The world 2010....a different perspective!, What will Alberta and Sask. look like in the spring of 2010. Options

[seeu22]

Hi Guys,

Throwing this out there for discussion.........No flaming please

Summer of 2009 a scientist from the International Committee on Climate Change proves that Global warming is indeed tied to the consumption of fossil fuels. Governments around the work impliment strict measures to limit consumption, especially in developing countries where the infastructure for fossil fuel distribution isn't developed yet.

The price of oil falls dramatically. OPEC decides they don't like these Canadians taking a share of the pie, so they open the tap for a couple of years further supressing the price of oil. Production in the tar sands halts.

I know this sounds extreme and it is. I don't believe that this is going to happen, but I do believe that the housing prices in Sask and Alberta are still out of line even with the slight correction in the major Alberta markets.

My wife and I looked at an average show home in Regina. The price $600k. Lumber is cheaper than ever before. Drywall, insulation, floor products all cheaper than they have been for years.

The builder claims that an increased demand coupled with a short supply due to a lack of labour is causing the housing prices to jump so dramatically. Thats great, but what happens when the supply catches up to the demand. It will eventually all systems reach an equilibrium. More workers will arrive to fill the positions needed, etc.

He also pointed out that our housing prices are still cheaper than in Vancouver, Montreal, and Toronto. Vancouver is sandwiched between an ocean and a mountain range, Montreal is on an island, and Toronto is bordered on one side by a lake and by suburbia on the other sides. Geography limits the supply in these markets. On the prairies we can build houses from Winnipeg right through to the rockies. One big city.

Look at strong economies in the US like Vegas, Dallas-Fort Worth, or Houston. Where are there housing prices? The TX markets have been relatively flat for 20 years even with a strong economy and inmigration that may actually out pace Alberta. Why are their housing prices flat, because there is nothing limiting the supply.

My concern is a small change in the economic fundamentals in SK/AB could have dramatic effects on our RE market, because there is no real limit on the supply out here and the prices have far surpassed the real costs of construction.

With a lot of people stretching mortgages out to 40 years in order to make a property cash flow, we could end up in real trouble. Try factoring in a 7.5% interest rate in your cash flow projections and see if your still in the black.

Discuss.

Neil

[JRL]

The price of oil falls dramatically. OPEC decides they don't like these Canadians taking a share of the pie, so they open the tap for a couple of years further supressing the price of oil. Production in the tar sands halts.

This is about the only part of your post I find a tough time seeing your side upon. What do you see driving a dramatic reduction in the price of oil? Certainly not excess supply.

My wife and I looked at an average show home in Regina. The price $600k. Lumber is cheaper than ever before. Drywall, insulation, floor products all cheaper than they have been for years.

That sounds very high. How long has this "developer" been in business? I imagine there were quite a few "real estate developers" who broke into business in 2006 and probably don't really know how to effectively manage costs.

On the prairies we can build houses from Winnipeg right through to the rockies. One big city.

Interesting point.

[DaveRhydderch]

Just a quick note on a couple of things

Summer of 2009 a scientist from the International Committee on Climate Change proves that Global warming is indeed tied to the consumption of fossil fuels.

As much as science can, this has already happened. However

Governments around the work impliment strict measures to limit consumption, especially in developing countries where the infastructure for fossil fuel distribution isn't developed yet.

This hasn't. India, China, Brazil, other developing countries aren't even a part of Kyoto. These countries will probably be the last to limit consumption (as they were for the Montreal Protocol which dealt with the Ozone layer). The only thing that will cut consumption is an increase in Oil prices.

The price of oil falls dramatically. OPEC decides they don't like these Canadians taking a share of the pie, so they open the tap for a couple of years further supressing the price of oil.

Whenever prices drop these days, OPEC cuts supply. OPEC is also on record as wanting Canada to join them.

The builder claims that an increased demand coupled with a short supply due to a lack of labour is causing the housing prices to jump so dramatically. Thats great, but what happens when the supply catches up to the demand. It will eventually all systems reach an equilibrium. More workers will arrive to fill the positions needed, etc.

See the problem with this statement. Where do you expect the workers who come here to live? By coming here (or wherever), they continue the supply.

