Alberta House Prices OVERVALUED.

RebeccaBryan

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Sep 17, 2007
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#4
QUOTE (wealthyboomer @ Oct 1 2010, 12:50 AM) What`s your point?

Other Canadian Banks also settled on the Enron issue.


Wealthy Boomer,

I`m wondering if you have any investment properties and if so, where are they?
 

JimWhitelaw

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Aug 26, 2008
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#6
No misdirection, just a bit of (apparently ill-placed) humour. Perhaps a reminder that big institutions sometimes make big mistakes...

Digging a bit deeper, let`s look behind the curtain:

The information in the report that is the basis for the sensationalist headline is in Chart 8 on page 6, "House Prices vs. Fair Value". It is a comparison of market prices to "fair value" pricing that concludes that market pricing for Canadian residential housing is mostly higher than fair value pricing. Some questions come to mind:

What data is used to determine "market pricing"? SFH, Condos, multi-family buildings?

How is fair value calculated? Replacement cost? CAP / utility rates? Supply/Demand?

Why is it valuable to compare market price to fair value?

This is where it starts to get weird/interesting for me. I`ve never seen this used as an economic indicator for residential housing before. Who else uses this metric? How does the current measurement compare with the past?

I`m not an economist, so my understanding may be incomplete, but "fair value" is a mostly abstract accounting valuation method that is generally used on items for which it is difficult to calculate a market value. This isn`t the case with housing, where the market is open, relatively liquid, and the data is easily available.

More importantly, no one can actually buy or sell real estate at "fair value"; by definition we all transact at current market value. So I`m not clear that this is an important economic indicator that investors should track.

The information in the report that has spawned the "HOUSING OVERVALUED!" headlines is a relatively tiny part of a report that generally concludes that things are mostly OK and that we are poised for modest increases in economic growth. The parts that are most relevent to me are the economic projections for Alberta which indicate increases in GDP of 2.9% and 3.6% for the next two years and increases in employment of 2.0% and 2.3%. Those, to me, are valuable indicators that are likely to affect demand and affordability of rental and retail housing.

If I were a conspiracist, I might also want to know how CIBC or its market partners could benefit from the publication of this information and the resulting emotional response to the sensational headlines. But that`s just entertainment.
 

GarthChapman

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Aug 30, 2007
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#7
Look beyond the headline and you will note that Alberta and BC prices are reported to be only about 1% more overvalued than most of the rest of the country. A more appropriate headline would have been "Canadian House Prices Overvalued". But that would not have attracted as many readers.

Remember what the headline is supposed to do `get you to read the next line`. And the job of the first line of text is `to get you to read the next line`. And so on...

Now for my 2 cents on the subject of the headline...

Much of Canadian house prices have somewhat overshot historic valuations relative to our earnings. The question is `how elastic is this process`? In other words how much will prices come back down and how much will earnings grow to meet those new valuations? I think in most of the country most of the correction has already happened, but there is room for more correction in some markets, much of which will be determined by the state of the economy in that region over the next 1-2 years. Meaning I think BC, Ontario or Quebec could easily see price corrections to come. I think that in Alberta we are going to see much better times over the next year and beyond. There is much happening again in the oil patch that has not yet hit the headlines nor the unemployment lines. Business is smart, and some governments are learning from their mistakes. The wild card as always for Canada is how bad will things get in the USA, and can China offset enough of the US malaise for Canada to stay out of the ditch?
 

bizaro86

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Jan 29, 2008
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Calgary, AB
#8
QUOTE (Rickson9 @ Oct 1 2010, 05:28 AM) Is this misdirection? I apologize, but I don`t see the relevance to the OP.

It`s absolutely misdirection, but CIBC is kind of fun to make fun of. It has something to do with how they keep having huge writedowns. You remember Enron, Subprime mortgages, Global Crossing, Amicus, Olympia & York, Third World Debt, Dome Petroleum, etc.

In many of these cases, all the Canadian banks had some exposure, but CIBC managed to have the biggest exposure, often by huge amounts.

Michael
 

JDaley

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Dec 22, 2009
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#9
QUOTE (RebeccaBryan @ Oct 1 2010, 02:48 AM) Wealthy Boomer,

I`m wondering if you have any investment properties and if so, where are they?

... and what`s your point ? Wealthy Boomer just posted a relevant link that`s certainly worth a discussion. I own property in Alberta and I`d like to know opposing or contrarian views because these views are often correct. Foreclosures in Alberta have doubled since 2008 and although still below 1% it is a bit unsettling.
 
Likes: Rickson9

JDaley

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#10
QUOTE (wealthyboomer @ Oct 1 2010, 12:50 AM) What`s your point?

Other Canadian Banks also settled on the Enron issue.

I agree with wealthyboomer, what does this have to do with the OP ?
 

gwasser

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Oct 22, 2007
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#12
QUOTE (housingrental @ Oct 3 2010, 09:43 AM) I`m interested in reading more discussion on the future direction of Alberta`s housing market

I can see that Vancouver and Toronto may be overvalued in general terms, but Calgary?

Since 2000 property values have increased dramatically even taking into account a 5 to 30% (depending on market segment) drop in value from the peak. As with any boom like the one we experienced in Alberta there was initially a significant catch up component when compared to the other Canadian cities.

