You buy a house for half a million dollars and...

...one early evening(8 pm) you hear a doorbell. You are surprised to see someone who resembles your neighbor. He asks if the sound of music that he's hearing is coming from your house. You wonder, what sound is it? And then you remember, oh yes, it's your 4 year old who is listening to the nursery rhymes on youtube and hooked up to your 10 year old Philips stereo. You politely say yes...and promise to turn the volume down.
This is not a hypothetical example. A friend of mine who is renting a place in NW Calgary had this exact experience a few days ago. Without getting into the legalities of the situation(was it too much noise, 8 pm late enough etc) and the 'home owners' rights, the question that needs to be asked is- what the heck is going on?
We all know the story of rows of houses getting gutted in Edmonton because there was too small a distance between the homes.
A house that sells for nearly half a million and you have neighbours complaining of noise. And this isn't unruly teenagers doing a late night party, but the sound of nursery rhymes.
Also, these houses don't share any common wall, but the distance between them is no more than a couple of feet. After all, the developers, the city and everyone else needs to account for such massive scarcity of land in Calgary, right?
If this were attached houses, apartments, condos etc, such complaints would be understandable.
But if after spending close to half a million dollars, your little kids can't dance to a nursery rhyme at 8 in the evening at slightly higher volume, you are forced to wonder the entire point of buying a house.
And you recognize that something is seriously wrong with the situation. The bankers, realtors, mortgage brokers and pretty much the entire real industry complex wants to sell overpriced shoe boxes to naive young families and push them into debt subservience for most of their productive lives.
So may be this is a warning to those who are thinking of jumping into the housing market at this stage for lifestyle reasons-that their kids can have room to run around and play-Beware! What you buy might appear a bit spacious than the townhouse or condo you are currently living in, but don't expect a lot of space for yourself or your family. You'll be living in a tight and cramped subdivisions built by greedy developers, rapacious municipalities, voracious bankers and less than truthful realtors, all abetted by the economic policies and framework created by your 'government representatives.'
As for my friend, she is a 'lowly renter.' She'll be looking for a better place once her lease expires in the next few months. She does thank this blog and the commentators that she did not buy. Now imagine what would be her feeling at this stage if she had bought the same house for $483,000 with 10% down and 35 year mortgage. Worse, if most of the neighbors were in the same boat financially.
Happy renting!

Weekend Open Thread

• Retail sales in Canada down sharply in November. Ex-gasoline, sales fell 1 per cent in November. You won't find a glorified mention of this item in the mainstream media.
• Why? Because they will be highlighting the other release from StatsCan- the fall in number of EI recipients. Which is a news to be welcomed, if it were not for the real possibility that those falling off the EI rolls are venturing into the territory of self employment or under employment.
• Vacancy rates in the office and industrial sector in Alberta have soared. More so in Calgary than in Edmonton so far. But while passing through some of the industrial sections of North East Calgary, there was a glut of industrial space waiting to be leased. This reflects the level of pullback in the primary sector that has driven the prosperity of Alberta over the last decade or so.
• What are your observations?

And then they'll say they never saw it coming

Almost all the 'institutional liars' claim that they never saw the financial crisis coming. In the Canadian context, we were told that there won't be any recession. Prior to that, circa 2007, there was not even a brief mention of a housing bubble anywhere, except at places like this blog.

3 years later, with 5 % reduction in GDP, over half a million jobs lost, real estate values falling by over 10 to 15% from the peak, it seems people seemed to have learnt nothing. 'Real estate investing' is back in vogue and a lot of 'investors' want a piece of the action. Here's an ad in local Calgary classified for a 50 year old apartment building:

Year Built
1957 (est)
Construction
Wood frame
Suite Mix
4 One Bedroom Suites 600 sf +/-
4 Two Bedroom Suites 700 sf +/-
8 Suites Total 5,200 sf +/-
Appliances
8 refrigerators, 8 stoves, 1 washing machine,
1 dryer
Rental Rate Range
One Bedroom - $750 - $875
Two Bedroom - $875 - $950
Comments
• Clean building New roof
• Historically low vacancy

