Tuesday, March 4, 2008

Edmonton Real Estate: Is Alberta Too Hot Right Now?

We have written several pieces in the past about investing in Edmonton real estate, but the question remains: how long can the boom last? It seems that the world is waking up to the economic powerhouse that Alberta, Canada—and Edmonton in particular—is becoming. The price of oil just hit another high, and oil drives Alberta’s economy. Is it too negative to think that the gravy train has to end at some point?

As long as the price of oil remains as high as it is now, Edmonton is likely to remain a hot commodity. The oil sands region in Alberta contains an enormous amount of oil, and being that it comes from a friendly, neighboring country, there will continue to be huge demand for their oil. With the amount of money flowing into the Edmonton economy, people there can afford to pay a premium for their living expenses. With that in mind it’s possible that the real estate values could continue their rise for awhile longer.

On the other hand if the price of oil were to drop off significantly, Edmonton, and Alberta as a whole, will be hurt dramatically. Edmonton has done a good job of working to diversify their economy, but the fact remains that oil is the number one industry in the area. It is also possible that environmental regulations could have an impact on the oil sands region. It is no secret that the oil sands produce an enormous amount of pollutants, and it is possible that restrictions could be placed on the production which could prove very costly for the oil producers and the area’s economy. Let’s also not forget that real estate values in the area have skyrocketed over the past few years, and history tells us what goes up, usually comes down. Read our article Resource Driven Real Estate Booms and Busts for some more insight.

Overseaspropertymall.com just did an interesting blog post on the subject. In their post, they looked at both sides of the argument and offered some insight as well. I would recommend that you check it out if you are curious about investing in Edmonton real estate.

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8 comments:

March 9, 2008 at 9:34 PM etownbrown said...

"With the amount of money flowing into the Edmonton economy, people there can afford to pay a premium for their living expenses."

Ha ha ha. Typical 2-dimensional real-estate bull market thinking! Most of the people lined up in bidding wars were flippers resulting in over-inflated sales figures and skewed "affordability" numbers. Think about it. If houses went even to $1,000,000 average in E-town, and speculators thought they were still bound to go up, bidding wars would still happen despite the homes being affordable by basically nobody except those with easy credit or loose capital to invest - not "Joe Six Pack” with $30K saved for a down payment. But tell that to the flippers that got in too late and now have $2500/mo carrying costs on a place they want to rent for $2500/mo but can't compete with rents on traditional rental properties for $1000 - $1500! (Oh - the thrills and spills of unbridled capitalism! Let me play my really tiny violin for those guys...) The latest round of flippers are holding on for dear life and getting slaughtered by carrying costs while renters are in relatively cheap accommodations balk at empty properties they KNOW are flips! Were first time buyers supposed to THANK flippers for a 300% increase in the cost of an average home in E-town? I’ve heard it from many couples – “We walked away because it was empty – clearly a flip with a fast paint job – and we know he was looking to make a cool $50K and we just didn’t feel like giving it to him!” What things cost are ultimately what they are worth… to BUYERS. Real-estate folks only seem to believe in supply/demand when in a bull market and prices are skyrocketing. “Real estate always goes up” may apply to long-term steady inflation, but not for spikes in costs associated with the volatile energy sector. Anything that goes UP with the energy section can go DOWN with the energy sector.

People are calling $1800/mo + utils rent on average townhomes and $2500/mo mortgage on basic bungalow "affordable". Sure, maybe for the influx of ‘Tar-struction’ workers that make $160/hr with a welding truck. But not for people making $20/hr or even $25/hr here in town in fabrication shops and other Tar-struction support sectors. 40 year mortgages can't even help these people and banks are tightening up on high-ratio mortgages. Probably they are scared by the home-equity ATM secret everyone is keeping and the sheer amount of unserviceable debt that is building up like a snow-pack on “Mount Avalanche”. At $25/hr one person is clearing $3200/month, $1800+utils (say $2000) is a whopping 63% of NET. After groceries and gasoline these people are going BROKE living here. Sure, it's only 50% of their gross they say. Small comfort. And small business is crying that they can't find workers? WRONG! They can't find workers that can afford to work on wages from 5 years ago adjusted for ONE PERCENT INFLATION when inflation has been closer to 6% and housing costs have doubled! And find me a forklift operator, parts person, secretary, hospital support worker, or fabrication assistant that makes $25/hr! These companies are claiming to be desperate but STILL offer “good wages” that would only be any GOOD three to five years ago! (‘We can’t find workers’ simply means ‘We won’t pay workers what they need to live here because we want to get rich on this boom too!) Again, my tiny violin plays on and on…

