Is all the good news already priced in?

Thanks to everyone for wonderful comments.

Despite all the oil sands work and hype, the government will be collecting fewer royalty dollars in the coming years.
So even though a worldwide peak oil in terms of production may be a bit away, Alberta has almost certainly experienced the peak in terms of royalty collections.
Here's an analysis of the same phenomenon.

"It's tempting to ask, why worry? Oilsands production is expected to last 40 to 50 years. But the oilsands will never yield the rich flow of petrodollars pumped into the treasury by conventional oil and gas.Despite the fact that production is rising dramatically, oilsands royalties will go down, from a high of $2.3 billion last year to $1.1 billion in 2009-10.Even when production triples to three million barrels a day in 2020, royalties will be stuck at $1.1 billion, the same level as 2004-05, according to one report."

So any long term investors in Edmonton and Alberta real estate should give it some thought. What will a fall in this inflow do to government spending? And this is the story at almost highest historical oil/gas prices. What will happen if the prices were to fall in half? Slowdown? Recession? Who knows.

As I've repeated on numerous times in this blog: Oil Sands is the Alberta's story for the recent runup in prices. But doesn't everyone in the world already know about Oil Sands? Haven't Edmonton and Calgary prices become the highest in Canada after Vancouver? As for quality of life and its wonderful offerings in Edmonton, even Oilers are having trouble in retaining talent in Deadmonton!
What will a little slip in oil and gas sector do to Edmonton and Calgary? Can it take Edmonton back to where it was just a few short years ago.
Even if some of the very recent predictions for lower oil prices do not become a reality, for how long will the mad rush of oil sands developments continue? And how many jobs will be left once the capital spending phase is over.

The obvious question is: Is anyone getting into real estate even thinking about some of the above things, before buying a crappy $400k home on a 40 year mortgage?
For most people, it's the same story:

Alberta=Oil or Oil Sands=Higher Oil Prices=Higher Real Estate prices=Buy Now or be priced out forever

But I guess it's a sign of our times. Most people have drunk the 'real estate always goes up' serum and fairy tails spun by its effect still appear real.

Alberta Boom and Budget

The provincial government is on a spending spree, taking an almost anti-Keynesian approach towards spending. Rather than saving some money for the rainy day(yeah, there's a heritage fund but this year almost zilch will go into it) , and you can bet there will be one sooner or later, they want to spend now due to political reasons.

And what's this-they are talking about deficit when they should have been sending out those $400 checks again. No, it's time for realpolitik and that demands fervent spending to reduce the 'infrastructure deficit' accumulated during Klein years.

While at almost any other place on earth such spending would be a welcome news, in Alberta it is going to make things worse, at least in the short term. Where is the labour for these projects going to come from? There will be cost overruns, labor shortages, further housing problems and further run up in inflation. Already, inflation is running at around 6% in Alberta.

Most in the government do acknowledge that this boom was unexpected (just as the bust will eventually be). But I think nobody showed any vision as far as oil sands projects were concerned. If the peak oil theorists are indeed right, then there should have been no urgency to rush the development of so many oil sands projects concurrently. They could have fetched even higher lease rates for the oil sands patches by restricting the supply of available area/deposits and arranged the development in a more organized manner. Instead, everyone from a ground zero flipper to the oil companies want to make a quick buck at all costs.

The problem is that if the oil price does fall to the historical levels, we will certainly see another bust. The migratory labour will leave again in search of better pastures, but long time residents of Alberta will suffer. Like in the past.

At this time, a government with vision should have been putting billions of dollars for the rainy day and for diversification of Alberta's economy. The way Norway is doing.