Annual Rent $82,500

Laundry $ 1,800

Gross Income $84,300

Less: Vacancy (1%) $ 843

TOTAL $83,457

EXPENSES

Taxes $ 5,902

Insurance $ 2,400

Utilities $ 7,026

Caretaker $ 2,400

R & M $ 4,800

Misc. $ 1,000

TOTAL $23,528

Net Income $59,929

Price $1,600,000

A cap rate of less than 3.75 per cent with very aggressive occupancy assumptions for a 53 year old wooden building in a boom/bust city of Calgary. Sorry, I forgot we had mastered the business cycle. I won't be surprised if CMHC underwrote the mortgage for this type of loan to a 'smart investor'.

Back in the days of 'Alberta Advantage' a property like this would sell for no more than 30 to 40k per unit.

a note on the moderation of comments-it will be stricter. far more stricter than before. if you post a personal attack, it will be deleted. if you post an insult twice, you will be banned.

The Day of reckoning is coming

Here’s something to ponder on the Christmas eve: Alberta finally has seen negative inter provincial immigration (something we did mention several quarters ago as a distinct possibility). We have also seen the mortgages in Alberta that are in arrears (pdf) rising to the highest levels in years. We also have a fairly high level of unemployment, both official and the invisible ones (those who are off the EI rolls).
The economy grew in October but only because utilities were slightly costlier and the realtors and mortgage brokers found some bigger fools who seem to learn nothing from other peoples' miseries(US bubble, Albertans who bought at peak who are still under water etc). Despite that we are still meandering somewhere in late 2005 GDP level territory. And given the population increases since then, we are certainly doing a lot worse than a lot of special interest groups would like you to believe.

So all in all, the "solid fundamentals" that drove the Alberta's real estate market during 2005-2007, have all but vanished. Just to recollect, remember all the arguments from that era:

• People are moving in droves to Alberta.
• There are plenty of jobs.
  
• There's Alberta Advantage.

Yet, the prices keep on rising in late 2009. Which means, there must be some other factors at work. Like the factors we discussed way back in 2007 - speculation fueled by cheap credit and abetted by CMHC. And nothing else. Nothing is more important to the health of real estate market than the availability of cheap and accessible credit. And accessibility sure means NINJA loans, government underwriting, lax conformance to solid rules of lending.
Jobs don't matter. We have seen that. Negative inter provincial immigration doesn't matter. We just saw that in this quarter. Overall shrinking economy doesn't matter. We saw that this quarter.
But credit matters only until it stops mattering. Sooner or later something will give in.

The Honourable finance minister, having woken up woken up to the reality of a real estate bubble and the devastating aftermath it might unleash when it bursts, is contemplating changes to the CMHC's requirements.

That this bubble will collapse is a mathematical and financial certainty. Will it collapse under its own weight, like it had started doing last summer, or will it be done by exogenous forces?
Will 2010 be the year when bond vigilantes finally wake up? Will the bond market really live up to its reputation as the scariest thing?

For all the renters who have managed to save goblets of cash, don't forget to share your good fortune with those in need around you. Happy Holidays to all of you.

China Bust Scenario

• Is China overheating? An interesting post from Mish. Of great interest should be the video below where in a brand new huge city has been built with the obvious motivation of boosting the GDP numbers. Mal-investments? Who knows?
• What happens when the China boom turns to a bust or eventually runs out. For Canada, and even more for Australia, the only growth story has been commodities. Take away Commodities and Canada's financial situation overall becomes a lot more perilous.
  
• Obviously for most Canadians, such a scenario is nearly impossible to imagine. But remember until a few years ago nobody believed that housing prices could fall across the whole country, a la USA. So we are big fans of possible events that could become probable. Whenever the China bubble pops, the ramifications will be felt in the down under and the Great white north.
• Leaving aside all other cases such as higher interest rates, CMHC, real estate speculation, this is the real wild card that not too many people want to talk about. Why? Because they don't see it happening.
  
• And pray tell, what's our plan B, should commodities fall?
  
• A couple of more interesting perspectives on Chinese bubbles and GDP calculations.
  
