Where do we go from here?

Last year housing prices kept on marching upwards despite rising inventory. The trend continued until the middle of summer when prices stopped climbing- the basic supply and demand variables starting to take their toll.

Are we seeing a repetition of this pattern? Perhaps we are. Despite sharply higher inventory, the commonly tracked average/median prices have been inching upwards. But it’s not unexpected and most certainly not unseen in other bubble markets, especially south of the border. Prices continued climbing upwards even as inventory continued to balloon in places like Phoenix, San Diego and of course Florida. The commonly given reason for this phenomenon is the smaller number of transactions occurring at the lower end of the market, thus pushing both median and average numbers higher. It certainly sound plausible.

We are close to the end of February and sales are off by around 40 per cent as compared to last year. Sales are certainly running slower than they were in 2006 or 2005. Yet the inventory in both Calgary and Edmonton is nearing all time highs. And this is February only. What will happen when we are past the peak selling season but not the peak listing season. That is how high will the inventory be in September of October? Can we say 15000 in Calgary and Edmonton, excluding the sale by owner listings?

If we were to hit that number, then it would be a massive glut of listings that would be chasing a small pool of buyers. 19000 listings (15000 plus about 4000 in sales by owner) for cities of size of Edmonton and Calgary (around 1 million population each) would mean roughly a house for sale for every 50 people. That’s right. 1 house for Sale for every 50 people. Is it going to happen? Of course, predicting future is fraught with perils but just observing the seasonal rise in listings along with the sheer number of projects that are completing in this time frame makes it likely that we’ll hit these numbers or go beyond.

The important question that we must ask is- why are so few sellers stepping ahead to buy? Have we run out of demand? With Alberta’s economy still perceived to be the strongest in North America, why are we not seeing another mad rush to get into the market? Have people recognized that the prices have further to fall? Is it because the massive surge in demands were simply 'borrowed' from pool of buyers who were not yet ready to buy but bought in any case using creative financing and 40 year amortizations (subprime anyone)?

You would expect the mainstream media to ask some of these questions. Instead, they are busy regurgitating the press releases of realtors who tout the ‘wonderful investment’ that Alberta real estate has been. Too bad that masses don’t seem to understand the difference between ‘has been’ and ‘will be’ when it comes to investing (or any other trends really). Alberta was a great investment when you could buy ‘condos’ in apartment building for less than $20k a piece around 10 years ago. Of course, talking of real estate was considered asinine by the masses at that time. As late as 2005, you could pay a reasonable 100 to 125 times rent and buy almost any property across the province. And then, the craziest escalation in prices began. The same $20k condos were 'refurbished' and sold for over $200k to the believers of 'buy now or be priced out forever' crowd.

On this blog, we try to venture into the territory where the mainstream media hazards not to. For their bread and butter comes from the advertisers who rely so much on keeping the prices high and transaction volume higher still. The fundamentals haven’t changed much. We have rapidly rising inventory and falling sales as compared to levels attained in last several years.

Typical properties in both Edmonton and Calgary have fallen by at least $50k since last summer. The bubble is deflating right in front of our eyes but a lot of people are still claiming that it’s all rosy. They can’t afford to say anything otherwise.

First time buyers should exercise caution and do their research- is buying at this time really the best thing? Could you save $50k, $100k or even more if you waited for a year or two?

Here's a quick poll for the projected peak inventory of 2008:

Weekend Open Thread

Please post links, comments and other relevant thoughts. Some contributions from my side:

• The blog is almost one year old now. Thanks for your support and valuable comments. Hopefully we have saved at least a few people from seeking advice from the new 'Aunt Abby' about 'approaches to deal with falling prices if you bought last year'. I suspect that in the not so distant future, the readership of such columns will be expanded to include buyers from year 2006.
  
• 'Shoe box' starter homes in Edmonton suburbs are now selling for less than $300k. Of course, it would have been preposterous to even suggest such a price last year. My take is that these homes are overpriced by at least 50 per cent. So over time, either the rents will have to rise quite a bit, prices have to fall or inflation has to do the work. We can probably get a clue from how things are going in the US-a simple and steep decline across most of the US.
  
• The typical $300-$400k property has lost close to $50k or so, if it has sold, from the peak prices. Of course, the median and average numbers are fairly close to this, but some properties have done worse than others. Have you seen anything in particular? The two bedroom condo that was mentioned last July has shed around $20k and has still not sold. Perhaps, it needs to go below $300k to get some more interest.
  

Guest Post- Why I am bullish on Alberta real estate!

