Alberta Real Estate- Driven by oil prices or Interest Rates?

We have all often heard that so long as the oil prices are high, real estate in Alberta will remain solid as steel. I just wanted to check the strength of this argument to see how well it was the case at the time of last boom in Alberta. Of course, the NEP could have played a part in making things worse for Alberta, but it's hard to quantify this number. I'm just going to present some numbers and leave the rest to your interpretation.

Year	Crude Oil Price	5 Yr Mortgage Rate	Edmonton Avg Price
1979	12.64	11.25	74,453
1980	21.59	13.25	78,914
1981	31.77	15.5	88,624
1982	28.52	18.75	92,313
1983	26.19	13.5	84,785
1984	25.88	12.5	81,941
1985	24.09	12.25	75,769

(Prices are not adjusted for inflation, home prices and interest rates are for January of each year, crude prices are average for each year.)

So a 50% increase in interest rates was good enough to devastate the Edmonton real estate market last time when the prices had not risen so much. Will another 50% jump in interest rates (to say 8 or 9%) do anything to this market?

View from the ground...

Condos that were selling for less than 100 k just 2 years ago are now being offered at $335k. Of course, it makes so much sense to 'invest' in these properties. It rents for princely $975 a month. Add on property tax of around $200 per month(may be more based on this new value) and $195 for condo fees, and you'll make a super $580 on investment of $335k. Wow a super 2% return.
But these numbers are for old fashioned, non believers in Alberta economy like me.
But then, I think these are the properties that will fall hard-falling by more than 50% in less than a year- like the ones in Fort Myers Florida.
But we are different. This apartment will soon start renting for over $2500 a month and there won't be any correction in Edmonton. Or, the condo will double in value again to make up for the opportunity costs!

But isn't it possible that this condo sells again for $100k or even less to bring the return on invested capital back to a more reasonable 6% or so?

Alberta Real Estate 'Truths'

1. Real Estate always goes up.
2. Buy now or you'll be priced out forever.
3. Alberta market which has gone up almost 300% in several cases in the last 3 years will not go down from the current levels. The worst case scenario is that it will go down by 10% or so and then stagnate before starting its upward march.
4. We are running out of land in Alberta. Not all types of land, but affordable, residential land.
5. Oil prices will never go below $50 again.
6. The dramatic surge in the prices in the last few years was a result of robust fundamentals that merely brought Edmonton and Calgary in line with prices in other 'big cities' such as Toronto and Vancouver.
7. Alberta is different as we have oil sands and our real estate prices should reflect that.
8. There is no speculation in Alberta market. The majority of buyers are buying their primary residences, either for the first time or upgrading. May be some wealthy Boomers are buying their second/third vacation homes.
9. Everyone wants to live in Alberta, or at least get the $12/hour jobs offered here in plethora.
10. Interest rate hikes or US recession are unlikely to have any impact on Alberta economy. Even Chinese recession is unlikely to slow down the Alberta boom.
11. The current dramatic increase in inventory is a result of usual summer slow down in Sales and is merely reflecting a return to the 'regular' and more balanced market in which buyers have more choice. Prices will rise with a vengeance by autumn and continue their march to infinity thereafter.
12. Increase in housing prices is great for a locale. Lots of companies will have trememdous interest in opening offices here once employers realize that they won't have to pay any wages to their employees but can pay them in the form of 'assignments' on latest condo projects in Airdrie or Fort Saskatchewan. Just look at start ups and other companies around Route 128 in Massachusetts and how it has been flourishing since the dot com bubble burst and the real estate bubble inflated.

Please add any other 'truths' that you might have heard from the main stream media, your flipper friends and neighbors, real estate agents, bank managers, loan brokers builders or other variants of perma real estate bulls.

Weekend Open Thread...

Thanks for a wonderful week of discussion and comments.
Lots of things happening around us.

• Mortgage rates rising
  
• May be due to specter of overall global tightening.
  
• Luxury car sales booming in Edmonton, fueled by (cough, cough) those in "Land Development, Construction...." "Business is booming. They're in things like land development, construction...In some cases business has doubled, tripled. They had an $80,000 car and now they're buying maybe a $160,000, or $200,000 car."
• Inventory is still climbing, at least in comfree Edmonton. Up by more than 100 properties in less than 3 days.
  
• Environmental concerns about 'dirty oil' in Alberta (thanks to marvinmee for tip)
• So we have something interesting going on here- higher inventory, poor affordability, rising interest rates, serious environmental concerns about the core story of this bubble. Would it all translate into something of epic proportions like the last time? Or would the global central bank driven credit bubble get reinflated and address all those concerns. Stay tuned.
  

Have we passed the Peak?

It's a hard question. Given the worldwide craziness in so many asset classes, it is hard to find fault with 'investors' in Alberta who are trying to have a little bit of fun with the easy money that's copiously available. May be they'll keep on buying at higher prices in the hope of selling it at higher prices still. A lot of people still believe that Alberta will run out of land and millions of people will relocate to Alberta in the next few years.

Of course, long term students of the markets know that the time to buy is before everybody else buys it. And the time to sell is before everybody sells. We get panic buying if everyone wants to buy at the same time (like in 2006) or everyone wants to sell at the same time(would it be 2007 or later?).

I was reading Jim Rogers' Investment Biker and found a very interesting passage that is a very astute observation on all markets. In the context of Alberta real estate at present time it is particularly applicable. This would be old hat to any serious investor, but it's hard to see it in practice these days.

