Five years undone

Readers of Bill Booner’s daily missive will recognize a term that he widely used during last five years or so. He used to call the boom as a ‘crack boom.’ A boom in which nothing useful was created but everything was merely an illusion. Just like an eastern scripture says, ‘all that is visible is illusory.’ There was illusion of wealth and prosperity.Of achievement and triumph. Of mastering the business cycle by artificial setting of interest rates by a committee.

And now with oil falling below $35, we have undone almost 4.5 years of speculative and artificial demand of a product that would have made Alberta and Canada the Energy superpower of the world. Demand that was fostered by free credit, rampant speculation and excessive greed. Demand that disappeared as soon as the Hummers were repossessed, the McMansions foreclosed and factories closed down in China.

Too bad, that in one stroke OPEC agreed to reduce the oil production by the entire projected supply of the Oil Sands (by 2020).

This morning sitting in my office with a windchill of -35 outside, I am just wondering how could so many people around the world have been so naïve. The naiveté varied across cultures, continents and locales, based on some sort of fundamental underlying belief that ‘we are different.’ The 'weather in California', 'oil sands in Alberta', ‘Olympics in Vancouver’, ‘Microsoft/Boeing Economy of Seattle’, ‘BRIC magic of Mumbai’, ‘Manufacturing prowess of China’, ‘Financial juggernaut of London’….the list is endless. Every city had its own way of overpowering reason and common sense.

And now, we have to confront reality.

The consequences won’t be pretty. As most of Canada and several parts of the US go through a major cold weather streak, I can’t help but think what would have happened to natural gas prices if this were year 2005 or 2007. But then, until the ‘master thieves of universe’ started placing massive bets in the commodity markets on 50 to 1 leveraged funds, periods of massive spikes and volatility in prices were few and far between. Peak oil was merely an interesting theory and not a call to action for the doomsday crowd. Yet, a good majority of people who believed in a housing bubble did not believe there was a commodity bubble. Or bubble in oil and gas.

The entire Alberta Government and the oil and gas chieftains of Calgary or Houston did not believe that oil prices will fall again. But time and again, the unbridled optimism of investors and market participants is undone by Mr Market. This time is no different. Many on this blog ridiculed me for being a pessimist and believer in gloom and doom. Reflecting on this, I think I had been too optimistic for I did not know the extent of corruption, fraud and deceit in the underlying financial economy.

The reality of Alberta’s economy is that it is entirely dependent on the Energy sector. Once the energy sector slows down, as it is now, everything else will follow. Foreclosures, lay offs, bankruptcies will all rise leading to the prairie land version of rust belt. At least until the next wave of liquidity lifts the sunken boats of commodities. And the coming months and years will illustrate how inane the claims of diversified Alberta economy were.And perhaps for next few decades people will think numerous times before spending half a million dollars on a tiny shoe box.

Happy holidays to everyone.

Weekend Open Thread

I woke up this morning to hear not so positive news on so many fronts. The chicken are coming home to roost now and the years of credit excesses, leverage, denial, 'Greenspan Put' and speculation are clearly hurting the mainstream economies both in Canada and the US.

• US unemployment rose by over a whopping half a million. Worst since 1982. Bye Bye Goldilocks economy. Bye Bye quick recovery.
  
• Canadian unemployment rose by 77,000, a much worse number than the US if we account for population.
  
• The West is fairing better at this time, but it's only a matter of time. Layoffs are occurring at GE, Jacobs etc and the full effect of the ensuing commodity bust is only starting to getting felt.
• Oil is at $43 and more importantly natural gas is below $6. A fall to $25 and $4 will kill the economy of West in a replay of 1982. But 1982 will look like a picnic as compared to what's unfolding right now. Just for perspective, the 1982 recession was 18 months long. This recession is already 12 months old and until recently leading economists did not even admit that there was a recession. And Canada is only in a 'technical recession' as per our esteemed leaders. Expect things to get much worse on the employment front with a double digit unemployment rate a very real possibility.
  
• With manufacturing tanking and the commodities bust about to show its ramifications, what's going to happen to the real estate? Not a very pretty picture.
  
• The bust is here. It can't be wished away and most readers of this blog knew what was coming. Yet a few delusional ones bought and even had the chutzpah to lure others into buying by making specious arguments. With a grim employment picture, it won't take much convincing to anyone to put off buying homes. Or will it? When people have sleepless nights before signing on the mortgage papers and committing themselves to a debt for 25 years, we'll know the market has become normal.
  
• Finally, the loonie is down to 77 cents and change. The true companion of $25 oil would be a 65 cents loonie. So much for the collapse of USD.
• And here's a little bit of humour on this otherwise gloomy news day(from Calculated Risk blog comment post):
  

Lawrence Livermore Laboratories has discovered the heaviest element yet known to science. The new element, Governmentium (symbol=Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Since Governmentium has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. A tiny amount of Governmentium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete. Governmentium has a normal half-life of 2 to 6 years. It does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places.

Have a great weekend everyone.

What will Oil and Gas Bust do to Alberta real estate?

Several months ago, there was a poll on this blog that talked about the ramifications of lower oil prices on Alberta. The consensus then was that anything below $50 would be bad. If $50 were bad, what would $25 oil do to Alberta? And what will be the impact of $3 or $4 natural gas?
Many educated commentators on this blog have long made the case that the Alberta real estate boom had less to do with the commodity prices but more with the rampant construction activity and easy credit/speculation.
But we can't deny that at least there was some component of the increased demand from people who moved to Alberta in search of work. Now that it looks an oil and gas bust is a fairly probable if not likely event, what will happen to all the new Albertans who moved here just for jobs? They will likely move to places (in east or west) that have somewhat more diversified economies.
I've a few friends who moved to Calgary in EPC companies from all over Canada during the last few years. The EPC companies (Colt, Jacobs etc) recruited massively in the last few years in anticipation of the hundreds of billions of oil sands spending that everyone was counting on. With almost all the upgraders now canceled or indefinitely delayed and the spectre of $25 oil seriously threatening mining projects in Fort Mcmurray, I expect massive layoffs in EPC sector soon.
And that is just the start. Even though there are still lots of jobs in Calgary, almost everything in province is built around oil and gas. We have discussed in the past how our half trick pony energy industry manages to kill everything in the boom years that is developed during the bust years.

If the commodity bust really unfolds as I am afraid it will, expect the following:

• Sharp fall in provincial government resource revenue (this will be impacted more by natural gas prices) leading to fall in government spending, hiring freezes and potential layoffs in government. Let's hope it won't be 1992 all over again for government employees.
  
• Very few oil sands projects will continue to produce leading to sharp fall in profitability of oil and gas sector and consequent retrenchment of workforce.
  
• Since everything in Alberta is built around the energy industry, everyone ranging from accounting firms to staffing agencies will be impacted.
  
• A sharp slowdown in construction employment sending the transitory labour force home.
  
• Rental vacancies climbing and reaching 10 per cent or more.
  
• Flippers, speculators and others in the same genre who have been saved so far by a strong rental market will start hemorrhaging cash and will run to exits.
  
• Start of noticeable foreclosure activity in Alberta at this stage.
  
• Combination of layoffs, falling employment, tighter credit, foreclosure will pull the prices further down.
  
• And the vicious cycle will continue.

Of course, this is not a chronological forecast of things that are about to unfold but a likely scenario that can play out in several different ways but will most likely feature most of above mentioned items.

In most of the posts in the past, I avoided making a case for collapsing values in Alberta real estate based on the fundamental economic factors. But the dreadful bust scenario is now knocking on the doors of Alberta and the last few years of greed, speculation, excesses, lack of public policy will only exacerbate the problems.
It looks like the fat lady has sung on Alberta's most recent boom.

Anyone who is thinking of buying at this time is either too rich or too stupid.

Is the beginning of the second leg down in prices?

Residential Sales plummeted across the board in Edmonton and Calgary last month. The first drop in prices last summer was preceded by a sharp contraction in sales volumes from the bubble level sales.

