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It seems all of a sudden, hope has been replaced by ardent confidence.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.

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.

On Realtors

Realtors are commissioned sales people who make their living by selling their services and ‘advice’ to home buyers and sellers. The higher the price of the goods they sell and the higher the volume, the higher their commission. Is there anything complicated in this that people do not understand? If the market volume falls and/or market prices fall who loses the most? You guessed it right. It is Realtors and pretty much everyone else in the real estate value chain. So why do people have any expectation that Realtors or the associations that represent them will put anything but a positive spin on everything. The case of David Lerah and the US real estate associations is all too well known. Do people really believe that CREB, EREB or any of the Realtors talk about on this blog really wish for lower prices or lower sales volumes? No.

They really want higher prices and even higher sales volume. And if I were making my living by providing these services, I’d probably be doing the same thing as well.
Just contrast how things have changed for the real estate business between 2004 and 2007. Sales volumes doubled. Which means double commission. Average sales prices doubled which also means double commission. So obviously, any thoughts of falling sales prices and/or falling sales volume must be an anathema since it clearly hurts their bottom line.

The problem here is that the real estate agencies control the data and since they are the custodians of the data, they can spin the numbers whatever they want, including changing the criteria or representation as they deem fit. We have to keep on referring to Bob’s site or Sheldon’s site because these are the only places where the data is available. If CREB/EREB were to make this data (or forced to make) this data publicly available, life will be a lot easier for everyone.

So here’s what I’d suggest again- look at the numbers from whatever sources you can, and don’t get too much into the commentary and interpretations of those whose occupation is to sell used houses. And don’t count too much on the advice you get here either-Be intelligent and smart, use your critical thinking. For example, if inventory keeps on climbing, prices have to fall, it’s just a matter of time.

Don’t expect a Realtor to say that you should hold off making purchases until a certain time. How will they make a living if they were to pass on such advice? After all, they have mortgages too! :)

I’ve nothing against any Realtor or real estate agencies. They are merely doing their jobs-if it involves pumping the market, creating an urgency to buy, introducing ‘fears of being priced out forever’ or anything else that will increase their commission-they will do it.

The onus is with the layperson to see what’s the best for them and act accordingly.

Finally, have faith in Mr Market. If the propaganda or positive spins could keep prices high, the situation in the US would have been far different.

UPDATE: Came across this nice article on the 'realtor ads' down in the land where real estate always used to go up. So clearly, these guys are the most 'optimistic bunch' with their tactics almost borderline chutzpah.

Weekend Open Thread...

Wow! The last condo post was the most popular ever penned on this blog and got the maximum responses and discussion. Your input is very welcome-whether you are bull or bear or neutral. Just keep your messages in a civilized tone and avoid personal attacks.

Some ideas for the weekend:

• Housing market still on a sizzle. Given that they are comparing YoY prices(May 2007 versus May 2006), it will be quite a while before the sizzle disappears. I suspect it will take at least another eight to nine months before we register a first YoY drop. May be more. Of course, I don't have the chutzpah of market forecasters and I have had egg on my face enough times in the past to make a prediction like this, but I guess it's okay to do that once in a while!
  
• In the personal anecdote territory, the man on ground-flipper friend of mine-said that there's a 2 bedroom condo available in downtown Edmonton with almost 50k price drop. The reason-the seller is an international student and now for some reason his visa papers have not come through. And he wants to sell in desperation now. What was the business of an international student buying a condo in Edmonton? We'll find out "who was swimming naked when the tide goes down."
• Looks like we are talked about a lot but never mentioned in some of the realtor circles. It's too bad they won't name the source. Are they afraid of linking to us? Afraid that people will perhaps get a different perspective? To make things more interesting for our visitors and to give them a view from the 'other side', I'll be linking to the blogs of realtors Sheldon et.al and Bob Truman.
  
