Good News for Alberta Housing Markets – Last week we heard that oil and gas lease sales in Alberta have hit an all time record in 2010 with 5 more land auctions still to come.  That means that oil and gas exploration will follow, maybe not this year, but soon.  It also means an inflow of cash into our provincial government coffers.

New oil and gas exploration means new jobs.  New jobs mean population growth.  Population growth means demand for houses.

Demand for houses means economic growth and prosperity since the construction industry is one of the engines that drives our economy.

Our housing markets in central Alberta have just experienced a slow summer, which was to be expected since the local economy has been slow and we have not experienced much job creation or population growth in the past year.

Recent news indicates that net in-migration to Alberta from other provinces increased substantially in the second quarter of 2010 after negative growth in the three previous quarters.  The numbers are not nearly what they were in the boom years, but are a huge improvement.

Alberta has always led the rest of the country out of a slow time.  The demand for our exports in the US is still not what it could be, but recent news suggests they are looking at our oil sands as a safe source of energy.  Economic growth in south-east Asia and China is still relatively strong and there will be new demand for our commodities from there.

We own the second largest proven reserves of oil in the world.   We know that even in a slow economy the world is consuming vast amounts of oil and gas and eventually the demand will outstrip existing reserves.  Ft. McMurray and the oil sands seem a long way removed from central Alberta, but things are booming up there as companies rush to develop more production capacity.

While low natural gas prices have held back much of our energy industry, there are some who are predicting higher prices next year.  That theory would be supported by the sale of those leases previously mentioned.  As an added bonus, a small increase in natural gas prices will have an immediate effect on government revenues which eventually flow into our economy.

Alberta is the land of milk and honey.  We have the lowest taxes, the least amount of debt, the largest oil reserves and the most opportunity!  It is the best place in the world to live and work and I am thankful to be here.

Oilpatch rebounds to record – by Harley Richards – Red Deer Advocate – The word “record” hasn’t been used in connection with Alberta’s oilpatch for some time. But the provincial government was able to dust off the word and insert it into a recent news release reporting on the status of this year’s oil and gas land sales.

As of last Wednesday, it had collected $1.86 billion in revenues from lease and licence sales — surpassing the previous high of $1.83 billion earned in 2005. And with five more sales scheduled before year end, the tally will grow.

“That’s a great sign,” said Brad Rowbotham, general manager of Red Deer’s Roll’n Oilfield Industries Ltd.   “It gives all of us reason to have some optimism that a lot of people could be going back to work.”

Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, said his organization noted improved land sales early this year but hadn’t anticipated that they would be this high after just nine months.   “I think it took us by surprise that they were as good as they are.”

Herring said drilling activity in the third quarter of 2010 — with an average active rig count of 322 — is up more than 80 per cent from the same period last year. The increase would have been greater, he said, if rigs hadn’t been bogged down in wet weather.

“As we go into the fourth quarter, our forecast is calling for a significant increase again over what we saw last year,” he said, predicting an average active rig count of about 400.

“I would think in 2011 we’ll see additional activity, beyond what we’re seeing now, but we haven’t got there yet.”   CAODC members are much more optimistic than they were a year ago, said Herring.   “Their frame of mind is much improved.”

Rick Doré, Nabors Production Services district manager for Sylvan Lake, is among those with a more bullish outlook.  “This year, from probably late spring to early summer, has definitely picked up and been busier than last year.  “As long as oil prices stay where they’re at and gas prices creep up a little bit, I think it’s pretty positive.”

Rowbotham has also observed increased activity and is hopeful more money will be invested in production in 2011.   “You’ve got to figure with those land sales that there are going to be a group of customers who are going to have better budgets next year than this year.”

He thinks the big reason for the improved health of the energy sector is the price of oil. Herring believes production incentives and a more favourable royalty structure announced by the province this spring were also factors.  “Had we not seen those changes, in spite of the fact we have high commodity prices, we wouldn’t see so much activity in Alberta.”

