spending, not unlike the boom in the US.

The rental market is changing as well. Pretty much all the big guys in Alberta are offering a free December move in, along with a number of incentives. For all the talk of rapid rent escalation, there's now a desperate need of renters to pay the over sized mortgages of the landlords. Of course, the 20,000 or so multi family units under construction in Edmonton and Calgary will be dumped into these markets by this time next year and it's unlikely to improve the situation.

But for those who are contemplating buying in this market, the real fall hasn't even begun. Properties are still selling for 200 to 300 times their current rents. The rents must rise or the prices must fall. The rents aren't really rising anymore, so we know which way the prices are likely to go.

Of course, the continued problems with more banks in the US is unlikely to change the lending and risk appetite of the mortgage industry. Happy flippers in Western Canada will be in a buying spree come January 2008 and the very short 'bear market' in Alberta housing will be over.

Edmonton Prices Tumble....

2007-12-04T12:00:00.001-08:00

Finally, a no spin release from EREB, at least in the headline. No more 'stability'. No more balanced market. No more 'reintroduction of prices.'
A plain and simple- Prices 'tumbled' by more than 5.5 % in November. However, they do express their 'surprise' by saying that prices tumbled even though the 'inventory' decreased. Of course, the inventory fell as it always does during this time of the year. But not too much.
Inventory fell by a mere 600 units as compared to October. Not too big a change when you have more than 8600 properties still on the market in the MLS system alone.
The YOY gains appear to be evaporating pretty quickly as well, and the median is up only 10% from last November's values. I expect this to move into negative territory in the next few months.
Prices have now been falling since June. Is this still the best time to buy?
Here's another chance for bulls (speculator, banker, mortgage broker, flipper, used or new house salesperson): Make a cogent case for why anyone should buy in Edmonton now. Also explain why prices will go up next year when we'll enter the new year with at least 8000 listings in MLS , over 3000 in COMFREE and more than 15000 properties coming for sale next year?
Once again, Edmonton is toast.

View from Ottawa

2007-11-29T12:03:00.000-08:00

Just returned from a ten day trip to Ottawa and Mid Atlantic US. Of course, home coming is not always a great experience when you have the worst weather of pretty much all the big Canadian cities.

Ottawa has the highest family income in the country yet prices are roughly 40% lower than those in Edmonton or Calgary. They have pretty strong employment, tones of recreational activities, milder weather, proximity to the US (to get all those cheap US cars, clothing, gas and what not) and bigger Canadian cities (Montreal and Toronto) and an economy that’s diversified (federal government and high tech).

The rental market there is soft, not unlike that of Edmonton in early 2005. Free Ipods with a yearly lease are a common incentive.

We saw an ad by a custom home builder offering homes for $156/sq foot that included a treed one acre lot at a location not too far from Ottawa. Perhaps, a location similar to Morinville. But Morinville, Alberta is so different, and that’s why the cost per square foot here is easily double of the values in Ottawa. Instead of getting a 2000 square foot home on a one acre lot here, you instead get a crappy 800 square foot condo for $275k.

This is not to say that Ottawa is fairly priced. But as compared to Edmonton and Calgary, almost anything would look fairly priced. The market there has been growing at a rate closer to the inflation rate, than to the 50% or so we witnessed during last several years here.

While visiting one of the show homes, the ‘new home salesperson’ told us that they are getting a lot of visitors from Edmonton and all of them were complaining about the high prices in Edmonton.

Just for perspective, home prices were a lot cheaper in Edmonton until about last year. 2004 average Edmonton price was around $179k, compared to Ottawa’s $235k.

But we know what happened after that when the prices in our city rose to around $350k at the peak earlier this year.

As I’ve harped several times in the past, there’s no fundamental reason for prices to be this high in Edmonton or Calgary. Both the cities can expand for hundreds of miles in all directions. There’s no shortage of raw materials. The only constraint-labour-will ease in near future. Of course, in the short term, people can believe in all types of fantastic stories, but in the long term reality eventually sinks in. And it might be painful for a lot of leveraged home owners and speculators in our province.

The price per square foot in Edmonton is a little below $300. It has been falling for the last several months after reaching a high of around $330 in summer. I expect that when all the dust has settled, this number will be cut by half. Or perhaps more. Even then, the prices will be higher than they were at the end of 2005.

I’ll post some observations from New Jersey in my next post.

Finally, thanks for the wonderful participation and commentary by all.

Weekend Open Thread....

2007-11-16T06:22:00.000-08:00

Some thoughts for the weekend:

We are living in interesting times indeed. On surface, everything seems okay with the Alberta (Canada) market still showing YOY gains. Of course, the MSM conveniently forget to mention how prices have been falling in Alberta for the last several months. That's obviously going to change at some point in the next few months if the 'bubbleheads' are correct and the first YOY declines are registered. But then it will passed on as a mere 5% fall in prices after several years of gains. Statistics....you can make the numbers sing on pretty much any tune you want if you have a musician who is skilled enough.
Meanwhile, the hopes for new year rebound are fervent, even though misplaced. My flipper friends have all rented their places (at steep cash flow losses) and will sell them next year when 'market corrects.' It's not hard to understand this hope based on the behavioral pattern (just look at last 10 years or so), but certainly difficult to follow if it's based on some facts of the dismal science that touts supply and demand as its core pillars.
Why? Because unless the number of expirations increases very significantly, both Edmonton and Calgary will be entering the new year with over 10,000 properties for sale. That will probably be amongst the highest inventories for January. To put this into perspective, we entered this year with fewer than 3000 properties for Sale in each city.
Edmonton inventory hasn't budged much despite a big seasonality factor that should have kicked in by now. Current MLS inventory is over 8800 and COMFREE has a stubbornly high number of 3100 or so.
Meanwhile, the biggest money shufflers on the planet, see heightened risks of US recession due to the continued credit problems. But obviously, Alberta is an island of its own. We have oil sands. Credit crunch, no worries. US Recession. Who cares? Rising costs, no hassles.
And attempts to sell the Canadian variety of junk are failing miserably. The ABCP market is still frozen and in the last few days drew bids of around 50 cents to dollar. But this is only going to increase the risk appetite of lenders to shelve out more money for buying a 1200 sq ft mansion in North East Edmonton for $400k.

Thanks again for valuable links, comments and other interesting insights.