There are (just like in other investments) so many ways to value properties and there is always one that points to overvaluation. REIN members look at cap rates and base value on investment income. Others compare values based on the prices of recent sales for comparable properties. Some is done in excruciating detail others are happy with a CMA. Value is in the eye of the beholder and a lot is emotional and also depends on the pocket book of the potential buyers.

I have attached the Calgary Single Family Price chart from 1973 - 2010. You can interpret this charts in 2 ways the glass is half empty (pessimistic view) or the glass is half full (optimistic). In the pessimistic case you can interpret the chart as representing a bubble that hasn`t crashed yet. In the `half full` case, my most likely scenario, we had a value catch up and now we are returning to more sustainable levels of appreciation. I bet you can come up with every scenario in between and some that are a lot more bullish than the `half full` view.

So let`s start with the bubble scenario or `half empty` scenario. Many investment bubbles are characterized by a gradual value increase that suddenly steepness with valuations reaching unsustainable levels. Classic examples are the U.S. Real Estate 2000-2007 or the high tech bubble of 2001. After an unpredictable long or short time period, the market crashes. It crashes not back to reality but it overshoots to extreme levels of pessimism and undervaluation. Just like in March 2009, investors will realize that their pessimism is overdone and values will restore back to the original trend (possibly with some volatility). Based on this scenario, Calgary housing prices may collapse and fall back to the $300,000 - $350,000 range and from then on-ward appreciate at its historical rate (prior to the bubble of 7.3%). Right now the rate of appreciation is somewhere around 2-3%.

The scenario favoured by me is shown on the `steady as she goes` or `half full` scenario. My scenario is that Calgary`s real estate appreciation accellerated because of a fundamental economic change. Namely commodity pricing and heavy oil. After decades of depressed commodity prices, Alberta`s resource potential, in particular for heavy oil in Eastern Alberta was recognized; it and became technically viable and economic attractive. This was a fundamental game changer and allowed Calgary real estate valuations to catch up with that of other North American cities of similar size. That is why we experienced not a crash as elsewhere in North America because Calgary`s fast rate of appreciation was supported by fundamentals. I guess a solid Canadian banking system helped as well.

So now that we have caught up and are getting past the volatility experienced in North America overall, we will likely revert back to a more sustainable and very respectable rate of appreciation reflecting Calgary`s vibrancy even during normal economic times. Even in that regard, 7.3% may be considered very attractive and we would do well et even today`s more modest growth rates of around 2-3%.

When looking at Calgary`s current income levels, in-migration and potential as an energy power-house, I think we are far removed from bubble conditions. But... as always, the world is unpredictable, just look at what a new technology such as multi-stage frac`ing has meant for the Natural Gas industry or what technological innovation has done to the profit margin of the computer manufacturers.

Even if there is a bubble in Calgary, as long as you bough before 2005 and are in a positive cash flow with a responsible level of leverage, 10 years after the bubble `burst` you would still be ahead. If the `Steady-as-she-goes` scenario (Glass is half full) will play out, you`re hollering all the way to the bank. And at even better economics, you`ll go hysterical for joy. In my experience, optimistic realism is what makes you rich!
 

gwasser

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#15
QUOTE (ThomasBeyer @ Oct 4 2010, 11:55 AM) as opposed to realistic optimism ?

I`ll let you decide


You`re welcome, Adam.
 

Rickson9

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Oct 27, 2009
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#16
So now that we have caught up and are getting past the volatility experienced in North America overall, we will likely revert back to a more sustainable and very respectable rate of appreciation reflecting Calgary`s vibrancy even during normal economic times. Even in that regard, 7.3% may be considered very attractive and we would do well et even today`s more modest growth rates of around 2-3%.

When looking at Calgary`s current income levels, in-migration and potential as an energy power-house, I think we are far removed from bubble conditions. But... as always, the world is unpredictable, just look at what a new technology such as multi-stage frac`ing has meant for the Natural Gas industry or what technological innovation has done to the profit margin of the computer manufacturers.

Even if there is a bubble in Calgary, as long as you bough before 2005 and are in a positive cash flow with a responsible level of leverage, 10 years after the bubble `burst` you would still be ahead. If the `Steady-as-she-goes` scenario (Glass is half full) will play out, you`re hollering all the way to the bank. And at even better economics, you`ll go hysterical for joy. In my experience, optimistic realism is what makes you rich!
Is there anyone holding rental product bought in Calgary before 2005 on this forum?
 

Rickson9

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Oct 27, 2009
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#17

Matt Crowley

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Dec 14, 2013
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Calgary
#18
The construction industry is one of the worst/slowest innovative industries. If it takes a crisis to develop smarter building processes so be it. We are building homes virtually the exact same since the 1960s, but at a much, much lower quality. 1960s were probably the golden years for building quality (at least in AB).

I also think 99% of land developers are putting out the exact same crap sprawl-style neighbourhoods with 0 innovation on the exact same template as has been done for decades. Back in the 1920-1940s, developers would pull real hard infrastructure to the neighborhoods before they were allowed to develop. Take Glenora in Edmonon, one of the wealthiest neighbourhoods. The neighbourhood was not allowed the go-ahead until it brought the streetcar right to the community. Now we just build wider road-sewers with fake meandering-roads that makes even bus transit slow and unused by most residents.