• But such unsalubrious thoughts should not consume us during the Festivus season. Happy holidays to everyone.
  

Yet another voice on Bubble

It seems all the contrarians who successfully called the US housing bubble and global credit bubble are somehow feeling remiss in their obligations to their readers by holding back in their perspective on the Canadian real estate.
The latest one to call the Canadian bubble is yet another contrarian-Karl Denninger. He rarely minces words and boldly proclaims what a majority of Canadians will be loathe to admit:

Canada is in for a housing bust WORSE THAN OURS.

And what is his rationale?
Canadian family income as a whole ("families of 2 persons or more") is allegedly $70,000 (approximately.) The average house price? $325,000.
That's a multiple of 4.64, or dramatically into bubble territory (the maximum for affordable housing is roughly 3x, so this is 154% of the maximum!)
It's worse in places like Vancouver - there the ratio is over 10 (!) for single-family homes and about 8x for all residences.
And he concludes by warning:
Beware Canadians..... you can argue over the timing of the outcome here, but if you think the "bad event" won't happen and act on that belief, don't cry when a year or three down the road I start piping up with "I told you so!"


That's too much truth in there to be handled by the mainstream readers. So enjoy the double top formation in Canadian and Alberta real estate prices.

Canadian Housing is a Bubble, says Rosenburg

One of the better known analysts who is bullish on Canada, the loonie and overall Canadian economy has a somewhat surprising take on the Canadian housing market. Dave asks, if the Canadian market is in a bubble? And the answer is yes, even though he is somewhat more conservative in his estimates of the over valuation.

This adds to the list of commentators (Shilling, Mish, numerous bloggers) whose voices have not yet produced cacophony unpleasant enough for the BOC or the Feds to do anything about it. But if they don't do anything now, they'll have to do something in the next few years.
It's a funny and tragic commentary on the human emotions-most of us will continue to merrily believe "it can't happen to us, until it happens." The bubble has burst in the US, Spain, Ireland, UK and several other parts of the world. But where it hasn't, the unflinching confidence in real estate and 'we are different' thrives.

From today's Breakfast with Dave:

IS THE CANADIAN HOUSING MARKET IN A BUBBLE?

It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.
While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).
In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …

Real estate surge no ‘blip,' TD says

How do you categorize the definat housing market in face of rising unemployment, continual contraction of the economy, global recession, massive problems in the economy of our largest partner, surging trade deficit and {add your list of other problems with the economy here}? Here are the choices:

a) It's a bubble.

b) It's a bubble on steroids fueled by the greatest fools who have learnt nothing from the real estate debacle in the US, UK, Dubai and several other parts of the world.

c)It's based on strong fundamentals.

If you answered c, you can get a job as an economist with the TD Bank. But seriously, why would you answer it any other way? If you make a good chunk of your money by lending obscene amounts of money riskfree to the greatest fools in many generations, this would seem an appropriate response.

Let's talk a little bit about the fundamentals here, since we haven't dealt with those in a long time. I'll focus on my favorite ones-the ones that use the cost of production model:

-How expensive should land be in a country like Canada where there's no dearth of land? Especially in Alberta where there's usable land. Why are lots in Calgary sub division three to four times as expensive in Texas? New Mexico? Colorado?

I won't even mention the lot sizes here. The newer lots are a fraction of the size of older lots in the same city. I won't dare do a comparison with the US suburbs here. Everything is so much smaller. Because the developers can get away with it, just as retailers, auto makers, cell phone providers and everyone else in our country can get away by milking the sheep-would be Canadian homeowners.

-Why should there be so much difference in cost of construction across different parts of Canada? Yes, excluding the cost of a lot, why does it cost so much more to build a house in Calgary or Vancouver than in say Guelph or Barrie? I won't even venture to do a comparison between the US construction costs and the Canadian ones. We no longer have the problems of 'surging labour costs' as evidenced by the nearly 8% unemployment in Alberta.

What are the real fundamentals behind the house price increases? If you have been reading this blog for a while, you know the answer. And it's a four letter word.

