We all know that oil and gas exploration and production form a very large and important part of the central Alberta economy and the price of oil and gas dictate the amount of activity our local energy industry participates in.

Any time the world economy falters, oil and gas prices are affected.  It’s a constant guessing game to know where prices will be next week and next year.

Fortunately, the last couple of paragraphs below offer some hope for continued stable prices and therefore a stable local economy.

Oil Price Swing by Todd Hirsch, Senior Economist, ATB

Albertans are used to watching the price of crude oil rise and fall, but even seasoned veterans of the oilpatch were paying attention to the wild price gyrations witnessed this week.

Based on the price of West Texas Intermediate crude, a benchmark commodity traded and priced on the NYMEX, oil prices have fallen nearly 20% over the past few months. After hitting a recent high of $US 113 per barrel back in April, this week oil fell to below $US 80. If prices stayed below this point for a long period of time, some of Alberta’s oilsands projects may be reconsidered—or possibly shelved.

Behind this recent price volatility are several factors. The downgrade on US government credit sent shockwaves through markets all around the world, including stock markets and commodities. Oil was one of the casualties (although gold hit record highs).

Also, revisions to US economic data show that the 2008 recession was far deeper than first thought. And numbers for 2011 are not encour-aging. The prospect of another recession in the US economy helped push oil prices lower.

By the end of this week, oil prices had recovered to above $US 86 per barrel (at noon trading). The volatility in stock and commodity prices this week is not necessarily being driven by market fundamentals, but rather by fear and uncertainty. That will subside.

On the supply side, nothing has changed. Oil is still costly to dig out of the ground. And emerging economies such as China and India still need plenty of oil (for now, at least). This suggests that once this recent bout of market volatility calms down, oil prices will calm down too, and should continue trading between $80-$100 over the coming months.

The central Alberta real estate market is chugging along about how we expected.  Until now sales have been up or at least equal to last year’s in most central Alberta markets.  It’s hard to predict how the most recent economic turmoil will affect the market, but there is always a silver lining – interest rates should remain low, keeping housing affordable.

Generally, the market is most in balance in Red Deer with the outlying areas still favouring buyers with ample supply and mediocre demand.  People moving to the area generally start in Red Deer where most of the jobs are.  There is still ample inventory in Red Deer and higher gas prices may be keeping people close to their jobs.

The majority of sales activity still happens in the lower price ranges.  The upper end market continues to heavily favour buyers with ample supply and low demand which creates opportunity for those families looking to move up.

We believe the slight improvement in the market generally can be attributed to a more active oil industry that has caused population growth – increased demand.  New housing starts this year are lower which has helped keep the supply side of the market from getting too large – stable supply.

Very simply, the relationship between supply and demand dictates price movement and the health of the housing market.  CMHC defines a balanced market, where neither buyers or sellers have an advantage, as one where 25 – 30% of the inventory sells each month.

Red Deer – year to date sales are up 9.24% over the same period in 2010 – demand is up.  The number of active listings as of the first of August were down 20% this year compared to last – supply is down.  As a result, our sales to listing ratio in July was 22%, not quite high enough to support price increases, but much closer than we were a year ago – the market balance slightly favours buyers.

Lacombe – year to date sales are down slightly compared to last year – demand is down.  The number of active listings on August 1^st were the same as they were last August – supply is equal.  The sales to listings ratio in July of this year was 17% – the market favours buyers.

Ponoka – year to date sales are up 24% over the same period in 2010 – demand is up.  Active listings are 9% higher than Aug. 1, 2010 – supply is up.  The sales to listings ratio in July was 11.5% – the market favours buyers.

Sylvan Lake – year to date sales are the same as 2010 – demand is equal.  Active listings on Aug. 1 were up 8% compared to Aug. 1, 2010 – supply is up.  The sales to listings ratio in July was 11% – the market favours buyers.

Blackfalds – year to date sales are up 25% compared to the same period in 2010 – demand is up.  Active listings on Aug. 1 were equal compared to Aug. 1, 2010 – supply is equal.  The sales to listings ratio in July was 13.6% – the market favours buyers.

The acreage market closely resembles the rest of the market with a sales to listing ratio of about 10%.  Sales at the high end of the price range are rare with most of the activity at the low end of the price spectrum.

