...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!
Showing posts with label alberta housing. Show all posts
Showing posts with label alberta housing. Show all posts
Wednesday, February 3, 2010
Thursday, November 27, 2008
How much will you pay for your next house?
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:
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?
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.
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?
Sunday, April 15, 2007
Some Thoughts for Sunday
Thanks to everyone for a wonderful week of discussion. You guys have been providing some valuable insights and interesting links related to Alberta real estate and related things.
A few thoughts:
-The possibility of rent control in Alberta. The industry claims that there's shortage of affordable housing here because....it's too expensive to build stuff here. No surprises here. I wonder how do they actually manage to provide housing in rest of Canada where they don't allow more than 2 to 4% rent increase per year. This in itself is a complex topic and those with a deeper background on the subject are welcome to comment.
-Looks like that the possibility of a slow down is being recognized in our neighbouring province. While theoretically there still could be some 'equity locusts' moving from the rainiest parts of Canada to the coldest parts of Canada, with the recent increase in Alberta prices, their motivation to do must have reduced a bit. If there is indeed a slow down in BC, would it have any impact on Alberta? Of course, there are no oil sands in BC and we are different.
-Anecdotal observations- Just looking around in Edmonton and Calgary, everyone seems to have a new car. When I first came to Alberta, I was actually shocked by the number of 'beat ups' all around me. And now, it's almost like NYC here.
Although I have no numbers to prove this, but it looks like good old house ATM is funding the automotive dreams of Albertans. Nothing wrong with it, so long as they recognize that they'll still have to pay it back. After all, not everyone is getting rich in this province based on the resource wealth. At least directly. The housing boom is perhaps the 'democratic' way of spreading wealth amongst Albertans!
A few thoughts:
-The possibility of rent control in Alberta. The industry claims that there's shortage of affordable housing here because....it's too expensive to build stuff here. No surprises here. I wonder how do they actually manage to provide housing in rest of Canada where they don't allow more than 2 to 4% rent increase per year. This in itself is a complex topic and those with a deeper background on the subject are welcome to comment.
-Looks like that the possibility of a slow down is being recognized in our neighbouring province. While theoretically there still could be some 'equity locusts' moving from the rainiest parts of Canada to the coldest parts of Canada, with the recent increase in Alberta prices, their motivation to do must have reduced a bit. If there is indeed a slow down in BC, would it have any impact on Alberta? Of course, there are no oil sands in BC and we are different.
-Anecdotal observations- Just looking around in Edmonton and Calgary, everyone seems to have a new car. When I first came to Alberta, I was actually shocked by the number of 'beat ups' all around me. And now, it's almost like NYC here.
Although I have no numbers to prove this, but it looks like good old house ATM is funding the automotive dreams of Albertans. Nothing wrong with it, so long as they recognize that they'll still have to pay it back. After all, not everyone is getting rich in this province based on the resource wealth. At least directly. The housing boom is perhaps the 'democratic' way of spreading wealth amongst Albertans!
Tuesday, April 10, 2007
On Shrinking Lots, DIY homes and construction costs...
This past weekend we were spending time with a friend in
His house looked good but nothing great or spectacular. It just brought memories from eons ago(circa 2005) when a good sized (1800 sq ft) home would sell for close to the amount he paid in his locale. But what also struck me was the extremely small size of the house lot. It was no more than 18-20 feet wide. And if he got a garage built at the rear side, the yard would probably be no more than 7 or 8 feet long.
Why on this earth would lot sizes be so small, especially in a place like
What is going on? Is it pure and simple greed of the developers who are carving out smaller and smaller lots? Or is t the fear of the buyers who will buy anything so long as they get a chance to live in a SFH. I’m not sure how this will affect the resale prices of some of these homes when the next downturn comes.
The second thing that hit me was the really basic construction. How much does it really cost to build a similar home? I did some research and found that construction cost varies between $100 to $125. I'm not sure what the rate for construction would be in super hot
So, with all these thoughts in my mind, I began to wonder:
Would it not make sense to buy a parcel of land away from the city and get the house built yourself? Or even more radical idea: why not build something yourself. After all, just a couple of generations ago, this would have been commonplace. Now some people will simply scoff at this idea and call it just impractical, but given the extent to which people extend themselves-financially and commute wise-just to get their dream SFH, why don't people think a bit differently? How about taking a sabbatical from work for 6 months and building something on your own. You'll pick up a new skill and get the perfect home for yourself! And even though I don't have numbers, I think it is very likely that instead of a tiny little lot in NE Calgary, you can buy something three or four times bigger than that for probably half the price within 30 minutes of city limits. In
So instead of ending up with a tiny little house for $350k, you might end up with a huge lot (if not an acre) and a nicely built house for probably $200k or so and perhaps an additional half an hour in commute time.