As mentioned in my last post, any bull or bear who is interested in making a guest post to this blog is more than welcome. Of course, your identity will be kept anonymous if you wish to do so. This post was contributed by a poster who particpates on this blog as 'linnaeus'. Contributions are welcome at albertabubble@gmail.com

Let me start off by saying there is no attempt at spin here. I am not a real estate agent. I grew up on the edges of the business since one of the things my father did to support us was house appraisals and he started teaching me how to do it while I was still in elementary school. Eventually I did appraisals on my own.

We currently rent in a gorgeous neighborhood where we can walk or take the bus everywhere. We pay less than fair value because the house is old and not in very good shape. We also own farm land I lease out and am looking at buying more. We are planning to take the income coming off that land and buy a house in Sherwood Park. We are also looking at buying an apartment building in Edmonton (older) and restoring it. That isn’t a money making proposition, the finished development will be a community housing co-op.

I am proud to say I am one of the green fraudsters that carioca canuck rants against. I work hard at trying to reduce my footprint on the earth, recognizing it is still much larger than the world average. However, I am also a small business owner who hopes someday to be a large business owner. I have lived in the sun, on the beach. I hated it. Give me snow and sub zero temperatures any day Brent.

I say all this because based on a long observation of this blog I know most of the responses to this post are going to be negative and a frighteningly high percentage of them will be ad hominem attacks, so I am trying to make all my biases crystal clear up front.

So what is my argument for being bullish on Alberta real estate?

One of the services I have provided almost from the beginning of my business life is reliable forecasts for real estate in various communities throughout western Canada.

In more than thirty years of forecasting real estate I have learned that forecasting is never a simple linear process. I am sure this shows in my posting which tends to consist of various versions of don’t be so sure you know what is going to happen. There are two prime determinants of real estate price. The first is employment. High employment tends to lead to high prices. The second factor is related to employment being people’s expectations for the future. If people are optimistic then prices generally rise. If people are pessimistic prices fall.

I think people in Alberta remain pretty optimistic about the future and employment is at an all time high. Could that change? Of course it could. A deep and prolonged US recession certainly would penalize Alberta’s economy, especially if the Canadian dollar remained at par or above in comparison to the US dollar.

I don’t think it will change. That is because Alberta’s economy is poised to out perform the rest of Canada and the US. Everybody’s economy is slowing. It is just we are maintaining our relative edge over everybody else. That will lead to Albertan’s being relatively optimistic which will keep the wheels turning here.

It doesn’t matter whether you are a CEO or a secretary you make many life decisions based on your sense of optimism and in Alberta the majority of people think the sun is going to rise tomorrow and go right on shining. The CEO’s will continue, by and large to try and raise capital and push forward with development of their business because they think, on average everything is going to be okay. That is just human nature. Ironically, the more optimistic we are, the more our relative advantage is going to grow and the more optimistic we will become. The believe things are better here draws both inter-provincial immigrants and those immigrants will contribute to the on going growth.

Demographics will also play a role in driving Alberta’s economy forward. Baby boomers, of whom there are quite a few in Alberta, will continue to look at second homes in vacation spots. They will also continue to retire. This will lead to labor shortages which will lead to more people moving here.

Greed and stupidity has led to a housing affordability problem. I am not denying that. Housing prices relative to people’s income needs to correct and dramatically. Having crunched all the numbers and spent days debating what the difference in housing purchasing behavior in Edmonton and Calgary means I have concluded that there is going to be a long period of relative stagnation in real estate in both cities (though played out in different ways).

In Edmonton we are seeing a search for value on the part of buyers. There is a tight clumping around the median price. That median is slowly sliding lower for sfh and rising slightly for condos but in both cases price per square foot is falling. Many sellers are responding by letting their houses delist and buyers are responding by adopting a wait and see attitude. Inventory is rising but only slightly. Completed deals tend to be on properties that offer value relative to what the market was doing six months ago. This has all the hall marks of a long flat line in prices that one day will again meet the long term trend lines for housing affordability. It is in no way a bust and quality is still finding buyers. Statistically this is very different from what happened in Florida or Arizona. The market is, however, over built with many new properties coming on line. This over build will lead to a more pronounced drop in price per square foot and probably median prices in the short term. Rents remain at about half of comparable mortgages and while average asking rents are going up so are vacancy rates. Commercial real state development has, after a very brief spurt, all but petered out again.

Simply put, stagnant status quo is the order of the day in Edmonton. This is a blue collar town and a deeply conservative one in terms of fiscal thinking. While things are stagnant there is very little panic. Over time inflation will bring us back to earth.

In Calgary a more interesting picture is emerging. Commercial real estate development, despite a huge over build goes racing ahead. Median and average prices are both going up. This is because completed sales, while few, tend to be clumped in the upper percentiles of real estate value. Relatively little low end real estate is moving. This is all typical of a market that is susceptible to significant short term correction. In other words, Calgary may be on the edge of a collapse in value, a crash, a bust. New listings are high, delistings are low, sales are very slow and the rich are selling out. It looks a lot like Arizona and Florida.

