2012 Predictions - Yup its that time of year!

[wgraham]

2012 Predictions for Calgary


WRITTEN BY WADE GRAHAM |


Well, 2012 is just around the corner! Man that year FLEW by! It was a good year for real estate investors in Calgary. Prices were up and rents were up. That means happy investors for the most part! But what does 2012 have in store? The world seams locked in fear right now....Greece, China, US....blah blah blah!


Pealing back the onion I put my predictions on the table for all to see, encourage, critique, criticize or mock! But hey at least I'll take a shot


GDP - 3.5%


Calgary will lead the country in GDP growth and this will move into the 4% realm for 2013-2015

r: #ffffff;">Jobs - more than we know what to do with.

We created a lot of Jobs in 2010 and 2011 bringing back all that we lost in 2009. Office inventory is being eaten up ferociously quick and that space will be filled with people. I am actually expecting another labour shortage in Calgary and Alberta. This will push up wages and inflation.


Oil - $100 consistently


We are already consistently in the high $90 per barrel right now. Demand won't increase dramatically but supplies are coming down. If the Middle East gets ugly and Israel attacks Iran that we could see that pop up dramatically.


Vacancy - 2.5% maybe lower


We are already seeing a big drop in vacancies within Calgary and inventory is being dragged down too. We had a drop of 30% in rental inventory this year alone. With tight CMHC rules for investors we will see very little rental product added to the supply.


Rents - up a very strong 7%


With decreasing vacancy we will see a very strong push in rents for 2012. It won't surprise me to see a 7%+ increase in rents across the city. High demand areas will push above that. Look to transportation improvements for the largest increases.


Prices - up 3%

10px; margin-right: 0px; margin-bottom: 15px; margin-left: 0px; padding-top: 0px; padding-right: 0px; padding-bottom: 0px; padding-left: 0px; color: #646464; font-family: arial, helvetica, sans-serif; font-size: 12px; line-height: 18px; text-align: -webkit-auto; background-color: #ffffff;">As inventory keeps pricing muted and the world economy weighs on people's minds. I hope I am proved wrong here. We never budget for more than 3% anyway but many are thinking this could be higher. I am not so bullish. Looking longer out I can see us getting back to the 5-9% appreciation but that won't happen until the global woes leave and confidence returns.

Interest rates - on the floor for quite some time.


No surprise here. Marc Carney and the Bank of Canada have openly stated that we will not see an increase until the world gets its finances in order. If that means inflation than so be it! He (and I) will happily watch inflation take hold rather than deal with a deflating economy....Besides how else do you pay off huge amounts of government debt?!


Downside risks -


Europe doesn't pull it together. The US doesn't create any jobs and slips back into a recession. China slows more than expected. 1 out of 3 of these will happen....Take your pick.



Upside risks -


Israel attacks Iran and oil takes a ride to the sky. Inflation really takes a good run. Obama actually gets the US moving forward. Im not sure any of these will happen but if I was to pick one it would be the Inflation card.


What does all of this mean for real estate investors? Well long story short we will have healthy rents and lower vacancy thus providing strong yields (cash flow). In the mean time we will see mondest price growth. Tell me where you are finding that in the stock market these days?

ng-top: 0px; padding-right: 0px; padding-bottom: 0px; padding-left: 0px; color: #646464; font-family: arial, helvetica, sans-serif; font-size: 12px; line-height: 18px; text-align: -webkit-auto; background-color: #ffffff;">What are your thoughts? Where do you think we are headed? What sort of risks do you see? What does your city look like?

While your at it check out this video I put together discussing the ins and outs of the Calgary market. A ton of graphs and a lot of great info on exactly what is going on RIGHT NOW in the Calgary rental market.






















What is your city going to do?

 

[GaryMcGowan]

Predictions

Last season Phil Kessel was the last player picked for the NHL All Star game in the draft. This season he will be the leading vote getter.



Oh, You mean real estate predictions.....



It always intrigues me that in the Alberta market you can move rents up or down as the market sees fit. If I was investing there I would pay close attention to your numbers above.