Is it such a crazy idea? I'd certainly be willing to consider it before buying one of the little sub-starter homes for $350k.
What do you think?
Saturday, March 17, 2007
A few macro trends worth keeping in mind
There is now a growing concern that environmental policy is likely to play some role in inter-provincial politics that directly impacts Alberta. And it is most certainly going to impact Oil Sands investments. Whether it is going to be just a temporary hold off, a minor economic impact in the form of reduced profitability or a full blown investment withdrawal remains to be seen.
Secondly, if the forecasted US recession does occur and there is a consequent slow down in Asia, $40 oil could become a distinct possibility. When that happens, the economic incentive to continue to invest in oil sands will reduce further.
Thirdly, we still have the US sub-prime meltdown going unabated and it likely to have some impact on us. Even though cheerleaders would let us believe otherwise. My question to them is simple: Did anyone in the US believe, even as late as just 2 months ago, that their sub-prime sector was in trouble? So it ain't going to concern anyone here till it hits here. Even if we agree that lending standards have been tighter than in the US, the same speculative elements are commonly seen here as well- leveraging against current equity to buy more real estate, novices holding multiple properties, bidding wars for run down properties -not to mention the rampant consumerism flamed by HELOCs.
The above items would concern any long term investor. But for a foolhardy flipper and newly minted landlord, this is noise that will go away soon. We will see how some of the real estate investors will emerge once everything settles down in a few years-a lot richer with increased confidence or a lot poorer with humility and experience.
Secondly, if the forecasted US recession does occur and there is a consequent slow down in Asia, $40 oil could become a distinct possibility. When that happens, the economic incentive to continue to invest in oil sands will reduce further.
Thirdly, we still have the US sub-prime meltdown going unabated and it likely to have some impact on us. Even though cheerleaders would let us believe otherwise. My question to them is simple: Did anyone in the US believe, even as late as just 2 months ago, that their sub-prime sector was in trouble? So it ain't going to concern anyone here till it hits here. Even if we agree that lending standards have been tighter than in the US, the same speculative elements are commonly seen here as well- leveraging against current equity to buy more real estate, novices holding multiple properties, bidding wars for run down properties -not to mention the rampant consumerism flamed by HELOCs.
The above items would concern any long term investor. But for a foolhardy flipper and newly minted landlord, this is noise that will go away soon. We will see how some of the real estate investors will emerge once everything settles down in a few years-a lot richer with increased confidence or a lot poorer with humility and experience.
Sunday, March 11, 2007
Alberta Prosperity and Real Estate-Tail wagging the dog?
In the last two years, the number of luxury cars you see in downtown Edmonton or Calgary has gone through the roof. Almost all the restaurants worth anything are completely packed in downtown Edmonton even on a weekday.
Some clear signs of Alberta prosperity right. Yes, but what is the source of this prosperity? Stupid question some would say. It's obviously oil sands and natural gas wealth.
I wouldn't quite agree. I don't really have any numbers to prove my hypothesis, but I'll write it nevertheless.
I think most of the conspicuous prosperity in Alberta is not due to the commodity boom but due to real estate boom. And by conspicuous prosperity, I don't mean trades jobs or McJobs, but the $50k cars, $5k plasma TVs, $200-300 dinners and the stuff. Or perhaps the $400k cars.
I think the average Albertan who is not in business for herself/himself or does not (did not) receive a huge oil/gas bonus would not have become richer but for dramatic rise in real estate. Most Albertans have been touched by this boom, but primarily in terms of expensive real estate. I have not heard of very many stories where any one's wages increased by even 10% over the last few years. No doubt at the lower end, minimum wage climbed from $7 to $12, but someone making $30 didn't suddenly start making $45. And most newcomers struggle with housing and other necessities and would not be creating the conspicuous boom, other than helping boost province's red hot real estate.
As I mentioned in one of my earlier posts, every mania is based on a 'story' and in this case, the Alberta real estate market is based on the oil sands story. It is a plausible story and most average Janes and Joes have bought the story wholeheartedly.
And why not? If the story made them richer by $150k (average increase in their home values), why should they dispute it? Especially when they didn't have to work for an hour to do so. It's free lunch.
So while everyone is talking about Alberta's prosperity being rooted in the oil boom, it is possible that its conspicuous prosperity for average Albertan is actually rooted in real estate.
People are feeling richer not because of the $400 cheques they received a year ago but because of the tremendous increase in real estate. And I don't have any numbers again, but I am pretty sure Albertans are feeling confident because their net worth has gone up quite a bit in the last 2 years. And they must be withdrawing from their 'home ATMs' , as they are so found of saying down in the US, and keeping the Touareg's on street and the restaurants busy.
What will be the impact of this on the Alberta economy when real estate market fizzles? Will it be business as usual if we see moderating/stabilizing oil prices and a declining real estate? In my opinion this is a fairly plausible scenario in the coming months.
