diff --git a/project.py b/project.py
index 2248a7e..3ba8a07 100644
--- a/project.py
+++ b/project.py
@@ -1267,7 +1267,8 @@ class Project(object):
       try:
         fd = open(alt)
         try:
-          alt_dir = fd.readline().rstrip()
+          # This works for both absolute and relative alternate directories.
+          alt_dir = os.path.join(self.objdir, 'objects', fd.readline().rstrip())
         finally:
           fd.close()
       except IOError:
@@ -2353,6 +2354,10 @@ class Project(object):
             ref_dir = None
 
           if ref_dir:
+            if not os.path.isabs(ref_dir):
+              # The alternate directory is relative to the object database.
+              ref_dir = os.path.relpath(ref_dir,
+                                        os.path.join(self.objdir, 'objects'))
             _lwrite(os.path.join(self.gitdir, 'objects/info/alternates'),
                     os.path.join(ref_dir, 'objects') + '\n')
 
diff --git a/subcmds/init.py b/subcmds/init.py
index eeddca0..9466b9a 100644
--- a/subcmds/init.py
+++ b/subcmds/init.py
@@ -401,7 +401,7 @@ to update the working directory files.
     git_require(MIN_GIT_VERSION, fail=True)
 
     if opt.reference:
-      opt.reference = os.path.abspath(os.path.expanduser(opt.reference))
+      opt.reference = os.path.expanduser(opt.reference)
 
     # Check this here, else manifest will be tagged "not new" and init won't be
     # possible anymore without removing the .repo/manifests directory.