While condos in both Edmonton and Calgary saw a sharp drop in prices, an across the board massive drop in value hasn’t occurred yet. Like a ten per cent fall in SFH values in Calgary or Edmonton in a month.

With the psychologically important oil prices below $50 and environmental pressures mounting in the face of an ultra liberal government, oil sands might not be the saviour of Alberta Real Estate after all.

If sales fall further in December from the levels seen last year, it’s possible that we are now going to see the second leg down for the real estate prices. And if the macro economic picture and commodity bust unfolds as I’m afraid it might, the spring bounce that so many sellers and realtors are counting on (yet again) will be more ephemeral than a mayfly.

How much will you pay for your next house?

Garth has an interesting post on becoming a property vulture. One of the reasons we stayed away from buying a house was the arrogant attitude of builders, realtors and pretty much everyone else in the real estate food chain. Hopefully, the last 15 months will have given them some idea of what's about to come. But certainly, by the time we reach a bottom in terms of economic activity, housing, commodity prices and morale, almost everyone in this country will begin to treat their customers with respect.

Moving on to the main point of the post, the most important question that one must ask is-what is the fair value of house? How much will you pay for the house?
As I've mentioned in a couple of posts last year, the following metrics will be of help:

• Cost per square feet. I think $100/sq feet is a very reasonable number. Accordingly, for the links that bearclaw posted for 1700 sq ft properties, they will be fairly priced in the $175k range. Some might find the price outlandish, but for me it's merely the representation of a cookie cutter shoe box on a tiny lot in the middle of prairie with harsh winters, half trick economy and no recreation other than a big mall.
  
• Price to Rent Ratio. The old school fair value of a property was 100 times monthly rent. Assuming the current rental rate of this property at $1700 , it values the property at around $170k. But given the current level of elevated rents, the actual rent in the not so great times might be only $1300. So based on this metric, the fair value will be $130k.
  
• Cashflow positive etc. A lot of 'investors' buy properties based on this metric. I'm not a huge fan of this method.
  
• Historical values. Some say 2002 prices will never return to Edmonton. Perhaps. But to get a true sense of 'normal times', we must go back to the years when Edmonton used to be associated more with 'block heaters' and 'rednecks' than prosperity and oil sands. 2002 is a good year for making that comparison. Economy had started getting out of the gutter of late 1990s bust and things were beginning to sell. Builders were selling fairly priced homes that were affordable and had good quality. A friend of mine bought a similar home (to the ones shown above) in 2001 for around $165k in south Edmonton. You could buy similar homes in the $160-$190k price range until 2004. And then the caravan trips began.
• Buy versus rent metric. Don't use the calculators provided by the realtor organizations. The best ones I've seen is from NYT and using the calculator.
  

You can guess that the time for me to buy is quite a bit away. I won't rush into buying inasmuch as even if prices don't fall beyond a certain point, they are likely to languish there for a while.
For most people a house purchase will be the biggest purchase they make in their lives. Most people unfortunately, spend too little time on this. They won't haggle, negotiate or simply walk away from the purchase. And the consequences of such nonchalance are seen in years and decades ahead.

Your thoughts?

$50 Oil is here....

and is very likely to overshoot on the downside. Is $40 or even $30 possible. Why not? If 3 months ago anyone questioned that oil could go below $60, he or she was termed fool, like several posters here. Too bad people have such short memories. Even the champions of doom and gloom such as Garth Turner buys into 'higher long term energy costs' while we are in an ocean of deflation. But just yesterday, the DOT reported that the number of miles driven has fallen by around 5 per cent in the US in September. People are now saying, "anytime you drive your vehicle and it's not for work, you are wasting money." Ouch. With the prospect of a multi year bust and double digit unemployment, where is the demand for oil going to come from? The Chindia bull is dead for the moment, but who knows.
In the mean time, our province faces more fundamental problems- What will Alberta do once the oil sands engine is cold? Not much. All the diversification attempts have come to a naught with a merciless exodus given to all non oil and gas companies. Intutit, Dell, TD Call Center and many more have left the province(or even Canada).
Now that the bubble inflated by artificial supply of credit and fake demand for worldwide commodities has burst, are we going to revert to our core competency of selling cheap manufactured goods to the US, attracting US tourists based on a 70 cent loonie and handing out film tax credits? It should not be outside the realm of possiblitiy. It was after all only 4 short years ago that Dell when opening its Edmonton location even refused to pay for training its new recruits. Such was the state of desperation for new jobs in Edmonton. Any big corporation will now be extremely reluctant to take advantage of massive unemployment and cheap loonie anywhere in Alberta after our success in driving out most non-energy companies out of here. And for that, the primary reason was wage inflation driven by high cost of living created primarily by the high cost of housing. Perhaps Alberta government should do something about reining in the speculation in Real estate based on subsidized mortgage products.

Welcome to the New World

We are back after spending a week in the US. The US has changed quite a bit since our last visit almost a year ago. From waitresses in Manchester, New Hampshire who offered suggestions on getting special combo deals for breakfast as ‘every cent counts’, to the sales clerks in Wrentham, MA who hugged me to buy lots of things on the Veteran days sales, it seems like the deflation reflected only in the asset prices so far has finally found its way into consumer items as well. Hotels have become a lot cheaper as well. We stayed in decent Holiday Inn and Mariott rooms for less than $70. Of course, unlike most Canadian hotels, these were large, nicely furnished rooms with flat screen TVs and included breakfast. In booming West though, you only get a roof over your head for this much price, that is if you are lucky.

A retail sales associate in Nashua mall checked on me at least three times to make sure I found what I was looking for. Obviously, with low sales volumes, everybody is scared of losing their job. And what better way to ensure job security than actually doing what you are paid for! What a novel concept. I don’t really recall sales reps being this good in the last ten years. Of course, Albertans are still living in their fantasy land and the nonchalance of sales reps is still very conspicuous in almost every place where I shop. While taking the delivery of my Accord I casually asked the sales manager if their sales were declining and she remarked, “Yeah, there’s a little slow down, as some people see all this gloom in the US and get worried. But it’s their economy and not Canadian economy!”
Of course, she will be learning some painful lessons in economics and firmly grasp that ‘we are all dependent on the US economy’ the coming months as oil prices drop below $50 in the coming weeks and months.
A friend of mine who has family in India says things are getting gloomier there by the day. Perusal of the economic press there talks about major reduction in workforce, fall in real estate, stocks and pretty much every other asset class.
Remember the decoupling theory? Nobody wants to talk about it anymore. It is in graveyard along with the titans of Wall street. It was the ray of hope for the world after the US housing bust, even though the entire world’s growth was piggybacked on the insatiable US (and perhaps other first world) consumers. Remember India was going to save Alberta. And China too. Now that these countries are looking for their own saviors, who is going to save Alberta? Yes, the OPEC production cuts. But didn't we have the second largest reserves in the world? Can't we do something about it? I guess almost every oil company is going to do something about it and the answer won't be to the liking of anyone whose fortunes are tied to high oil prices.

When I look back at things, I could never have imagined they would get this bad. I thought the biggest swindlers and crooks on Wall Street still had everything in control. But I guess with TARP firmly showing up on their balance sheets, they couldn’t care less for the fate of the main street or the rest of the world.

In the coming months and years(hope not), those who possess cash will be in a lot better shape than those who don't. The inflationary period characterized by too much money chasing too few goods (houses, stocks, oil, cars, labour, art work, RVs, boats, carry trade currencies) is definitely over. In the new world, cold cash will rein supreme and those who possess it will have the upper hand over those who have no cash but possess too much of stuff (stocks, cars, houses, debt, art work, RVs, boats etc). The latter group unfortunately represents bulk of world’s population today (exceptions in some parts of Europe, Asia etc).
Too bad nobody in Canada will wake anyone up on what’s about to be unleashed on everyone pretty soon-government hiring cuts, tax hikes (GST going back to 7%, when?), budget deficits, falling loonie, house prices cut in half, high unemployment….
After all, it's only today that the economists in the US have managed to agree that the US is in a recession. So much for the foresight and wisdom of the dismal scientists.
The list is long and painful. Only those who were characterized as the doom and gloomers (including yours truly) who have had nothing but cash in their account for the last several years have been proven right. Not that I’m happy about it.