Thanks everyone for a wonderful week of discussion.
Some clear signs of Alberta prosperity right. Yes, but what is the source of this prosperity? Stupid question some would say. It's obviously oil sands and natural gas wealth.
I wouldn't quite agree. I don't really have any numbers to prove my hypothesis, but I'll write it nevertheless.
I think most of the conspicuous prosperity in Alberta is not due to the commodity boom but due to real estate boom. And by conspicuous prosperity, I don't mean trades jobs or McJobs, but the $50k cars, $5k plasma TVs, $200-300 dinners and the stuff. Or perhaps the $400k cars.
I think the average Albertan who is not in business for herself/himself or does not (did not) receive a huge oil/gas bonus would not have become richer but for dramatic rise in real estate. Most Albertans have been touched by this boom, but primarily in terms of expensive real estate. I have not heard of very many stories where any one's wages increased by even 10% over the last few years. No doubt at the lower end, minimum wage climbed from $7 to $12, but someone making $30 didn't suddenly start making $45. And most newcomers struggle with housing and other necessities and would not be creating the conspicuous boom, other than helping boost province's red hot real estate.
As I mentioned in one of my earlier posts, every mania is based on a 'story' and in this case, the Alberta real estate market is based on the oil sands story. It is a plausible story and most average Janes and Joes have bought the story wholeheartedly.
And why not? If the story made them richer by $150k (average increase in their home values), why should they dispute it? Especially when they didn't have to work for an hour to do so. It's free lunch.
So while everyone is talking about Alberta's prosperity being rooted in the oil boom, it is possible that its conspicuous prosperity for average Albertan is actually rooted in real estate.
People are feeling richer not because of the $400 cheques they received a year ago but because of the tremendous increase in real estate. And I don't have any numbers again, but I am pretty sure Albertans are feeling confident because their net worth has gone up quite a bit in the last 2 years. And they must be withdrawing from their 'home ATMs' , as they are so found of saying down in the US, and keeping the Touareg's on street and the restaurants busy.
What will be the impact of this on the Alberta economy when real estate market fizzles? Will it be business as usual if we see moderating/stabilizing oil prices and a declining real estate? In my opinion this is a fairly plausible scenario in the coming months.
Thanks everyone for a wonderful week of discussion.
Saturday, March 10, 2007
Can the MSM really influence the market
...by hiding bad news? In financial terms, that would tantamount to withholding information from buyers of a product/service. Or the case of information asymmetry. But if the 'participants' themselves are the masses, we should not be surprised. They probably really want to hear nothing bad, other than the usual squabbles between liberal and conservatives. But I am digressing here.
There wasn't really any news coverage in the last few days of the mortgage fraud in Calgary that we covered yesterday.
The Mainstream media are covering only the positive stuff:
I wonder to what extent can this type of coverage continue to keep people away from reality. Is this really deliberate attempt to not focus on any potential negatives of the housing market?
After all, it's really a very symbiotic relationship between banks, Realtors, builders and mainstream media. Everyone from this group gains if the housing market is strong, except for the poor buyer who gets the opportunity to get enslaved by a 40 year mortgage.
In the US too, things went on like this for quite a while before the MSM finally began reporting stuff more transparently. They had to as things just could not be pused under the carpet.
I wonder what will bring the day of reckoning to Canada. When will the bad news be 'big' or 'bad' enough that it will have to be reported. We'll have to wait and find out.
There wasn't really any news coverage in the last few days of the mortgage fraud in Calgary that we covered yesterday.
The Mainstream media are covering only the positive stuff:
I wonder to what extent can this type of coverage continue to keep people away from reality. Is this really deliberate attempt to not focus on any potential negatives of the housing market?
After all, it's really a very symbiotic relationship between banks, Realtors, builders and mainstream media. Everyone from this group gains if the housing market is strong, except for the poor buyer who gets the opportunity to get enslaved by a 40 year mortgage.
In the US too, things went on like this for quite a while before the MSM finally began reporting stuff more transparently. They had to as things just could not be pused under the carpet.
I wonder what will bring the day of reckoning to Canada. When will the bad news be 'big' or 'bad' enough that it will have to be reported. We'll have to wait and find out.
Thursday, March 8, 2007
Yes, the stink is same here....
Mortgage fraud in Alberta. In Calgary?
" The RCMP Commercial Crime Unit say five per cent of all Alberta mortgages are fraudulently obtained." I wonder to what extent this has been playing a role in all the bidding wars.
Were we not supposed to be different? The boom in Alberta is based on solid fundamentals. There is no speculation here. There are no excesses here. There are no lax standards in lending.
It smells eerily similar to what's going on in the US, though I wonder how long would it take before we see similar stuff from RCMP or CHMC.
