Saturday, May 12, 2012

Yesterday is priced into the market but tomorrow is all about making profits

Some months ago, I wrote that real estate is governed by the local economy and the stock market is governed by the national and world economies. Todd Hirsch of the Alberta Treasury Branch (ATB) spoke last week at the REIN workshop. One of the things he said really hit home: Canada’s economy depends heavily on what’s going on in other countries and that much is beyond the control of Canadians and their government. It is influenced by oil and gas prices and prices of other resources; this in turn is governed by the economies of the BRIC countries, the European situation and of course the U.S. In the latter case, we not only depend on the U.S. economy but also on their politics.

We’re price takers and that is directly reflected in our economy. The ‘only’ thing Canada’s government can do is being fiscally responsible. But then what do you expect from a population of barely 33 million people that is only twice the population size of Holland; a country so small it fits between Calgary and Edmonton?
Last year, Alberta’s economy really stood out. Not only was it the fastest growing economy in Canada. It was the fastest growing in North America and it definitely grew a lot faster than Europe. Its GDP growth was a whopping… 5.2%!! We’re on fire and we do not realize it! Albertan’s look around them and think what they see is ‘normal’. It isn’t and that is shown in the stock market which reflects the overall economy which is far from being on fire. Yet, when Albertan’s look around them they think that fast economic growth is normal and they don’t understand why the stocks are down or at least grow at a snail’s pace.
Real estate is driven by the local economy and there we start seeing the effects of being an island of economic bliss in a sea of grey. Apartment rents are clearly on the rise, Alberta’s population is rapidly approaching 4 million and housing starts are dramatically on the increase. Yes, we haven’t experienced Vancouver and Toronto housing prices, but that is because we had an explosive real estate market between 2004 and 2008! REIN’s Don Campbell calls it the ‘Tiger Wood’s years’ and you know that such peak performance can’t keep up; there is a time of pay back that even Tiger himself experienced.
I noticed a significant increase in condominium apartment prices; we’re definitely coming out of the trough. Sales volumes are up 25% compared with a year ago. There are reports of bidding wars between potential home buyers. As mentioned in another earlier post ‘hold on to your seats’ we’re about to take-off.  I mentioned rents; for apartments, rents have risen by nearly 20% in one year. Vacancies are low around 3%. I rented out one of my places within two days – something unheard of a year ago and dreamed of two years ago!
Often Real Estate is considered a lagging indicator – i.e. it trails economic growth by 6 to 18 months. So, considering world economic growth we should be in real estate doldrums. But we’re not driven by the world economy! We’re driven by Alberta’s. That is, in my mind, the real reason for the increasingly strong real estate market.
This is where diversification works. Alberta investors with holdings both in real estate and the overall stock market investments have a fabulously diversified portfolio – that is as long as you aren’t overweight in oil and gas stocks. If the current Alberta growth is so great - the Provincial Government is expecting to be back in fiscal surplus in 2013-2014 - then how do you think Alberta will do with oil & gas pipeline issues resolved and with oil & gas being traded at world market rather than land-locked market prices? Investors are interested in knowing about what will and might be, rather than in knowing what was yesterday. Yesterday is priced into the market but tomorrow is all about making profits.

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