How did we get here? And where do we go from here?

Things have changed so much since this blog was started in February 2007. There was euphoria in the markets at that time. The housing bubble in the US had burst, but the sheer magnitude of the devastation it would unleash, as well as its ramifications on the rest of the world had not been anticipated by most observers. Only those in the 'borderline insanity' category had the prognosis of the disease whose symptoms are now becoming visible.

The disease was easy credit abetted by the viruses of greed, speculation, leverage, stupidity, lax regulation, hubris and ignorance. In almost every asset class in almost every part of the world, there was an asset bubble. From the trailer homes in Fort McMurray to the art market in Eastern Europe, from the high end apartments in Bombay to the stocks in China. Easy credit of last twenty years gave high hopes and ‘can’t go wrong with xyz’ mentality to almost everyone. There was 'death of risk.' Even know, despite all that has transpired, morons are dime a dozen, who want to borrow and invest in Canadian stocks.

The period of easy credit is over. And so is the period of feigning low risk by absurd mathematical models created by armies of glorified economists. When I try to put a perspective on the massive oil sands related investments that had been planned for Alberta, I see that they were fueled more by the easy credit and low risk environment than by any fundamental factors. Most readers are familiar with Warren Buffett’s comments (paraphrased) on oil sands that ‘you could be the best mining engineer in the world, but if you are not sure that the price of oil would be in the $120 range, oil sands may not be the best investment.’ Of course, the temporary high prices speciously bolstered by the doomsday scenarios (but fundamentally caused by speculation and leverage) gave enough reasons to almost all underwriters to finance the billions of dollars of projects easily. As the price of oil comes down further, oil sands will be get hit twice as hard inasmuch as they are very high risk investments (environmental, economic, currency) amortized over very long periods. In easy credit environment such investments could be financed easily but in tougher environment where cash is the most precious thing anyone wants to possess, such projects become akin to financing etoys.com in year 2001. Not impossible (there are always some fools around), but very hard. I trust bulls in Alberta and Canada have at least that much intelligence to figure out the ramifications of significantly depleted oil sands investments on the province, the loonie and Canada as a whole.

Cash really will be the king, as I have tried to mention numerous times in the past. Deflation really is strengthening its hold and there’s nothing central banks can do about it. The sins of past have to be absolved for; and the time to do that has arrived. You just can’t weasel your way out of the bad karmas of credit orgy so easily.

Being early in the deflationary bust cycle is one common mistake most people will make. Yesterday, even I committed such a mistake. No, I didn’t buy a house, but I did buy a new car. I thought I was getting a great deal-Almost $5k off the sticker price of a Honda Accord. But giving up almost $25k in cold cash from savings account did not feel very good. But my rationalization was that my old civic is almost ten years old now and hasn’t been reliable. And I needed to reward myself (yeah, the same North American malaise that leads to the current mess)…Perhaps, I will look at my Accord whenever the temptation of buying a house comes to me in the next few years.

Now the mainstream media is catching up with the sea of negative news that was predicted here and at so many other blogs. Pretty soon, it will be self reinforcing cycle. An economy that is driven 70% by consumption will feel the pain when people stop buying cars and houses, reduce their vacations, minimize eating out, stop buying expensive clothes and desert the malls. Businesses will start laying off people and the anti-goldilocks economy will be at work. Businesses dependent on retail companies (IT, Human Resources staffing etc) will cut down their investments and hiring, making things even worse. And all this while the central banks have interest rates at zero.

Yet, all this is necessary for the revitalization of the economy. The inefficient and diseased corporate hierarchies of North America and much of the first world need cleansing. The FIRE based economies of First World need real savings, real production and real wages.

The coming bust will be a hard one. Unemployment will be high, bankruptcies will soar. A lot of generation X and Y kids will learn painful but much needed lessons. By the time this is all over, savings in bank accounts will not be derided upon.

I’m flying to Boston for a week long vacation to escape from everything for a while. Have a great weekend.

No Subprime in Canada yet Sales Plummet in Calgary

I've been very busy last week or so....this post from 'rjt' puts things into clear perspective:

If you read my posts over the past couple of months, I predicted that the end of 40 year mortgages and zero down mortgages would create a major gap in buyers. I figured that since 40% of mortgages originated in Calgary in 2007 were the 0-down, 40 year variety, when these went a way, sales would drop substantially.

Well, the numbers are out, and while there are other factors in play, it appears that sales volume did fall off a cliff in Oct 2008.

Sales Volume (old criteria of combined SFH and Condo, from BT’s site)

Oct 2001: 1821
Oct 2002: 1930
Oct 2003: 2021
Oct 2004: 2135
Oct 2005: 2584
Oct 2006: 2122
Oct 2007: 1944
Oct 2008: 1442

How about days inventory?
- This is calculated based on month end inventory from BTs site, divided by monthly sales, multiplied by 30

Oct 2001: 101
Oct 2002: 95
Oct 2003: 121
Oct 2004: 100
Oct 2005: 46
Oct 2006: 96
Oct 2007: 154
Oct 2008: 226

Look at Days Inventory over this year. Impressive October!

Oct-07: 154
Nov-07: 148
Dec-07: 148
Jan-08: 134
Feb-08: 131
Mar-08: 148
Apr-08: 162
May-08: 171
Jun-08: 159
Jul-08: 160
Aug-08: 167
Sep-08: 161
Oct-08: 226

A huge number in October 2008, way above anything we’ve seen in Calgary since at least Jan 1999, which is where my data set begins. The second closest month had days inventory of 171 (May 2008).

People, disregard the spin from the media about a “balanced market” and “normalization” and all those other bullsh-t sales pitches. If you are in the market for a house, make sure to low-ball big time, as you are likely the only potential buyer by a mile.

More of the same?

What has changed since last week? Not much I guess. In our 'super power island', things are crawling to a halt in terms of sales, at least in Calgary. There is now 7 months of inventory for SFH in Calgary as per CREB ticker. This is perhaps the highest since the deflation of this bubble began.
Not unexpected at this time of the year, but it's likely to be worse than previous years if you account for the short term boost that the days before the end of 'subprime lending' gave to the sales.
The important thing is that even with oil at around $60 and natural gas a little over $6, no major bad news has hit Alberta yet in terms of lay offs and the employment picture. But for how long? People are still confident that they will ride through this storm unaffected. Perhaps the Canadian smugness will save them.
In other parts of the world, Aussie dollar has taken a brutal hit and is down all the way to 60 cents. At this point, the currency markets are pointing to something other than inflation for the world economy and it begins with a capital D. Can our loonie go to 65 cents or so?

Weekend Open Thread

Doesn't look like a happy Friday for the markets.

• Terrible day in India with Sensex down by a whopping 10 per cent. What was the second country after China who we were counting on so much for the perpetual $120 price of oil?
• Doesn't look like a promising start for the North American markets, but anything can happen. What was it, don't fight the fed or whatever....
  
• Loonie below 79 cents....Over 33% of those who took the poll here said loonie could tumble in the below 75 cents range. It looks very likely it will happen. Just for record my cash position is 40 per cent in USD and more than half of our income is in USD as well.
  
• The cartel armies are trying desperately to keep their massive cash flows intact. Looks like they are failing as oil is touching $63.
  
