New Year Brings New Confidence  

Most of the economic news we are hearing lately is more positive than negative.  Reports of slow recovery in the U.S. and even Europe are filtering in and it appears that more and more economists are finding reasons for cautious optimism. 

How does that affect us in central Alberta?  A world wide economic resurgence creates demand for oil and natural gas.  Increased demand generates higher prices, which motivates energy producers to spend money looking for oil and gas and then producing it.  A very large portion of central Alberta’s economy is generated from oil and gas exploration, production and servicing. 

While natural gas prices still languish on the bottom edge of the acceptable price spectrum, oil prices continue to hover around the $90 mark, high enough to support exploration and recent efforts to extract oil from shale in our western foothills. 

Shale oil extraction requires expensive horizontal drilling and very large fractures of the shale and activity in that area will keep several large drilling and frac companies here busy. 

We are now hearing reports that worker shortages are energy companies biggest concern.  A shortage of workers will generate recruiting activity and bring new folks to central Alberta.  New jobs in oil and gas create spin off service jobs and ultimately more population growth. 

Population growth contributes to a healthy construction sector and the creation of more jobs and more economic prosperity. 

Economic prosperity brings stability to the housing market.  On the other side, housing market stability is one of the signs of a stable economy.  Everyone dreams about the “good old” days when their home values were going up $10,000 per month, but that is not stability.  That is a recipe for disaster.  The price of homes can’t go up faster than wages because it’s wages that determine ability to own a home. 

Stability is the key.  The current situation in central Alberta is that while we are seeing increased activity in our housing market, we also expect to see a lot of the homes that didn’t sell last year come back on the market.  That increasing supply will have a moderating effect on prices. 

Recent steps by the federal government to further toughen financing requirements will also have some dampening effect on house prices.  Some first time buyers may be kept out of the market and some will be forced to buy less expensive homes. 

We see a return to a stable, balanced market that treats our buyers and sellers equitably and that suits us just fine.

Market Update – More Changes to Mortgage Rules – The biggest impact the new rules outlined below will have on the housing market is the reduction of the maximum amortization from 35 years to 30, which will add about $100 to the monthly payment on a typical mortgage, but save the borrower more than $40,000 in interest over the life of the mortgage. 

It is one of the ways the government is attempting to reduce Canadian household debt from its’ current high levels.  We believe their efforts should have been aimed at credit card lenders, to limit their very high interest rates and borrowing limits.  A much quicker way to reduce the average family’s debt in our opinion. 

The Harper Government Takes Prudent Action to Support the Long-Term Stability of Canada’s Housing Market – Jan. 17, 2010 

The Honourable Jim Flaherty, Minister of Finance, and the Honourable Christian Paradis, Minister of Natural Resources, today announced prudent adjustments to the rules for government-backed insured mortgages to support the long-term stability of Canada’s housing market and support hard-working Canadian families saving through home ownership. 

“Canada’s well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries and helped protect us from the worst of the recent global recession,” said Minister Flaherty. “The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future.” 

“The economy continues to be our Government’s top priority,” continued Minister Paradis. “Our Government will continue to take the necessary actions to ensure stability and economic certainty in Canada’s housing market.”  

The new measures: 

• Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.  
• Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.  
• Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.  

Our Government’s ongoing monitoring and sound underlying supervisory regime, along with the traditionally cautious approach taken by Canadian financial institutions to mortgage lending, have allowed Canada to maintain strong and secure housing and mortgage markets. 

The adjustments to the mortgage insurance guarantee framework will come into force on March 18, 2011. The withdrawal of government insurance backing on lines of credit secured by homes will come into force on April 18, 2011.

Don’t Just Read The Headline…. the news in the body of this article is really quite positive for Alberta, predicting improved employment growth in 2011.  Employment growth means more people working and population growth, which translates to economic well being.  Long term economic well being creates a strong housing market. 

For first time buyers, it appears that now is an opportune time to make your move to home ownership.  We do believe that there will be a very good selection of homes to buy this spring and combined with fantastic mortgage rates, makes this best time to buy.  If you are considering moving up, that great selection and the interest rate advantage applies to you as well. 

Alberta Firms Reluctant to Add to Payrolls – by Dan Sumner, Economist ATB Financial 

Alberta’s economy showed strong signs of life in the fourth quarter of 2010, with nearly all economic indicators pointing to the upside. However, when it comes to employment, firms have only reluctantly added to payrolls.

Total employment in Alberta shrank by 2,400 jobs in the final month of 2010, while the unemployment rate moved sideways at 5.6%. December’s reading was the second consecutive month of flat employment after seeing a big gain in October. 

Digging deeper into the data shows a generally lacklustre report with a gain of 3,100 part-time jobs more than offset by a loss of 5,500 full time positions. Alberta’s mighty energy sector saw strong job growth (+6,100) along with profession scientific and technical category (+13,300), which includes things like engineers, geologists and lawyers.

Interestingly, over the past year the forestry, mining and oil and gas category has seen the strongest job growth of any industry, adding nearly 30,000 jobs. Considering the energy sector is the base for so many other parts of Alberta’s economy, this could spell good news for jobs in 2011. 

Nationally, the jobs report was slightly more optimistic with Canadian employers adding 20,000 jobs in December. Over the last few months employment growth has slowed down markedly from earlier in the year, although has managed to stay positive. 

Employment in Alberta, which lagged behind momentum seen at the national level during 2010, is still just below its pre-recession peak. Looking into 2011, with the oil sector benefiting from strong prices and the economy generally moving in the right direction, it is likely that Alberta will finally regain all the jobs that were lost to the recession.

Market Update – We hear lots of words these days describing the local economy… slow and steady, modest, gradual, flat line, weakness, fall short, stronger, picking up …. etc. etc. 

When I look around me, things appear pretty normal in central Alberta.  Stores are busy, restaurants are busy and the streets and highways are full of traffic. 

One of the measures of a healthy economy is strong consumer confidence.  Imagine, if the average guy on the street has confidence, it can make a difference in the economy. 

We need to be careful not to over-analyze things too much sometimes.  Sometimes we need to forget all the negative stuff we hear from the media and just act like things are normal. 

Modest GDP Growth Kicks Off Q4 by Todd Hirsch, Senior Economist, ATB Financial 

It may have dipped into negative territory during the final month of the third quarter, but Canada’s GDP kicked off the fourth quarter with a month of positive, albeit modest, growth. 

In October, the national economy expanded by 0.2% (month-over-month, and adjusted for seasonality). 

Oil and gas extraction expanded by 1.3%, almost entirely on the strength of natural gas. Support activities for mining and oil and gas extraction rebounded (+9.9%) from its September decline. 

That pace of activity bodes well for Alberta. While monthly GDP figures are not reported for the provincial economies, Alberta is the dominant region for Canada’s oil and gas sector, and related support activities. The strong energy sector related activity— prompted by stronger oil prices— suggests that Alberta’s economy is picking up momentum. 

Other Canadian sectors to post gains were real estate, the public sector, wholesale trade and transportation. Contractions were seen in manufacturing, construction, utilities, retail trade, and finance and insurance. 

While the 0.2% expansion of the Canadian economy does represent a return to positive territory, it did fall a bit short of economists’ expectations (+0.3%). The underlying weakness in the US economy, which greatly affects Canadian exports, as well as the high Canadian dollar continue to weigh heavily on growth. Excluding natural resources, the economy has flat-lined. 

This morning’s GDP report is unlikely to prompt the Bank of Canada to raise rates at its next Fixed Announcement Date (January 18, 2011). If anything, it could encourage the central bank to hold off on rate increases until much later next year.