"Rents - up a very strong 7%

Prices - only up 3% as inventory keeps pricing muted and the world economy weighs on people's minds. I hope I am proved wrong here."



The bright side is prices are moving slowly but the rents are moving up very fast.

 

[bizaro86]

[quote user=wgraham]

We are already consistently in the high $90 per barrel right now. Demand won't increase dramatically but supplies are coming down. If the Middle East gets ugly and Israel attacks Iran that we could see that pop up dramatically.





The Alberta Economy has two main drivers, Oil and Gas. Oil is going full out balls to the wall. Trying to buy equipment (separators, tanks, satellite packages, etc) and suppliers are sold out for months with huge price increases. They're all hiring and working overtime.



Gas is in a complete funk. AECO spot gas closed at $3.10 yesterday, which is really, really low. Many gas producers in Alberta require $6 gas to make drilling economic. But gas production from shale (especially in the US) is still growing. US gas production is over 2 TCF/month, whereas only a few short years ago it was 1.4 TCF/month. Nearly a 50% increase in supply will lower prices big time.



The huge surge in gas production is due to technological changes and the rise of effective methods to recover shale gas. Some of those technologies are moving to oil plays. If North American conventional oil production from shale grows the same way gas has, oil prices would crash. To me, that is the number one risk to Alberta real estate.



I can't predict whether companies will find and be able to economically produce significant amounts of shale oil, but if they do it could be significant.



Regards,



Michael



Gas production source: http://205.254.135.7/dnav/ng/hist/n9050us2m.htm

 

[Rickson9]

I predict that I will continue to invest in U.S. RE and that these properties will offer better overall returns than Canadian RE, but poorer overall returns than my stock portfolio.

 

[wgraham]

Rickson are you going to unleash your strategy for consistant over performing stock market investing?

 

[Rickson9]

I already reveal what I do on my website.

 

[housingrental]

Hi Wade

What conditions do you think need to be in place for Calgary house values to fall?

Thanks

 

[housingrental]

This is a great post Michael, thank you!



I've been posting for years that many resources do not keep track with inflation over time and technology has been the biggest reason for this. I've only seen arguments against this from posters until now. You have made my day.





[quote user=bizaro86][quote user=wgraham]

We are already consistently in the high $90 per barrel right now. Demand won't increase dramatically but supplies are coming down. If the Middle East gets ugly and Israel attacks Iran that we could see that pop up dramatically.





The Alberta Economy has two main drivers, Oil and Gas. Oil is going full out balls to the wall. Trying to buy equipment (separators, tanks, satellite packages, etc) and suppliers are sold out for months with huge price increases. They're all hiring and working overtime.



Gas is in a complete funk. AECO spot gas closed at $3.10 yesterday, which is really, really low. Many gas producers in Alberta require $6 gas to make drilling economic. But gas production from shale (especially in the US) is still growing. US gas production is over 2 TCF/month, whereas only a few short years ago it was 1.4 TCF/month. Nearly a 50% increase in supply will lower prices big time.



The huge surge in gas production is due to technological changes and the rise of effective methods to recover shale gas. Some of those technologies are moving to oil plays. If North American conventional oil production from shale grows the same way gas has, oil prices would crash. To me, that is the number one risk to Alberta real estate.



I can't predict whether companies will find and be able to economically produce significant amounts of shale oil, but if they do it could be significant.



Regards,



Michael



Gas production source: http://205.254.135.7/dnav/ng/hist/n9050us2m.htm

 

[wgraham]

Adam, for house prices to fall in Alberta and Calgary we will need to see a significant reduction in the demand for oil and thus a drop in price to sub $50 per barrel.

But last I checked demand isnt being shorted at all even with the global issues and we haven't come up with new supplies or more efficient technologies to lower the cost of production although I am sure that is on the way. However new supplies are few and far between.

So do I see $50 oil on the horizon? Can't say I do.

I believe in peak oil. I believe we will see $150 oil before we see $50 oil again.