‘Redmontonians’ think that this city can basically live without anyone who can't afford to be here. But the real news is that this city NEEDS the lower 1/3 of its working class now more than ever. The janitors. The cooking and support staff for existing and new restaurants. Hotel staff. Auto sales and maintenance. Couriers. Fabricators. Painters. Laborers. The service industry. Hospital Support staff. Administration staff. The Rich Oilbertans making $150K per year welding up the plants in Fort Mac clearly don't care either. "If you can't make it in the boom, then you (socialists) can go home/ go to BC / go to Sask". That's a nice attitude. But what happens when the bottom 1/3 of the blue-collar working class DOES say: "Forget this noise!" and leave? (They're already leaving – real estate cheerleaders only cited NET migration figures - not the erosion of the bottom of the working class.) The economy starts to erode from the smallest businesses and up (the ones that employ the lower wage earners). It's already happening. Oilbertans just laugh at these people but guess what happens when there is NET NEGATIVE MIGRATION to Alberta like this year (first time in 10 years)? Can you say "BYE BYE to DIVERSIFICATION"? And do you think it only impact smalls and medium sized business? Think again. TD headquarters. Gone. Intuit. Gone. Dell. Gone. These are "small time ma-and-pop businesses? Little socialist crybabies"? No, these are HUGE CORPORATIONS that refuse to pay 1.5x wages for anyone who has a pulse due to a labor glut! They don’t want tar-workers spoiled kids and wives saying “You know, I really don’t feel like coming in today – and I REEEALLY don’t NEED this job…so….” (We’re getting some real characters coming here because of the desperation of employers! Drug sales are right up there! So is crime and murder!) Even the conventional oil recovery (drilling) sector has been hit by huge increases in operating costs. Oil wells cost 250% to service compared to three years ago. (1 million up to 2.5 million) and only 50% of wells are being serviced for that reason alone. Even CONVENTIONAL oil can't keep up with the labor glut and supply chain greed caused by the OILSANDS construction frenzy!!

So yes, you can rant and rave about a bull real-estate market. But this idea “Alberta has money and can afford the infinite housing price gains caused by speculators” is such a narrow view that it makes me laugh… rather hysterically.

Then again, real-estate agents need to be cheerleaders to keep the speculator monkeys in a heated buying frenzy. It’s all part of the “greed / fear” balance. Like the “getting locked out” prophetic warnings. Why buy in a market frenzy? If you get locked out? MOVE! If you don’t, buy after the bubble bursts! But why RISK watching a $400K sale w/ 40 year term drop to $200K? Because you need a place to live?

RENT until this madness is over I say. Time to buy was three years ago. Time now to hold (rent) or fold (leave). Alberta is affordable for some and there is an Alberta Advantage for some: about 15% of the population. 70% of Albertans polled a while back said that they were not benefiting from the boom at all. This probably means things like higher crime, lower standard of living, less disposable income, higher living and housing costs and driving on streets with 21 year old drugged-up dropouts who are being paid twice what they are really worth.

So be more specific when you say “Albertans” can afford PREMIUM living costs because you’re talking about 15% of the population.

I lived hear for 40 years and I was here for the crash in 80 and I know people who are saying "It CAN happen again - and the way things are going, it's getting more likely all the time!"

Will saying "Diversification!" over and over again stop 1980 and 1986 from happening again?

I guess we're going to find out! :o)

March 21, 2008 at 5:52 PM Danielle said...

"Is the Alberta Boom set to Bust?" Good question if you think in a Boom and Bust mentality...

In reality what you have happening in the province of Alberta, specifically Edmonton, Calgary and Red Deer cities is a healthy slow down in the market. It's not a Boom and Bust. It's not a 'Too Hot', in fact it has slowed enough to become a buyer's market- opening up the market for the first time in the past 2 years.

When a market is firing on all cylinders it has growth stages and moderating stages where it absorbs the outflow of energy produced. It's a self-regulating safety valve so that the economy doesn't get overheated.

As a sophisticated investor you don't want to target a market that is doing double digits year after year... you want to target a market that has a diverse, multi-tiered economy that is set to grow year after year.

Too many novice investors (read: Speculators) chase the percentages. They look for the next 'Big Town' that is going to BOOM. When in reality, seasoned investors look for a growth market where real estate appreciation is between 6% and 8% per year, sustainable. When your market goes above your targeted 6% to 8%, it's gravy- a nice bonus.

My job as an investor is to study the Edmonton market and the province of Alberta's economic fundamentals. When the economy can't support the growth, then you begin to research other areas or property types that will support that growth.