Weekend Open Thread

• Short term rates in the US are negative again. There's certainly the fear of inflation that is about to be unleashed imminently, but for now, TBTB know that there's nothing to be afraid of by getting fully into short term UST.
• Here's an interesting perspective on the reflation trade- what if the commodity boom fueled since early spring is not based on solid sustainable demand? The answers won't be pretty for many, but particularly ugly for Canada and Australia.
• If CMHC keeps on expanding its balance sheet, will the bubble ever burst in Canadian real estate? Remember, the music went on in the US until mortgage reset based defaults started to hit the collateral quality in a direct way. Assuming the interest rates stay low for at least the short to medium term, what will cause the bubble to be popped in face of all the free money that is being thrown?
• Debt is the real enemy. It takes quite a lot of debt to produce any income stream. Be it professional education (medicine, dentistry, law school), small businesses (think of franchises and mom/pop shops) or a vanilla real estate(strip malls, apartment buildings, commercial condos). A friend of mine who was laid off from an oil and gas company late last year has been unsuccessful at finding any work in his engineering profession. He's looking at buying a small fast food type of business. For a small food business(think Subway Sandwich restaurant) that produces barely $100k of free cash per year, the prices are close to $500k. Why? Because there is plenty of debt available. Think of Canadian government's pledge to help small businesses via number of its programs and the BDC. These loans all inflate the prices of underlying assets, just as CMHC based loans make real estate more expensive. Same with student loans. Cost of education keeps on climbing because the government wants to make education affordable. In the process, they are making education more expensive by throwing more debt at everyone. 'Affordable' in the government parlance means- we'll lend you money so that you can afford something done by being debt slaves for the rest of your lives. Not unlike the targets of CMHC. In the US, this has reached a breaking point now with the recent riots in the Universities of California system. The government's solution is simple- keep on increasing prices for homes, education, small businesses and keep on providing more debt. All the government entities do the same task. Instead of making things 'affordable', they make all these things accessible to joe public. At enormous price. And in a nation full of financial illiterates and 'per month payment' champions, accessibility means affordability.

Have a good weekend everyone.

Weekend Open Thread

• Officially double digit unemployment in the USA. Too bad, the unofficial or the other official metrics of unemployment are much higher.
• Canada is not doing so badly at a mere 8.6%. But what's this, someone is actually questioning the discrepancy between what StatsCan reports based on household surveys and the official payroll reports. There's a huge gap between the two. The unemployment numbers based on household survey are very volatile for Canada showing huge gains and losses in a short period. Potentially, the higher the layoffs in a month, the more the vigor with which the ex-employees will claim that they are self employed. I'd say that the payroll report is more objective, unless we want to believe that employers are firing employees and then hiring them again pretty soon as consultants.
• But I guess none of this should really make any difference to the overall economy. After all, an economy built on speculation in stocks and commodities and selling homes to each other does not require such puritan thoughts as solid employment, savings, fiscal and monetary restraint. I guess everyone will now have more time to attend open houses, visit show homes and become day traders . {Sarcasm}
• Have a good weekend everyone.

Growing economy, more jobs and other lies

Why is it that every contraction in GDP called 'unexpected'? Or every decline in jobs seen through the eyes of economist who never saw it coming?Why do all these economics have to constantly bullish projections? I think I know the answer-they are the cheerleaders for their respective sell side institutions, including the central banks. Here's the headline from Globe and Mail:

Economy contracted slightly in August as gross domestic product fell 0.1 per cent, following flat reading in July, but economists still believe recession over.

Why should anyone listen to these moronic 'economists' when they didn't even see it coming. Some time in future they will all claim that they never saw the housing bust coming.

Two very sobering releases from Stats Can- the Payroll report and the GDP report.

The GDP number takes us back all the way to the fall of 2005 with a total output of around $1170 billion or so. So much for 4 years of growth and the new era of prosperity brought in by the dirty oil and natural gas speculators. The growth is occurring in the same sectors-construction and public sector. One paid by tax payers now and for the other the bill will be coming pretty soon in the form of tax payer supported bailouts.