 

[housingrental]

Thanks for your thoughts Wade

 

[bizaro86]

[quote user=wgraham]Adam, for house prices to fall in Alberta and Calgary we will need to see a significant reduction in the demand for oil and thus a drop in price to sub $50 per barrel. But last I checked demand isnt being shorted at all even with the global issues and we haven't come up with new supplies or more efficient technologies to lower the cost of production although I am sure that is on the way. However new supplies are few and far between. So do I see $50 oil on the horizon? Can't say I do. I believe in peak oil. I believe we will see $150 oil before we see $50 oil again.



Now, I don't think Calgary real estate is a bad investment (I own a fair bit of it), but oil supply could certainly increase, in exactly the same way that gas supply has.



As for not coming up with new supplies or new technologies for oil extraction, that is absurd.



Discoveries have been made in Brazil, Norway, West Africa, the Gulf of Mexico, and South America. Some of them are huge.



And technology is increasing at a breakneck speed. Off the top of my head, we've seen the rollout of SAGD, solvent aided thermal processes, rollout of polymer and ASP processes, commercialization of CO2 flooding, multi-stage fracing, THAI, wavefront injection, enhancements to artificial lift systems, multi-lateral drilling for horizontal wells, 4D seismic, etc. Some of these have the potential to be gamechangers when combined with existing knowledge of low porosity liquids plays. For example, high resolution seismic used to define optimal drilling locations for multi-stage fractured multi lateral horizontal wells in shale oil horizons could have a huge production impact.



And supply increases work just as well to lower prices as demand increases. Probably better, since demand is inelastic for energy. (You wouldn't double the amount of driving you do if gasoline was 50% off. You wouldn't heat your house twice as hot if natural gas was cheaper, etc) That means changes in supply have an outsized affect on prices.



The oil and gas industry has always been and will always be cyclical. If you hear yourself saying, "this time it's different" well, consider that carefully.



Regards,



Michael

 

[RealtorDave]

Good post Michael. You are correct that cheaper prices don't necessarily mean more demand. However, natural gas usage for electricity is increasing at a higher rate than any other fuel. This isn't only due to price, but this wouldn't be the case if gas was twice as expensive.

 

[bizaro86]

[quote user=RealtorDave] Good post Michael. You are correct that cheaper prices don't necessarily mean more demand. However, natural gas usage for electricity is increasing at a higher rate than any other fuel. This isn't only due to price, but this wouldn't be the case if gas was twice as expensive.





I said it was relatively inelastic, which is true. A decrease in prices will cause some increase in demand, but not nearly proportional. If gasoline was 50% off, there'd be a few extra road trips etc, but the average person wouldn't drive 30,000 kms a year instead of 15,000 per year. Maybe it'd be 16,000 or something like that.



I actually think power generation will be the saviour of the natural gas business though, so I definitely agree with you there. That's another place that technology has changed. Current generation combined cycle or cogeneration plants are much more energy efficient than the single cycle natural gas plants of the past. That, combined with low gas prices, makes new natural gas power plants a good investment. When the plants currently under construction get completed (eg the Shepard natural gas power plant near Calgary) natural gas demand will start to increase. This will be accelerated as regulations restricting coal power get more prevalent.

 

[Thomas Beyer]

Great post Wade. Oil will likely fluctuate between $75 and $125, low when new supplies come on or if European recession .. And high if war on Iran. US election will likely keep US economy muted until into 2013. European cut backs will impact their economy, as will the US's. AB and SK will outperform ON or BC economy by a wide margin.

 

[david123]

HI

This is a really good post and I agree with your openion. US should promote and boosts up their econmy instead of war in any other countary. I also agree with your good approach. thanks for this post.

 

[wgraham]

[quote user=bizaro86]As for not coming up with new supplies or new technologies for oil extraction, that is absurd.


Yes, I agree. What I meant to say was new technologies are likely! I worked in the tech world for a lot of years and I know how rappidly new products come on line!! New supplies less likely.