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Alberta’s Housing Bubble?

Let’s talk about REAL ESTATE prices.

With this province’s recent (and current) economic boom, it seems the price of houses just keeps going up and up. For those of us on the “other side” — that is, those of us who are new homeowners — the speculation of a housing bubble as prophesized by the media is daunting. I have large amount of money invested in a small piece of REAL ESTATE, so what is the chance that my investment will lose value? First, let me explain: after a little more than a year in my house — and a “locked in” price arranged months before that — the speculated market price of my home, if I were to sell, has doubled. Yes, that’s right. Officially, my home is now worth TWICE what I paid for it.

Does that mean I could sell it and walk away rich? Sure. If I wanted to go back to a rental apartment. No chance.

So, I ride. And I wonder. Is the market in a bubble? And if so, will that bubble pop?

But, what is a bubble? I guess, as I understand it, a housing bubble is a little like its namesake: an expanding, inflating, fragile sphere that is full of air and susceptable to popping. If the housing bubble pops, housing prices collapse and fall.

To use myself as an example, my doubled house value might drop from a healthy gain, to a worrisome loss.

For example, if I paid $190,000 for my home and owe $140,000 on my mortgage, the doubled value means that my house would now sell for about $380,000. My investment value (accounting for cost of sale and owing on mortgage) means I could walk away with about $200,000 in my pocket right now. But if that value dropped to, say, $170,000 (if it could even go that low — unlikely, but possible) I would walk away from a sale with less than $10,000, much less than even my down payment and thus, A LOSS!

Do we need to worry about this? The buzz in the air says yes. But, more reliable sources say no:

Continued strong growth in economic activity and population are expected to increase housing starts in 2006. However, starts are expected to moderate over the medium term, as rising interest rates and escalating house prices slow housing demand. Nonetheless, Alberta is expected to maintain a healthy housing market by historical standards over the medium term. - Alberta Finance

I’m interested to hear the opinions of others. For now, I think I’ll consider a long-term strategy: pay the bills, maintain the building, and sit on it for a while.

I’ve recently written a follow-up to this called “Alberta’s Housing Bubble Slowly Deflating?“ Click the title to read it now.

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