Revisiting Fundamentals

Edmonton market has slowed down substantially as the forthcoming numbers will attest. Calgary is holding better for the moment, but we’ll see how it holds in the coming months.

Inventory in both cities is now over 10,000 including the commission free listings. Based on my rough calculations, at the current rate of sales, Edmonton has at least 5 months of inventory and Calgary has around 4 months worth of product.

In Edmonton it’s hard to see ‘Sold’ Signs on listings even months after the listings go up. This is just a couple of months after the Edmonton Journal story that mentioned houses were “Going, going….Gone.”

The new mantra will be “Sitting, Sitting….Trying to Rent, Trying to rent….Rented”

And for once I do agree with Sheldon, that a number of listings have changed from COMFREE to a realtor. I’ve seen it happen in a few places, but I can’t say that the change brought any positive results, yet.

So why is this market imploding? On paper Alberta is doing wonderful, except for perhaps the Natural gas industry. Oil is still at historic highs and barring some catastrophic event, it looks likely that all the oil sands investments are going ahead full steam. People are still moving to Alberta, though not at a vigorous pace seen last year. But net migration is still positive. Interest rates are going up, but nothing major there either. The Alberta story is still intact. Yet, the housing prices have stopped rising. They are falling across the board in Edmonton and in certain product types in Calgary.

I guess that this market has run out of bigger fools. As I’ve harped on numerous occasions in the past, this market got the huge boost based on

• Low inventory
• Sudden surge in Demand from real people
• Dramatic surge in speculator interest who believe that housing prices will increase by at least 30k in 2 months holding period.

Otherwise, is there any reason why on a fundamental basis prices should be so high in Edmonton, Calgary or of all places in Lacombe? It’s all a short term phenomenon that is going to die in the coming months and years. With our without any major ‘shock event’ occurring.

To recapitulate, why I think this market is overpriced:

• Abundance of land. All cities in Alberta can expand for hundreds of kilometers in all directions. There is no shortage of land. The current increases in prices are purely speculative.
• Abundance of building materials. The shoe box houses and condos that are built here do not require raw materials that are shipped from across the world. The bulk of raw materials come from our own province and from BC. Timber prices have fallen significantly since the US housing slowdown and this trend is likely to continue.

On the flip side, the primary fundamental reason for the rise in prices is related to the non-availability of cheap labor. As and when that happens, one of the major fundamental factors will have corrected itself and the market is likely to fall.

Of course, other than these fundamental factors, there are other reasons based on the market condition itself. Pretty much all the good news is already priced in to the real estate prices. Every builder and his cow know that there are going to be upgraders built in the area. So does every new ‘investor’. Unaffordability is severe. Price to rent ratios too high.

The bulls and speculators are all holding on hoping for a magic turn around in their favorite season. They are counting on a sudden surge in sales that will reduce the inventory from all time highs in a few months. It may not happen. They should all prepare a plan B.

What's the real inventory in Edmonton?

Shelodon's blog says it is 6720. I'm not sure if that is the correct number. Another fully automated search location (that will remain anonymous here) reports inventory at 5056 Residential, 2772 condos and 10751 total (including commercial). So total inventory is over 7800 just with MLS.
And then there's comfree with inventory of close to 2600. The total takes the inventory level in Edmonton to over 10,500.
No doubt that number is unnerving to many. When will the Edmonton real estate board change their criteria for inventory calculation?

What's the market like?

A couple of friends who think that I know something about the real estate market in Alberta are seeking my advice. They of course don't know that I write this blog. One of these guys had a nice mid sized home in Edmonton and he booked another one last year. And since prices were all going up, he wisely decided not to sell either one. Of course, he doesn't want to hold both the properties and wants to sell his newer house. And he's now getting a little bit nervous as almost everyone is getting aware of the sheer vastness of inventory in Edmonton. As of today, there are over 7500 properties (apartments and condos) listed on MLS and over 2500 on Comfree. That's 10,000 properties available and I'm pretty sure this is not the peak yet. A lot of new product is going to be coming in the market soon that will further inflate the inventory. And I know a whole lot of such people, including professional flippers and 'chance investors' who hold a lot of these homes and condos. And it looks like they are all planning to exit at the same time.

The Calgary crowd on the other hand looks more confident even though almost every third or fourth post on WeList.com has a price reduction. Almost everyone is counting on the magical recovery that always happens once summer is over. But it will take only one exception to rain on the parade and make life harder for a lot of people who are counting on the turnaround later this year.