Alberta Equity Locusts

We all have heard stories of if not directly experienced the role played by equity locusts in driving up prices in an area. Just a few years ago, home owners from BC moved to Alberta in search of cheaper and more affordable housing. And they probably played some role in driving up prices in Alberta.
Now, it's the turn of Alberta home owners to 'spread the wealth' to other parts of Canada. Here's a nice article that talks about equity locusts from Edmonton fleeing to Saskatoon and driving prices up there.
From the article:
"Many property-rich Albertans have targeted the city, they say, as the next in line to experience the kind of huge upswing in property values that have swept through Calgary and Edmonton."
What is going in Saskatoon? Oil Sands? Natural Gas? There is a strong resource sector in Saskatoon, but nothing that really should cause such dramatic increases in prices. What has caused a doubling of prices there? I guess it's the same exuberant belief that has driven prices worldwide.
Who is next in line? Equity locusts from Saskatoon driving up prices in Yorkton(where you can currently buy a home for under $50k) and Moose Jaw? When will Winnipeg's turn arrive?

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!

Who can afford these condos?

We all know that there's very little speculation in the Alberta market. That's why we have some ads like these.
Seriously, does Edmonton have the demographics to support 900 sq ft condos selling for $450k?
This is clear cut Vancouver or even San Diego pricing. Any guesses on who will be the potential owners for such an apartment?Lawyers making $120k? Software consultants making $100k per year? How many such people do we have in the city?
Also, take a look at this one in a lowrise. This building was developed in front of my eyes and is now almost 50 to 60% occupied. $318k for a downtown condo that doesn't have anything fancy. Similar units in this building rent for $1300 that includes condo fees. The launch price for these just a year and a half ago was close to $160-180k. What is the expectation here? Finding another greater fool? Or that the rents will go up to $2000 to make it a worthwhile game for whoever is buying? I strongly doubt that 2 br apartment is going to increase to $2000 in Edmonton even in the next 5 years. In the last 2 years, the average 2 bedroom apartment has gone up from $800 to around $1000 to $1100. This is based on my random market inquiries during last week.
I think we are running into the affordability wall, at least for some of these condos, the Alberta boom notwithstanding. Or may be there are still enough 'investors' out there who have far greater prescience than I do.

Update: Here's a very interesting link on relative comparison of various world cities.

The 10 most expensive were Paris, followed by Moscow at $688, Seoul $630, Vancouver $577, London, England $532, Calgary $500, Athens, $375, New York City $375, Tokyo $325, and Edmonton, $322.

So Edmonton and Calgary are now officially expensive even by world standards. Of course, we are a truly world class city.

On Shrinking Lots, DIY homes and construction costs...

This past weekend we were spending time with a friend in Calgary. North East Calgary to be specific. He bought his little house at the 'right time' last year, paying close to $250k for a detached 1000 sqft home. He looks happy in the home and after paying more than 25% down, he pays around $1100 in mortgage plus $500 in other expenses such as utilities and property taxes, . He spends close to an hour commuting to his downtown location (car plus c-train). My friend mentioned how he would have been unable to afford house in today's market when similar sized homes go for over $350k. I couldn't disagree with him as Mr Market is always right.
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 Calgary NE? I do not have any figures to back this up, but just based on what I saw there, it looked very odd. Bigger houses (2000 sq ft) in the same neighborhood had lots with open area only marginally bigger than my friend's lot.
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 Alberta economy, but as I mentioned earlier, labour rates have certainly not doubled. Anyone with an idea of the real cost of construction in Alberta?

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 Edmonton, land on the outskirts of city will be even cheaper.
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?

March Numbers and some fundamentals

New highs for both Edmonton and Calgary.
Starting with Edmonton numbers first.
Average price in Edmonton is now up to $325k, slightly up from February value of $321k. Average SFD in Edmonton is now close to $400k, up almost $25k from last month. Condos witnessed a slight decline. Inventory has almost doubled since last summer to 2574 (2120 for February).
Calgary SFD is now $463k. The overall average is now $415k.

What do I make of these numbers? The basic question is- who will afford housing at these prices? How many people can buy $400k starter homes?And $250k condo in Edmonton and $325k condo in Calgary?

Of course, Edmonton can become as expensive as Calgary. But can Calgary become as expensive as Vancouver? A lot of 'investors' could be counting on that.