Why then am I bullish on real estate? First of all you don’t buy real estate, or shouldn’t, to resell it tomorrow. It is a long term hold, a place to live in, to call your own, or to use as a vacation getaway. It can also be an investment, particularly if you are a landlord. At the moment I wouldn’t be buying property to rent in either Edmonton or Calgary and neither would any other shrewd business person, the return would be awful, especially in comparison to the return. I am looking at buying a house to live in as I said above. However, if you bought a house more than two years ago and are renting it out I can’t imagine any reason you wouldn’t be happy right now.

That is because no matter how bad the depths of a recession, even a depression reach several decades from now Alberta’s economy will be back here on this mountain top. In the meantime the mountain will have grown and be higher than ever. This is because we won’t be a half trick pony, not a one trick pony either but one of the world’s most dynamic and diversified economies.

I am a devotee of the concept of peak oil. We are going to run out one day. The closer we get the more valuable the tar sands are. However, much more importantly the more valuable Alberta’s other resources become. We have coal which can be burned clean if we want to invest the money. We have sun, we have wind and already we are exploiting these resources in small ways, ways that will grow over time. Most importantly we sit on, and most people don’t know this, vast geo-thermal reserves. Under the ground in Alberta is enough power to fuel the entire world. Then there are gigantic iron deposits, and other non-precious metals the energy under the ground in Alberta could be used to turn that into steel and other products. There is a large uranium resource available in Alberta if we decided we wanted to exploit nuclear energy. Our forests are a resource we could rebuild, renew, and manage for many centuries to come as a stable economic engine. Agriculture keeps reinventing itself and will in time learn how to get by without current petrochemical inputs and it is here I think Alberta will become a leader in energy efficiency.

What I am trying to say is increasingly we live in a world of high energy inputs and Alberta has the energy. This is indisputable. We need to manage it smarter and learn to avoid these outrageous booms and busts. We need to figure out how to develop it while protecting the environment. These are not impossible targets. Humans have an amazing capacity to learn and adapt.

Bluntly but, the future belongs to Alberta, unless we really screw it up. As long as we aren’t total morons in the long term real estate in Alberta will re-engage the long term trend lines and then slightly outperform it. What happens in the short term is quite another matter.

I think there are so many people in Alberta who purchased housing when it was affordable that the 80,000 property owners that will be feeling the pinch can’t drive the price down to the levels of the late 1990s, there just aren’t enough of them, and even some of those will struggle through. Is it going to be pretty? No. Is it going to be catastrophic? I very much doubt it. Will real estate ultimately rebound? Absolutely.

January Numbers and other thoughts

We are experiencing the best of the times in this province. Looking around, there are signs of prosperity. Everybody is happily employed or has the best shot they ever had at getting some jobs. Some people have high paying jobs. Lending is still pretty lax and people are still getting their HELOCs based on elevated values of their ‘residential portfolios.’

Yet, the houses are not selling at the pace witnessed in 2005, 2006 or 2007. The sales to listings ratio is close to the lowest levels in many years in both Calgary and Edmonton.

Perhaps, we are slightly past the best of the times in this province.

While the media and the usual suspects are trying desperately to make a trend of an almost statistical aberration in the change in median prices (average isn't the favorite of creb itself), the reality is that if you are a home owner trying to sell your property, you have to wait for a long time to sell your property, if you are able to sell it.

There’s nothing unexpected here.

I won’t spend too much time dissecting the numbers here because it has already been done and also because it’s easy to paint the numbers as ‘half full’ or 'half empty', based on your market perspective. There's nothing conclusive yet that the bubble is deflating.

However, as honest 'students' of markets and not paid shills or 'professional' salespeople , we can look at trends and try to draw some conclusions from them.

The most important trend that hasn’t changed at all is that of continuously rising inventory and falling sales.

As per old criteria, Calgary had only 3500 or so properties for sale in January 2007 and there were over 2631 sales. A hot market.

This year, at month end, Calgary had over 8093 properties and only 1800 sales. That's almost 4.5 months of inventory and it's only January. This is without counting properties on WeList or other FSBO channels.

The price movements do not adequately reflect what the sellers are experiencing as expressed in the days of market statistic.

One of the most unusual things about the Alberta bubble has been the rapidity with which the prices rose and then the abruptness with which the prices began to fall. Even in the worst bubble markets in the US, prices did not double in less than two years. So Alberta is indeed very different from almost any other market, with the exception of perhaps Saskatoon (where Alberta equity locusts went to buy the cheap houses), that we saw price declines on the first sign of major inventory build up. The typical behavior has been inventory build up accompanied by slowing sales ultimately leading to price declines.