And it looks like, a few people are claiming that we are past the peak in natural gas production in Alberta. If that is indeed the case, it bodes bad for Alberta and Edmonton in particular. Natural gas is the biggest source of royalty to the province and once it begins to decline, there is not going to be any replacement for it. Oil Sands is all good in polluting our province and generating immediate jobs, but over long term, the province will not collect more than a buck or two per barrel of oil produced. And lower provincial revenue will lead to lower spending and all the downstream consequences.

So it looks like a lot of people are still clinging to the Alberta bullish story despite:

• Rising Interest Rates
• Severe unaffordability
• Rising dollar impacting both provincial treasury and energy sector profitability
• Reduced net immigration to the province.
• Massive inventory at this time of the year.
• Significant number of new completions going to increase inventory further.
  
• Distinct possibility of US recession.

Your thoughts?

No fear yet.....

In either Edmonton or Calgary. This condo in downtown Edmonton is a case in point. I don't have any previous links to this property, but this property is on sale for $400k.
An exactly same unit sold in the same building for less than $350k a few weeks ago. So it looks like the flippers are all alive, kicking, expecting very well from their 'risk' and counting on $50k jump in condo prices in less than 15 days. May be they are right. It will happen yet again. But it looks increasingly hard, especially in face of over 2500 properties listed just on comfree.
If we follow the classic bubble deflation cycle which has the following stages:

-Ridicule
-Denial
-Concern
-Fear/Panic
-Near hatred of asset class

then we are somewhere in the ridicule and denial stage.'Investors' are still buying in the hopes of a magical turn around after summer.

Which one will fall harder- Edmonton or Calgary?

Just returned from a two day trip to Calgary. I spent quite a bit of time in the North East area and downtown. One thing was immediately obvious-there are lots of listings in Calgary as compared to a few months ago, but in terms of 'feeling the quantity of inventory', Edmonton is way ahead. The numbers roughly support that, but as you walk in downtown Edmonton, it's not uncommon to see upto 10 condos for sales in a complex. Such sights were rare in Calgary.
So may be the rush to list the market hasn't hit Calgary....yet.
I met a couple of old acquaintances who recently ventured into the field of real estate and related industries. One of these guys used to drive a truck. He has recently got his real estate license. Another gal who used to run a pizza shop got the license for becoming a mortgage broker. She reckons earnings of around $1500 per $300k loan. She has to sell just five or six a month to make decent money. Although I should not have asked her this question, but I did ask- Will the bank keep the mortgage on its own balance sheet or will that be packaged into some exotic derivative product. "What????", was her response.
When truck drivers and pizza shop owners are leaving their current vocation in pursuit of easy real estate money, can we say the end is near?
Returning to Edmonton, I couldn't help but notice how filthy this city is. Even though Calgary isn't really the greatest of cities, in comparison to Edmonton, there's a 'night and day difference.' Even after discounting the proximity to the mountains factor. The only nice area in Edmonton is the river valley. And yet, the pace of residential construction in Edmonton is breath taking and the prices so high.
Many moons later when the dust has settled, Edmonton will have fallen quite a bit more than Calgary.

Weekend Open Thread...

• Looks like the Chinese are finding the Alberta oil sands not so compelling after all. How could that be....the world is running out of oil and Alberta is the last glimmer of hope. No wait, Petro China will be doing business with Venezuela instead. I suppose Venezuela does not have to pay $50/hour for unskilled workers. Will others follow? How much of an investment does this reflect?
• Former Edmonton mayor Bill Smith is aghast at Globe and Mail comment that compared Edmonton's culture to bitumen pit. Does anyone seriously disagree with this other than the usual Edmonton Journal Cheerleaders?
• Loonie is still rising. Will we reach parity this summer?
• Have a good weekend everyone and try to stay cool.
  

You know the market has gone nuts when....

A two bedroom apartment in a building sells for less than one bedroom unit in the same building.
One bedroom unit in the Parliament selling for $359,900
Two bedroom unit in the same building selling for $349,900.
So it looks like one of these two sellers has got it all wrong. I think they both have it all wrong, but may be it's too premature to declare that.

Other than that, I have always wondered where that last $900 comes from, do they want us to give the impression that $100 is going to make a big difference. Come on, you guys are not selling $17.99 toaster that will bring in the consumer buying psychology into play.