• The moral of the fiascoes we have witnessed since 1998: Don't trust the economists. Don't trust the political leaders. Don't trust the bankers. Don't trust CNBC, Jim Cramer, Globe and Mail, Financial Post or Mainstream Media. They are the tools by which sheeple are led for shearing. Don't trust the lawyers. Don't trust realtors. Don't trust mortgage lenders. Don't even trust bloggers here or anywhere else. Most have no clue. Appeal to Authority is for losers. Trust yourself. Even though most on this blog already do this, form your own well reasoned opinions. Study the markets. Study Austrian economics. Save money. Spend only when necessesary to reduce your footprint on the world. If it doesn't make sense, don't invest. Cash is not trash. It's the old fashioned way (before the fiat currency and free lending for all reared its ugly head), rather the only way to make investments to fuel growth. Enough for today. It's all captured in the cartoon below:

Have a great weekend.

The Princes of Alberta Island are now running scared....

as Suncor cuts its spending by a third. Yes, a whopping third.
“Our aim is to ensure we are living within our means during a time of market uncertainty, while also making the strategic spending decisions that will allow us to continue our growth path,” Suncor chief executive officer Rick George said in a news release.

Living within our means, how relevant and appropriate. Expect something similar from all the oil sands majors, minors and the expectants. Consumer spending will be the next shoe to drop in a big way even as the falling loonie makes big tickets purchases even more expensive. And the signs of it are clearly imprinted in the August Sales report.

"Alberta was the only province in the country in August to register an annual decline in retail sales."

Any specific reason? I think it's got everything to do with the MEW(or the house ATM or the home equity loans). Alberta was the only province to have registered an YOY decline by August this year and we can see how phony the 'growth story' was. It was never the oil money as we had been clamoring but the retail spending and construction money. Very much like in other parts of the world.

This can't bode well for the $400k shoe boxes in the prairie land, on either side of Lloydminister.

Right now, the loonie is in a free fall and so are oil prices. The other 'kings of the world', Goldman et.al are chopping their workforce by 10 per cent....I think this is just the first step in cuts that will deep, prolonged and painful.

I consider myself to be bearish, but the rapid rate of fall of crude oil, stocks, loonie and everything other than USD has shocked even me. But I can't say there were no warnings.

The Falling Loonie

is making new multi-year lows today....can't help but mention my call again to move the cash to USD. Canadians overall are going to feel really bad about the fall in loonie as pretty much all their assets have taken a significant beating on the world stage. The only saving grace is that we are doing better than the Australian dollar whose dollar has fallen more precipitously than ours.

To put things into perspective, from the days of parity:

those in cash are down about 17 per cent in USD terms.
those in TSX are down by about 35 per cent in CAD leading to a total USD decline of (.83*.65) around 46 per cent.
Those in Alberta real estate are down by about 20 per cent in CAD leading to a total decline of (.83*.8) around 33.5 per cent.

What will this do the Canadian consumer confidence? Not a whole lot of good. People will begin to feel poorer as months go by. The Canadian retailers can resume the blatant gouging without having to do any token service of bringing down the prices.

Most export businesses will be happy with this in as much as their revenue side will be intact(of course the slowdown in the US is the other impact, along with demand destruction for the oil patch) but their cost base just plummetted by a whopping 20 per cent or so. One of the big challenges of Canadian economic policy was just cured by markets in 15 days.

Where do you think the loonie is headed?

Weekend Open Thread

Some discussion starters:
-And why not begin with the favorite of both bulls and bears- the price of oil. Some in the deflation camp are talking of $40 oil, the price that was considered 'good' just 4 years ago.
-Some 'financial wizards', in their tradition of 'cash is trash', are arguing that if you keep money in bank account, you would have lost roughly 15 per cent of purchasing power in terms of US Dollar. That's true, assuming one did not convert to USD and used the ATB protection, but even if someone didn't convert to USD, those in straight cash have fared so much better than those in any other asset class over the last 15 month period. TSX is down by 35 per cent or so, Alberta real estate by 15 to 25 per cent, oil is almost half of its peak value...and cash is well, still the same, so long as you are within Canada.
-The Greater Fool as applied to the stock market bubbles.
-Edmonton SFHs and condos have erased all the gains made during 2007 (plus more). It took around 15 months (Aug 2007 to October 2007) to give up the gains of 7 months (Jan to July 2007). Does it mean that we can be back to 2005 prices in 2 years? Or could it be even sooner, given the commodity bust, credit crunch, potential job losess and otherwise tough economic climate? We'll find out....

And finally:
- While imitation is the sincerest form of flattery, I am not too pleased with excessive usage of exclamation marks in my writings. Now some people do like their exclamation points, I'm not one of those. The imitator of 'Gloria White' on other blogs, should note that.

Have a great weekened everyone.

No Banker Left Behind

Happy days are here again....let's go out and buy some more toxic garbage. The first $25 billion was merely the prelude.
Too bad, in the garb of 'regulatory arbitrage', the sound Canadian banks will be 'bailed out' for the maximum possible impact. The Canadian federal debt is a little south of $500 billion. These guarantees alone are going to be worth $225 billion.

In this cold harsh world where free markets hurt so much, No banker should be left behind.

In a strict free market environment, the insolvent financial system in much of North America and Europe would have ceased to exist in its present form. Instead, it's being nourished and nurtured in ICU at enormous cost to the taxpayers. Mish describes it best as:

The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

And now that every country is willing to do 'whatever it takes' to help their elite class of bankers, Canada will be forced to up the ante as well. Otherwise, the 'regulatory arbitrage' will come into play and capital will flow away away from Canadian banks.

Please do go out and vote and try to make whatever difference one vote will make.

Weekend Open Thread

Update: So much for only talking about buying back mortgages. They are now buying $25 billion worth of garbage to ease 'liquidity' concerns. Too bad that our 'pride' and 'faith' in our financial system will lead us down. No debate, no policy discussions. At least in the US they ran through a charade of democratic process. Not here....the hockey season has started for sure.

• Brent crude below $80. How long before we see $60, or dare we say $50 oil?

• Roubini warning of ‘severe global depression’ if radical measures are not taken. Too often government actions only exacerbate the problems. I think the train of pleasing the markets by rate cuts and simple fiscal measures has long left.

• Loonie continues to plummet and is now going at a princely 85 cents. Days of rejoicing in Ontario won’t be too far, provided there is too much demand left in the US to keep the factories in Ontario running.

• Canadian banks are safest ones in the world, but based on similar surveys, so were Lehman Brothers and WaMU. And if everything is well with Canadian banks, what’s the need for ‘Paulson style’ recapitalization using the CMHC as the buyer of last resort? There’s bound to be lot of toxic garbage on the books of these banks. After all, someone lent to all the ‘property barons’ of Alberta, BC, Ontario and Saskatchewan during the ‘last commodity boom’ (if I may take the liberty of calling an end to the boom, or am I too early?). So how will this work? Apparently, the exchange program will work the same way as in the plan of Dr Evil himself- the AAA rated CMHC bonds (which we discussed a while ago here) will be swapped for the 40 year NINJA variety loans (read an anecdotal example here- international students in Edmonton buying $300k condos) so that the banks’ balance sheets are strengthened and lending to Canadians is not impacted. As if we really need more debt to buy overpriced condos, twentieth iPod and the third gas guzzling SUV in five years or take the cruises to the Caribbean.

• And on a personal note, we have not bought anything on credit since recognizing the perils of buying on debt when we bought our first new car ten years ago. And we are still driving it. And we will positively pay all cash for our house as soon as sanity returns to the markets (like it is returning to stock markets).
  

• As and when the markets begin to bottom, there’ll be some great opportunities for those who have a fat savings account at ATB. I don’t know when this will occur, but that day will arrive eventually.
• And finally, a happy Thanksgiving to all of you-bulls, bears, readers, optimists, pessimists and realists. Good health and strong families are way more important than material wealth. Let's count our blessings and get ready for another down week (not)!

What Now?