Although much of the drilling fleet remains inactive, many of those rigs were designed for natural gas production, particularly in shallow fields, said Herring.

“The part of the fleet that’s running almost at capacity is that that’s directed at oil and some of these natural gas plays that have horizontal drilling with multi-stage fracs.”

Whereas natural gas accounted for about two thirds of the wells drilled in Canada a few years ago, the low-priced commodity now makes up about 40 per cent of the total, noted Herring.

Rowbotham thinks a spike in natural gas prices several years ago probably attracted more capital to this energy source than Western Canada’s geology warranted.   “They forgot that it’s called the oilpatch for a reason — not the gaspatch.”

He added that the limiting factor if the energy sector continues to prosper will not be drilling and service rigs, but the people to operate them.   “A lot of companies in the industry are really going to have a tough time,” he said, pointing to the loss of manpower during the recent downturn and the considerable training required to prepare new people for the field.

Market Update – We have stated in the past that new home construction is only necessary if we have population growth to fill those new homes.  A healthy residential construction industry is one of the engines that drives an economy.

The negative growth trend of the past 3 quarters was abruptly reversed in the second quarter of this year and while those numbers don’t suggest a return to the heyday, they are very encouraging and may signal the beginning of better times in Alberta.

The effect of this recent growth will most likely be felt in the rental vacancy rates, but when vacancy rates go down, people start to look at moving from rental to ownership and the housing cycle begins.

Of course, this growth must continue in order to see long term benefit and that requires jobs.  Jobs bring people to Alberta and the biggest job generator in Alberta has always been the energy industry.  We suspect that the oil sands are the largest contributor to the recent growth which will not have an immediate impact on central Alberta.  But, energy activity anywhere in Alberta contributes to the overall economic health of the whole province

Migrants Reverse Course – Dan Sumner – Economist, ATB Financial

One of the best measures of the relative economic and social health of a region is whether migrants are moving to or from the region. According to Statistics Canada data released this morning, Alberta just experienced its most solid quarter of interprovincial migration in a year.

2,820 Canadians moved to Alberta from other provinces during the second quarter of 2010, up from only 312 in the first quarter and net-negative migration in the two quarters before that (see graph). In addition to the positive reading on interprovincial migration, Alberta’s total population grew at the fastest rate in Canada, rising by 0.5% to 3.72 million.

The main factor driving Canadians to move between provinces is jobs and job prospects. During the mid-decade unsustainably strong job prospects drove migrants to Alberta from all corners the country, although this trend reversed course quickly during the recession.

Statistics Canada also noted that behind Alberta’s lofty population growth rate was a strong level of natural increase (births minus deaths). This is partly due to demographics as Alberta’s population also has the lowest median age at 35.8 (national average = 39.7), and more young people means more babies.

The strongest reading on interprovincial migration since the recession began is good news for a province that isn’t used to losing residents to other provinces on a net basis. However, considering the jobs market here is unlikely to return to its pre-recession pace for some time, Canadians are unlikely to flock to Alberta at the rates they did during the boom.

Market Update – The news is full of mixed messages about what is happening locally and around the world.  One day the news is good and the next it’s bad.  Economists can’t agree on what has happened in the past, let alone what is going to happen in the future.  (Let’s face it, if they could accurately predict the future, they wouldn’t be writing economic forecasts).  The media happily regurgitate all the stuff they hear from the economists and quite likely don’t get it right a good part of the time.

Unfortunately, bad news seems to sell better than good news so we seem to get a larger proportion of the bad.  The problem with continual bad news is it causes consumer confidence to falter.  Think about it.  If the media prints a prediction that house prices are going to drop by 10% next year, consumers will delay buying homes, waiting for those lower prices.  If enough consumers wait to buy, that lower price forecast will almost certainly come true.