Too bad, Canada didn't spend anything on stimulus plan. Oops...they did spend around $50 billion, but that wasn't enough to still get us out of recession. Next on agenda-more spending backed by the strength of the Canadian tax payers.

The payroll report is even more sobering -guess why nobody in mainstream media talked about it. More than 110,000 non farm payroll jobs lost in August. If you look at the payroll graphs you'll see that the employment numbers are back to 2007 levels only. But the GDP is back to 2005 levels. So the economy will most likely shed more jobs to produce the same extent of output and maintain similar level of productivity. Or may be most of the employment was generated by the public sector requiring no productivity.

This is all happening when the commodities have not been routed at all-they have merely come down a bit from their all time high prices. What will Canada and Alberta be like, when the commodities do enter their secular bear market? Is there a plan B here, other than continually expanding the balance sheet of CMHC?

Have a good weekend everyone.

And the secret recipe for continued housing strength is...

CMHC. Or secruitization and mortgages backed by us, the poor Canadian tax payers. CMHC has been given the go ahead to increase its mortgage cap limit to $600 billion by the Federal government. The government has full commitment to just one thing-ensuring that assets bubble don't deflate, no matter what the cost. For stupid $2 to $5 million items and expense items much smaller than that, there's a lot of debate, discussion, media attention and bickering. Yet hundreds of billions are implicitly guaranteed without anyone asking a single question anywhere. Such is the power bankers yield in this day and age.

Just for perspective, this limit is roughly half of our GDP. And when things go south, as they most likely will, what would it do to the Canadian sovereign rating? And deficits? the Loonie? Most of the people would ignore this, as they generally do until it's too late. We are following the footsteps of US just too closely.

The question is-will be lucky and see the bubble pop when the guarantees are mere $600 billion or will we have to wait till we hit a sweet trillion dollars or more?

At least the illusions of the strength of the Canadian banking system and the robustness of our lending practices are intact.

More on Natural Gas

Our province's economy depends significantly on natural gas prices. More specifically, a strong Alberta economy depends on strong natural gas prices. In the past, many have speculated the ramifications for Alberta if the prices were to enter a sustained downturn.
The recent shale natural gas discoveries are getting noticeable coverage in the mainstream media and many are even speculating that this will solve the perennial US dependence on foreign energy resources.
What do you think?

Deja Vu all over again

It's getting harder and harder to be a bear. It is as if the laws of common sense have all been rewritten. Less is more, debt is good, you buy houses when you don't have a job and prices rise in recession. The real demand is down, price cuts are rampant and yet inflationary fears are exacerbated by attempts to ward off almost certain deflation. It's harder to actually think rationally about finance, economics and market any more. Natural gas prices go up and down by more than 25 per cent in a single session. US Dollar keeps on falling on account of increasing deficits and loose monetary policy, yet most of the currencies it's declining against (CAD, Euro, INR, JPY etc) are just as fiscally profligate. Decoupling which had barely been buried solidly six feet in the ground just a few months ago is back with a vengeance.
We are closer to an 'economic black hole' perhaps, now that none of the 'old laws' of economics have stopped working any more.
Real estate wars are heating up all over the world. From Delhi to San Diego, it seems a solid resurgence in real estate has taken place. It seems the world is buccaneering again on the dosage of easy availability of money. No lessons from past mistakes have been learned nor any punishments served on those who brought about the pain to the masses. And here we are ready to repeat the show.
Real demand for finished products is down worldwide, yet China is building more capacity to export. China is stockpiling more of commodities, boosting Australia's economy. And this brings back decoupling back into vogue.
Multiple bids were common in 2005, 2005 and 2007. And they are back in the summer and fall of 2009.
What's the end game from this? The central bankers and pretty much all governments have only one faith and ambition- to somehow in someway refuel one global bubble. So far they are having some success.
What do you all think?

Alberta sans Natural Gas

Those who have spent any time in Alberta know that the province might get all the hype for its conventional oil and oil sands assets, but it is really a natural gas driven province. What would happen if Alberta's natural gas was simply 'priced out' of the market? What would happen to the provincial royalties and the provincial budget that has gotten used to the cushy $7 to $8 prices?
This article in the Globe discusses just that:

Combine that with a technological revolution that has allowed firms to profitably extract shale gas at $4 to $5 per thousand cubic feet, compared with $7 or $8 for new Canadian conventional supplies, and Alberta gas may find itself simply priced out of the market.