It's really hard to tell the magnitude of this, but in cases of financial irregularities and cockroaches, if there's one, there's going to be more. We'll have to just wait and see how big a news it's going to become. And how many other cities are impacted. I won't be surprised if there's similar stuff going on in Edmonton.
But such occurrences will only highlight what so many bloggers and participants on this forum and others have been clamoring for a long time-irrational exuberance and rampant speculation. And now there's outright fraud.
Thanks to a wonderful bunch of people who contribute to discussion here and are ever vigilant of the news and post it here.
You are all making this blog so much more useful for everyone.
" The RCMP Commercial Crime Unit say five per cent of all Alberta mortgages are fraudulently obtained." I wonder to what extent this has been playing a role in all the bidding wars.
Were we not supposed to be different? The boom in Alberta is based on solid fundamentals. There is no speculation here. There are no excesses here. There are no lax standards in lending.
It smells eerily similar to what's going on in the US, though I wonder how long would it take before we see similar stuff from RCMP or CHMC.
It's really hard to tell the magnitude of this, but in cases of financial irregularities and cockroaches, if there's one, there's going to be more. We'll have to just wait and see how big a news it's going to become. And how many other cities are impacted. I won't be surprised if there's similar stuff going on in Edmonton.
But such occurrences will only highlight what so many bloggers and participants on this forum and others have been clamoring for a long time-irrational exuberance and rampant speculation. And now there's outright fraud.
Thanks to a wonderful bunch of people who contribute to discussion here and are ever vigilant of the news and post it here.
You are all making this blog so much more useful for everyone.
Housing Starts are down sharply
And for the first time in a while that they have fallen below seasonally adjusted 200,000
But one month doesn't really make a trend. We'll have to wait and see how this changes in coming months. It could just be the weather or may be some builders are getting a clue of what is going on in the US.
Here in Edmonton though, at least in downtown, I see cranes everywhere around. I'll try to do a post in coming days on condos that are going to be available in coming months in Edmonton and Calgary.
But one month doesn't really make a trend. We'll have to wait and see how this changes in coming months. It could just be the weather or may be some builders are getting a clue of what is going on in the US.
Here in Edmonton though, at least in downtown, I see cranes everywhere around. I'll try to do a post in coming days on condos that are going to be available in coming months in Edmonton and Calgary.
Wednesday, March 7, 2007
Are these just isolated events....
Like this cancellation by CNRLOr do they indicate a bigger macro trend? That is some hesitation on the part of bigger corporations on environmental and financial/cost overrun risks with new oil sands investments? We'll have to wait and see.
But if some of these massive investments fizzle out, what is going to support these high prices in Alberta? Thankfully, we have been blessed with wonderful weather that would easily attract thousands of retirees from across the globe :)
On a totally different note, does this ad for condo indicate a sign of things about to come? I mean, we are Edmonton where there are bidding wars going on for property and here we have someone throwing in a 7 year old Merc with a condo. It's not Florida, yet!
But if some of these massive investments fizzle out, what is going to support these high prices in Alberta? Thankfully, we have been blessed with wonderful weather that would easily attract thousands of retirees from across the globe :)
On a totally different note, does this ad for condo indicate a sign of things about to come? I mean, we are Edmonton where there are bidding wars going on for property and here we have someone throwing in a 7 year old Merc with a condo. It's not Florida, yet!
Tuesday, March 6, 2007
Where will the Markets go from here
Interesting discussion going on in the previous post about where the prices are headed. Here's my take on the direction on prices.
I don't really know where the prices will be in a year from now or even in six months.
Honestly. If I have learnt anything from my previous experiences, it is that Mr Market has his own mind. Markets will be 'irrational', 'stupid', 'crazy', 'maniac', 'wow', 'wonderful','bullish' or whatever you want to call it for as long as people are willing and able to pay the current prices. We could be very close to the top or we could merely be beginning. After all, Calgary can easily beat Vancouver in housing prices. And so can Red Deer or Grand Prairie. There's really nothing stopping the prices from going that high or 'crazy'.
At the same time none of the bulls or real estate agents know much about prices either, except for their guess on general direction. Late last year, bulls and Realtors were talking about an orderly 15% or so advance in the prices in 2007. We have already covered that much ground in the first two months. Could 2007 be a repetition of 2006? Why not. Or could this be the year when everything finally ends, like it did in the US last year? May be.
Nobody can authoritatively predict the future course of a market that has been disconnected with fundamentals for this long.
I remember during the equities bull market of 1990s, a lot of long term bears were frustrated and humbled for several years before the bear market finally began. A lot of them called the market top in 1996, 1997 and 1998. The 1998 Asian crisis was dubbed as 'The Correction' when it proved to be merely a blip and equities marched with vigour never seen before. Were the bears right in complaining about markets during 1996-1999? Absolutely. Were they too premature? You bet.