I’m not a big fan of doomsday scenarios, but what has transpired in last week is nothing less than astonishing. The markets worldwide are in free fall. Loonie just lost 10 cents in a week (my call of going into USD was pretty good I think). The shine is about to wear off of the strength of the Canadian economy. The commodities will fall further and could push Western Canada into a deep slump. Ironically, Eastern Canada could benefit again in the backdrop of a weaker loonie. This scenario is increasingly likely to play out as the deflationary forces strengthen their grip on world economy and hapless central bankers and debt ridden governments and consumers watch the show like meek spectators.

Master Card recently recorded a 9.5 per cent fall in US gasoline sales in September 2008 versus last year’s numbers. Canadian sales held up a little better and were down only 5.4 per cent in August. I won't be surprised if sales fall further off in the coming months. October is likely to be worse. People who have just taken a 50 per cent of more haircut on their 401k and RRSP’s won’t exactly be jumping out to vacations and burn gasoline in gas guzzlers. Don’t expect Asia to be savior either-Japan is falling into its gazillionth recession in the last 20 years, China is slowing down and India isn’t fairing too nicely either.
As unemployment rises further in the US (some people are forecasting a double digit unemployment rate by the time everything settles), there will be further reduction in gasoline and commodity demand. This demand destruction will outstrip any, if at all, demand increases from the emerging economies.

The big questions are- if the clock rewinds to 2004 in terms of asset prices, commodity prices and job opportunities are you sufficiently prepared? Can anyone even imagine another bust in Alberta when most of the people around you are drowning in debt and falsely insulated by the 'home equity' gains. Or by the illusion of 'secure jobs' in the Oil/Gas industries and pretty much everything else that services it. I can't think of any industry that will pick up the slack employment wise if Oil and Gas sector fizzles again. The government depends too much on the tax and royalty revenues that basically stem from the oil and gas industry.
Too bad that Alberta manages to kill all the diversification that occurs during the bust years in less than 3 years of a boom…

Central Banks are Panicking....

...and have cut interest rates almost in every part of the world. In US, Canada, EU, BOE, China (and every other Banana Republic) has cut interest rates by half a point. Too bad Japan can't join the party. The ammunition of interest rate cuts is now seriously depleted, at least in the US. The big question is-what if the markets shrug this off as it becomes aware of the enemy. Sure you could get a dead cat bounce, but it doesn't change anything fundamentally. Consumers that can't buy any more houses (except in Alberta perhaps), banks that don't trust each others and an enemy that is as cold as the Hannibal.

"A Depression doesn't run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality."

Meanwhile, let's enjoy the last few days of easy credit flow in Canada before the faucet dries up.

Monday Market Turmoil

Despite the biggest boondoggle of this century getting passed quickly and becoming law, world financial markets are tumbling. Nikkei down 4.5 per cent. Indian stocks down by almost 6 per cent. Oil below $90 (who could have thought that?). A lot of people were speculating that Fed would cut again, but when you have so few bullets left in your armor, you do not want to waste them every time the markets fall by 5 per cent in a day. The days of Greenspan put were so good....
But finally it looks like Fed has found its match or better still. And that is deflation.
If global deflation does materialize, it will be very painful for everyone, but especially for those who carry debt. Commodities will be hit hard.
The last thing you should want to do is get into a zero down 40 year mortgage, but a lot of people seem determined to lend to people who can't save even $20k for their down payment. Yes, we don't have sub-prime in Canada.

Deflationary Week

The WSJ has a very interesting graphic on how various investments did in the last week. It was massive wealth destruction across various asset classes.



We can safely add the TSX and Canadian dollars to the asset classes that were mauled quite badly.



The most common opinion out there is that the bail out package is inflationary. But a few people, including those from the Austrian school say that the bailout package is of very small scope as compared to the massive deflationary spiral that has been unleashed by the global credit contraction.

And while those who called for oil prices to fall below $80 or so were called lunatics just a few months ago, Merrill Lynch has now released a forecast for $50 oil if the global recession materializes.

Alberta Real Estate bulls and 'Fundamentals are strong in Canada' proponents had better be prepared to handle the destruction of their favorite underlying factors(commodity boom).

People are mad as hell....

...and they are showing it. On the momentous occasion of another attempted bailout in the house, a couple of clips that behoove the situation.





In other news, commodity bust is enjoying eating the TSX gains made during last few years. Are we back to 2005 yet?
While the gloom and doom spreads around us, remember that we'll be presented with some great once in a generation opportunities in the coming months and years. Stay put in cash (preferably at ATB) and when everyone is running for covers, it will be time to buy. But we are far from it in Alberta real estate yet.

Global Demand Slowdown

...is happening at a fast pace. Canada has been one of the biggest beneficiaries of the boom in China, India and other fast growing emerging economies. But it looks like something is finally beginning to give in after years (or decades) of relentless growth.
Here's an interesting link on how Chinese importers are defaulting on Iron Ore purchases from India:
"Our exports are in deep red as there is no demand from China," said Rahul Baldota, president of the Federation of Indian Mineral Industries and managing director of miner MSPL Ltd.
Exports in the first half of September dropped to 1.99 million tonnes from 2.7 million tonnes in the same period last year.

FT is also reporting on the same item as well.

At least a few in Canada are taking notice of this:

That may sound like a manageable slowdown, but if China's economy hits any serious roadblocks, it won't take long for Canadian investors to start feeling the pain, given that nearly half of the benchmark S&P/TSX composite index is made up of resource stocks.

Island of Alberta should remain intact in the financial maelstrom though. Just ask any realtor or mortgage broker trying to lure the 'greatest fools' into a 0 down 40 year mortgage.

They are a persistent bunch....

No matter, where you look at. From the realtors in Calgary, to Edmonton to fraudsters on Wall Street and Washington. Their sole aim is to make their commission, earn their profits and separate the masses from their money by getting them deeper into debt.
Now they are planning an unprecedented vote in the Senate and Mr Bush is going to address the nation yet again talking about how we are inches away from Armageddon.
And while they are it, they might also include a rehashed form of 'Suzzane Researched this' with 'Paulson/Bernanke researched this':




These are truly uncertain times and most certainly not a time when you pile up several hundred thousands of debt. But what's this, the Canadian GDP actually grew by 0.7 per cent due to higher energy costs, so everything is going great. The island looks fortified. Even though every major collapse in the US is creating a chink in the armour of the Canadian Financial system.

Weekend Open Thread

Sorry for no posting during the week. Some discussion starters:
- Merrill says what we have all known for last several years and says Canadian housing is overvalued by quite a bit. Scotiabank, fully aware of the mortgage junk it has loaded in its balance sheet during the last several years, denies it vehemently. Most Canadians, in our great tradition of smugness agree.
-From, "but Canada is an Island" category, SunLife says it has just a quarter of billion dollars of exposure to Wamu bonds.
-A personal anecdote: I think we are light years away from any fear or panic, even in the US. A friend of mine who just got a job with WAMU(yes, this is a different epoch, companies about to go bankrupt are hiring. After all, what's a small overhead like employee salary when you have spent billions in gambling over housing prices) bought a huge $600k home in Seattle with just 5% down(Yes, countrywide is still making these loans, which means they are still selling more rope to hang themselves with).
I strongly advised him not to do so given the precarious state of WAMU and the Seattle housing market which has to go down quite a bit. I talked to him last night to see if he was okay after the WAMU seizure but he wasn't even aware of it. When I told him, he was overjoyed that WAMU was "bought". I guess before this is all over, people will be once again afraid, something that has eluded the credit drunkards.

Your thoughts....