• I guess this is the story of our society circa 2007. Hard work, savings, rational discussion, solid economic fundamentals, economic value are derided upon and banished as 'socialist', whereas 'get easy rich', 'real estate always goes up', '400k mortgages for shoe boxes', 'condo investments' are considered the hallmarks of 'capitalistic' society. Wow!
  
• Have a wonderful weekend everyone.

Update: Bob Truman has a post on his blog welcoming users from this site. Thanks Bob! And yes, I did not say that you called the visitors on this site any of those names. I've removed the reference to that negative post entirely. I have heard good things about you from visitors on this and your blog. Your statistics are much appreciated.

Yes Virginia, we have a bubble in Alberta Real Estate

They may say there's no bubble….
But we do know that stock brokers generally never say that there's a bubble in stock market. Oil companies will never say that oil prices are high. Realtors will never say that real estate is expensive, leave aside in a bubble.
And they are right.
Abby Joseph Cohen, the famous stock market bull said that there is no bubble in NASDAQ in 2000. The now (in) famous Professor Fisher also said in 1929 that "stocks have reached a permanent plateau". Even Greenspan said in 2000 that it's hard to argue against the wisdom of millions of well informed investors.
At different times over the last several centuries, asset bubbles have appeared in different parts of the world. One of my favorite books that documents this is the 'ExtraordinaryPopular delusions and madness of crowds' that illustrates some of the well known delusions of the crowds.
But let's begin from the basics. What is an asset bubble? Here's my understanding: An asset bubble is a significant rise in asset valuations fueled by greed and mass frenzy into buying that asset class. In the post-modern world, it could be due to the ease of availability of credit, lose lending standards, media propaganda and the beliefs that xxx-asset never goes down (xxx could be anything ranging from tulips to real estate in Tanzania).
A bubble does not appear out of nowhere. A bubble is usually preceded by a healthy bull market. The last stage of the bull market gives way to an asset bubble. The defining characteristic of a bubble is the disconnection with the fundamentals.
For example, a two bedroom condo that was selling for less than $100k in March 2005 and renting for around $800 in Edmonton now sells for roughly 3 times that amount. What has changed in two years? Have the rents gone up by 3 times? Has the average rent moved closer to $2400 per month for such an apartment?
Have people's incomes gone up by that much? Exactly what has caused this dramatic jump then? I think it's the massive speculation and 'investor' interest in such properties that has caused such an increase in prices. Every mania needs a story and the oil sands are the Alberta's story.
No doubt Alberta has oil sands. But it also has more land than most countries in the world. And this is soft arable land where you can dig a foundation with a shovel!
And we are around 4 hours away from one of the largest timber producing regions in the world, and the last I checked the timber prices were falling.
There are a few things that should be pretty obvious. There was (and probably still is) strong demand for housing in Alberta. That should have boosted up the prices, but not to the extent that they have gone up. The prices are now disconnected from long term fundamentals-abundance of land, ease of availability of building material and worsening affordability. Also, it looks like the days of cheap credit may be coming to an end with BOC signaling higher interest rates in coming months.
There's just one factor that is holding the prices high at this point and that is the labor shortage. And when the labor shortage eases, a lot of people will discover the extent of builder margins in this market.
And finally, just to let everyone know, I don't have an agenda. I'm bearish on real estate in Alberta, but I'm bearish on pretty much most asset classes across the world. That could range assets as varied as real estate in India to stocks in China.
The problem is that for almost all these markets- real estate in India, stocks in China, real estate in Alberta or Vancouver-there is a plausible story. In India it's the emerging market story harnessing the outsourcing cost advantages. China is the manufacturing superpower of the world and nothing can stop it from growing perpetually at ten percent per annum. Closer to home, of course, there are oil sands and in Vancouver there is the Olympics.
So everyone is different, but still the same. Everyone believes they are different and they are right. But most asset classes at this point are expensive and in that regard they are all the same.

It will be interesting to see how things will unfold in the coming months with rising interest rates and loads of inventory coming to the market with poor affordability. And this is with oil still above $60.