He also pointed out that our housing prices are still cheaper than in Vancouver, Montreal, and Toronto. Vancouver is sandwiched between an ocean and a mountain range, Montreal is on an island, and Toronto is bordered on one side by a lake and by suburbia on the other sides. Geography limits the supply in these markets. On the prairies we can build houses from Winnipeg right through to the rockies. One big city.

Gas prices keep rising, that'll limit how much the cities can grow

Don't forget, the price of land is going up due to raising food prices and the cost of housing. Real construction costs are one thing, the price of land is another.


This is just my two cents. Good luck on your decisions going forward.

This post has been edited by DaveRhydderch: Apr 29 2008, 05:35 PM

[ThomasBeyer]

yes, there IS political risk in W-Canada by envious central Canadians and their elected left-leaning politicians !

We've got in the West: oceans, lakes, mountains, coal, uranium, hydro power, oil, gas, oil sands, nickel, pot ash, copper .. and space, clean air and job growth and low unemployment !!

they have: CN Tower .. more museums .. car manufacturers (none of which are yet hybrids or electric cars !!) .. humidity in teh summer and cold winters .. but they got Ottawa ..

so yes, that MAY happen if NDP or Liberals get elected !!

btw: 90% of the world's growth in green house gases come from Asia .. and may cause us (in US or Canada or Europe) to implement a carbon IMPORT tax (i.e. you use dirty coal to provide cheap energy .. so we have to slap on a carbon tax)

New carbon technology / legislation will create EVEN MORE jobs in AB or BC or SK for improved filters, pipes or new nuclear power plants !

All it does make oil more expensive here and in the east !

(btw: US housing starts dropped over 60% from 2006 to today .. so OF COURSE lumber and drywall is cheaper than 2 years ago .. but labour and cement and copper is not ..)

so yes, 600K for a house in SK is maybe a tad high and might ease down a notch to 500K in Regina or Saskatoon .. so do not buy any house at any price and expect upside !!!!

This post has been edited by thomasbeyer2000: Apr 29 2008, 07:26 PM

[Cbeak]

Thanks Thomas. I found your vision to be plausible.

I would like to toss this in for consideration:

1. Real-world inflation in Alberta is much much higher than stats canada tells us. I estimate it's is in the range of 10% to 15% per year. Our real estate portfolios will increase in value, but we should be aware that our paper gains may not accurately represent a true increase in wealth.

With that said, offsetting the effects of inflation is better than losing ground to it, and I dont know of a better investment venue for my needs.

2. I also think the US dollar is still quite overvalued and could drop significantly relative to other currencies. The Canadian dollar is therefore a little vulnerable due to the weakness of its close cousin. We would stay strong relative to the US, but not necesarily compared to other world currencies. Again, we will be making money on paper, but are we really getting ahead in wealth?

I'm not saying I know what to do about it, but I 'm trying to stay aware of the effects of inflation.

Craig Beakhouse

[ThomasBeyer]

Thanks Thomas. I found your vision to be plausible.

I would like to toss this in for consideration:

1. Real-world inflation in Alberta is much much higher than stats canada tells us. I estimate it's is in the range of 10% to 15% per year. Our real estate portfolios will increase in value, but we should be aware that our paper gains may not accurately represent a true increase in wealth.

With that said, offsetting the effects of inflation is better than losing ground to it, and I dont know of a better investment venue for my needs.

2. I also think the US dollar is still quite overvalued and could drop significantly relative to other currencies. The Canadian dollar is therefore a little vulnerable due to the weakness of its close cousin. We would stay strong relative to the US, but not necesarily compared to other world currencies. Again, we will be making money on paper, but are we really getting ahead in wealth?

I'm not saying I know what to do about it, but I 'm trying to stay aware of the effects of inflation.

Craig Beakhouse

I'd DISAGREE on both points !

yes, we HAD 10-15% inflation .. but that is over with prices this high now, and slower in-migration .. in fact material such as wood is down over 50% in price Y-over-Y

also, the US $ is more or less where it should be .. and quite a manufacturing powerhouse due to lower US $ .. most Europeans are complaining about the Euro being too high and exports to US being difficult !

