I recently went on a trip with the family. One destination on the trip was Calgary and it is a different Calgary from when I passed through six years ago. Construction is everywhere and the scary thing is that there is no end in sight.…..let me explain. The Albertan economy is growing by leaps and bounds and the labour pool has dried up. I mentioned last week about Tim Hortons up north paying $15-18/hour to get people to work there. Hotels have 90-100% occupancy, which makes it difficult for the traveler to find a room. A $200,000 family home in Winnipeg with 3 bedrooms would go for $450,000 to $500,000 in Calgary. Homes on waterfronts in Calgary generally run for $1.2-1.5 million. By my estimates, the real estate market in Calgary is at least 2-3 years away from a top before a serious decline ensues. Hotel occupancy rates are high because companies are bringing in workers who can not find a place to hang their hats. When the job market balances itself out in 1-2 years (if it ever does), and then a period of 12-18 months of higher prices/stabilization will occur before declining. Real estate in eastern Canada has peaked, but it has a ways to go in Alberta and BC. 

We went to visit some friends in Armstrong BC, but I had around 100 conversations with different storeowners and people in general to get a ground zero feeling about the economic sentiment. The Okanogan valley is the playground of Albertans. BC residents often resent them, because they come in with huge sums of money and jack up the local real estate prices. This is great for long-time landowners, but terrible for someone whom is twenty something wanting to move out on their own. A starter home in the Vernon/Armstrong area is $250,000 and it is a real starter home. 

On the return trip, we passed through Nelson BC. This is an isolated "hippie" town in southern BC and truly is a beautiful, unique town. Everyone who lives there is likely to be caught wearing a backpack with some form of facial hair, a hemp-made article of clothing and some marijuana in their back pocket. There are many unique stores in the area and it truly is a tourist trap. Lake front property in this area is through the roof. The price of real estate has not worked its way to the extent of the Okanogan or Kootenay mountain areas, such as Creston BC. This town is like a northern town with locals and no focus on marketing (such as Nelson BC) to make it a tourist destination. It is a live-in town deriving its income from surrounding resource-related jobs. A price of 10 acres of farmland cost $160,000 compared to $380,000 in the Vernon area. Creston BC is located between the Selkirk Mountains and the Purcell Mountains. The valley it is quite expansive, with the Kootenay River flowing beside it. For anyone who wants to move to BC, this is the place to go. There are orchards as far as the eye can see and prices are just setting up to rise. 

Passing through Fernie BC, this was the last exposure we had to the beautiful mountains. There are 5 local coalmines around Fernie, with one of them having visible operations at the edge of town. The company is literally going to be taking down a mountain over the course of the next 10 years to extract the coal. Removing mountains like this changes the valley distribution network, which also will affect wind patterns and rainfall. The town of Fernie hosts a fantastic ski hill and the trend for owning a little chalet beside the ski hill has caught on. Real estate prices in Fernie have gone ballistic, but all of this is about to change. 

The forests of BC are under attack from a pine beetle. The pine beetle kills the trees, turning the needles brown, which then fall off. This leaves huge stands of trees that are dead and translates into a lot of kindling for sparking forest fires. A big chunk of real estate of BC is based upon "the view". There were huge sections of forest we saw on the trip where it looked like a forest fire had gone through. The timber from these hit areas is being logged as rapidly as possible to extract the value from the timber and also reduce the forest fire risk. As time passes, the area of land the pine beetle covers will be huge. It is just on the fringe of Nelson and 3 years from now, all the standing pine trees will be dead. This will make the area very prone for a severe forest fire due to a lack of a good road network. The pine beetle has already hit Fernie and will wreak havoc on the tourism industry in 2-4 years. When "the view" is gone, the buyers will dry up and the inventory build-up in real estate will commence. Most properties in BC are purchased for recreational purposes, so there may not be any selling pressure immediately. There will be some individuals however that are speculating and a lack of sellers translates into owning property that becomes a money pit. They will have to sell and some unlucky buyer may think they are getting a deal. As the prices really begin to take a hit from no buyers, 40-60% declines in prices could happen. 

Notice how the 2-3 year period I mention for the pine beetle destruction fits in with a peak in real estate in Calgary. So, if one is to buy real estate, look to Saskatchewan and Manitoba. These two provinces have cheap land i.e. 60 acres of land cost around $35,000. This will be the next area for investment, because global food supplies are going to contract further over the coming years. Owning land is a good way to mitigate risk of not having food on the table. The forests of northern Saskatchewan, Manitoba and Ontario will eventually become stricken with the pine beetle, but the southern and midsections of the provinces have mixed forests. This will reduce the impact of a massive wipeout of forests. 

If I can step back to BC for a moment to discuss the pine beetle; the forests help to retain water for the watershed that feeds the rivers and aquifers. A lack of trees will prevent absorbing a large portion of rain, which will quickly find its way into rivers. The water will not be filtered through the soils and have a slow release which keeps river levels relatively stable. The spread of the pine beetle is killing huge sections of forest in different valleys and this will cause flooding due to the water having no "sink" (forest). Flooding in BC will become common for the next 10-20 years, until the dead sections of forest accumulate enough biomass to begin retaining large amounts of moisture. Flooding results in land slides, which will impact salmon runs. Expect a massive government work program created in the next 5 years to clean debris from salmon streams, tree planting etc. In 50 years, BC will be bountiful in resources, however there are going to be many hardships over the next 3-40 years for the timber industry, because there will not be an industry. Owning land with future timber reserves could be profitable, because there will be a lack of it in the future. I will be presenting some ideas for investment in different lumber companies in a few weeks (think South American teak stands, cork tree farms and other unique timber). 

I hope this update of the trip provides some insight as to what is driving the real estate market in Alberta and BC and what will cause its collapse. The housing debt in 2-3 years will weigh in on people, so they will have to sell whatever assets they have to pay off debt. After 2009, most money should be parked in gold and silver bullion. For the next 3 years, an energy crisis is going to unfold globally which will drive energy stocks much much higher. Gold and silver will also rise as investment demand increases due to a flight from paper to tangible assets.

A final note, most people in Alberta and BC are experiencing the frenzy that England Australia and the US had the past 3 years. All three markets have declined and Canada will be no exception. Very few people own precious metals or invest in commodity-related stocks. This tells me that the bull market in commodities could be bigger than most expect and longer in duration.

This article is a divergence from things I normally discuss. The markets I follow are the 10 Year US Treasury Index, US Dollar Index, S&P 500 Index, AMEX Gold BUGS Index and the AMEX Oil Index with commentaries on trends in the commodity markets . Nothing has really changed with any prior updates, especially my bullish stance on the XOI. As well, there are numerous stocks we follow primarily energy and precious metal related.

David Petch
July 6, 2006

© 2006 David Petch
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