Weekend Open Thread

Some discussion starters:

* Joining the legendary list of countries such as Pakistan, China and more recently the UK, the US bans short selling of all financial stocks. Way to go. Free markets at work.
* Theories of financial terrorism are floating around to legitimize the case for banning short selling. Big Picture guy has a discussion on this. Of course, we know that patriotism is the last refuge of the scoundrel and it's very likely that quite a lot of people will actually buy this. Mission accomplished.
* As a further add on to the Credit Union guarantees of Alberta, the key point to remember is that the guarantee is all backed by the Government of Alberta, perhaps the most solvent government in the western world (after Norway and Alaska perhaps?). So let's say ATB goes under then Alberta Government will step in and make up for the losses of around $22 billion in deposits(Annual Report pdf). And that should be relatively easier to fix than for Canadian government to try and make up for the loss of over $250 billion dollars in deposit for a typical Big 5 Canadian bank.
* [rant on]The cardinal rule of the game is- don't fight the bankers. It's not don't fight the fed, it's not don't fight the government but don't fight the bankers. Bankers will typically get whatever they want by flexing their muscle and exercising their clout over the who's who of the world.Will this mean there won't be any recession? Will this mean there won't be any major spike in unemployment? The certain thing is that the bankers will be bailed out no matter what the consequences. There's no leadership left anywhere in the world to stand up and protect the interest of the little guy. Not even pretensions. [/rant off]

And the safest place to place your money is....

....any credit union in Alberta. Of course, the one that's backed by the Credit Union Deposit Guarantee Corporation.

Despite the innocent appearances, what’s going on in the hidden balance sheets of the Big 5 and other Canadian banks is all unknown. We didn’t know anything was wrong with the Canadian banks last year until the ABCP fiasco emerged. We won’t know the implications of the CDS contracts the Canadian banks have written until a big counter party blows up.
So it’s better to be safe than sorry and rather than chasing a 100 basis points yield advantage by picking up your bank, it makes more sense to move to a safer place.
That safe haven is the Credit Unions of Alberta.
They will insure all your deposits, yes there’s no $100k limit as imposed by CDIC. And if you want to diversify into US Dollars, that is covered as well in the insurance.
Of course, the Alberta Credit Union Deposit Insurance is backed by the Alberta Government.

From the site:

Is this guarantee the same as the banks' $100,000 insurance?

This guarantee is more extensive than the banks' insurance. All deposit amounts are fully guaranteed and include accrued interest to the date of payout. Deposit amounts include chequing and savings accounts, RRSP deposits, RRIF deposits, foreign currency deposits, and term deposits, including those with terms exceeding five years.


So I’m moving pretty much all of my US Dollars savings from TD to ATB.

Impact on Alberta Island Continues....

As Petro Canada tries to talk itself out of Oil Sands project.
The other day I was a reading a post somewhere that the recent fall in prices shouldn't impact most energy companies inasmuch as they base their investment decisions over long terms- 20 years or more. And then I suddenly wondered the giant rush to develop oil sands- an energy inefficient, economically risky and environmentally unfriendly way to make oil. All based on expectation that the prices will remain in high double digits or triple digits from here to infinity.

And since most new oil sands projects are based on the same expectations that Calgary condo projects are, the inimitable Warren Buffett in his recent visit to Fort McMurray said:
"Because you could be the world's greatest mining engineer, but if you were wrong about the price of oil in a big way, it would negate all that knowledge."

"So I can tell you that ... if you had $120 oil from now till, you know, 50 years from now, that the tar sands would work out very well. But I don't know the answer to that."

Finally, "The stage is set for Petrocan to walk away from this project. There are any number of deeper-pocketed, more visionary energy companies that will make $14-billion-plus bets on the 50-year potential of the oil sands. If control of Fort Hills comes up for grabs, watch EnCana, Canadian Natural Resources, Suncor or one of the foreign energy giants to step up."

Make that a $21 billion project (new cost), seriously impaired credit markets, slowing or contracting global economy, falling energy prices and we'll see how many brave company boards exist out there to venture into such a project.

Credit Destruction

…is here and in full force. It’s most certainly a deflationary event. The credit markets' tale of wanton and greed of last couple of decades is now ending with a bang and I’m not sure if we have reached the grand finale. Oil is already below $100, peak oil, China etc notwithstanding.
Not incidentally, China, which was growing at a blistering pace of over 10 per cent growth for the last gazillion years has eased its interest rates for the first time.
If we witness wealth and credit destruction of historic proportions, expect commodities to tumble to unimaginably low levels. Most financial institutions in the world have their balance sheets seriously impaired and the banks fighting for their survival don't make loans on overvalued, deprecating assets (aka housing).
If you think the housing sector is about to recover in the US and Canada will escape unscathed, wake up.
Enough said on this early Monday morning. A lot more influential people around the world will chip in much more valuable stuff.
Your comments?

The Joys of Economic Modeling

A physicist, an engineer and an economist go for a job interview. The interviewer, not in a mood to use lots of his gray cells, asks a simple question to each of the candidate. He asks, “What is the sum of 2 and 2?”
The physicist snaps immediately: exactly 4.
The engineer thinks for a while and says, 4 with may be 2 per cent margin of error.
Then comes the economist's turn. When asked the same question, he responds, “What do you want it to be?”

So goes the old joke about the nature of dismal science. Forecasting of any type is inherently risky, but when it is applied in the realm of social sciences it can be self serving.

Of course, this perambulatory text was required before trying to question some of the “research” published by the UBC school of Business.
There are generally very few problems with the models used in forecasting or in pricing based models. The models are generally borrowed from the domain of physical sciences and the underlying "math" of these models is solid. The problems are usually with the assumptions behind these models.
No wonder, it was the contribution of similar simplistic and infallible modeling that has left the US financial system almost bankrupt. Stupid is as stupid does. Especially when making important assumptions.
Most financial institutions priced their mortgage securities based on the assumption that real estate always goes up. And they gently added an appreciation factor of 4 or 5 per cent in all their calculations. Of course, prices go up, until they don’t.
And that’s precisely the mechanism you use to come out with ridiculous statements such as Vancouver being over priced by a mere 11 per cent and Edmonton actually being under priced by 8 per cent as mentioned in this study.
Vancouver, is the mother of all bubbles and we’ll see how far it’s going to fall when everything is said and done.
But this whole paper is just a glorified buy versus rent calculator designed to appeal to authority. There’s nothing interesting there- just a simple formula with unreliable data, with no references to data collection techniques or sample space. We don't know for example, how many data points were analyzed when collecting rent information. How many ads were actually verified for accuracy on craigslist or Kijiji? Did they actually call the advertisers? Did they negotiate the rates? One would expect some rigour or explanation on data collection when an academic paper is published.
But this study isn't meant for publication in a peer reviewed journal. It's designed to get the greatest of all fools who have somehow managed to so far resist the temptation to buy.
Rather than wasting 20 minutes or so on this paper, prospective buyers will be better served if they use this intuitive and simple buy versus rent calculator from NYT.

The Real Estate complex in this country knows that things are falling apart pretty much all across the Canada and they are trying their level best to contain the impending crisis. This "academic work" is too feeble an attempt and unlikely to convince anyone but severely delusional.

Freddie/Fannie.....Can it happen here?

Two years ago the very thought that Freddie/Fannie would be "socialized" in the capitalistic paragon of the world would have been ridiculed. So at the risk, of inviting ridicule, I wonder, can something similar happen here? I've not had the time to dig deeper into the financial details of CMHC, but they are doing quite a bit of heavy lifting (around $120 billion in Canada Mortgage bonds) in terms of guaranteeing mortgages with a rather thin capital base (less than $7 billion in equity).
But in Canada no mid Sunday morning bail outs will be necessary, should we experience anything remotely resembling the rout in the US housing markets. After all, "CMHC’s Guarantee of Canada Mortgage Bonds carries the full faith and credit of Canada, and constitutes a direct, unconditional obligation of Canada."

Here is a video in celebration of the 'socialization' (heads bankers win, tails taxpayers lose) of our southern neighbour...

Back to School Sale-35 Per Cent off in Calgary

As you might have noted in the Daily stats. We have heard several stories of people getting more than 20 per cent off properties of interest to them. But 35 per cent means either the property was seriously over priced or the seller was pretty desperate. Or could it be an error like the ones you find in the Sears catalog?
But in any case, August 2007 was a slow month, yet this month is likely to be slower still, at least in Calgary with approximate monthly sales of 1175.
No spring rush, no summer rush, no bottom and the Sale has just started.
The markets will be good to those who wait for the right time to buy.