...“Canadian plays in general have some challenges because of the higher cost structure and greater distance to market,” EnCana chief executive officer Randy Eresman said this month.

Could Encana's forthcoming splitting might have anything to do with this changed game?

In the article there are a few other critical insights:

“There may well be a ceiling on North American gas prices,” Gary Leach said. “We may be range-bound – at the top end, around $6, $6.50 – and a lot of Alberta natural gas needs prices higher than that.”

“Either they bring down the costs and there will be a larger industry, or the costs remain the same and it will be a much smaller industry,” he said.

But wage deflation in the oil and gas sector is simply impossible? After all, don't Albertans have to pay well over $300k just to get a little shoe box in the middle of prairies?
Too bad, those signing up for 35 year mortgages based on the very recent prosperity of the province might wake up to numerous economic surprises during the different stages of their mortgaged lives.

Bad Karma- Consequences catch up with you, eventually

India is now the new diabetes capital of the world. Cases of hyper tension, diabetes and its subsequent consequences are common place here. But the street vendors and high end shops that sell low quality sweet junk and other similar Trans fat full crap are doing bustling business, even in these recessionary times. A local friend of mine has a cousin, who has been diagnosed with end stage renal failure and is expected to undergo a transplant in the next few months.
Yet, few people are concerned. I’m told that 20 years ago end stage renal failure was less common and people used to get worried over such prognosis. But not anymore. There are millions of people who have bee diagnosed with end stage renal failure and other complications that arise from hypertension and diabetes. Yet, both these chronic diseases are taken lightly. Why? If you are wondering what all this has to do with Alberta or Canadian real estate, please bear with me. At the current rate, roughly 1 in 10 people in Delhi have been estimated to be affected with Diabetes. A combination of bad genes, bad diet and lack of exercise has made this disease an epidemic here.

This is as much a social phenomenon as much as it is a public health problem. People are no longer worried about diabetes, hypertension or kidney disease because it’s normal to do so. The consequences- a drastically shortened life span and poor quality of remainder of life are not given much thought.

What does this have to do with Alberta real estate? A lot, in terms of the underlying psychology.
The Western economies have been afflicted with similar diseases. The severe addiction to debt- zero down housing, cars, massive funding for student loans, consumer credit, multiple credit cards-is similar disease. The consequences, which could especially be ‘at some point in future’ are not given a lot of thought. Especially because everybody else around you is doing it. The underlying human psychology is built primarily around ‘fight or flight’-things get our attention only when we see an imminent danger. Deleterious consequences especially that might happen at a time in the not so visible future are generally disregarded as ‘pessimist thinking.’
The sharp rise in housing sales this year in Canada is equivalent to the behavior of a diabetic patient who has been advised by the sane doctors to curtail the carb consumption, yet he increases his insulin dose and goes on a carb eating spree. Because at this very moment he doesn’t see any ill effects other than a few higher than normal medical test numbers. And this is considered ‘normal’ because he sees a lot of people around him doing the same thing. But in the slightly long term (anytime after immediate today), there will be repercussions. More debt today will result in greater pain tomorrow. Slower growth, higher taxes, higher unemployment and more bailouts. All leading up to end stage renal failure which might require a very painful transplant. Unfortunately, we do not know the treatment from this end stage debt bubble collapse.
Too bad, it is very hard to dissociate yourself from the less responsible in the society. We’ll be paying a price for the zero down mortgages, 35 to 40 year amortizations, and continued rise in prices. Even though we were responsible and did think of ramifications of our actions.

On a different note, I’m back in Alberta after spending a few months in India. Blog entries will become more frequent now.

The Pitch From Toronto...

It seems all of a sudden, hope has been replaced by ardent confidence. In fact, the same old scare tactic is back with a vengeance with a not so subtle mention of 'buy now...or..."
It might be the final hurrah before the ultimate demise, but going by the fervor in the following pitch, it seems a lot of people will get sucked in. A friend of mine who has some interest in condos in the Toronto area sent this mail:

Prices are rising fast. JUNE MLS SALES HIT ANSTONISHING HEIGHTS!