I think Alberta will behave more or less like a very healthy, but "old world" economy with decent growth for years to come .. say a % point or 2 above the US, the rest of Canada or Europe .. but nothing too dramatic either .. i.e. an EXCELLENT place to do business for 10-50 more years !

[seeu22]

Don't get me wrong, I really like the West. The hypothetical senarios I presented above are highly unlikely, however in any boom there is always the chance of a bust as well. For the most part you don't see it coming. It's happened in markets all over the world.

Things change. The big players in global economics change. Any research I have done leads me to believe that we have bright economic future in western Canada. A bright future is not a good reason for irrational exuberance.


Fourplexes in Calgary that gross $3500 a month rent selling for over 600k don't make sense.

Taking out a 40 mortgage in order achieve cash flow doesn't make sense. On 600k property with 20% down your principal is only paid down by 50k after 10 years. You have renegotiate your mortgage twice in that time frame. We enjoy cheap interest rates now, but what happens to your payments if rates jump up to 7% or higher. At least with a 25 year ammortization you can refinance after 10 years if you need to.

It is likely we will continue to see some modest appreciation in the coming years that will see our appreciation rates return to historical trendlines. Assuming a high appreciation rate in our property analysis is risky. Especially if your cash flow is negative and you are banking on appreciation for your return on the investment.

Properties in markets with strong economies don't always appreciate. I mentioned Dallas above. The Dallas/Forth Worth area is growing by 440 people/day. All coming for good paying jobs and reasonable property prices. With all this positive economic news the housing prices in Dallas have been relatively flat. Check out this article;

http://money.cnn.com/galleries/2007/biz2/0...biz2/index.html

There are too many investors out there that don't follow the fundamentals that Don laid out in his book. The last couple of years these investors looked brilliant, but the coming years will seperate the mice from the men. Those who use realistic expense data in their property analysis to help them identify positive cash flow properties will always do well. The speculators might continue to do well also, but they assume a higher level of risk. Will a 600k 4 plex sell for 720 in a couple of years? Maybe, but I will be waiting with cash just in case some investor needs to be relieved from the burden of negative cash flow.

Neil

[EdRenkema]

Don't get me wrong, I really like the West. The hypothetical senarios I presented above are highly unlikely, however in any boom there is always the chance of a bust as well. For the most part you don't see it coming. It's happened in markets all over the world.

Things change. The big players in global economics change. Any research I have done leads me to believe that we have bright economic future in western Canada. A bright future is not a good reason for irrational exuberance.


Fourplexes in Calgary that gross $3500 a month rent selling for over 600k don't make sense.

Taking out a 40 mortgage in order achieve cash flow doesn't make sense. On 600k property with 20% down your principal is only paid down by 50k after 10 years. You have renegotiate your mortgage twice in that time frame. We enjoy cheap interest rates now, but what happens to your payments if rates jump up to 7% or higher. At least with a 25 year ammortization you can refinance after 10 years if you need to.

It is likely we will continue to see some modest appreciation in the coming years that will see our appreciation rates return to historical trendlines. Assuming a high appreciation rate in our property analysis is risky. Especially if your cash flow is negative and you are banking on appreciation for your return on the investment.

Properties in markets with strong economies don't always appreciate. I mentioned Dallas above. The Dallas/Forth Worth area is growing by 440 people/day. All coming for good paying jobs and reasonable property prices. With all this positive economic news the housing prices in Dallas have been relatively flat. Check out this article;

http://money.cnn.com/galleries/2007/biz2/0...biz2/index.html

There are too many investors out there that don't follow the fundamentals that Don laid out in his book. The last couple of years these investors looked brilliant, but the coming years will seperate the mice from the men. Those who use realistic expense data in their property analysis to help them identify positive cash flow properties will always do well. The speculators might continue to do well also, but they assume a higher level of risk. Will a 600k 4 plex sell for 720 in a couple of years? Maybe, but I will be waiting with cash just in case some investor needs to be relieved from the burden of negative cash flow.