Is this a good trade-Long USD, Short Alberta Real Estate?

The loonie has fallen by more than 15 per cent from its top that was reached last November. Alberta real estate prices have fallen by an almost similar amount since reaching their peak last summer. I expect that loonie and the Alberta real estate prices will continue to fall for a while.

So for all those ‘bitter renters’ who have been saving their money and putting it in GIC or some other investment vehicle, would the following trade be a good idea:

- Convert your GIC into USD and wait for loonie to fall further.

- In the mean time, the Alberta real estate prices are likely to fall as well.So while there is no explicit 'shorting' of Alberta real estate, the waiting itself is good enough to get the benefits.

Of course, I was so consumed by other things that I didn’t have time to do the conversion of any of my Canadian dollars into US dollars in the days of parity and beyond. The net result will be a possible double gain.

Of course, the above will go against the conventional wisdom that says US dollar is toast et.al.

But our currency is strongly tied to the price of crude and in face of clear demand destruction and recession in pretty much the entire developed world, the prices could tumble even further in the short to medium term.

Of course, with conversion to USD, you’ll likely earn less interest rates and lose the CDIC insurance benefits.

What do you think?

The Long Term View

I’ve been enjoying the beautiful weather for last few weeks and haven’t been too tempted to sit in front of computer and do a fresh post. I realize a lot of readers would like to see postings more frequently, but I’m somewhat burnt out from a lot of over work during the last couple of years. So more frequent postings would be to my liking as well, but I’m spending more time recuperating and spending rest of the time on doing my work. I’d like to keep this blog going as much as you all want.

Coming to the real estate market in Alberta, so far not much different than what was predicted here on this blog has happened. Sales are slow, prices are gradually falling. There was no spring or summer rush. A lot of people are still paying more than one mortgage. The strong rental market is covering a good part of most ‘investor’s’ second/third/ multiple mortgage payment. Marketing gimmicks(h/t to one of the readers) are in full force but are yielding minimal results. The shoe boxes in Edmonton area are officially advertised for less than $300k. Last year these were at around $350k.

I won't spend time discussing the stats-they have been covered in detail on the realtor blogs. Instead, let's spend some time on the bigger, more fundamental questions. The ones that not too many 'investors' like to ask these days.

As we have mentioned earlier as well, the strong Alberta economy is really a function of construction growth and spending, more than the energy sector per se. And a number of stories in the recent past suggest that we are past the prime spending on construction, at least in this cycle.

On the commodity side, it looks like a bust is in the makings, the price of crude oil and other commodities having fallen by more than 20 per cent in the last few weeks. Should we go to levels below $60 (yeah, it’s a preposterous idea. But until it happened, real estate prices had never fallen in the entire US since the Great Depression) , it will raise some more serious questions, along with the perennial environmental issues, for the big oil contemplating oil sands investment.

But even if price of oil were to remain high for the foreseeable future, the big question is- What would happen once the construction boom runs its course? What would happen once all the oil sands projects are in production? Process industry typically doesn’t generate huge continuous employment like manufacturing industry does. What will fuel the employment growth five years from now? Ten years from now? I am fully aware of the perils of making forecasts, especially for what may happen ten years down the road, but asking some fundamental questions will be a good exercise. Especially those who are about to take a 35 year mortgage.

We have almost close to zero diversification and whatever diversification was done during the period between last bust to about three years ago has come to a naught. A lot of non energy companies have moved away from Alberta (and Canada) due to higher dollar and tight labour market. Those who bought or are still buying overpriced cardboard boxes on minimal down payment and 35 or 40 year amortizations need to consider this seriously.

A look at Windsor Ontario or Detroit will be instructive. Ten years ago it would have been hard to believe that Windsor Ontario would face the downturn it faces now. But this is what happens when an economy is singularly dependent on an industry.

As I’ve harped on so many occasions in the past, based on fundamental valuation metrics (availability of land, prices of raw materials), the current prices in Alberta are totally out of whack. As and when the labour market softens, there will be further downward pressure on the building cost pushing the costs down.

Those looking to buy at this point will do themselves a favor if they were to wait for at least one more year.

Canada Wakes up....Is it too late?

As posted in the comments section(h/t to bad) and noted at other places, the Canadian government has finally woken up and is trying to do away with the 40 year mortgages, as well as the zero down mortgages that are backed by the government (via CMHC and others). They'll also enforce more rigorous documentation standards.

They specifically mention that this is being done to "reduce the risk of a U.S.-style housing bubble developing in Canada." If you ever wanted a classic example of reactionary measure taken by bureaucrats, this could be it. The time to do this was in 2005 and 2006 when the mad rush was already reaching its zenith in Alberta and BC. Or even in 2007 when the frenzy was near its peak in Saskatoon/Regina. But in 2006, they were cheer leading the 'affordability paradigm' and passing laws to provide 40 year mortgages with zero down payment.

And while they abetted the bubble by offering these products, they are going to help deflate the bubble by eliminating some of these products from their offerings.
I'm pretty sure that this is only going to reduce the pool of buyers that could have otherwise obtained financing on on overpriced Edmonton condo using zero down, no document, 35 year term with credit score of 550.

How much impact will this have on Sales in Alberta? And to prices?

Frog and Scorpion

It is difficult to get a man to understand something when his salary depends upon his not understanding it" - Upton Sinclair

And yet, people expect realtors to give a ‘fair’, ‘balanced’ or unbiased perspective on the current market situation. It just can’t happen. It’s not unlike the old fable of Frog and Scorpion. No matter what the ‘realtor’ says, his or her motive is only one- to make the sale. And you can’t blame them. To not sell would mean to go out and look for another calling. So beware of the advice you get from those whose only interest is to sell more houses for commission.

On the market front, things are going almost as per the expectations. Demand and supply effect is now showing up in the statistical metrics for prices. Prices have resumed their fall once again, at least in Calgary and in Edmonton condos. Even though almost anyone on street could attest that prices through out 2008 have been lower than in last few months of 2007.

After all, what would you expect with inventory close to all time highs, anemic sales volumes, rising inflation and banks about to unleash a wave of interest rate hikes?

For those who are planning to buy, there's just one advice- WAIT. Renting is still a lot cheaper than buying and prices are expected to decline to get them in line with the historical trends. Read through the posts and comments on this blog and other places as well to make a well informed decision. Remember, mainstream media will mostly rehash the press releases of the realtors without an iota of original research or analysis.

My apologies for the less than frequent posting, but I’ve been busy with a new project and taking time off to enjoy the weather.

Inflationary Scenario

Quite a lot has happened in macro economic world since I wrote the ‘deflationary scenario’. While there are still quite a number of deflationary proponents holding there ground, the mainstream economists and pretty much all the central banks are getting perturbed over rising commodity prices. And for once, their words have some meaning as demonstrated by Bank of Canada holding interest rates steady, increasing the probability of rate increases in future. Just a couple of months ago such a scenario would have been unthinkable amidst all the talk of the global credit crunch.

Clearly, Central bankers in Canada, UK and the US are afraid of 1930s style deflation, but they are also not comfortable with the 1970s style stagflation. I guess they are stuck at a Morton’s fork point- raising rates will further worsen the housing market and create problems but keeping status quo will further raise prices making things much worse for them.

The implications will not be salubrious for the health of Alberta and Canadian real estate. Inventory is at highest levels ever seen, sales at levels close to the lowest levels for this time of the year. Meanwhile, new product is still coming to the market at a pace far faster than markets can absorb. Meanwhile, the nouveau landlords are learning some painful lessons on the 'joys of becoming a landlord.'

One of the scenarios that was often discussed on this blog was a disruption in the oil sands development in Alberta (environmental issues, commodity bubble bust etc) leading to a significant deterioration in the Alberta real estate market. The inflationary scenario, if it bears fruition, will lead to a direct impact on the real estate market. It could make properties that are ‘barely breaking even’, bleed cash profusely. As interest rates go up, a lot of speculators and double property holders who are somehow holding on to their properties in anticipation of a rebound of prices to Spring 2007 levels will likely capitulate.