But will those prices reflect any fundamental value? That is the question, value investors ask. If Oil prices were to fall to $20 (not that any one's cow expects that to ever happen, but a value investor must ask such questions), would the investment still be worthwhile? Would they incur huge losses if that were to happen? Most momentum investors or flippers don't think in these terms. Most don't even understand the basics of real estate market.
Obviously, no self respecting value seeker in real estate (or any other) market would be buying in Alberta at these prices.
It will be interesting to see how far momentum will take us.
I don't really know where the prices will be in a year from now or even in six months.
Honestly. If I have learnt anything from my previous experiences, it is that Mr Market has his own mind. Markets will be 'irrational', 'stupid', 'crazy', 'maniac', 'wow', 'wonderful','bullish' or whatever you want to call it for as long as people are willing and able to pay the current prices. We could be very close to the top or we could merely be beginning. After all, Calgary can easily beat Vancouver in housing prices. And so can Red Deer or Grand Prairie. There's really nothing stopping the prices from going that high or 'crazy'.
At the same time none of the bulls or real estate agents know much about prices either, except for their guess on general direction. Late last year, bulls and Realtors were talking about an orderly 15% or so advance in the prices in 2007. We have already covered that much ground in the first two months. Could 2007 be a repetition of 2006? Why not. Or could this be the year when everything finally ends, like it did in the US last year? May be.
Nobody can authoritatively predict the future course of a market that has been disconnected with fundamentals for this long.
I remember during the equities bull market of 1990s, a lot of long term bears were frustrated and humbled for several years before the bear market finally began. A lot of them called the market top in 1996, 1997 and 1998. The 1998 Asian crisis was dubbed as 'The Correction' when it proved to be merely a blip and equities marched with vigour never seen before. Were the bears right in complaining about markets during 1996-1999? Absolutely. Were they too premature? You bet.
But will those prices reflect any fundamental value? That is the question, value investors ask. If Oil prices were to fall to $20 (not that any one's cow expects that to ever happen, but a value investor must ask such questions), would the investment still be worthwhile? Would they incur huge losses if that were to happen? Most momentum investors or flippers don't think in these terms. Most don't even understand the basics of real estate market.
Obviously, no self respecting value seeker in real estate (or any other) market would be buying in Alberta at these prices.
It will be interesting to see how far momentum will take us.
Monday, March 5, 2007
There's still a lot of steam in this market
Despite CREB's error as reported by some very astute observers of Calgary market (thanks squidly and others), both Calgary and Edmonton registered impressive gains
It is too early to say whether the continued trouble with mortgage industry in the US will have any impact on the frenzy here. I guess not.
I think most buyers, sellers, realtors and even the cows in Alberta firmly believe that if oil prices remain high, nothing wrong can happen with Alberta real estate.
But oil prices were higher than what they are today at time of hurricane Katrina. But real estate was roughly 50% cheaper.
What do you think will bring an end to this bubble in Alberta:
It is too early to say whether the continued trouble with mortgage industry in the US will have any impact on the frenzy here. I guess not.
I think most buyers, sellers, realtors and even the cows in Alberta firmly believe that if oil prices remain high, nothing wrong can happen with Alberta real estate.
But oil prices were higher than what they are today at time of hurricane Katrina. But real estate was roughly 50% cheaper.
What do you think will bring an end to this bubble in Alberta:
- An oil price collapse to $30-40 range?
- Unwinding of Yen Carry trade?
- The bursting of global credit bubble?
- A recession in the US?
- Nothing will go wrong with Alberta real estate for several years?
- It will self deflate?
Sunday, March 4, 2007
Edmonton is the new Vancouver....
or so it seems....
"The cost of a 1,000-square-foot, new, two-bedroom condominium concrete highrise is rapidly moving towards $500,000 in this city," Goatcher says. "That's Vancouver prices."
As more condo conversions hit renters, a lot of people will really have to give up their Alberta dreams....
I was reading somewhere that around 25 years ago, at the time of last mania, Edmonton was THE most expensive place to live in Canada. Can it happen again? We just need another year of 50% increase and we will be there....
"The cost of a 1,000-square-foot, new, two-bedroom condominium concrete highrise is rapidly moving towards $500,000 in this city," Goatcher says. "That's Vancouver prices."
As more condo conversions hit renters, a lot of people will really have to give up their Alberta dreams....
I was reading somewhere that around 25 years ago, at the time of last mania, Edmonton was THE most expensive place to live in Canada. Can it happen again? We just need another year of 50% increase and we will be there....
Monday, February 26, 2007
The Bear Case-Part 3- The Disappearing Alberta Advantage
As I mentioned in one of my earlier posts, one of the reasons cited by Alberta RE Bulls for the rapid escalation in RE prices is the so called Alberta advantage- a combination of low taxes with less cost of living and high wages that makes Alberta such a desirable place to live in.