People sell their homes because they want a new home, because they want to move to a bigger or smaller home, because they need to move for their jobs, or even because they’ve lost their jobs.  People buy homes forthe same reasons.

Those who buy and sell trying to predict the highs and lows in the market are almost certain to miss their timing.  Those who wait to sell until the price of their home goes up will pay more for the house they buy.  Those who wait to buy their first home until prices go down, may miss the low in the market because no one knows when we’ve hit low until prices start to go up, and then they may pay a higher interest rate which is exactly the same as a higher price.

The moral of the story?  Your home is the place where you live and raise your family.  Real estate values have always kept pace with inflation.  Your home is a great forced savings plan.  You can build equity while you provide a roof over your head.  Make your housing decisions based on your family’s needs, not on some vague prediction for the future.

The compelling arguments for buying a home today:

Ample supply – we have more homes on the market than at any time in history.  A great opportunity to find just the right home for your family.

Low prices – a large supply of homes relative to lower demand has caused very attractive pricing relative to previous years.

Low interest rates – interest rates are at historical lows.  Because most home purchases are mortgaged, low interest rates are the equivalent of a large price discount.  A difference of two or three percent in the mortgage rate means thousands in savings over the most interest rate sensitive first five years of ownership.

If you are going to sell and then buy again, current price levels are irrelevant, but low interest rates can still be a huge advantage.

Natural gas risks worthwhile: Shell CEO – Canada is home to many promising natural gas reserves trapped underground – September 13, 2010, Canadian Press

The promising natural-gas industry carries environmental risks as companies work harder than ever to unlock it, a top international oil executive conceded Monday at the World Energy Congress in Montreal.

Royal Dutch Shell CEO Peter Voser told delegates at the conference that the world is on the cusp of a natural gas supply boom.

He said recent events – like the Gulf of Mexico oil spill – are a reminder that sometimes things can go wrong.  “I realize that there’s some public concern that fracturing could affect fresh water layers in the ground,” Voser said in his keynote speech at the conference.

“We take that concern seriously … Whether we like it or not, producing energy and delivering it to billions of customers around the world comes with certain risks.  “Rather than closing our eyes to that reality, we must confront risks and manage them as effectively as we can.”

However, Voser strongly defended the potential of natural gas as a clean and abundant energy source that will help countries reduce their overall greenhouse gas emissions. He even called on governments Monday to loosen regulations, and allow natural-gas extraction to reach its full potential.

The head of Europe’s largest oil company says the fuel will play a bigger role in the global energy mix in the coming decades.

He predicts the world’s annual natural gas demand will increase by 25 per cent by 2020 – and almost 50 per cent by 2030 – as emerging countries like China continue to grow.

“A key question is whether the world’s appetite for natural gas will keep pace with supplies,” Voser said.

Tapping into deep gas reservoirs is easier than ever with the help of new technology — and Canada is home to many promising reserves trapped underground.

Shell owns extraction rights in British Columbia, where the corporation is already producing enough gas to power more than 400,000 homes. Voser used Shell’s operations in B.C. to illustrate Canada’s potential in shale and tight gas, both of which must be extracted from rock deposits.

Housing market not in free fall, report argues – Financial Post – Sept. 8, 2010

OTTAWA — Canada’s cooling housing market continues to put the brakes to residential building plans in Canada, although the slowing trend in no way signals a U.S.-style housing free fall, the Conference Board said Wednesday.

The Ottawa-based think-tank weighed in on the housing-bubble debate on Wednesday, after Statistics Canada released data showing the value of building permits for residential construction fell for the fourth straight month in July.

The 2.4% decline, to a monthly rate of $3.5-billion, follows similar data showing housing starts and resale activity in Canada declining for months now, along with reports arguing that Canada’s housing market is a bubble waiting to burst.

Not so, the Conference Board of Canada argued in a report Wednesday.  “The housing market has lost its lustre. No doubt about it,” said Mario Lefebvre, the centre’s director for municipal studies.

