Alberta's Outlook, The Bigger Picture
Edmonton’s monthly REIN (Real Estate Investors Network) Meting in February had a great turn out as usual. There were about 300 investors in attendance, and Don Campbell was the host. He went over the current market situation in the US, and it is expected the sub-prime crisis in the US still has the worst to come. It's expected that foreclosure rates will be at their peak in the 3rd quarter of 08. Here are some insights to what’s affecting our market.
US Subprime Crisis
The main catalyst to this sub prime crisis is what is known as a Ninja Mortgage, standing for No Income, No Job or Assets. Many of these mortgages were funded in the US, and not only that, they were funded with extreme front end load. The front end mortgage rate would be a 4% discount for even up to 2 or 3 years. When the rate increases, what we are seeing now, the buyers have no money, they put little or no money down to buy their home, so they have no major financial interest in the property, and they are just walking away.
This leaves the banks, and sub-prime lenders holding the assets, and the former home owner just going back to renting. Sub prime doesn’t mean at a rate less than prime, it means at a rate which is less desirable than bank rates, there are far less sub-prime mortgages in Canada than in the US! That is important to know!
Although there are many foreclosures going to occur in the US, this doesn’t mean that automatically Canada is in trouble. There are some current economical effects which we are dealing with. We have a higher Canadian Dollar as the US dollar gets battered. On a North American scale, this is generates emotions of fear and uncertainty. We are looking at difficulty with exports, because our costs are higher, and our neighbors to the south may be less interested in coming up north for that vacation. Inevitably this will cause somewhat of a slowdown in Canada, but let's dig a bit deeper. Here are some recent news snippets.
Current News on subjects affecting Alberta’s Economy
Calgary Herald Jan 25, 2008 - On Thursday (January 24, 2008) the bank of Canada slashed its economic growth this year to 1.8%, down 1/2 % from the projection last fall. The central bank blamed a weak U.S. economy fro the revised forecast, saying it will put additional downward pressure on Canada’s export growth. However, domestic demand in Canada is expected to remain strong, supported by continued income growth due to high commodity prices, it added. And the Canadian economy will rebound next year, growing by 2.9% in 2009, it added." "Economic Growth in Alberta rises head and shoulders above the national average, with forecasts ranging from a low of 2.7% by TD Bank Financial Group to a high of 4.2% by the Conference Board of Canada." ""If there is any part of the economy that will be impervious to weakening in the U.S. consumer, It's certainly Alberta" - Pedro Antunes, director of national and provincial forecast for the Conference Board of Canada.
Calgary Herald Jan 20, 2008 - Alberta Oil could prove safe haven in rattled market -- As Canada's stock market suffers a bad case of the shakes, investors may look to oil, gold, oil, and select financial issues to calm their nerves" "There are divergent options on where to seek refuge from a recession, ... Not surprisingly this time around, larger oil and gas companies and gold producers are among analysts' favorites for the year as energy and gold prices looks set to rise further." "USB's top picks in big oil companies include Suncor for its high exposure to light oil, Nexen Inc. and Canadian Natural Resources Ltd. Among oilsands plays, USB likes UTS Energy Corp. and Opti Canada Inc." --- Oil is the place to invest, Alberta has Oil.
The London Times (UK) January 25, 2008 - "Jeroen van der Veer, Shell's chief executive, said in an e-mail to the company's staff this week that output of conventional oil and gas was close to peaking. He wrote "Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand." The boss of the world’s second largest oil company forecast that, regardless of government policy initiatives and investment in renewable, the world would need more nuclear power and unconventional fossil fuels such as oil sands." <--- Alberta has the oilsands. 45 Billion dollars of upgraders are proposed for Sturgeon County, north of Edmonton.
Calgary Herald January 11, 2008 - Oil to hit $150 in 5 years, says CIBC.-- "Oil prices will continue to rise - reaching $150 US within 5 years - as delays in bringing on new supply from Alberta mega-projects such as Alberta’s oil sands widen global supply gap, CIBC World Market Predicts" "Delays and massive cost overruns have plagued the oilsands development in northern Alberta, but are also becoming a familiar refrain around the globe due to higher costs and technical challenges associated with bringing more unconventional oilfields online, Rubis said" <-- costs are going up here, but also everywhere. More delays, more expensive oil, more worth spending money to extract it.
Summary
We can expect there is going to be a large amount of investment going out of the US market for the next while, and it looks like oil and gold are good places to invest for the next few years, and oil, much longer term. The only thing that could have been better for Canada is if they put diamonds on the list. I guess we'll wait and see. But as for now, looking at the big picture, although we don't expect to see the monster gains we made in 2006 and 2007, we can look at good healthy increases of about 8 - 10 % in Alberta real estate. Our economy is still very strong, and the fundamentals we have leave us to be in the strongest position to weather the US Recession, and perhaps be the place to move those US investments to. If you are expressing concern over purchasing a property in the area, I would suggest you look long term.
First time buyers, once you are in the market, you are less affected by the real estate changes if you are moving into the same market, and prices look like they are going to rise this year. You might consider strongly getting on the ownership train fairly quickly.
Investors, this is a safe, stable growing period we can likely be comfortable to invest in. Looking at the options, Alberta appears strongest, and within Alberta, Edmonton North has the most activity and jobs planned.