Well, here's a news for them- Alberta disadvantage is evaporating into thin air. Probably at the same rate at which the Real Estate bubble is inflating.
Let's ask a fundamental question: Why should a young family move to Alberta when a starter home of 1100 sq ft costs close to $400k and the average family income is no more than $70k?
Or, why should a young family based in Alberta continue to live here despite such high costs of housing?
Gary North, an astute, albeit bearish economic commentator, offers some perspective on this topic for the US market. He suggests such young families to move to Midwest where there are plenty of opportunities and lots of cheap housing. And shun coasts where starter homes have become very expensive.
If young families were to do something similar and shun Alberta, we'll see a drop in prices. We have heard of some stories where in people from Calgary have started moving to Saskatoon (and creating a mini-bubble over there!) in search of affordable housing.
Especially if you are not making a living working directly on the oil patch, is there really an advantage in living here in Alberta? If you work in a non-Oil and Gas industry, what is really the advantage of living in Alberta when it is hard to afford a detached single family home.
I remember the initiatives started by Alberta government and the cities of Edmonton and Calgary to diversify their economic base to avoid an 80s like disaster due to reliance on a single industry. It looks like all their efforts have gone in vain as the boom in a single industry has created factors to drive out pretty much every other industry.
Until a couple of years ago, Alberta used to pitch the 'Alberta advantage' story to companies from other industries-technology, manufacturing and finance etc- to setup offices in the province. With that advantage almost gone, how will the Alberta economy every diversify?
Contrast this with what Texas did in 1980s. From the ashes of the last oil bust emerged an impressive high-tech industry in Dallas, Houston and Austin. But we are still a one trick pony after experiencing the same bust.
And nothing really has changed, we are still the same oil and gas province as we were in the 1980s, this time only more arrogant and even more reliant on Oil Sands.
Well, here's a news for them- Alberta disadvantage is evaporating into thin air. Probably at the same rate at which the Real Estate bubble is inflating.
Let's ask a fundamental question: Why should a young family move to Alberta when a starter home of 1100 sq ft costs close to $400k and the average family income is no more than $70k?
Or, why should a young family based in Alberta continue to live here despite such high costs of housing?
Gary North, an astute, albeit bearish economic commentator, offers some perspective on this topic for the US market. He suggests such young families to move to Midwest where there are plenty of opportunities and lots of cheap housing. And shun coasts where starter homes have become very expensive.
If young families were to do something similar and shun Alberta, we'll see a drop in prices. We have heard of some stories where in people from Calgary have started moving to Saskatoon (and creating a mini-bubble over there!) in search of affordable housing.
Especially if you are not making a living working directly on the oil patch, is there really an advantage in living here in Alberta? If you work in a non-Oil and Gas industry, what is really the advantage of living in Alberta when it is hard to afford a detached single family home.
I remember the initiatives started by Alberta government and the cities of Edmonton and Calgary to diversify their economic base to avoid an 80s like disaster due to reliance on a single industry. It looks like all their efforts have gone in vain as the boom in a single industry has created factors to drive out pretty much every other industry.
Until a couple of years ago, Alberta used to pitch the 'Alberta advantage' story to companies from other industries-technology, manufacturing and finance etc- to setup offices in the province. With that advantage almost gone, how will the Alberta economy every diversify?
Contrast this with what Texas did in 1980s. From the ashes of the last oil bust emerged an impressive high-tech industry in Dallas, Houston and Austin. But we are still a one trick pony after experiencing the same bust.
And nothing really has changed, we are still the same oil and gas province as we were in the 1980s, this time only more arrogant and even more reliant on Oil Sands.
Sunday, February 25, 2007
The Bear Case-Part 2, some real data crunched
I had planned on continuing with some more abstract thoughts, but I came across the following interesting listings on craigslist:
For Sale
For Rent
We don't come across such gems for doing buy versus rent comparisons or to make a bull or bear case for real estate. This two bedroom condo is selling for $220,000. The same condo can be rented for $1100, all inclusive.
Old fashioned real estate value seekers would say that a good value for real estate is a property selling for 100 to 130 times monthly rent. In this case, the monthly rent, after excluding the condo fees is $758. Which means this property should be selling for no more than $100,000.
Or, the rent should really go in the $2000 range (plus condo fees). I'm not too sure how many people would be willing to (or able to) pay this much amount for this condo, at least in Edmonton. I think we still have not become Manhattan yet. May be if this mania continues for another15 years, but we are not there yet.
So by one metric, this property is severely overvalued. My guess is that this property was selling for around $120,000 less than two years ago- A time when sanity was still prevalent in Edmonton market place.
