Investoid

I met up with my friend who’s a real estate investor in Alberta. He was bought out of the company he co-founded and is now looking to purchase 20 rental properties with the funds. He is still extremely bullish on the local market, and anticipates housing prices to increase at least 20% annually the next two years. He cites the extremely low vacancy rate (which is project to be 0.5% by 2008), continued low interest rates (and inflation), and the political stalemate over tough environmental laws nationally and globally.

As I’ve talked about before, I think the runup in housing prices has been largely based on fundamentals, although there is undoubtedly speculation in the markets. But I think prices will run into affordability issues soon, and consequently much smaller increases. One mitigating factor to this would be the onset of interest only or adjustable rate mortgages, which would fuel demand even more in the short term.

If prices increased 50% over the next couple of years, Alberta would have housing roughly more expensive than Toronto, which I don’t think is realistic in the short term. Plus, you have investors already diversifying out of Alberta due to opportunities elsewhere, like Saskatoon.

I also think there is some political risk of environmental and/or royalty legislation that could slow down, if not stop altogether, oil sands development. Many of the major producers are already complaining that high costs have forced them to re-think any future expansion. Indeed, one CEO lamented that he would not start the project they are currently working on today if costs were this high when they started. Additional costs could push many to re-think their expansions, given the current price of oil.

It will be interesting to see how the market develops during the peak summer months, which will be a good indicator if the market has plateaued or will continue its run.