In a nutshell, the economy remains diverse in Edmonton and will prove to be a very stable place to invest for the next 5 years. Of course as the market shifts you may need to adjust your target property type and check to make sure that it still makes sense. For example, if single family homes are no longer priced in your target range of affordability, look at Town Houses or Condos, which still remain quite affordable.

Too often in the media, regional areas and investments get painted with one big brush. On one hand that may be good, because it shakes out the inexperienced and continues to regulate the market. Look at year over year averages and check the fundamentals to decide what is a 'Boom or a Bust'.


Here are a few quick facts below:

Alberta's unemployment rate is the lowest in Canada at 3.20% . An incredibly healthy employment percent is 3% (11/07 to 2/08 Stats Canada)

Alberta's GDP: $290 Billion- yes, Billion. In a province of 3.4 Million people.

If you still think Alberta's economy is on the slide, then read the RBC (Royal Bank of Canada) Report released February 2008:

http://www.rbc.com/economics/market/pdf/provfcst.pdf

"Alberta's economy remains the 800-pound guerilla of Western Canada. At some $290 billion, Alberta's GDP -- gross domestic product -- is almost 15 per cent larger than that of B.C. and Saskatchewan combined.

So when housing starts in Saskatchewan's two major cities soar by 60 per cent -- as they did in 2007 -- it's from a tiny base. Even with a slowdown, Alberta's housing starts will top those in Saskatchewan by six or seven to one in 2008.

Indeed, although home builders in Edmonton plan to curtail new construction in the first half of 2008, some are already worrying that they won't be able to meet new demand by this fall, when inventories are likely to be depleted. In short, rumours of Alberta's economic demise are greatly exaggerated."

Affordability: Although Alberta's housing affordability has increased the past few years, so have the wages. Alberta leads Canada in job growth and average median salaries are the highest in Canada at $854.28 (with the exception of hardship posts in the Yukon and NWT)

Despite the high Canadian dollar and manufacturing/export slowdown related to the slow in the U.S. market as well as cyclical slowdown, the GDP is still up 0.02% Alberta's GDP far outpaces nearly all Canadian provinces and has been pacing slightly behind China's growth. Although it will slower this year- which is what healthy markets do, enabling them to continue moving forward at a sustained pace.

http://www.statcan.ca/Daily/English/080303/d080303a.htm

"Looking forward, although Alberta’s outlook for growth has eased, given the large number of major projects that are still underway, the province is still likely to outperform the rest of the country for the next several years. CanaData is forecasting the province’s real (inflation-adjusted) Gross Domestic Product (GDP) growth to be 4.4% in 2007 and 3.7% in 2008."

Economic Indicators - GDP Alberta vs. Canada

Is Alberta diverse? Yes. It's not just Oil and Gas- although they make up a fair percentage of the current growth. In fact investment dollars into the Oil Sands were LESS than other areas of investment. Read the Report Here: http://www.alberta-canada.com/statpub/





(The graphs I had here wouldn't load. Download the PDF here: http://www.alberta-canada.com/statpub/




"Aside from the energy sector, significant spending is being targeted at roads and highways, health care, education and commercial developments across the province." In an interview, Hamilton said Alberta's GDP growth will be down from the estimated 4.4 per cent in 2007 "but still strong." "Comparing it across the rest of the provinces, we expect Alberta to be the growth leader mainly because the oil and gas sector is still running at full steam and on top of that construction activity still remains very, very strong. This is not only specific to the oilsands." Construction is also very strong provincewide in public infrastructure.

"Construction is going to be a huge boon for the province," said Hamilton.

The report forecasts the GDP growth in 2008 for Canada to be 1.9 per cent this year and 2.2 per cent in 2009.

For Alberta, GDP growth is expected to be tied with British Columbia for tops in the country at 3.2 per cent.

For 2008, the forecast calls for three per cent growth in Saskatchewan and 2.8 per cent in British Columbia.

The construction activity in Alberta is spurring growth in consumer spending through employment gains, said Hamilton.

Todd Hirsch, senior economist at ATB Financial, said he would have thought Saskatchewan would be higher in GDP growth this year .

"They're more exposed to oil than gas. Alberta's the opposite," he said. "They're much more exposed to crop than livestock. And they also have all these other commodities like uranium and potash and diamonds and gold that we don't have here. And their population is growing. I would think that in Saskatchewan things are looking really bullish. As long as they have a good crop year weather-wise, they're going to be singing. The farmers are going to be dancing. Livestock prices are not doing very well and Alberta is much more exposed to livestock than Saskatchewan." Hirsch said Alberta will be well above the national average this year, even with moderating growth.

