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The Real Estate Frenzy
April 20th, 2007 by 
investoid
My wife and I have been unexpectedly thrust into the real estate frenzy in Alberta. We were given three months notice from our place today, as the owner is looking to sell, as her returns on capital will be higher with the money in hand than renting the place, given the current housing prices. I don’t blame her, and her analysis makes a strong case for us to continue renting, since renting prices are once again below the equivalent housing costs.
However, rent has been increasing dramatically in Alberta right now, and barring some rent controls (which the Alberta gov’t is looking into), rents will likely catch up to housing costs once again given current growth trends.
As I’ve stated before, I think Alberta’s housing boom has been driven by a mixture of fundamentals and speculation, the proportion of which is extremely hard to determine given the data available. In the past I’ve been slightly bearish about the future prospects for home prices, but have been proven wrong so and continue to be as we approach the peak buying season.
Future housing princes in Alberta essentially boils down to energy prices, so as long as cold fusion or another cost effective alternative energy source isn’t discovered tomorrow, things will not drop immediately. There are risks that China’s economy could face a hard landing (they had another 4% correction yesterday, amid fears of the enormous number of newly minted equity investors. Oil summarily dropped in sympathy), which would directly affect world energy demands.
Another interesting aspect is the high amount of debt lenders are willing to give to consumers. We were preauthorized for over $600K without any documentation (although there was a credit check), which makes me wonder how many people are taking as high of mortgages as possible.
In the end, we are leaning towards buying a home, one that has a basement suite so we can partially recoup our mortgage payments. We are looking for something that we can afford even with no renters, and in the extreme case only one of us has a job (although we’d be eating KD every day in that scenario).
This is a huge undertaking and has come about in the past 72 hours, but we know that we must act quickly and smartly. Any house in our range that’s half decent will have multiple offers on it, so we must be prepared to pay higher than asking price, or go after a home with issues and fix it up. We have some houses to look at tonight and if there’s one we like we will have to put an offer on it within 48 hours or it’s likely gone.
I am getting a crash course in home buying the hard way. It’s definitely not the way I expected to learn, but you never know what life will throw at you.
Posted in Real Estate | 
April 20th, 2007 at 2:09 pm
Hey Investoid,
CanadianCapitalist has offered some recommendations for upcoming Canadian Tour of Personal Finance blogs.
Care to drop by and comment?!!
Thanks,
Monty Loree
April 20th, 2007 at 7:06 pm
Hi Investoid,
Have you considered valuing the house using Discounted Cash Flow as you would with stocks? i.e. what is the market rent and the expected growth rate?
I’m still curious what prompted the decision to buy a home now. Is it because you might get priced out forever?
April 20th, 2007 at 7:50 pm
You’re nuts - if renting was a better deal 72+ hours ago then it probably still is.
I’m not suggesting don’t buy because the market is “too high” or “wait for a drop”. All I’m saying is do it your terms. Keep renting - look at the market and buy when you’re ready.
I really think you are panicking because you think house prices are going to keep going up forever…they may not go down much, if at all but they won’t keep going up at the same rate.
Also - pre-approval is always done without docs - I’m surprised they did a credit check. It’s not binding if the data you gave them can’t be proved which will happen later on when they ask for the docs.
Sorry if I seem a bit harsh but I made a big real estate mistake a couple of years ago mainly because I rushed things too much. Never a good thing to do.
April 20th, 2007 at 7:51 pm
I meant to say “do it on your terms”.
April 20th, 2007 at 7:58 pm
I would tread very carefully here. Buying in a hot market is hard and harder yet during the peak season. Know what you want and be prepared to wait for it.
My most critical piece of advice: NEVER FALL IN LOVE WITH A HOUSE. If you do that it will not end well. You can only get a decent deal if your willing to walk.
Best of luck,
CD
April 20th, 2007 at 9:13 pm
I was alluding to the same points above. I live in Vancouver and the average detached is now selling for in the low $700k. I’m not worry about being priced out. If Vancouver keeps up with the double digits increases, it’ll surpass $1 million in 3 years, and I don’t see that happening when you can rent the home for $2,000/month.
April 20th, 2007 at 11:27 pm
Hey everybody,
Thanks for the comments, they are much appreciated. I’ll try and address your points as I can.
Mike, my rent vs. buy scenario has changed completely. My prior analysis was based on our current rent and the going rate for equivalent places. Since we were getting below market below rent, it was the clear (but close) winner.
Now, we are in a position that we are no longer going to get that advantage, and rents have gone up 30-50% in the past 6 months around town. What we’re paying $1050 for will rent for $1400-1500 now.
I totally agree that we are rushing things, however it is likely to be another strong peak buying season in town. Prices are unlikely to go up another 50% this year, but even a 5-10% increase means $15-35K in additional mortgage. We have discussed waiting until the early winter and see what we can get when everyone hates to move, but unless prices stay within 1% of current prices we are not doing better by saving the different in rent and putting toward a down payment later.
CD - Good advice. We have found one that we will likely bid on tomorrow, but we have our price and if we get outbid then we’re fine with that. If we can’t get anything ‘reasonable’ (given current prices), we are willing to wait and not buy a dump in panic. We’ve got a lot of friends and family who may be enjoying the pleasure of our company in the interim, but as long as we don’t outlive our welcome we’re prepared to do that.
Jungle - In Vancouver, the rent vs. buy option is clear - there is no way a $2000 rent can be covering a $700K mortgage (unless it’s 100 year amortization
A $2K/month rental in Edmonton is a $400K home, a much different scenario.
Thanks again everyone, we need some sleep.
April 21st, 2007 at 9:34 am
Ok, in that case I would leverage your timing to your advantage. Right now is the best time to be a seller because a lot of buyers want to move at the end of the school year. If you are renting then you have more flexibility on when you can move so I’ll suggest waiting a month or two and the “spring froth” will have died down a bit. You might not save much if any money but you might avoid some bidding. Late fall/xmas is also a great time to buy.
April 21st, 2007 at 2:45 pm
Mike,
Thanks for the advice, although if last year is any guide there was no dip at all (just a steady increase in prices).
We’ve placed an offer on a place - if it comes through I’ll post more about it in detail.