Sunday, May 14, 2006

Reality from the Front - There is still more land!

I just returned from a weekend up in Northwestern Alberta. Every time I leave Calgary by car or plane I am still struck by an amazing picture.... There is lots of land.

Unlike many cities in bubble land, Calgary is not constrained in any direction. In fact, one could imagine building suburbs out for hundreds of kms in each direction before coming into physical constraints.

This, of course, is juxtaposed with much of the recent panic in Calgary's housing market. The common theme amongst the masses is that "you'd better buy now, or else you will never be able to afford a house again!!!" I believe the current run-up in prices is due to supply constraints being overwhelmed by a surge in demand. Much of the demand is driven by panic.

One acquaintance who works for one of the large home builders here told me that they have 25 years of land ready to be developed, but constraints like the number of workers were the problem. The interesting thing to me is the age-old short run vs. long run in economics at work here. The huge demand for housing is short run in the sense that when the panic ends, much of the demand will be reduced. Market psychology can change over-night. Whereas the supply problems will alleviate over the longer run (more workers can come over the next few years, more builders can enter the market and expand...) There is certainly no constraint over land.

Lots of people ask me, when will this insanity end? I don't have the answer. All we can look at is other cities and see what happens. If the US is a fair example, it looks as though the crazy markets eventually run out of steam, and then you see rapid increase in inventories over a short period of 6-9 months, and that's when panic selling sets in.

Another possibility is that the coming US recession will cause a worldwide recession, weakening energy demand and therefore prices. Should prices drop rapidly, Calgary could see an absolute bloodbath in real estate. Most "experts" dismiss this notion but I believe it is likely should a world-wide recession occur.

posted by RJT at 9:49 PM

3 Comments:

Anonymous Anonymous said...

Here is the argument for the constraint on the growth of Calgary: Indian Reserve on the SW, MD of Rockyview on the West (if this is developed, it will be strictly low density high-end real estate), industrial lands on the East, boredom on the North and South. The other argument is the time-to-commute argument. Calgary is massively spread out and any new real estate that is developed will easily be a 1 hour commute in rush hour traffic. People who work downtown will not be so keen on purchasing that far out. This is why we see the rapid appreciation and redevelopment in the inner city.

9:01 AM  
Anonymous Anonymous said...

This is all true. However, I don't think "boredom" in the north and south constitues a true constraint. I agree that commute times should increase values in the inner city, but that should not cause bidding wars for suburban houses in the farthest flung suburbs.

9:29 AM  
Blogger me2200 said...

"Another possibility is that the coming US recession will cause a worldwide recession, weakening energy demand and therefore prices. Should prices drop rapidly, Calgary could see an absolute bloodbath in real estate. Most "experts" dismiss this notion but I believe it is likely should a world-wide recession occur."

Everyone in the oil industry thinks they have the world by the balls. Guess what ? Oil is a commodity and like any other when supply exceeds demand it craters. Gasoline inventories built the last 2 weeks and probably will again tomorrow. Inventories are high. Shell is bringing 450Kb/d on in Nigeria in a few weeks. The US consumer is slowing down. China's demand is going to crater when the US consumer slows down due to their housing bubble bust.

Anyone remember 1980 ? It is going to happen again all over. And once again Calgary sits with an economy that is 50% oil and 30% real estate.

10:34 AM  

Post a Comment

<< Home