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Alberta’s Housing Bubble Slowly Deflating?

Archived in Risk, Real Estate | 1 Comment

CBC news had an interesting article on the relative momentum of the Canadian housing “bubble” as compared to the bubble being experienced by our neighbors to the south, the US. Not exactly predicting a burst (or at the very least, a deflation) in the near (NEAR) future, the article was looking medium-term to what might happen based on the differing spending habits of Canadians versus Americans.

In recent weeks, analysts have been debating an impending North American housing slowdown and the form it may take. Some say when market drops it will do so with a resounding crash, while others see a more gradual decline.

We’d all prefer the latter scenario, of course. Who can sleep well at night knowing that the new-found value in their REAL ESTATE investment is bound to crumble? Canadians, thank your fellow homeowners for being a bit more thrifty than our American friends.

One of the big differences between Canadian and American homebuyers, [Mark Chandler, an economist with Scotia Capital says], is that “U.S. (homebuyers) have been taking a lot more out in terms of mortgage equity withdrawal.”

I think this statement just solidifies what I was writing about in my post “Housing Bubble Risks - Part 2“, that some people (apparently more Americans than Canadians) tend to borrow against false equity in their homes. Well, perhaps the equity isn’t EXACTLY false, but it certainly isn’t guaranteed in the medium term when those loans are going to be fully due. I’m not ragging on our American friends. Don’t get me wrong. But there are subtle differences in attitude being enforced by our repsective Big Brothers that are leading vastly different habits and results.

That said, from an Alberta perspective there seems to be more “americanized” inidicators flowing through the provincial economy than the national ecomony as a whole. An oil-rich province with a labour shortage has a sense of stability among the short-term dreamers that may or may not be real.

“Practically every indicator at our disposal tells us that we are very late in the cycle and the historical record also strongly suggests that the next wave after the Fed has inverted the entire yield curve is either a hard landing or a very bumpy soft landing,” [David Rosenberg, North American economist for Merrill Lynch] said in a note.

So what’s that mean for home-owners, home-buyers, and the consumer in general? If you own a home, it’s getting more prudent to sit-tight (or take the money and run, if you don’t mind jumping back in at high RISK!) If you are looking, be prepared to take on a HUGE mortgage and loose some equity in the medium term. And if you are renting a flat somewhere without any equity at all, decorate: you might be there for a while.

This is a follow-up to my (popular) entry: Alberta’s Housing Bubble

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Housing Bubble Risks - Part 2

Archived in Risk, Real Estate | 2 Comments

Aside from the self-centred, personal weath factors, there seem to be a number of associated risks to an economy as a whole when housing prices suddenly rise very quickly. I’ve been watching a few of these trends and I’m going to take a few posts to make some notes on what I’ve noticed in Alberta’s REAL ESTATE housing bubble.

Transient Labour

I consider this loosely tied to the labour shortage, but it reflects a much larger problem in the concerns of CONSTRUCTION quality and workmanship. In my humble opinion, the shift towards a transient (and I use the term to mean ‘always on the move’ not homeless) labour pool is also a shift towards a less-skilled labour pool. Transient labour becomes less accountable, by its very nature, to the community as a whole. This reflects in input as well as output. One one end of the spectrum, the quality of the work (on average) tends to suffer from the influence of transient labour. On the other end of the spectrum, there is a percieved negative influence on communities when the workers building those communities are imported, drain financial and moral value from the community, then leave again.

Quiet Debt

It may seem obvious, but more expensive homes mean that people are spending more money on those homes. This would be okay if the majority of homes were paid in full by cash. They are not. The majority of homes require some kind of debt or mortgage to be assumed by the buyer. Barring the other obvious statement that a crash in value would financially crush the people carrying these loans or mortgages, there is another problem inherent in artificially rising house values. The quiet debt assumed by more an more people amounts to a drop in the total net worth of your average working class citizen. Sure, there is more value in property, but this value is NOT assumed by the buyer. The debt assumed by the buyer is seemingly balanced by equity in REAL ESTATE. This may not be true if the value of that REAL ESTATE changes suddenly in either direction. If the value inflates too much, the buyer assumes he is worth more than he really might be, making it easier to obtain more credit and easier to sink into further debt. If the value deflates, the buyer will be worth much less making it nearly impossible to obtain (reasonable) credit, and difficult to maintain a functional income to debt ratio. Most of us really are just a couple paycheques from living in a cardboard box.

Do It Yourself-ers Who Can’t

I am struck by the idea that this is definitely linked to the labour shortage. Case: Joe Blow is flabergasted by both the cost of overpriced landscapers and the extended timelines of labour that is (seemingly) booked three years in advance. Joe’s solution: do it yourself. Between opportunity and the influence of an onslaught of reality television like Trading Spaces, Flip this House, and While Your Were Out more and more ordinary folks with no real skills take their renovation and landscaping problems to Home Depot (rather than a qualified contractor) expecting the instructions on the back of a box or in a handy pamphlet to be sufficient to install drywall, place a sprinkler system, or pour concrete piles. The results are often less than adequate and require further investment of TIME and money to remedy. This is investment, in an already inflated market, that is neither warranted nor advisable. I ask: is it actually possible to lower the value of your home by DIY?

This was the second of a two part article on Housing Bubbles. You can read the first part here.

Sell Now!: The End of the Housing Bubble How to Profit from the Coming Real Estate Bust: Money-Making Strategies for the End of the Housing Bubble Buying and Selling Your Home: Real Estate DVD Second Great Depression The Total Money Makeover Workbook The Wealthy Barber, Updated 3rd Edition: Everyone\'s Commonsense Guide to Becoming Financially Independent

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Read more posts by Gary W (About the Author)

del.icio.us Digg it Earthlink Furl iFeedReaders ma.gnolia Maple.nu Netvouz Netscape RawSugar reddit Scuttle Shadows Simpy Spurl StumbleUpon Wink Yahoo MyWeb

Posts that might have similar content:

Alberta’s Housing Bubble Slowly Deflating? >> CBC news had an interesting article on the relative momentum of the Canadian housing "bubble" as compared to the bubble being experienced by our neighbors to the south, the US. Not exactly predicting a burst (or at the very least, a

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

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