“However, this will not lead to a free fall for Canada’s housing market. This country will not experience home-price declines to the tune of what we have witnessed in the United States over the past few years.”

Signs of a slowdown were unmistakable in Statistics Canada’s report. It showed weakness in residential permits was much more broadly based than in the nonresidential sector, with declines registered in six of 10 provinces, said Scotia Capital economist Derek Holt.

Yet, he added, the report “is directionally in line with expectations for softer housing markets,” and that the number of residential permits “nonetheless remains 31% higher than a year ago.”

Mr. Lefebvre conceded in his report that the next few months will be weak, thanks to a slowing economy, the arrival of the harmonized sales tax in Ontario and B.C., declining consumer confidence, European debt worries and a jobless recovery in the U.S.

At the same time, home prices now average more than $300,000 in Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal — far above the $150,000 to $200,000 historical average — according to a recent report from the Centre for Policy Alternatives which said those markets have all the hallmarks of an “accident waiting to happen.”

But Mr. Lefebvre argued the country will only see a pause in home-price growth, with some possible small declines in a few markets.

Mr. Levebrve said prices have held up despite declining resales because those sales “are coming off incredibly high levels in most markets — levels that were simply not sustainable.”

The board said it does expect housing starts to decline. But like the resale market, this will mark a return to more normal levels rather than a collapse in the market, which, in the case of the U.S., was the result of laws that allow mortgage deductibility for tax purposes and the “ring-fencing” of mortgage debt, which prevents lenders from pursuing other assets of a mortgage holder, the board said.

Oilpatch hiring again – By Harley Richards – Red Deer Advocate – Published: August 27, 2010 6:43 AM

A year ago, the prospects were pretty bleak for oilpatch workers with a resume in their hand.  No more.   Drilling and service companies are beating the bushes for skilled and even unskilled people as their industry recovers from the economic downturn.   Bonnie Snair, human resources manager at Red Deer’s High Arctic Energy Services, said her company has hired 74 workers over the past two and a half months.  “I anticipate that we’ll be hiring another 50 before the end of the year,” she said.  One of the most popular places for oilpatch companies to seek staff has been the newspaper classifieds. And after a period of absence, corporate logos have returned to that section of the Advocate, said Richard Smalley, the newspaper’s retail advertising manager.

“You’ve just got to open up a paper and you’ll see all the oil and gas ads that are running in there.”   Year-over-year, said Smalley, the Advocate’s classified display linage — which consist primarily of employment ads, particularly for the oilpatch — is up 43 per cent.  “That’s a huge jump.”  Charles Strachey, a regional communications manager with Alberta Employment and Immigration, has also observed an increase in job postings at his department’s Labour Market Information Centre in Red Deer.   “There’s been a significant jump in the number of oilfield jobs,” he said, adding that construction has also seen renewed hiring.

“Basically, there was almost zero jobs for the oilpatch on the job board last summer.”  As might be expected, this increase in the male-dominated sectors has impacted the ratio of job-seekers visiting the local Labour Market Information Centre.   Six months ago, 75 to 80 per cent were men, said Strachey; now the male-female split is about 50-50.  He added that his department is also now getting more requests for the specialized training typically required for oilpatch jobs.

Shane Goacher, operations manager with Bravo Oilfield Safety Services Inc. (B.O.S.S.), said the Grande Prairie-based company’s ads have generated quantity but not quality.  “A lot of people are available but nobody has the experience.”   When the oil and gas sector plummeted, he said, many skilled workers disappeared.  “Some of them ended up going to school, some of them ended up getting (other) jobs.”

Nancy Malone, economic analysis manager with the Canadian Association of Oilwell Drilling Contractors, said senior staff on drilling rigs tend to ride out the slow periods.  “They understand the industry, they understand the ups and downs and they work appropriately.”