We have been pounding the table since January that all the signs were clearly pointing to a fast real estate recovery in Toronto.

At that time, we were starting to see growth month-over-month in sales, but the “chicken littles” in the media and financial community were still promoting the doomsday scenario with an apocalyptic fervor. My advice had been for buyers to enter the market as soon as possible.

With some leftover motivated fall ’08 sellers and crazy interest rates - it was a great time to buy, a fleeting setback in a rising,long-term, bull real estate marketplace. My prediction was for the real estate market to settle down and start rising again, represented by a strong

seller’s market by fall ‘09. I also indicated that Toronto’s development sites, which buyers have avoided like the plague for the past year, were going to get very busy by the fall. Well, I was 100% correct about all of it, except that the real estate recovery happened a little faster than I predicted back in January. June ’09 MLS sales were nothing short of spectacular. Almost 11,000 (10,955) homes were sold. This represents an all-time high. Keep in mind that June is

typically the 4th or 5th strongest month of the year. We are smack dab in the middle of a seller’s market. Most properties sell in a few days, many with multiple offers. Prices are rising fast. I expect that for the balance of 2009, we are going to see strong numbers. Currently, the time to sell, or number of days on the market, has fallen to an average of 33 days. Chronic inventory shortage exists in most areas.

What is now going to happen is a surge in new development sales. July and August will set the tone for a busy fall when I predict that over 1000 units per month will sell for the next several months. Buyers still have a great opportunity to purchase at rock bottom prices at most of the city’s new sites.

The inventory of ‘leftover’ suites is shrinking. Pricing at all of the city’s developments are going to start to rise. New development prices are currently 10-15% lower than

resale prices. This margin will close to nothing in 3-4 months with the strengthening new development marketplace. I predict that some new developments will be launched

in the fall and several will come to market next spring. It appears to me that our economy in mending quite nicely and by late fall we will be back to business as usual.

Despite what some doomsdayers still predict, the U.S. and the world is in a better place economically. We are now in a recovery mode. By 2010, the negative prognosticators will be

safely trotted back to their dark little holes where they spend the majority of their lives, having enjoyed their fleeting 9 months in the sun. “June ’09 MLS sales were

nothing short of spectacular... Most properties sell in a few days, many with multiple offers.

View from Bangalore

As I had alluded in the past, the severe cost escalation in pretty much everything in Alberta strongly dissuaded us from expanding our business in Alberta. Even after 20 to 25 per cent fall in housing and real estate prices and significant jump in unemployment, the Alberta advantage has not yet been restored. That is, Alberta advantage for companies that are not dependent on their physical presence in this province. Just 5 years ago, Dell had chosen Edmonton as one of its favored low cost locations. And just 3 years hence, it closed its operations.

So I’ve been visiting India for the last several weeks trying to establish our back office here. Despite all the bullish talk of the Indian economy’s miracles and the sustained 7 to 8% growth for decades to come, the mood here is somber. There is massive overcapacity in pretty much everything. The commercial real estate is massively over built, all in the anticipation of thousands of companies that would want to setup their back office operations here. Not that many companies have not done so or won’t do in the future- it’s just that the actual demand has been way less than the projections. Not unlike the real estate in the US, Spain, UK, China or dare I say, Alberta. The loose credit policies of central banks worldwide have transformed normal economic booms into massive manias. First the technology boom, which was a genuine economic phenomenon was masqueraded as the beginning of a new golden age. It was indeed golden age, but for those who were early to cash out their stock options and for the investment bankers who fooled the public by underwriting crap IPOs. Similarly, the genuine investments in Alberta’ oil sands and energy industry should have resulted in some uptick in the real estate. Instead, the massive credit bubble worldwide created party times for somewhat different constituency this time- home owners, flippers, mortgage brokers and of course the investment bankers.