"Alberta is still very well positioned to be one of the fastest growing provinces in the country." The Provincial Trends report said that on the residential side in Alberta, construction appears to have peaked but will remain at high levels, with housing starts edging down to a forecast 42,000 units this year compared with an estimated 48,000 in 2007. A further drop to 40,000 units is expected in 2009. This is due largely to lower migration numbers and declining housing affordability.

But employment growth is forecast to lead the country this year at two per cent and be second to B.C. (1.8 per cent) at 1.7 per cent in 2009.

The Scotia Economics report also forecast Alberta's unemployment rate to remain at 3.5 per cent for the next two years -- the lowest in the country.

Alberta GDP Growth Strong © The Calgary Herald 2008 2/23/08

(BTW etownbrown I grew up in Alberta and my family has been here for generations, in and out of the booms and busts. There is partial truth to your comment- but partial truth is never enough. With a responsible plan in place (from you, me, the government, big oil, investors etc...) there is no need to fear a collapse. Just be smart about the decisions you make and the constructive support/input your give the leaders and politicians in the province to help guide it towards longterm success)

Hope that clears up any Boom and Bust nonsense.

Danielle Millar,

http://edmontonrealestateinvestorabroad.blogspot.c

March 26, 2008 at 4:12 PM JPAQ said...

Etownbrown,

Wow you sure have a skewed view on things. Because other people see oppertunity and you do not want to step up to the plate, you should not be upset. I am 35 married with 2 kids. I own my own home outright in St Albert and I own 5 exclient rental properties with great tennants. I have two twin brothers who are highly skilled welders and they get paid very well because of this. If you think it is so easy why don't you step up to the plate?
When oppertunity knocks and you do not want to open the door do not be upset at the people who do.

Get a Life!!!

Jason

June 5, 2008 at 3:34 PM etownbrown said...

Hey JPAQ.

I have a life. I have a 20+ year career that started out with a technical education from NAIT. Sure, trades work hard and deserve good money - but something is wrong when even well paid trades don't seem to want to come here anymore. C'mon. Don't you see just a little wee problem with that? If these guys can't cut it here - what about the people that already lived here and are not working directly in "tarstruction"? What about your five renters? Don't care if your next rent hike drives them out of province? Are you renting to just tarstruction workers? Or people with "regular jobs" who in your mind are just not "stepping up"? Maybe they will get tired of paying your mortgage and want a future for their own families. What's the point of making good money and giving it to a landlord or a bank for a huge mortgage on an overpriced property? Why work so hard to give so much away? Ah, that's the Oilberta dream. Make big bucks. Spend big bucks. Have big truck to show for it.

What about nurses? Dentists? School teachers (I hope you're not home schooling because you can't spell "excellent" or "tenant" or "opportunity"). What about the butcher? Pharmacist? Ah right, they all need to step up and go weld! You're a piece of work, Jpaq. You are a typical high-flying Oilbertan.

But we all know that "the rest of us" who have lived here for DECADES have survived here through more than one boom-bust cycle. We don't have to go running home to whatever province we came from because we lived too high off the hog in the boom times.

So poke fun at people in "non tar" jobs buddy. We're not going to be the ones packing up for the "home province" when oil prices correct, the environmental poop hits the fan, the US and world economies fall around us and interest rates finally creep up.

The high rollers are living on borrowed money and borrowed time and the Bank of Canada can only hold the dam walls up for so much longer with their panic measures to keep overextended Canadians tails out of bankruptcy.

Tick tock my high rolling friend.
Tick tock.

June 6, 2008 at 11:36 AM Anonymous said...

Dear Mr. Low roller,

I am in Montreal for the race this weekend with my Family. Something tells me that you were not hugged much when you were a kid. I am simply saying that here in Alberta we all have the opportunity to provide trans-generational wealth to our families. I went to Nait as well and lived here all my live. Not one of my tenants are employed in the oil and gas industry. I rent all my homes out at below market rent. I like to help people out. I find that I get a better tenant when they know they are getting a deal. I actually make a bigger profit because of this.
I am glad you finely responded. I know own SIX properties. I sold one to a couple great tenants of mine in a rent to own deal. He is a school teacher and she is a nurse. With the profits I purchased two more properties. Do you know anyone who is looking to rent a house? I guess some people always see the glass half full. It is sad to live ones life like that. I guess you have a right to struggle. That is your choice……not mine.

P.S. Believe it our not I actually live well below my means. Allot of very successful investors do.

