Sunday, February 8, 2015

Calgary Real Estate is not reflected in the short term hysteria of the Globe and Mail

You may have read the Globe & Mail recently with its doom-reports on Calgary real estate because of falling oil prices. You’d think when you read these panic articles that Calgary’s real estate market has prices listed as if it were a stock market. Bollocks!

Usually sales results run 2 or 3 months behind.  Also, in winter, real estate markets in Alberta and in Calgary tend to slow dramatically as is. Yes, listings may shoot up because people are concerned about their job security in Calgary, especially those that use high leverage trying to lock in some profits or get back to more conservative debt levels. But when you do that during the slow season, you are setting yourself up and you victimize yourself just like so many retail investors have been doing in the stock market for years.
So, let’s look at some realities when investing in real estate. First of all, large numbers of Calgarians have no mortgage whatsoever on their properties and even a larger number have paid their mortgages off significantly. These people are not in a state off forced sales.
Unless people move out of the city in droves, which is very unlikely, people who sell their houses have to live somewhere else in town. So, what are they going to do, rent? In a city that just a couple of months ago had no rent vacancies?  Not likely. So do they buy another place right away?  It would not make sense for Calgarians to sell their place in a panic, just to turn around and buy another home in the same market.  Realtors would love that… yummy commissions! Real Estate lawyers would salivate too, but net worth would suffer big time.
For many Calgarians, this is not the first downturn in the oil patch. In fact, apart from the 2004 to 2008 boom, since 1980 the oil industry has never been without worries. There is always something to fret about. Since 2008, the industry has limped on one leg(oil) that has been shortened by the land locked position of the province. Think WTI discounts due to Keystone and Northern Gateway and other pipeline projects. And natural gas, the other leg, might as well have been amputated!
Sorry, Globe you are not much better in behavior than some sensationalist tabloid.Now that we had a slightly better week in oil prices ($52 per barrel rather than $45) are you announcing on your front page the next bull market in Calgary housing or yet another shortage of skilled labor?  Yeah the perpetual shortage of labor myth! 

There may be a lack of welders or carpenters from time to time, but ask many engineering students or geology graduates or more senior engineers and landman if it was so easy during the last four or five years to get a job.  Some of my older colleagues with a wealth of experience haven’t worked for several years.  And in today’s market things will be even tougher.

Yes, professionals in the right experience range 5 to 10 years are often in demand because they’re cheap and bright (but lack real experience). This has often been a hiring theme in the industry because many managements feel that technical work is not important; they only want to drill and keep the stock market happy. So, who cares about expertise, after all the suckers of the stock markets respond to every production set back with a mass exodus while any IP3 augmented production increase (some number that borders on fraud) results in jubilations by the press and short sighted oil speculators claiming to be investors will chase up the stock price.
 
Today’s hero is tomorrow’s villain because it is never the investor’s fault that companies become over-levered and pay exorbitant prices for land and services. But if your BOEs per day don’t go up every quarter (regardless of long term profits) the stock market punishes you with a vengeance. No wonder that the oil patch is a boom and bust game!
 
So, ignore the Globe and Mail. Ignore the hype. Don’t sell or buy Calgary real estate like speculative stocks. Over the long term, real estate prices appreciate here between 4 to 6% per year. Oil and gas prices always recover while oil service prices retrench until profitability returns and the game starts over – often in a matter of a few quarters or a few years.
 
What you should avoid buying in Calgary is new, unproven, real estate. This is the most speculative portion of the market. Inexperienced buyers buy those glossed-up, often down-sized, properties at inflated prices with way too much leverage. It is like all those guys and gals buying leased BMWs and Mercedes which get repossessed at the first sign of economic weakness. Not only are those new properties often financially unstable, but nobody knows how many issues were created during construction and have to be ironed out during the first three to five years of operation. This often results in massive special assessments or other large surprise out-of-pocket expenses.
Since Calgary real estate, except for the newest stuff, was recently quite reasonably priced (especially older condominium complexes), the market will likely get past the current hysteria and will do very well over the long term – thank you very much. So do not join the crowd of panicked speculators and keep on investing for the long term.

Peak Oil is real in that we have run out of light oil from easy reservoirs.  The new technologies are right now producing from semi-depleted and poor reservoir quality plays that cannot be produced at today’s prices. Also, don’t forget that nobody knows exactly what the Saudi production capacity is, nor that of many other OPEC countries, because they have always massaged the numbers and kept them close to their chest. How much higher can their production go? Especially since larger and larger volumes of their oil are consumed domestically.
 
Not only has the technology and oil play quality changed, but also the supply quality has changed. Think about it, in the olden days, oil and gas wells produced for decades, today we produce large volumes from wells that produce not much longer than 2 to 4 years; close to 60% of the oil is produced in the first year! If you don’t think that this has changed the oil and gas game big time then you’d better think again.
 
Don’t be so sure that the ‘experts’ know where the price of oil is heading. There are no experts, just a bunch of deluded simpletons that lead you down the garden path. It is sad to see that these days many claim to be experts on everything because so much data is available at our fingertips.  The problem is that nobody knows exactly how to interpret this deluge of data properly and how good the data is. This turns every short-term investment decision into not much more than a casino gamble.
 
Keep your head cool and think what is good for the long term. That strategy is always important when investing but never as important as today!

 

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