The Economy is Still Fragile – thankfully the US government seems to have resolved their debt ceiling dispute which was causing economic concern around the world.  As you can see by the article below, Canada’s economic stability is still tenuous.  The good news is that the spring slowdown in economic growth is predicted to be temporary.  The other good news is that interest rates will likely stay low for a while longer, keeping housing affordable.

 May Brings Showers – Dan Sumner, Economist TD Economics

 Although it had been widely expected that the Canadian economy would pull back in Q2, preliminary indications are looking even more negative than the market predicted.

 Canadian gross domestic product – the principle measure of overall economic activity – shrunk by 0.3% in May. That’s the largest monthly decline since May 2009, when Canada was mired in recession. The reading was much worse than the +0.1% growth called for by a consensus of economists, and signals that after expanding by 3.9% in Q1, the Canadian economy has really slowed down in Q2.

Although GDP information at the provincial level is only available on an annual basis, considering the largest driver to the downside at the national level in May was the mining, oil and gas extraction sector, the report doesn’t look good for Alberta. GDP in that sector plummeted 5.3% in May; however, the decline appears to largely be due to temporary factors like the slow spring beak up and wildfires in northern Alberta.

Other sectors dragging on economic growth in Canada in May were manufacturing and construction, while most service sector industries expanded during the month.

This morning’s report definitely surprised the market to the downside and taken along with the pull back in inflation observed last week, leaves room for the Bank of Canada to keep rates unchanged at its next meeting on September 7. However, as is often the case with monthly statistics, the overall trend in the Canadian economy appears to be clouded by one time events in this report.

The Canadian oil industry (and the resource sector in general) is an engine of growth in the Canadian economy right now, and over the next month or two, GDP will probably bounce back as the temporary factors weighing on GDP in May dissipate.

More Jobs = Population Increase = Stronger Demand for Housing 

Those who are still waiting for prices to come down before buying might want to start looking now.  More jobs will equate to more demand and eventually higher prices.  Our current environment of low prices and low interest rates creates the perfect time to buy and it won’t last forever.   Let the Hiring Begin! 

Todd Hirsch – Senior Economist, ATB Financial 

Job creation in Alberta lagged behind most other provinces in the 2010 recovery period, but stronger employment growth started to pick up around the turn of the year. What are Alberta employers anticipating this spring?   According to the latest survey of employers from Manpower Canada, companies in Calgary, Edmonton and Red Deer are expected (on balance) to add to their payrolls in the second quarter of 2011.   The survey calculates the difference between the percentage of firms expecting to expand payrolls and the percentage of firms expecting to contract them. The difference for all three Alberta cities in the survey is positive.   Reversing a trend seen in previous Manpower reports, firms in Calgary are now expected to lead the province in terms of increasing employment. The balance of net employment outlook in Calgary stands at 26%, which is an improvement over earlier surveys.   Employers in Edmonton and Red Deer, which had traditionally led the gains, now trail with a net positive balance of 12% and 10%, respectively.   The Manpower survey press release notes that nationally, Canadian employers are expected to add to their payrolls (i.e., a net positive outlook), but that optimism is particularly strong in Western Canada. Activity in the energy and mining sectors are identified as the primary drivers.

Market Update – Who can predict what will happen next?  No one saw it coming, or at least we didn’t hear anyone predicting it, but major unrest suddenly hit North Africa and much of the Arab world and is causing economic ripples and uncertainty in the rest of the world.  Any time oil supplies are threatened, the world goes into turmoil.  Oil prices go up, which has a negative impact on airlines and trucking companies, to name a few, in countries that rely on imported oil.  On the other hand, countries that export oil are quite likely to see economic gains from increased oil prices. 

The news item below shows that Canada and Alberta are already doing very well relative to much of the rest of the world.  Increased demand and higher prices for oil could very quickly change the landscape in Alberta and help us see a return to the good old days when budget surpluses were the norm.  We don’t want to see the good old days as they were in 2007 but a return to balanced markets and strong employment will be welcome.  We believe that can happen in 2011. 