But the peak we reached in Alberta was so precipitous that the early declines occurred with severe rapidity, not unlike the fall of NASDAQ from its peak reached in spring of 2000. By early autumn 2000, NASDAQ had almost recovered to over 80 per cent of its peak.

The important questions are- How will things proceed from here?

Alberta market can play out in two different ways. First one, if there’s an 'oil sands shock.' And by that, I mean the sole economic engine powering Alberta’s growth-the oil sands-is adversely impacted by some event. I’m fully aware of the overall lack of correlation between oil prices and real estate, but Alberta which used to be 1 trick pony (Energy sector comprising oil and natural gas) has now become only a half trick pony (oil sands). May be some day natural gas prices will rise and we’ll have a full trick pony again, but we don’t know when that is going to happen. There isn’t much to speak of in terms of diversification of Alberta’s economy and even though energy sector contributes around 30 per cent to our provincial GDP, it is the sector from which every other sector drives its growth. Even the ‘technology companies’ based in Alberta are based on oil and gas sector! No wonder then, if energy sector goes down, Alberta goes bust. The 'shock event' could be of environmental, economic or political nature. If that happens, things will become pretty bad and we’ll probably have to look back at the Alberta of early 80s or the Detroit of today to see how an area that’s dependent on a half trick pony fares when that pony falls ill. Let’s hope and pray that nothing of this sort happens for it will be immensely painful for everyone around. We haven’t diversified a single bit and the unplanned growth only goes on to kill the feeble attempts made at diversification when the energy sector is roaring.

The second scenario, the more likely one, is that there’s no major ‘oil sands shock’ and things just begin to implode-like we have been witnessing since last summer. As mentioned earlier, we still have the best of the times in the province, yet people are not lining up to buy homes. Last year, when the prices were this high, there were multiple bids and the ‘investors’ just couldn’t get enough of Alberta’s real estate. Prices are roughly at the same level that we saw in early 2007 and yet there’s no frenzy to buy. The factors fundamental to Alberta’s real estate are at work. It’s still a lot cheaper to rent a place than to buy it. A house selling for over $400k is easily available on rent for around $1600 to $1800.

We have been looking at renting a bigger place for ourselves and the last few days we have been checking out places for rent. We have been to over a dozen places and every single house was bought either as an investment property or as a consequence of an upgrade. It’s anecdotal, but it clearly indicates a lot of speculative activity and multiple ownership. Speculation that was (and still is in some places) a global phenomenon. In places as far away as Southern tip of New Zealand, to the bustling cities of china, suburbs of Indian metros, resorts and villas in Spain, flats in the UK, condos in Miami, houses in Phoenix and closer home in Vancouver, Victoria and Saskatoon, it has been the same story. Funded by lax lending standards, abetted by the almost non-existent checks and balances in the financial systems, fueled by the ‘getting something for nothing’ mentality of the crowds and the greed of almost everyone involved in the real estate value chain, we saw a massive real estate bubble globally. Yet, every place has its story to cover up the sordid tale of speculative mania. So you don’t need oil sands or anything else to be a part of this frenzy.

What we saw in Alberta, more so than in any other place was a massive ‘hoarding’ of residential product. Hoarding that deprived families a chance of owning a home and improving their quality of life. Hoarding that will prevent stronger migration to this province. Hoarding that prevents a genuine diversification of the province’s economy and ultimately leads to a less than stellar future and extreme dependence on a single industry.

The number of properties under construction is still close to an all time high and they are still building more. The rental market is also getting pretty competitive but there’s no fear or desperation yet. People still have jobs so properties are still getting rented out, even at a monthly loss.

So, is it possible that a spring rebound can occur? Weirder things have happened. Nobody can figure the mysteries of Mr. Market. But based on the inventory levels, falling sales pattern, the extent of speculative activity and the ongoing credit cycle contraction, it doesn’t look likely.

Once again, this is not meant to be a prediction. Make your decisions based on your critical abilities and knowing fully well that you are making a 25/30/40 year commitment to live in frozen tundra (sorry couldn’t resist this after the weather of last 10 days). If you are professionals not dependent on the energy sector, there are better and warmer options out there!

I’m busier than usual and if anyone (bull or bear) would like to write a guest post, please feel free to drop a line to me at albertabubble@gmail.com.

Finally, a request to everyone to keep the tone civil and arguments logical. Remember, this is a forum to give bulls and bears 'equal opportunity' to make their case and present their side of the story without making any personal insults or ad hominem attacks. It will give the readers a good chance to make decisions without having to scroll through scores of meaningless diatribes and flame wars.