All The best

JPAQ

June 9, 2008 at 12:26 PM Etownbrown said...

JPAQ:

If you live below your means then you are a low roller too. And you know you will have no trouble renting at or below market value - since you probably already know that the cost of ownership is disproportionately higher than renting right now. A lot of people are choosing to rent because of this and what some consider instability in the market. Some realestate market bears are talking of a continued - or even faster - decline. I am skeptical of both extreme bear AND bull thinking right now to tell the truth.

Houses prices have come down considerably, and seem to be selling quite well, especially in more sought after areas.

Myself, I think inflation will eventually catch up to the housing price correction we're seeing now and prices will start rising again at a more conventional rate. That's *IF* current economic conditions stay where they're at though. The economy here is cooling, but is still very vibrant so things *could* be good for years to come. But there are many variables at play like world economic conditions, the US economy and housing bubble, oil prices and even certain conflicts brewing that all could have a bearing on how many projects STAY on the books. Everyone thinks that the present forecast of projects is a "promise" or "guarantee" of future work and this could not be further from the truth. Big oil will scrap projects overnight if their bean counters tell them it's a no go. Thousands of people "banking" on these future projects could be in trouble if they have yet to start putting some money away for a rainy day. I think "cautious optimism" is the order of the day - not foolhardy high-life spending on credit because "China will need oil for the next 100 years!".

But back to my main point. There are many hardworking people who are not doing as well in this boom as others. And of the people doing well, not all of them are being smart with their gains. Anyone who works in energy related fields should be smart enough to put some away for the inevitable rainy days - these people will have wealth for their kids and grandkids as you say.

Also, net migration could turn around again as housing prices come back within reach for first time buyers. Everyone, too, seems to think that "small town" Canada is just chalk full of fully trained "tarstruction" workers that can just waltz up to FortMac and start working. Sure, some trades like welders, pipe fitters and construction workers can probably do that - but where more specialized technical trade skills (specific to the tarsands) are needed some are finding they are coming up short in qualifications. Even reps from the big companies are cautioning people to plan ahead before they come on board to make sure they have accomodations lined up and have the necessary skills to get these challenging and high-paying jobs. The streets are not necesssarily "paved with gold" here... you need the right skill set to get the big dollar jobs.

Also too, a person with six rental properties who may or may not even need to work full time is definately the exception and not the rule as far as a cross section of Alberta's working class go. If everyone 'stepped up' and did what you did, everyone would be a landlord... so tenants would indeed be in short supply.

Oh, and I was hugged just fine as a child. But I was also taught to walk into situations with my eyes wide open and form my own opinions based on the FACTS and not based on hype, speculation, rumor and "cheerleading".

Cheers,
Etown

October 22, 2008 at 11:45 AM E-town said...

Where did ya go Jpaq? Own 30 houses yet? You seem to get another one every time you post...

Things have changed quite a lot since we exchanged last. The RE bubble in E-town (and Canada and the rest of the world for that matter) has burst. Homes have depreciated steadily since April to the tune of $70K. The same speculator-caused bubble has hit oil as well. Oil did not get to $200 like some oil cheerleaders said it would, but has plummeted down to $68 today and there is no bottom in sight.

Meanwhile, upgrader projects are being scrapped one after the other because the tar giants don't feel obligated to refine bitumen here in Alberta where construction costs are double what they should be. Everything is inflated beyond reason, and the oil companies are going to show Albertans that THEY are the ones that gouge - NOT the Alberta construction labor force! They're also feeling the effect of oil demand destruction and credit constriction despite their seemingly unstoppable wealth. Instead they plan to use existing refineries in the US modified/upgraded to handle the bitumen stateside and do what corporations have ALWAYS done here in Bustberta... ship our natural resources south.

So the tarstruction boys had better start putting away some bucks for a rainy day and not live so high off the hog like so many are doing.

The scary "what if" of another 1980 has now become a definite possibility.

I really hope that housing prices don’t crash too much. Then the renters not working in tarstruction will be able to buy one (or more) bungalow “boxes” in E-town and not rent them anymore. And this means the nouveau landlords like yourself might have to think about doing real work again for a change.

Wouldn’t want that to happen now…

Keep smiling though. Your positive attitude will get you through!

Cheers,
E-town

December 19, 2009 at 1:35 AM ashley riley said...

Alberta contains an enormous amount of oil, there will continue to be huge demand for their oil. With the amount of money flowing into the Edmonton economy, people there can afford to pay a premium for their living expenses. Hence Commercial real estate works with continuous success this year and next year too.

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