.....From Investment Biker pp 123

This is how markets work. Something, a stock, land, or some other store of value, will bump along at a stable price. Eventually something changes the supply demand balance. The price starts going up because people realize "Hey, they have got a new product" or "The railroad is coming through Smithtown." The price goes up for legitimate and sound reasons.
There comes a time, though, when people buy land in Smithtown only because its price is going up. At that point, my mother calls me and says, "I want to buy some acres," or "I want to buy this stock."
"Why mother?"
"Well, Jim, it's tripled over the past year," she says in a tone that reminds me of the one Tabitha reserves for calling me a dodo-head.
"That's not the way you're supposed to do it," I say. "You don't buy it because it's tripled. You buy before it's tripled."
But this is what happens. People see the price going up and know that here is the gravy train that's going to make them rich. The newspaper will have stories about Joe and Sally, how they are now rich because they bought all this land or few shares of stock in the coal mine. The price now goes up because the price is going up.
This stock or these acres become vastly overpriced. The smart guys who bought early, who bought because their family had lived in Smithtown for a hundred years, they start selling. They realize that this is becoming unsound. It turns out it's not economical to put yet another General Motors factory here, so new people don't buy land. The demand tapers off. For sound economic reasons the price starts coming down....

(Investment Biker, pp 123)
----

If you replace Smithtown with Alberta (Calgary, Edmonton, Red Deer) and railroad with Oil Sands, you'll see that it's perfect bubble market description. A lot of people bought in 2005 and 2006 simply because the prices were going up. They would not look at any fundamentals at all.
But may be those who have lived here for a long time know that may be Edmonton or Calgary isn't worth this price after all. Could that be the reason that we saw such a spike in the inventory? That people think this is as good as it's going to get in a long time and it's probably best to sell it. We won't know for sure. But if inventory does keep on growing at the pace it has the past month for a couple of months, we'll know for sure.

Inventory Rising....and desperation begining

What do you make out of a Realtor press release that begins like this:
"Pessimistic market watchers are peering into the future for any sign of a market slowdown in Edmonton. According to the REALTORS® Association of Edmonton the market remains buoyant with a billion dollars worth of residential sales in May."

So is this the denial stage. Already? And going by the tenor of comments and the ad hominem attacks, it is looking like that. But I'll try to be very rational here. And look at the numbers and fundamentals. And may be an occasional shot at humor.

Let's look at the numbers. First Edmonton.
Inventory seems to have increased quite a bit. We are now close to 5000 on MLS alone. The Sales to listings has fallen to 59%. And the rule of thumb is that anywhere between in 40 to 60% is now a neutral market.
On comfree, there are over 1600 properties listed. And it looks like things are not moving at all in the comfree world.
Just to put things into perspective, last May there were only 1847 properties listed on MLS while comfree had 774.

Now to Calgary. There was quite a bit of stuff added onto the market last month. There are now around 6400 properties on sale on MLS alone. Add around 2000 from comfree and WeList and we have some choice. The Sales were actually down by 2% from last May. The sales to listings ratio is now below 60%, making Calgary a neutral buyer.
So are we at an inflexion point? May be. But you can never underestimate the 'buying power' of masses in a mania.
I'll further crunch these numbers in coming days.

p.s. Texas population increased by 12.7% between 2000 and 2006.
Alberta population increased by 10.6% between 2001 and 2006.
So you see, Texas should have seen even bigger boom than Alberta. Yeah, it's another failed attempt at humor from my side.

Update: As usual, the MSM cheerleaders are out in full swing. Obviously, they will be the last ones to see the import of rise in inventory and how things are sitting for much longer. I wonder why does anyone complain about the existence of this blog when all that anyone sees out there is roads to riches and the housing boom that will take the prices to infinity.

Alberta versus Texas

Cost of a starter home in Edmonton or Calgary-$400k.
Cost of a starter home in Austin Texas - $120k
Does anyone even remember the days when housing was pretty much in the same range in Alberta. I do.

But Alberta is of course very different now as we have oil sands.

And oil sands somehow reduce the free available land for housing developments, as per a number of bullish Alberta investors. The impact can go as far as thousand kilometers away from the oil sands fields causing drastic reduction in available land in Edmonton, Red Deer and Calgary and beyond. Oil Sands also tend to reduce the availability of timber from our neighboring province inasmuch as the days of cheap natural gas used to extract the oil sands are coming to an end and pretty soon they'll have to get 'medieval' and start burning all this wood for extracting the oil from sands.
And we don't have any illegal hispanic workers from Mexico doing our work dirt cheap.
Also, what does Texas know about culture? Alberta is the home of biggest rodeo on the planet and nothing really can compete with it.
And in terms of economic prowess, what is Texas as compared to Alberta. It would only be a measly economy just about the size of Canada. It only has around 110 companies in the Fortune 1000 list as compared to an incomparable 4 or 5 in Alberta.
And income taxes in Texas are so high as compared to those in Alberta. Ours are only 10% while they have a high of zero percent.

So you see, things are very different in Alberta that bump up our prices by more than 3 times the prices in Texas.

I have tried very hard to come out with the above fundamental explanation for the phenomenon. I think it will help restore some 'balance' a lot of people have complained about that his blog is lacking.
Have a good weekend everyone and try to stay cool on this hot day!