Let's take another metric-the Price to Earnings ratio for the property. Let's say you would buy this property as an 'investment' (as Realtors are so fond of saying).
What will be the earnings from this property? Assuming zero vacancy (not unreasonable to assume in the current Edmonton market, at least in the short term), the annual gross rent would be 13200 (1100*12) . The expenses are:
Condo Fees: $342*12= 4104
Property Tax: .01*220,000= 2200
We'll exclude any maintenance etc for this property for simplicity.
So the net income for the property would be : $6896
So for an investment of $220,000, the return will be $6896, making the P/E for this property around 32. Just for comparison, you can easily get 4% return risk free, hassle free from PC financial. If you take your $220,000 and put in that account, you'll get about $8800 in return.
So why would someone buy this property? Simple- in anticipation of double digit price increases.
Can anyone see the bubble yet?
For Sale
For Rent
We don't come across such gems for doing buy versus rent comparisons or to make a bull or bear case for real estate. This two bedroom condo is selling for $220,000. The same condo can be rented for $1100, all inclusive.
Old fashioned real estate value seekers would say that a good value for real estate is a property selling for 100 to 130 times monthly rent. In this case, the monthly rent, after excluding the condo fees is $758. Which means this property should be selling for no more than $100,000.
Or, the rent should really go in the $2000 range (plus condo fees). I'm not too sure how many people would be willing to (or able to) pay this much amount for this condo, at least in Edmonton. I think we still have not become Manhattan yet. May be if this mania continues for another15 years, but we are not there yet.
So by one metric, this property is severely overvalued. My guess is that this property was selling for around $120,000 less than two years ago- A time when sanity was still prevalent in Edmonton market place.
Let's take another metric-the Price to Earnings ratio for the property. Let's say you would buy this property as an 'investment' (as Realtors are so fond of saying).
What will be the earnings from this property? Assuming zero vacancy (not unreasonable to assume in the current Edmonton market, at least in the short term), the annual gross rent would be 13200 (1100*12) . The expenses are:
Condo Fees: $342*12= 4104
Property Tax: .01*220,000= 2200
We'll exclude any maintenance etc for this property for simplicity.
So the net income for the property would be : $6896
So for an investment of $220,000, the return will be $6896, making the P/E for this property around 32. Just for comparison, you can easily get 4% return risk free, hassle free from PC financial. If you take your $220,000 and put in that account, you'll get about $8800 in return.
So why would someone buy this property? Simple- in anticipation of double digit price increases.
Can anyone see the bubble yet?
Saturday, February 24, 2007
The Bear Case-Part 1
Every bull market generally starts on the basis of solid economic reasons. The reasons could be the relative undervaluation of assets or an increase in the expected future returns. However, as the bull market matures, it gets divorced from the economic reasons that started the bull market. I have personally witnessed several of these bull markets and their degeneration into manias in my life in different parts of the world at different times during last 15 or so years. The most recent one was the housing bubble mania down in the US and the one prior to that was the NASDAQ bubble in 2000.
Once the bull market enters the bubble phase, the same bull market story is sold to the masses and is given as the primary reason for asset price escalation.
The Alberta Real Estate bubble is no different from any of the prior manias we have seen in the past. The same arguments appear here-it's different here, we have a solid story (oil sands, strong economy etc) and other factors as mentioned in my previous post.
Alberta real estate market was in a healthy bull run till around 2005 spring after which all hell broke loose. I personally know of two long time investors who sold at about that time. One was an apartment building complex in Edmonton that was sold for roughly twice the amount it was bought for seven years ago (1997).
Take a look at this listing. Two years ago you could buy a detached starter SFH for around $175,000 in a good part of Edmonton. Now, you'll be lucky to even get a studio for that much!
The question really is-what has changed in the last two years. Why have most of the SFHs more than doubled in price? I do know the simplistic answer-it's the demand and supply. But if only it were that simple. Back in the heady days of Nasdaq bubble, I distinctly recall the day Palm made its IPO appearance. That day the market capitalization of Palm was more than the market captialization of 3Com, the company that actually owned most of Palm! And we do know what happened to Palm a few months after that.
Last year Warren Buffet mentioned a similar disconnect when he mentioned that the sum of land value and the improvement value of homes was way less than the amount for which homes were selling for in the US. The reality is that in a mania the fundamentals matter no more. It's greed and fear. Fear of being priced out forever. Rampant greed of speculators who think that they have become the next investing genius because of their three earlier successful flips. Ultimately, we might want to philosophize this as the 'fallen nature' of humans that expects something by doing nothing.
And if this is the way in which the market has been moving, how can the fundamentals or anyone talking of fundamentals be respected.
I've a lot more to say on this and will continue in my next post.
Once the bull market enters the bubble phase, the same bull market story is sold to the masses and is given as the primary reason for asset price escalation.
