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.

·         ATB Financial – Weekly Bulletin – July 10 – Residential developers in Alberta started construction on 24,900 homes in June 2010, a drop of 1,800 compared to the month previous but well ahead of the pace one year ago when builders started only 17,800 homes. All figures have been seasonally adjusted and annualized, which means it is the number of homes that would be built during the year if construction continued as it did for the month. This was the second consecutive month of declining housing starts in Alberta, confirming that the mood has cooled in the residential construction sector after a fairly strong period in late 2009 and early 2010.

Drilling down by region, it appears that multi-family construction (includes condominiums, duplexes and town houses) in Edmonton bore the brunt of the provincial drop in housing starts. However, housing starts have been much stronger in Edmonton than Calgary over the last few months, so even though starts in Edmonton slipped from the month before they are still higher than in Calgary.

Moving forward, it is very likely that housing starts will continue to stay subdued compared to the beginning of the year. So far in 2010, housing starts have averaged 26,700 units, which is much stronger than during 2009 which saw fewer than 20,000 new home starts.  However, it’s still well below the pace of 2006 and 2007 when over 40,000 new homes were started.

·         Local Market Comment – The central Alberta market is a reflection of what is happening in the rest of the province.  The reason new housing starts are slowing is because we haven’t had the population growth to sustain the pace we were on.

The reason we haven’t had population growth is because we had negative job growth in the last two quarters of 2009 and only a very small net gain in the first quarter of 2010.  There were a lot of jobs created in Canada in the last quarter but almost all of them were in Ontario and Quebec.  For the first time in years, Alberta has been lagging behind the rest of the country when it comes to job growth.

The reason we haven’t had job growth here is because there has been low demand for commodities in the world wide economic slowdown we have been experiencing for the past two years.  It’s never quite that simple though.  There are other factors that have had an effect on our local economy.  As an example, the Alberta Provincial Royalty review and subsequent changes to the oil and natural gas royalty structure caused jobs and workers to move to Saskatchewan and B.C.

There are some positive signs that job creation in Alberta may be on the upswing. Well licences are up over last year, oil and gas land lease sales are up over last year, there are more drilling rigs working than at this time last year and well completions are up over last year.  All very positive signs of recovery in the energy sector and when the energy sector recovers in Alberta, everything else follows behind.

More good news!  It seems that once Albertans go to work, we make more than the average Canadian.  The trick now is to get more of us working.

One explanation I heard the other day for the ongoing lack of activity in the oil and gas sector is that they are still on spring breakup.  With all the wet weather it has been difficult for the equipment to get into the field, so they sit and wait.  Once it dries up a little, things will pick up substantially and that’s good news!

Last week we said that in order to see a change in our housing market, we need population growth.  In order to have population growth we need jobs and the place we’re currently lacking jobs is the energy sector.  According to this news article, the jobs will soon appear.

Energy sector short 24,000 workers by 2014 – By: Lauren Krugel – Winnipeg Free Press

CALGARY — Energy firms should build talent within their own ranks before the next labour crunch hits rather than look outside when they’re in the midst of a shortage, a human resources consultant said in a report Monday.

Many in Alberta’s oilpatch adopted a “buy talent” strategy during the boom times between 2006 and 2007, scrambling to fill jobs with workers from across Canada and abroad. Salaries and wages spiralled out of control as energy firms vied against one another for labour.

“I think if you talk to HR executives in the energy sector, they’ll tell you they don’t want to go back to that,” said Stephen Doitte, Mercer’s talent management consulting leader for Canada.

Assuming employment demand grows by four per cent annually, Mercer predicts the energy sector will be short some 24,000 workers by 2014.

The survey of 135 oil, natural gas and utility companies included permanent jobs across all job types, from tradespeople to engineers.

A study by the Petroleum Human Resources Council of Canada found the sector would need 100,000 workers by 2020 to support oil and gas activity.

Demographics are not working in the energy sector’s favour, Mercer said.  The bulk of the workforce consists of baby boomers, many of whom are nearing retirement. Another large chunk includes workers in their 20s and early 30s, known as Gen Y.

“The energy and resources sector in Canada basically skipped a generation,” Diotte said. “As the baby boomers retire, there’s a big gap in knowledge and skill and experience between those that are leaving and the ones that are coming in behind.”

That means companies should tailor their programs to suit the needs of each group, rather than adopting a one-size-fits-all approach.  — The Canadian Press