Canada’s Economy Comes up Roses in Q4 – Dan Sumner, Economist, ATB Financial 

If you had to live in a developed country during the 2008/2009 recession and subsequent recovery, Canada was pretty much as good as it got. And according to new numbers released this morning, the Canadian economy is continuing to surprise the markets to the upside. 

Canadian Gross Domestic Product (GDP), a measure of the overall economic output of the country, rose by an annualized rate of 3.3% in the fourth and final quarter of 2010. This reading is ahead of both market expectations (+3.0%) and what the Bank of Canada was predicting (+2.3%), and is also stronger than US economic growth over the same period (+2.8%). 

The main contributor to the strong Q4 growth was a blockbuster month for exports in December, although consumer spending and business investment were also solid. Across industries gains were widespread but the biggest gainer was the mining and oil & gas extraction sector, which bodes well for Alberta. 

With the final data point for 2010 now available, Canada’s GDP grew by 3.1% in 2010 after falling by 2.5% in 2009. This compares with 2.8% growth in all of 2010 for the US. Readings on Alberta’s provincial GDP growth are not available yet (due out in spring 2011), although considering the energy sector has seen a strong rebound, growth is looking fairly strong. 

Moving ahead the Canadian economy is likely to remain robust in 2011, although growth could cool off as we move further away from the recession. The most important factor in 2011 will be what happens in the US. If things finally start to gallop down there, it will bode really well for the great white north.

Canada’s Economic Balance Tilting West February 18, 2011 – Todd Hirsch – ATB Financial 

It’s been ongoing for decades already, but the westward drift in Canada’s economic centre of gravity will gain even more momentum in 2011. Here are the top ten reasons why. 

10. Better fiscal environment: Saskatchewan is running a surplus. BC and Manitoba are close. And while Alberta is still running a pretty hefty deficit, the province is debt free and has plenty of savings to dip into. Ontario, on the other hand, is in some trouble. It’s not comparable to Greece (as some commentators have suggested), but big spending cuts and/or tax increases will eventually hit the province—and probably Quebec, too. 

9. Agriculture: It doesn’t happen too often, but crop farmers in western Canada may actually be smiling this spring. If moisture conditions hold up (and the snow pack this winter suggests they will), it could be a very good year for wheat, barley and canola growers. Prices are stellar. 

8. More diversified exports: The western provinces are somewhat more oriented towards China, India and the emerging economies than are points east of the Manitoba- Ontario border. This is especially true in BC, which sent only 45% of its exports to the US in 2010 (compared with 80% from Ontario). Even the Prairie Provinces, with all their energy exports piped south of the 49th parallel, sent slightly less to the US (78%). With the emerging economies leading global growth, the broader trade diversity in the West will be a solid benefit. 

7. The soaring loonie: related to #8 above, the higher Canadian dollar will be a disproportionately painful kick in the face to central Canadian exporters whose bread and butter is the US market. The story is really not so much about the loonie but about the US Greenback, the depreciation of which few think is quite over just yet. 

6. Fort McMurray: The oilsands have generated more than their fair share of controversy and problems, but the largest engineering projects on the face of the earth have taken on a life of their own. That is lifting not only the fortunes of northeastern Alberta, but the manufacturing heartland of central Alberta as well. A new upgrader near Edmonton is set to be built. 

5. Conventional oil drilling: not to be outdone entirely by the glow of the oilsands, western Canada’s conventional oil drillers are having a great year too. Forecasts for wells drilled have been revised upward for 2011. Prices well above $US 80 per barrel certainly help. But improved technologies in horizontal drilling— many of which were developed in Alberta—are giving new life and adding reserves to oil fields drilled decades ago. 

4. Non-oil resources: with the exception of natural gas, almost all of Canada’s natural resources are enjoying high prices in 2011. The world needs ‘em, and western Canada’s got ‘em! That will boost activity in potash, base metals, and even forestry. 

3. Jobs, jobs, jobs: Through the recession, employment in Saskatchewan and Manitoba didn’t even drop, and with the recovery in 2010, job creation has picked up. BC’s hit a soft patch post Olympics, and Alberta suffered the worst hit (proportionately) during the downturn. But through thick and thin, unemployment rates across western Canada remain lower than in central or Atlantic Canada. That will help pull job seekers to the West. 

