Season of Hope, again

The warm weather of last few weeks along with the ferocious rallies in equities markets worldwide has germinated what had almost disappeared by the middle of March. Optimism is back, and not lest due to the President who got elected on the message of hope. Optimism and hope are very powerful emotions, especially when there isn't much else available. And they were on vivid display and action during the last month and a half. The calls of 'the bottom' have been getting more vociferous, even if more cantankerous for us. 

So what if the world buccaneered in an orgy of debt for 25 years, the  magic potion of more debt by the Fed and the treasury cured all the problems in less than 18 months. The credit bubble will unwind in just as short a time and everything will begin their ascent to the end of the universe again. Oil will rise again, and so will other commodity prices. Alberta will blossom again, and this time Fort Mcmurray trailers will sell for $1 million. 

And how can we forget the major upswing in home sales across Canada? After all, sales in March have been higher than in Feb and those in April will probably be higher than in March. Notwithstanding the fact that this is as much of certainty as the average temperature going up in these months as compared to previous ones. But since this is the season of hope, no one is supposed to question such basics. 

But hope, like greed is a very powerful emotion. It clouds judgement. It diminishes the capabilities of mind to contemplate simple 'what if' scenarios. Not the ones that reinforce your perspective using selective data from the last few years.  Scenarios such as- what would happen to Alberta if oil goes back again to sub $30 level for a long time. Or if natural gas goes below  $3. Yeah, but we were told that oil  will never go below $80. 

I was looking at the new MLS site the  other day. For some reason, I did not hate it as much as I hated it the first time I used it. I almost liked it a little bit. If we forget the average and median prices for a moment, I think we are back to the levels last seen in April  2006 for many of the property types I used to track. A starter shoe box in Edmonton North is down to around $275k, and unlike in April 2006, there won't be multiple bids raising the price but some aggressive buyers who will ask for 5 to 10 % discount. It's the same story in Calgary. In Calgary, the homes that were selling for(at least  listed for $430k) are now going for around $340k, plus the  possible discount. 

These are not pretty numbers and have got to hurt those who have bought in  the last three years.  For most of these people, they haven't paid more than 5% of their mortgage and  are clearly in the red after accounting for the closing costs etc.

But these are all inconvenient facts. Facts that have the potential to dash hope and cause despair. And anger, frustration and grief. And that is to be avoided at all costs, no matter what the reality. So, the alternate reality world in which only good news happens, and is reported must be created and cherished. 

Credit bubble unwind, global deflation, falling employment, falling commodity prices, falling aggregate demand, falling real estate prices, exorbitant prices for shoe boxes, tapped out consumers, massive over capacity, end of 40 year mortgages, heavy over consumption and subsequent lower corporate profits are mere distractions. The world has changed with hope. We can wish the recession away if have strong will power. If we want to it strongly enough. Like the Russian comrades who could wish the fall of the Soviet Union just by believing in the alternate reality.  

But we know how that ended.  

Alberta Realities

This is my 100^th post. Over six months ago, when I started this blog, things were very different from what they are now. Real Estate myths that were firmly entrenched in the psyche of masses, though not completely debunked, but the faith in them has been somewhat shaken. My prediction is that Alberta real estate will become a questionable investment for the masses before the year 2008 is over. Not unlike what’s happening in the US.

Not only is the inventory in both Edmonton and Calgary at all time highs, but the sales volumes are at multi year lows for this time of the year. And while this is happening, there’s a possibility of significant pullback in investment by the industry. They could be bluffing given that their profits have increased over 3 folds in the last 10 years. Or they could be serious, but are merely trying to pin a political reason on spending cuts they would have made in any case.

As mentioned several months ago and repeated by a reader in the previous thread, I believe that for the average Albertan, the prosperity has been primarily due to real estate wealth. Yes, no oil or natural gas money for the masses. Perhaps a job in the oil patch for a few, but for majority, it’s just the boom due to real estate price escalation, not unlike any other bubble city of North America.

How else could one explain, real falling wages in these times? Despite all the hype of high wages in Alberta, the average wage has fallen in the last six years. "Despite the boom Alberta has become the province with the highest percentage of employed clients visiting food banks." Perhaps, they are all spending a good chunk of their money on housing costs.
The other day a friend was looking for a house for rent. The current tenants were leaving Alberta for greener pastures. Where to? Windsor, Ontario. Go figure. They say everything is so expensive here. And of course, the winter isn’t exactly a joke.

Here’s a summary of some of the reasons why I think this bust will be a lot worse than a lot of people think at this point.

-Massive run up in the values in the last 2 years causing significant deviation from long term average values for prairie cities.

-Extreme speculation in real estate market fueled by global credit bubble.

-No geographical constraints on expansion of any major city in Alberta.

-Significant disconnect between renal rates and carrying costs. Most properties are selling for 200 to 300 times the monthly rent.

-Dramatic erosion in affordability due to stagnant incomes and surge in prices.

-Global liquidity crunch making lenders more careful about who they lend the money to.

I think the primary reason anyone would want to live in Calgary or Edmonton is economic. If wages are stagnant, quality of living is poor, infrastructure is dilapidated, hospitals are full and real estate costs are lower only than in Vancouver, why would anyone want to move here? Or those who are already living here would want to continue to live here? Alberta became and still is a play ground of real estate speculators, a lot of whom are about to learn a pretty painful but much needed lesson.

A lot of people are often surprised when the boom becomes bust. This boom will be no different.