So what could be going on here? Is there a typo? Or is there a different type of flipper math at work? The two bedroom unit is on the 10th floor, so I don't think that will make a huge difference.
The above reminds of the heady days of NASDAQ bull market when the market cap of PALM exceeded that of 3COM despite 3COM owning most of Palm.
Downtown Edmonton is now littered with hundreds of condo listings that are simply not selling. Hundreds of new condos will be completed in the next few months. But we will be getting an army of construction workers who will gladly pay $300 to $400k for the fancy condos and enjoy the benefits of 'reverse commute' to their work sites in Fort Sask.

Nearly 9 in 10 Albertans say their home is overpriced....

as per this survey.
Of course, the current lot of homeowners is ignorant and does not realize the oil mines on which they are all sitting. Perhaps, they did not know about this around two years ago when speculators entered the market and caused an almost doubling of prices.
And for those counting on the rapid clearing of the inventory, here's something to seriously ponder over: about 83% of current renters, despite being aware of possible rent increases, will want to wait for prices to soften.

From the survey:

"In fact, Albertans have an extremely negative outlook on their housing market, which has skyrocketed in recent months. Nearly nine-in-ten from Alberta (88%) think homes in their neighbourhood are overpriced, and a similar number of Alberta homeowners (89%) say they could not afford a down payment on their home as presently valued. Four-in-five Albertans who rent their homes (83%) also say they will wait for a more favourable market before buying a home."

This could also be a contrarian signal-when everyone sees potential declines, the prices may not decline. Or Alberta market has become so blatantly overpriced that rent increase fears or being priced out concerns no longer matter.

We are indeed entering very interesting times.

Edmonton Comfree Numbers for June

While Canada is getting ready for the long anticipated interest rate hike, there's more somber news from the Edmonton world. Comfree report for June this year reports the inventory at the end of June at 2179(which has increased to around 2300 as of today) and a mere 405 sales. There were 1234 listings last month, brining the sales to list ratio to below 40%, a clear buyer's market.
To put into perspective, last year there were 487 sales for a mere 572 listings.
And while inventory is now openly being acknowledged at an all time high, the end result that usually occurs after such high levels of inventory is still being massively discounted. Prices will adjust minimally, excess inventory will be cleared off by the droves of buyers coming from all over the world to buy $300k Edmonton condos and the party will begin all over again by this fall. May be it will. But more likely, it won't.

Also, the loonie is rising unabatedly, or more like US dollar is falling incessantly, and it's going to have major consequences for Canada as a whole. If loonie reaches parity and God forbid, goes beyond parity, it's certainly going to have major ramifications for not only Eastern Canada, but also for our province in the form of higher project costs and lower government royalties.

Weekend Open Thread

Some thoughts on this bright Saturday morning:

• Interest rates almost certain to go up. How high will they go is anyone's guess but I'm pretty sure none of the 'landlords' looking for a quick flip will appreciate the increase in carrying costs even by a few hundred dollars a month. It's certain to make affordability more of an issue. But it might be counter balanced by a fall in prices.
  
• There's an open house of the distressed property today between 2 and 4 pm. So if you have any offers, this might be the time. I'm posting this again as there might be a sweet spot between the $100k- $125k most bears would pay and around $250 k that is the current asking price. Perhaps someone will see some value at $170k.
  
• How often have you heard the line, "But prices in our city have been depressed for so long that they are only catching up now." I have seen some long term tenants living in our building buy run down shacks on Alberta Avenue and regurgitating this inane line of reasoning. I guess now it is Moose Jaw's turn to stake a claim on 'depressed for too long' line. Honey, if prices in Moose Jaw are less, they are for a reason. The whole world doesn't want to live there and you don't have oil sands. Or beaches. Or mountains. And you are about ten times smaller than Saskatoon. And just to put this into perspective, ignoring the exchange rate calculations, Moose Jaw is now more expensive than Houston and Dallas. And yes, there is no bubble in Canada and they are running out of land in Moose Jaw. Wow!
• Finally, please be civil in your posts. There's no point of personal attacks-they don't add any value and diminish the overall reading experience. Offer something valuable to the readers.
  

Have a great weekend everyone!

Calgary Numbers....

aren't much different from those of Edmonton. The important number to show decline is the Median Sales price that fell below the April 2007 levels to 388,000.
The total inventory is now up to 8087 a huge increase from last year.
Of course, if we add the Welist numbers, the inventory will be up to around 10,000.
That's roughly 1 property for sale for every hundred residents in Calgary. Will it go as high in Arizona, where the numbers are like 1 property for every 40 or so residents.
Let's see.