At these prices, Calgary is more expensive than Toronto and Edmonton is almost approaching the Toronto prices. Also, for some perspective, both Houston and Dallas have average prices the same as the pre-boom Alberta prices. Below $200k.

From a fundamental perspective the question is: Why have prices almost doubled in the last two years in both Edmonton and Calgary? I realize there are the usual 'supply/demand' and other economic theory answers to explain the short term movement of prices, but there is more at play when people are buying something for the long terms (5 to 35 years horizon).
My questions are:

Is there a shortage of land that can be developed in both Edmonton and Calgary?
Have the prices of raw materials really doubled?
Has labour cost really doubled?



Other than these factors above, Edmonton and Calgary are not world class cities by any stretch of imagination. Except for during periods of oil boom, both cities have slow growth and poorly diversified economies, very few jobs, limited city based attractions, poor international connectivity (air travel etc) and generally very little to do. I don't want to start a debate on the Battle of Alberta, but Calgary has more to do(mountains) than Edmonton(yes, there's a mall here) and that's probably the reason for its traditionally higher prices. The reputation of Edmonton as Deadmonton is well earned.
I'm highlighting these factors because most of the people are not thinking about any of these things when they are taking a 35 year mortgage to buy a $300k bungalow on Alberta Avenue in Edmonton.
And if for some reason, an unexpected drop in oil prices occurs, or if there is an unfavorable oil sands regulation due to environmental concerns, what will support these prices? West Edmonton mall alone is not good enough to keep people in Edmonton. Yes, there is lure of mountains in Calgary, but it may not be enough.

And to all those practice, my best wishes for the Easter long weekend. All others have a nice holiday.

Not Much going on....

Same old stuff. I guess you have to wait for all good things and if you are counting on cheaper Alberta real estate, it will require further patience. A few items of interest:

• Building permits fell sharply across Canada.
  
• CIBC apparently contradicting David Dodge's concerns on sub-prime meltdown. They are proclaiming that Canada is different (and by extension Alberta is very different) and we will largely be isolated from whatever goes on in the US. We'll see. And it's the same belief-commodity markets are now not dependent on the US growth but on the global growth.
  
• On the street, it's business as usual. Same priced out forever fear. Same fear of escalating home prices. Same concerns on rent as 'wasted money'. At work, I've come across at least three individuals who have bought in the last three months in Edmonton. They recently moved (within last 1 or 2 years) to Alberta and have paid in the range of $400k for little more than starter homes (1500 sq ft SFH). May be they made the right decision. Perhaps these properties will end up costing as much as in Vancouver. The only problem is: Who will be able to afford $600k starter homes in Edmonton? All those trading up must find someone willing to buy their smaller dwelling.
• Thanks for the ideas on new threads. Some more ideas can be really useful, as we go through this somewhat uneventful time.

Weekend Open Thread

Nothing very significant going on, at least nothing that is perceptible yet. A few interesting items though:

- David Dodge talking about the "huge consequences" on Canada of hard landing in the US . But Canada, and certainly Alberta is different. We all know that by now.

-Met with a flipper friend who has interest in ten properties in the province. He had absolutely zero experience with real estate until 2005 and has now teamed up with several similar minded flippers to participate in the Alberta boom. I personally wish that things turn out well for him as he is a young guy with family responsibilities. He has so far sold not even a single property but is still looking for buying more properties. He was telling another friend to buy a duplex home in Edmonton for $300k as it would "for sure appreciate by $100k" in the next three or four months. No reasons, no valuations, no fundamentals. Just pure flipper play. Hopefully for him, the mania will continue and he'll manage to get something out of this boom. But I think once the music stops, there will be too many people without a chair.

-Any flipper friends who read this blog: how often/when do you actually flip properties? Is there any discipline involved in successful flipping in real estate? Or are you just happy holding on to paper gains?

Please post any other ideas, thoughts or suggestions for future topics.