The Alberta Real Estate bubble is no different from any of the prior manias we have seen in the past. The same arguments appear here-it's different here, we have a solid story (oil sands, strong economy etc) and other factors as mentioned in my previous post.
Alberta real estate market was in a healthy bull run till around 2005 spring after which all hell broke loose. I personally know of two long time investors who sold at about that time. One was an apartment building complex in Edmonton that was sold for roughly twice the amount it was bought for seven years ago (1997).
Take a look at this listing. Two years ago you could buy a detached starter SFH for around $175,000 in a good part of Edmonton. Now, you'll be lucky to even get a studio for that much!
The question really is-what has changed in the last two years. Why have most of the SFHs more than doubled in price? I do know the simplistic answer-it's the demand and supply. But if only it were that simple. Back in the heady days of Nasdaq bubble, I distinctly recall the day Palm made its IPO appearance. That day the market capitalization of Palm was more than the market captialization of 3Com, the company that actually owned most of Palm! And we do know what happened to Palm a few months after that.
Last year Warren Buffet mentioned a similar disconnect when he mentioned that the sum of land value and the improvement value of homes was way less than the amount for which homes were selling for in the US. The reality is that in a mania the fundamentals matter no more. It's greed and fear. Fear of being priced out forever. Rampant greed of speculators who think that they have become the next investing genius because of their three earlier successful flips. Ultimately, we might want to philosophize this as the 'fallen nature' of humans that expects something by doing nothing.
And if this is the way in which the market has been moving, how can the fundamentals or anyone talking of fundamentals be respected.
I've a lot more to say on this and will continue in my next post.
Making the case for Price Increases
Let me start the first real post on this blog by making the bullish case for Alberta real estate. Here is the stuff that is all going on in favor of Alberta:
- Overheated economy with minimum wage of $15/hour commonly seen.
- Massive proposed capital spending planned for next several years. Figures routinely quoted range from $50 to $100 billion.
-Massive influx of immigrants making Alberta a really popular destination for new immigrants who would otherwise be going to the 'Big 3' destinations (Toronto, Vancouver and Montreal).
-Massive inter-provincial migration.
-Lower Taxes in Alberta- the oft quoted 'Alberta advantage'.
-Relatively lower housing prices as compared to BC (Alberta is not lower than any other place any more).
-Alberta is different (due to above factors) and hence the economic rules applicable in the rest of the world do not apply here.
Alberta has witnessed an almost seven to eight year bull market in real estate due to above reasons. And as per bulls this is likely to continue for at least several more years before the 'crazy-maniac' prize increases subside to a respectable high single digit growth rates.
Next, I will make a bear case for Alberta real estate.
- Overheated economy with minimum wage of $15/hour commonly seen.
- Massive proposed capital spending planned for next several years. Figures routinely quoted range from $50 to $100 billion.
-Massive influx of immigrants making Alberta a really popular destination for new immigrants who would otherwise be going to the 'Big 3' destinations (Toronto, Vancouver and Montreal).
-Massive inter-provincial migration.
-Lower Taxes in Alberta- the oft quoted 'Alberta advantage'.
-Relatively lower housing prices as compared to BC (Alberta is not lower than any other place any more).
-Alberta is different (due to above factors) and hence the economic rules applicable in the rest of the world do not apply here.
Alberta has witnessed an almost seven to eight year bull market in real estate due to above reasons. And as per bulls this is likely to continue for at least several more years before the 'crazy-maniac' prize increases subside to a respectable high single digit growth rates.
Next, I will make a bear case for Alberta real estate.
Welcome to Alberta Bubble
Well, the last few days were bad for Real Estate Bubble bloggers in Western Canada. First VHB threw in the towel, then our beloved Rob at Calgary housing gave in. They say it must be close to the top (yes, the real top) when long time bears capitulate. I don't think either one of these guys really capitulated, but it makes you wonder.
And while somehow navigating through over 200 comments at Calgary blog, I realized that we just don't have adequate forums to discuss the happenings in Alberta real estate. Especially when you see the craziness- multiple bids, bidding wars, condo reconversions of absolutely dilapidated buildings, real estate agent condescension, owner condescension, 'Alberta is different' stories and a long list of items we will hopefully cover in coming weeks and months.
I can't guarantee you any particular frequency of the posts, but I will try to post as often as I can.
And while somehow navigating through over 200 comments at Calgary blog, I realized that we just don't have adequate forums to discuss the happenings in Alberta real estate. Especially when you see the craziness- multiple bids, bidding wars, condo reconversions of absolutely dilapidated buildings, real estate agent condescension, owner condescension, 'Alberta is different' stories and a long list of items we will hopefully cover in coming weeks and months.
I can't guarantee you any particular frequency of the posts, but I will try to post as often as I can.
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