Roger Soucy, president of the Petroleum Services Association of Canada, said the labour crunch is likely hitting some companies harder than others. Those active in horizontal drilling and multi-stage fracturing — increasingly popular methods for pursuing oil and gas — are probably busier than other firms.

He and Malone agreed that the situation is not as dire as it was during the boom period several years ago. But if rig activity is high this winter, manpower could become a concern.  “We lost so many people who generally don’t come back to the industry once they’ve left it,” said Soucy.

The companies vying for people are already turning to new strategies.  High Arctic has been promoting a snubbing boot camp to entice prospective employees to give the industry a try. Snair said it’s helped her company hire many of its new people.  B.O.S.S. offers employees a travel voucher that they can use for a vacation after working for a period of time. Goacher said such enticements have become commonplace in the industry.

Both businesses are tapping into new search methods — High Arctic has turned to Facebook and B.O.S.S. to Kijiji — in their efforts to connect with young prospects.  “I think people just have to get really creative and step out of the box,” said Snair.

June retail sales inch higher – Tuesday, August 24, 2010 – CBC News

Canadian retail sales were 0.1 per cent higher in June, rising to $35.9 billion. In volume terms, the gain was greater — 0.9 per cent. Lower prices were observed at gasoline stations and new car dealers, Statistics Canada said Tuesday.

A cashier rings through purchases at a supermarket. Canadian retail sales were 0.1 per cent higher in June, Statistics Canada reported Tuesday. (Eric Gaillard/Reuters)

“Looking ahead, further sales gains will likely be modest as income growth remains subdued, households have already cut into savings rates, and consumer confidence is now labouring,” BMO economist Doug Porter said.

Five of the 11 subsectors the data agency tracks were higher. In dollar terms, the largest increase was seen at motor vehicles and parts dealers, where sales were 2.1 per cent higher.

In volume terms, sales rose 5.1 per cent at electronics and appliance stores. Sales in this subsector have been trending upward since October 2009.

The largest decline was at gasoline stations, where sales fell 2.7 per cent, as pump prices were lower. June was the third straight month of sales declines at gasoline stations, after increases for the previous 11 months.

Sales at clothing and clothing accessories stores fell 1.1 per cent, a reversal of the upward trend in the subsector since April 2009.

‘Regional wrinkle’ in N.S.

Regionally, sales were down in six provinces during the month.

Sales declined in all of the Atlantic provinces except Nova Scotia, where they rose 3.1 per cent.

“One notable regional wrinkle was the 3.1 per cent surge in Nova Scotia, as shoppers rushed to beat a two-point hike in the HST at the start of July,” Porter said. “Aside from that province, sales were down fractionally.”

Sales increased 0.3 per cent in Ontario following declines in April and May. Quebec retailers registered a 0.2 per cent sales decline in June, a third consecutive monthly decrease.

Market Update – We have been through a slow spot in the housing market over the past 3 months.  Lots of people are asking why.  There are a few explanations:

Mortgages – activity in our market peaked in April.  It’s no coincidence that is when the government tightened up lending rules and made it more difficult for first time buyers to get into their own homes.

Spring break-up – our local economy is still heavily reliant on the energy sector for employment and economic activity.  Our wet spring conspired to keep the oil and gas sector at home and is still making life difficult.

Low natural gas prices – the majority of central Alberta’s energy activity involves natural gas.  The discovery of effective extraction methods from huge reserves of natural gas locked in shale formations in the US and Canada has drastically increased the supply of natural gas, effectively driving down the price and creating less need for exploration, drilling and extraction.

Population growth – all of the above has contributed to fewer jobs and fewer people moving to central Alberta.  Lower population growth means less demand for housing.

World economic woes – the world economy has been languishing in the last few months as it runs out of the massive amounts of stimulus monies injected by governments and there is uncertainty about future prospects.  Consumer confidence doesn’t do well under a barrage of bad news, but consumer confidence is exactly what we need to get the economy moving again.