Rising interest rates could expedite the widespread decline that has been so far avoided.

How likely do you think is a rise in interest rates?

Back to Fundamentals

I've been silently watching the "blog drama" that has been going on for the last few days. I really have nothing to say on it, except that everyone should be polite and when not in agreement, respectfully disagreeable.

Also, there were some false 'spam flags' on this blog causing it to be locked out. That's why there were no new postings in the last few days. And google blogger takes its own sweet time to manually review the blog(over a week in this case). Perhaps a lot of people clicked on the 'report objectionable' button at the top of this blog! There are may be quite a few people who want this blog to be shut down.

Closer to the real topic, inventory is gradually inching upwards while the statistical measures (median, 'special case median' etc) have moved slightly downwards. But bulls are still clinging to their original stories of "we’ve reached a permanently high plateau of prices." Or perhaps, according to them the current prices are entirely in line with fundamentals. That is fundamentals of the 'high energy prices', 'recession in Ontario', 'real estate always goes up' variety.

I came across this very valuable study from OECD that compares Canadian real estate prices to the real fundamentals-yes, the stories without the price of oil or weather in them-the price to rent ratio and price to income ratios.

Here's the link to the actual data

(http://www.oecd.org/dataoecd/6/5/2483894.xls)

It only goes back to 2006, but it should tell us a lot about the state of the market inasmuch as we do know how things were like in early part of 2007.

It doesn’t focus exclusively on Alberta, but on Canada as a whole.

Price to rent wise, Canada as a whole is only slightly better than the biggest bubble places of all-Spain. We are far worse than the UK or even the much maligned US.

Of course, as mentioned numerous times, the real estate game is that of patience. That is if you are not a get rich quick speculator spoilt by the markets of last few years. Reversion to mean is a common place occurrence in all markets, and it will happen one way or the other- either prices will drop or prices will stagnate for a long time to erode all the gains of last several years.

Okay, the market kind of sucks, but how about some spin!

If you enjoy the headlines at the realtor sites, you'll probably not like the one I've used.
But I guess when your bread and butter depends on making an earnings by selling homes, you've got to master the art of seeing the positive in the sea of negative news.

So what if we have inventory that's close to all time high and it's only the end of April.
So what if have sales that are amongst the lowest in the last several years.
So what if we have the key benchmark price used by EREB and CREB down noticeably since last year.
So what if at the peak of buying season we have got dismal sales to new listings ratio.
....
We will still hold on to our fantastic interpretations of data. Because it suits us.
We cannot possibly go on and say with a straight to all the people who bought at the peak last year that real estate always goes up.
We made big suckers out of all of you (and ourselves included, after all we strongly believe in consuming "our own dog food") and it was great while it lasted.
We don't really know what's going to happen and we are running quite scared.

Is housing influenza infecting Calgary?

No, no and No, as per this Calgary Herald article. Of course, MSM is losing its relevance with every passing day and such senseless rehashing of REIC perspective will only hasten their demise.

“I don't see a lot of price decline on a year-over-year basis in Calgary. I think we're still a pretty healthy economy and still a pretty healthy housing market," says Legge.

By which metric, one has to wonder. Median prices. Down. Average Prices. Down. Median price for condos, down? Pick any metric and it is down YOY.
Can they actually find a property that has increased in value since last summer?
All I see is a glut of inventory and a lot of reductions in prices.

Someone has to tell them that it wasn't the healthy economy that drove prices to stratosphere. It was the worldwide credit bubble abetted by the local tales of 'we are different here' that drove prices this high.

The other perma bulls are still throwing their wild predictions:
“And in the long-term, real estate here looks great, says Campbell, adding year-over-year average house price gains in Calgary should be in the 11 per cent range this year.”

Obviously, in the days of easy credit, liar loans and speculation driven mania all such predictions hold true. But when it costs 2 to 4 times the rent to buy, the average income can’t afford the average house, there’s a gluttony of inventory and houses are still being built like it's 2005 and credit markets are tightening worldwide, it's an act of desperation to make such statements.

Why do all real estate stories have the happy ending of perpetual 5 to 10 per cent annual increases? Are such increases a divine revelation? Why is there such a belief in this? Such patterns have been repeated at numerous other places in a lot of different eras. Especially, when they all believed that their city or locale was different.

On a different note, It’s been quite a while since I wrote the last post. I’ve been busy with numerous usual things, but I’ve been impacted by a few serious illnesses in my close circle of friends and family. That distracted me quite a bit from the real estate stuff and made me prioritize a few things. Yes, real estate is important, money is important, too much debt is bad, 40 year mortgages are bad; but poor health is worse than all these. Warm weather will hopefully come sometime this year, so when it does arrive, do take the time to go out and enjoy some outdoor activities that you like. Quality time with family and good health are two things that should be at the top of our priorities, certainly way higher than blogging, for both bulls and bears.

Fantastic Hopes

Spring is here, at least in the real estate context. But the spring hasn’t quite sprung sales wise. Inventory continues to pile up and the pace of new construction is still frantic.
The bulls claim that everything is perfectly fine except for a little ‘inventory problem.’ If only we could get rid of the excessive homes, things will be all fine.
This is not unlike the problems in the US. If only they could get rid of excessive inventory in Phoenix, Miami, California and pretty much most of the US, there will not be a housing crisis.
But the more fundamental questions are never raised, at least in the ‘bull’ or even realist camps. Why do we have such excessive levels of inventory? Did we over build based on speculator driven demand? Did we build assuming tremendous rises in rent? Did we over build based on an unending supply of greater fools? Did ‘investors’ buy properties without really having any understanding of the real estate market and valuations?
It shouldn’t require a lot of effort to figure out answers to these questions.
There was a massive run up in prices in Alberta real estate between Fall 2005 and Summer 2007. This had very little to do with the fundamental factors-‘Alberta Advantage’, oil prices, investments in projects, strong economy, job growth etc. It had almost everything to do with two things- tremendous speculation and easy credit.
The spring is here but the rebound has not arrived. So one of the bulls’ wishes has not been granted by the real estate gods. The next strong wish for the bulls is that the inevitable-a significant drop in prices- will be deferred permanently.
Right now, the mood is still very positive in Alberta. It’s keeping expectations and hopes high for most sellers. I know at least half a dozen ‘landlords of greed’ (including our current landlord), who have chosen not to list their properties this year and decided to rent out their properties, even at the cost of several hundred dollars a month out of their pockets. The reason- expectation of prices recovering to spring 2007 levels. Given a choice between selling their properties for big profits-an easy $100k over original purchase prices-or waiting for this ‘price recovery’ and renting out in the mean time, they are choosing the option of subsidizing the renters in the expectations that the prices will rebound to the all time highs again.
What they don’t realize is the possibility that in real terms prices may never rise to those levels again. Nominally yes, but in real terms, those prices may have been the all time high. Not unlike the loonie touching 1.10 to the US dollar. Not saying it can’t happen again, but anyone who had the opportunity to sell Canadian dollar at that point and did not will have to wait for a long time before the opportunity arises again. Perhaps 97 or 98 cents won’t look too bad for the loonie if we take a long term perspective. The Spring 2007 Alberta real estate prices horse has left the barn and is not coming back.
The match is now on between the fantastic hopes of the sellers and the patience of buyers. Assuming no external shock, slowly and steadily the weight of inventory will bring down the prices. If there's an external shock (lending issues with banks, severe recession, environmental issues with oil sands, commodity price collapse), things will get ugly.
In the meantime, all the bitter renters out there should take advantage of the ‘landlords of greed’ and let them subsidize your rent for at least a year. Patience is an under rated virtue and will be rewarded.

We are almost settled in our new place and postings should become a little more frequent.