Neil

Being conservative in your estimates is a sound strategy to not fail in my humble opinion. I have a friend who is utterlly convinced RE prices cannot continue to rise, his response is to keep his cheap paid off home and put all his savings in the bank. He doesn't understand inflation and taxes for one, but also he doesn't understand supply and demand. People demanding lower gas prices also don't understand S&D. The point is being able to gage the supply over against the demand. Part of that is understanding the economic fundamentals both on a macro and micro scale. So investing in properties with strong cash flow in a strong economy is the way to go isn't it? How to calculate those things is as much a learned skill as it is economic literacy. Those practicing and learning will always come out ahead of those who run away and hide their money, even if they fail along the way. After all failure is a verb not a noun.

[samcansam]

Hi Guys,

Throwing this out there for discussion.........No flaming please

Summer of 2009 a scientist from the International Committee on Climate Change proves that Global warming is indeed tied to the consumption of fossil fuels. Governments around the work impliment strict measures to limit consumption, especially in developing countries where the infastructure for fossil fuel distribution isn't developed yet.

Neil, you must be kidding. Is this the except of your new fiction book? Good luck, hopefully you would get a good publisher to take it on, lol.

Seriously, you are talking about a total economic collapse. Even with a libral government in Ottawa, this would not be the case. Alberta is feeding Ontario, and the liberals are more to the right of the current government. Also, Canada has commitment under NAFTA to provide energy to the US. Alberta has given permits to Oil companies and leased land to them. If only half the announced projects go forward, the province will be in unprecedented boom.

Take a vacation Neil, relax, it is going to be alright. Alberta real estate is coming back within 6 - 12 months as there are so many buyers on the side lines. Saskatchewan and Manitoba (IMHO) will go into a plateau. Remember that Alberta has 100 - 200 times the Oil in Saskatchewan.

[stocdavw]

OK Guys, let's not get carried away. The price of WTI today can exceed US$120.00. The number one factor is supply vs demand. There is some speculation in the oil markets, but supply vs demand is number 1. OPEC will not 'open up the taps' any time soon. The simple fact is, they are wide open. These countries have a long history of 'cooking the books' to make it appear that they have far greater reserves than are realistic. What will it take to bring oil down? Only 2 possibilities: 1 governments will legislate oil out of existence (ha,ha). Most governments couldn't legislate their way out of a wet paper bag. 2. Oil will become uneconomical to use compared to alternative forms of energy.

To date, every form of energy that competes with oil has some downside to it, ethanol, hydrogen, wind solar, wave, geo-thermal. As oil becomes more and more expensive (and it will), more and more people will direct their focus toward solving the problems with these forms of energy or discovering new ones. Eventually we will have a winner (or more than one), but for now, oil is still 'economical'. The best thing to watch is the USA, as they move toward a new presidential term with a new President. Who will it be? What will he/she do about their energy crisis?

[ThomasBeyer]

OK Guys, let's not get carried away. The price of WTI today can exceed US$120.00. The number one factor is supply vs demand. There is some speculation in the oil markets, but supply vs demand is number 1. OPEC will not 'open up the taps' any time soon. The simple fact is, they are wide open. These countries have a long history of 'cooking the books' to make it appear that they have far greater reserves than are realistic. What will it take to bring oil down? Only 2 possibilities: 1 governments will legislate oil out of existence (ha,ha). Most governments couldn't legislate their way out of a wet paper bag. 2. Oil will become uneconomical to use compared to alternative forms of energy.

To date, every form of energy that competes with oil has some downside to it, ethanol, hydrogen, wind solar, wave, geo-thermal. As oil becomes more and more expensive (and it will), more and more people will direct their focus toward solving the problems with these forms of energy or discovering new ones. Eventually we will have a winner (or more than one), but for now, oil is still 'economical'. The best thing to watch is the USA, as they move toward a new presidential term with a new President. Who will it be? What will he/she do about their energy crisis?

look to Europe to see where we are headed: MUCH MUCH higher energy prices (ca. 60% to 100% more for gas, gasoline or electricity) which then implies: smaller cars, less cars/100 people, more trains/buses/car pooling, smaller houses/apartments, higher density, more bikes, more motorcycles, more demands for "green energy", more government subsidies for anything that is not yet viable by itself, i.e. wind turbines, solar panels on roofs, geothermal .. but also: less GDP growth, higher unemployment, more state regulations .. life is SOOOOO good here in AB and (to a slightly lesser economic degree) in BC or SK: it is unbelievable !!!