THE GOOD NEWS!  We have noticed an increased level of activity in the energy sector lately where it counts – on the roads.  We are hearing numerous stories that oil and gas companies are busy and have work for a year or more.  We are also hearing that they are having trouble finding qualified workers, which means they are probably looking beyond Alberta.  That quite likely means that people will start looking at moving back to Alberta from the other provinces which means population growth and demand for housing.

It won’t happen overnight and we aren’t forecasting a housing boom, but Alberta has always led the way out of Canada’s recessions and we’re likely to do it again.

We think there is the possibility that activity could increase in the fall, helping to stabilize the current supply and demand imbalance.  Interest rates still very low and are not predicted to go up much this fall.

The current environment of great supply, low prices and low interest rates makes buying a home now a very attractive proposition and we believe there is some pent up demand out there just waiting for some encouragement.

The Exchange Rate and Inflation – The fear of deflation in the US appears to be on the rise once again. It’s rooted in the fear that private spending hasn’t yet strengthened sufficiently to offset a substantial reduction in stimulus spending (support for which is waning). At the same time there’s rising concern over the trade imbalance between China and the US. The link between the two, however, hasn’t really been discussed.

Deflation fears are rooted in the fear that reduced spending will further decrease capacity utilization (i.e., more factories will be idled more often). The increase in hungry firms, combined with a paucity of buyers, results in a possibility of general price declines. In isolated North Korea, this would be the end of the story, but for countries that are open to trade then consumer prices depend on another factor: the price of imported goods.

This channel of inflation is known as the exchange rate pass through. Its name reflects the fact that imported goods and services need to be purchased in a foreign currency, making the exchange rate vitally important. If the price of the foreign currency increases then so does the price of the goods and services that country produces, relative to the importing country, all else equal.

For instance, in the early 90s another North American country had a severe trade imbalance: Mexico. The Mexican central bank was maintaining the value of its currency artificially high vis-à-vis the US dollar. It simply wasn’t sustainable and devaluation followed.

Notwithstanding the fact that the local economy was in shambles, inflation soared from about 7% to 35% between 1994 and 1995. Why? One reason was due to the fact that imported goods became incredibly expensive overnight when their currency collapsed. This, of course, is an extreme example, but it illustrates the point.

Earlier this decade, between 2000 and 2005, the exchange rate pass through to inflation was a topic high on the radar screen for researchers at the US Federal Reserve Board and the Bank of Canada. Researchers were finding that this channel was becoming very weak. That is to say, exchange rate movements weren’t impacting import prices to the same extent that they were in the ‘80s.

What was the general consensus explaining the reduction? One explanation given was related to the change in the mid-‘90s by developed countries to implement a fixed inflation target. According to Professor John Taylor at Stanford, this change lowered the relative power of sellers relative to consumers, lowering their ability to pass increased costs on to customers. Another explanation, associated with Mario Marazzi work at the Federal Reserve, was that there was a fundamental shift that occurred in the economy, with the share of goods and services that are less sensitive to exchange rate changes dramatically increasing their share of imports.

A final rationale, also from Mario Marazzi body of work, highlights the important impact of China and its decision to peg its currency to the US dollar. Chinese exporters are effectively shielded from any exchange rate movement. Exporters from other foreign countries are cognizant of this fact and must compete for access with the US market with China, making them less likely to change their prices in response to exchange rate fluctuations.

The timing is fairly good for the US for it to fix its trade imbalance. Efforts to fix the US trade deficit with China will no doubt revolve around the latter’s policy of fixing its exchange rate with that of the $US and making Chinese imports more expensive, while at the same time making US exports cheaper.

The US economy could sure use the boost in demand and at the same time could easily handle any related price inflation (we’d expect that the exchange rate pass through channel will strengthen the larger the movement in the currency). The trick will be in making sure the shift is controlled and not a stampede, the risk of which is pretty low given the Chinese inherent preference for stability.