2. Growing cities: they may not be the size of greater Toronto or Montreal, but western Canada’s urban municipalities are showing some of the fastest growth rates in the country. Saskatoon took the top spot as the fastest growing population in Canada, and two other western Canadian cities—Vancouver and Regina—placed #2 and #3. 

1. A global glow: with the surge in mergers, acquisitions, and equity sales for Canadian energy companies, Calgary is gaining tremendously in global investment banking. According to a study by one large global financial player, Canada now ranks fourth in the world (behind the US, UK and Japan) in terms of generating investment banking fees. Toronto still accounts for the lion’s share of that. But the big growth has been in Calgary as big players like Barclays Capital, Credit Suisse, and Citigroup scoop up talent and office space. 

All of this will put western Canada on top of the national growth chart in 2011—and indeed in an enviable position among most of the global economies.

Housing’s Golden Decade 

RE/MAX re-leased a report this week on Canada’s major residential real estate markets and how they’ve per-formed over the past decade. With the average price of houses increasing between 126% and 164% in both of Alberta’s major cities, it almost goes without saying that investing in your home was an extraordinarily good investment over the past ten years. 

The report sees both of Alberta’s major cities creeping into a sellers’ market in 2011 (i.e. sales occurring faster than new listings). But despite the pick-up in sales activity prices aren’t expected to deviate far from the cur-rent average. The report also noted there could be a bit of a surge in activity as homebuyers attempt to qualify for mortgages before the new mortgage insurance rules are adopted. 

With mortgage rates headed higher and Alberta’s wage growth rate set to decline, affordability will certainly be more of an issue over the next decade. The past ten years saw the provincial average weekly wage index increase by slightly over 50% and the average mortgage rate drop by over 2 percentage points. Although wages are not expected to fall back much, rates are heading higher and this will reverse some of these affordability trends and limit upside potential to the housing market.          

 We believe that the central Alberta market will mirror Edmonton and Calgary’s markets although the timing could vary slightly. 

And the investment value of real estate in central Alberta has certainly been very similar to that identified in Calgary and Edmonton.

Alberta Housing is Moderately Affordable!  ATB Financial – Jan 28, 2011 

According to the 7th annual Demographia International Housing Affordability Survey, Edmonton is the country’s most affordable large city, followed closely by Ottawa and Calgary.  This pronouncement might turn some heads, but the rebound in the housing market was actually stronger in Canada’s other major centres – especially in Toronto and Vancouver. Average housing prices in Montreal might be lower, but so is average household income. 

The survey compared the ratio of median family income to average housing price for cities in the English speaking world. This measure is different from other surveys which take interest rates into account and look at the monthly percentage of income used to service a typical mortgage. 

The authors wanted to focus on home values instead of monthly outlays, as over the life a mortgage interest rates can change considerably but the price paid for the house stays constant. 

Edmonton and Calgary recorded ratios of 3.5 and 4.0, which are both substantially below Vancouver, where the typical home is 9.5 times the household income. A ratio of under three was considered affordable, which was the historic average. 

Strong GDP Growth in November – Todd Hirsch – Senior Economist, ATB Financial 

While economic expansion in Canada got off to a good start at the beginning of 2010, growth petered out through the summer and early fall. But new data this morning suggest growth started to ramp back up toward the end of the year. 

The total value of all goods and services produced in the Canadian economy in November expanded by 0.4% month-over-month, the highest rate of increase since March of last year, and twice the increase posted in October. That surprised economists, who had been forecasting a gain of only 0.3%, which still would have been respectably strong growth. 

The monthly GDP data are compiled only at the national level. However, one of the strongest components of growth in November was oil and gas extraction (+2.4%). Although not exclusively an Alberta industry, strong growth in energy bodes well for this province. 

Other national sectors that did well in November include wholesale (+1.5%) and retail trade (+1.4%), both of which suggest Canadian consumers are feeling increasingly confident. Monthly losses were posted in manufacturing (-0.8%) and construction (-0.4%). 

The stronger-than-expected growth in November should lift overall fourth quarter growth to the range of 2.0-2.5%. That’s still in line with the 2.4% projection by the Bank of Canada for all of 2011. Therefore, today’s positive GDP report is unlikely to prompt the Bank of Canada to raise rates sooner.

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.