Back to Bangalore. This place seems over populated, with roughly a quarter of the Canadian population in an area less than a fifth of the GTA. Everything should be in demand here, especially housing. Except for the fact that the current inventory of housing stock is unaffordable to majority of residents, even with generous financing. Software engineers, who were once princes and princesses of the ‘silicon valley of India’ are no longer the most desirable matches in the ‘marriage market.’ Not that the firms here don’t employ hundreds of thousands of such professionals, it’s just that the way too many of these professionals have been trained than there is real work. Once again, over capacity.

We found space in a world class business center at 40% of the rate that was given to customers last year. The reason- a major financial institutions fired its 150 employees who used to work in that office space. The business center is now desperate for any customers, and little fish like us have finally found the ‘value’ we had been seeking all this time.

On the employment front, a few ads on the popular job posting sites have yielded hundreds of resumes. Initial interviews have been fairly positive. If we are successful in hiring good candidates, we’ll be able to get 5 good people at the cost of 1 good equivalent Canadian resource.

We’d have loved to do this in our home province but alas, the Alberta economy has been severely disadvantaged to anything that is non-Energy based. Our competitors have all moved to lower cost locations and if we want to survive, we have no option but to do something similar. We figure that rather than closing down our operations entirely, it's better to remain incorporated in Canada and at least contribute something to the economy here in the form of taxes.

Before the reckless oil sands developments severely impacted all other non-dependent industries in Alberta, the province had a good shot at competing in so many industries. Housing was cheap, labour was skilled, high quality and affordable. A single wage earner making $50k could live a decent life since everything was so cheap. But all that is long gone. Once the inevitable end to resource driven boom occurs (just look at the UK), what will our economy be like? But who has the time to think about 10 or 20 years down the road when the priority for everyone is to milk the current setup for their own benefit? The recent rerun of the housing mania in Alberta and rest of Canada proves that unless it hits people directly, they won't learn anything from it. And that too, if they are really intelligent and observant.

We tried our best to not relocate our business out of the province. But the choice was simple-relocate or perish. Thousands of more businesses in this country will face similar choices in the coming months and years. The answers won’t be very healthy for the long term prosperity of our country. But who has time to think about all this when you can get rich just by buying and selling homes to each other?

Weekend Open Thread

Happy days are here again....

• Loonie up to 91 cents and change. Will we see parity again soon? Who knows. Ontario and Quebec are going to be in more trouble and manufacturing hit again.
  
• Oil up to $66. Are we going to see $100 oil again? Who knows. In any case, we sure seem to be running out of space for holding the excessive oil produced during the last several months.
  
• Up is down, good is bad, bad is great....fundamentals don't matter. Once again. We do know how this ended the last time, but everyone (Banks, Hedgies et.al) is back in the game with a vengeance, supercharged with the massive guarantees given by the governments of the world and inspired by their dedication to do 'good' to the world.
  
• And it's not misplaced. If they can all succeed in restarting the commodities bubble, so many problems will be solved. Like all those unemployed engineers and tradespeople in Alberta can start working on the oil sands again which will help energy companies produce more and generate more tax for the governments at all levels. Never mind the drag higher oil prices will have on the rest of the world and wilt the 'green shoots.' And we seem to have forgotten how the oil bubble ended the last time. But that was all so last year.
  
• The local real estate seems to be doing just fine again. For all those bullish on real estate, the only thing that matters is- but prices are going up and the sales are strong. This is all bolstered by the arguments specific to a locale- oil, weather, diversified economy etc. We all know how this has ended at other places but given we never completely fell down the cliff and miraculously got a lift on our journey downwards has revived many a faltering spirit. May be we are really different here. As many people would say- this is the last chance to get into the Alberta's faltered real estate market. Sigh.

Nortel Building Bought by City of Calgary

Some of you who are looking at commercial investments in future might have caught this one. The city of Calgary bought the Nortel's calgary campus for around $97 million.
Is it a good value? The city of Calgary assessed the property at around $125 million....so the city is saying that for commercial properties the actual value should be discounted by at least 20 per cent?

And you might notice that I've implemented a new comment system. It will make it much easier to get rid of the trolls and hopefully have a few moderators.