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.