Final thoughts for 2007

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

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

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....

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....

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

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....

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.