[MikeMcCrae]

Just a side note, some seem to think every thing is coming to an end. I had Firstline in my office today and they are so busy that their turn around time is minimum 3 days. M-Cap is running behind as well. Somebody is bying houses! Lots of inventory out there right now but lots of sales as well. It is not all gloom and doom. Real Estate is a long term investment. Prices will do just fine over time.

[ThomasBeyer]

Just a side note, some seem to think every thing is coming to an end. I had Firstline in my office today and they are so busy that their turn around time is minimum 3 days. M-Cap is running behind as well. Somebody is bying houses! Lots of inventory out there right now but lots of sales as well. It is not all gloom and doom. Real Estate is a long term investment. Prices will do just fine over time.

right !

after 4-8 years of steady and VERY steep value increases, especially 2005 to 2006 and 2006 to 2007 .. some moderation or even drop is NORMAL .. followed by 3-6%/annual growth again !!

case in point, Edmonton, the market I am most familiar with .. has dipped somewhat .. will be flat for a little bit AND THEN RISE AGAIN due to: inflation, in-migration, very strong economy, weaker inventories (bloated right now !!), .. a rise after a plateau

see here http://www.aurora-aace.org/user/tsounis-jan-08.pdf

This post has been edited by thomasbeyer2000: May 14 2008, 10:42 AM

[elainefinkbeiner]

I am looking at purchasing in Saskatoon as my daughter is going to UofS in the fall. Do you fill prices are going to go down in the next 6 months to year and I should hold off?

Hi Guys,

Throwing this out there for discussion.........No flaming please

Summer of 2009 a scientist from the International Committee on Climate Change proves that Global warming is indeed tied to the consumption of fossil fuels. Governments around the work impliment strict measures to limit consumption, especially in developing countries where the infastructure for fossil fuel distribution isn't developed yet.

The price of oil falls dramatically. OPEC decides they don't like these Canadians taking a share of the pie, so they open the tap for a couple of years further supressing the price of oil. Production in the tar sands halts.

I know this sounds extreme and it is. I don't believe that this is going to happen, but I do believe that the housing prices in Sask and Alberta are still out of line even with the slight correction in the major Alberta markets.

My wife and I looked at an average show home in Regina. The price $600k. Lumber is cheaper than ever before. Drywall, insulation, floor products all cheaper than they have been for years.

The builder claims that an increased demand coupled with a short supply due to a lack of labour is causing the housing prices to jump so dramatically. Thats great, but what happens when the supply catches up to the demand. It will eventually all systems reach an equilibrium. More workers will arrive to fill the positions needed, etc.

He also pointed out that our housing prices are still cheaper than in Vancouver, Montreal, and Toronto. Vancouver is sandwiched between an ocean and a mountain range, Montreal is on an island, and Toronto is bordered on one side by a lake and by suburbia on the other sides. Geography limits the supply in these markets. On the prairies we can build houses from Winnipeg right through to the rockies. One big city.

Look at strong economies in the US like Vegas, Dallas-Fort Worth, or Houston. Where are there housing prices? The TX markets have been relatively flat for 20 years even with a strong economy and inmigration that may actually out pace Alberta. Why are their housing prices flat, because there is nothing limiting the supply.

My concern is a small change in the economic fundamentals in SK/AB could have dramatic effects on our RE market, because there is no real limit on the supply out here and the prices have far surpassed the real costs of construction.

With a lot of people stretching mortgages out to 40 years in order to make a property cash flow, we could end up in real trouble. Try factoring in a 7.5% interest rate in your cash flow projections and see if your still in the black.

Discuss.

Neil

[ThomasBeyer]

I am looking at purchasing in Saskatoon as my daughter is going to UofS in the fall. Do you fill prices are going to go down in the next 6 months to year and I should hold off?

While I am NOT an expert in Saskatoon I have to admit the market moved up SUBSTANTIALLY over the last 1 1/2 years .. so some pull back maybe expected .. but it really depends on the going-in price and teh type of property you are buying !

SK has now a right-of-centre government, a strong uranium and potash industry and stated intents to develop oilsands .. so loads of upside .. but some wiggling on the upwards slope is expected !! 6 to 12 months is a pretty short view .. so yes, it may pull back a bit from overheated speculations .. but should be OK long term !