On a different note, I find it interesting that people suddenly almost demand empathy for those doing a distress sale (go to comments). Fair enough. But why should there be a problem with those offering lowball offers? The 'low ballers' are just the equivalent of 'flippers' in a falling market. More like 'vulture capitalists'. Bulls, bears, flippers, knife catchers, value seekers all have a function in a free economy and they should be respected for that.

Record High Inventory in Edmonton

First the big one, not a surprise.
The residential inventory at the end of June 2007 was a whopping 6367. This is higher than inventory in any other month since January 2004 and pretty close to the all time high in June 1994. But considering the inventory on COMFREE which probably wasn't around then (or didn't have as many listings), Edmonton inventory is the highest ever on record.

One important consideration should be the growth of Comfree in Edmonton during last two years. Comfree now has over 2000 listings, or close to 1/3 of the MLS listings. MLS's share has been falling, which means the growth in MLS inventory is even more staggering.
Based on about 2000 listings in Comfree, there were 8367 properties for sale in Edmonton.

The average price has fallen and is almost back to where it was in April. The average is now 348, 056, down from 354, 410 in May. Of course, the YOY number will still be a huge increase.

The sales to listings have fallen to almost the buyer's market level of 44%.

What will July bring? I expect more inventory and fewer sales.

Any Knifecatchers around?

Here's an 'opportunity of a lifetime'. Buy this condo for a steep discount as per this listing.
Never mind the fact that this condo went up by probably 300% in the last 3 years.
I just have a few thoughts related to this:

• This property will look like a good deal to some people.
• Etoys (remember anyone?) looked like a good deal to me at $40 and $20 on its downhill journey from $80. Of course, it ended up at zero a few months afterwards. Of course, real estate corrections never go that far, but we should not forget that this condo was selling for no more than $100k just over a year and half ago.
  
• If this sale does go through at this price, it will have some impact on the other units at market. The 'comps' will be badly impacted.
  
• The above ad could be put there to create a little 'awe and shock' in a market in which things have just stopped moving. May be they are hoping to generate sufficient interest to start a bidding war and get the top dollar for their client. Not a bad approach from a client perspective.
  
• There will be sellers who will need to sell due to numerous reasons-divorce, relocation, illness, estate taxes etc. In a slow market, these types of sales will bring the sale prices down for the overall market.
  

Your thoughts?

Why do I write this?

While we await for the official release of numbers, I'd just like to spend a moment to explain why I write this. Some people have accused me of having 'vested interest' and writing in a 'self serving' way. I have also been accused of being a loser, stuck in a job that I do not like and am envious of my flipper friends who have apparently made some money on paper based on massive borrowing and the yet to be realized real estate gains.
I would not say much about my financial position, except for the fact that we as a family make very comfortable living (last three years we made over $200k in annual earnings) and I'm not stuck in a job that I don't like. We live very frugally and save close to 70 per cent of our earnings.
If we want we can go out and buy a $500k shoe box for cash, but the outrageous valuations and the overall irrationality of the market has kept us away from this. Additionally, we have never really liked Edmonton where we have lived for last several years. So while we were debating whether we want to live here, the real estate prices zoomed into stratosphere giving us one more reason to leave this city.
We might move to Calgary, which is a lot better place than Edmonton, though even pricier.
So why do I write this? Simply because I've witnessed at least three 'bubbles' in my life so far. Every bubble starts the same way and unfortunately, for a lot of people ends the same way. A lot of bystanders get sucked into the frenzy and mania and sets people back by a few years at least. I've seen two very good friends buying additional properties in May this year despite being very uncomfortable owning their primary homes until last year. This blog is a forum for me to share (hopefully) some useful information with others who are contemplating buying in this market or just want to get an alternative perspective on Alberta real estate. That's why I welcome inputs from everyone-bulls, bears or bystanders.
I do not make any money from this blog, I do not sell real estate and I do not own any commercial or residential properties in Alberta. I might want to buy something in Alberta if the valuations corrected significantly. Or we'll just move from this province as our professional skill sets and business holdings are very transferable and not dependent on the energy sector.

And to the readers who come from the 'other world'- Bob Truman's or Sheldon's blog, you are very welcome here. Unfortunately, the blogging platform is not smart enough to distinguish between who is the real person and impersonation can occur. But your inputs and comments are welcome and provide ingredients for good discussion.

Thanks for your continued support and I'll hopefully keep on writing this till we are in Alberta.