"The Stage Is Set For A Massive Housing Market Correction in Canada's Oilpatch"

Tyler Durden's picture

Two weeks ago we reported that "the next victim of crashing oil prices has been identified: housing", particularly non-residential construction among the energy producing regions, where the capex collapse reality is already being felt far and wide. Eventually, once the overall economy of these same oil producing regions is impacted sufficiently, the pain would spread to residential housing as well, as the energy boom that kept the local economies humming for years, turns to a bust. But while the US patiently, and nervously, awaits the outcome of the crude crash, one place is already starting to suffer the consequences of the price collapse is Canada's energy Mecca, Calgary, where as the Financial Post reports, "the stage has been set for a massive correction in the oilpatch."

To be sure, just like with US production, nobody is quite ready to pull the plug just yet and indeed, "the price correction hasn’t happened"... yet. "The average price of a home sold in January was $460,933, down 0.5% from a year ago. The median sale price climbed 1.1% from a year ago to $417,500."

But it's just a matter of time, and as FP adds, "the stage has been set for a massive correction in the oilpatch. New listings jumped 37% from a year ago while the overall inventory was up 113.4% during the same period. A year ago, based on market conditions at the time, there was 1.52 months of supply in the system. At the end of last month, that number was 5.29 months."

Doug Porter, chief economist with Bank of Montreal, noted Calgary saw the largest percentage increase in prices, among major cities, in 2014.

The question is when does the momentum shift, and when do all the pent up "sellers on the sidelines" enter the market in hopes of being the one who sells first (and thus best). That moments is about to arrive: “by some measures it was the hottest and the tightest market in Canada,” said Mr. Porter. “The change is beyond dramatic and about as quick as you can say oil prices plunged, we are going to see this go from a sellers’ market to a buyers’ market.”

How bad will it be? Mr. Porter says nowhere near as bad as 2008. “We had a global recession. It won’t get that bad, but we will see a correction in Calgary and probably Edmonton as well,” adding Alberta’s capital could face even more difficult circumstances if the provincial government starts “swinging the axe” – cutting jobs – which would make the city even more vulnerable than Calgary.

For local listing managers, the outcome will be bittersweet: on one hand, once the selling deluge begins, the amount of commissions will soar. However, the outcome will be a devastated real estate market, and the brief surge in real estate revenues will be followed by a long, protracted recession in domestic spending. Unless, of course, crude prices explode right over $100 on short notice.

Elton Ash, executive vice-president of Re/Max of Western Canada, who has seen a few boom and busts in his decades in the business, says it’s too early to tell how bad this market collapse will be for the oilpatch.

 

So much is dependent on how long these low oil prices stick around,” he said, adding move-up buyers have pulled the plug on decisions to move immediately. “Information from our offices in Calgary … They are staying put.”

 

At the same time, he says some people are listing to test the waters to see what price they can get if they cash out. “It’s human nature. People become concerned. There have been job losses. We’ve seen it,” said Mr. Ash. “Some people want to sell now and hedge their bet.”

 

Corinne Lyall, the Calgary Real Estate Board’s president, appeared to be preparing people for the worst when she warned in a statement that sellers would have to have “appropriate expectations” in this market. “They need to consider their property type, the competition they may be facing in their community, their reasons for selling and, of course, when they ultimately need their property to be sold,” she said.

 

Demand was already beginning to wane in the city as Calgary sales fell 38.9% in January from a year earlier. “Sales are also down to levels we have not seen in a long time and a lot of that is due to consumer confidence,” CREB chief economist Ann-Marie Lurie warned. “I wouldn’t say there is panic because people would be fire-selling their houses.”

It all comes down to expectations: if sellers expect that oil will rebound quickly, they will pull their house from the market. On the other hand, buyers may do the same, in expectation of crude plunging right back down. Ultimately, it will be a question of housing vs cash flow need. And yes, if and when the crude flush takes place, as it surely will because Saudi Arabia means business when it says it wants to crush shale and the marginal US prodcuers, there will be a housing bloodbath, first in Calgary, then in Texas, North Dakota, and the rest of the shale states, and eventually, everywhere else. Because whenever someone tells you something is "unambiguously good" it never is.

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cossack55's picture

""correction in the oil patch"  Tarbaby?

johngaltfla's picture

The correction in Canada will pale to the amount of Canuckistanis abandoning their Florida 2nd homes and assfucking American banksters....

 

Without old farts from Canada, the Florida vacation rental, time share, and 2nd home market is fucked.

nink's picture

NIRP and the new COMER Case will fix all that. I will pay you to borrow money to buy a bigger house just wait. 

Stackers's picture

Canada and N Dakota had ridiculous housing booms from shale and tar sands. Texas not so much. Houston and Dallas are much more diversified than in the 80s, and much of Houston oil and gas jobs has to do with refining, not drilling. I almost moved to Edmonton 10 years ago at the height of the tar sand boom and you couldn't buy a single wide trailer home for $100k up there back then.... Same in N Dakota now... Or was

Deathrips's picture

Why this is worse for canada than for florida or california, it is important to understand full recourse loans. Look it up.

 

RIPS

asteroids's picture

Look at the price of housing! Study the delta between US and Canadian homes from WWII to today and you'll see a disaster in the making.

JustAboutThatActionBoss's picture

How can I short the Bank of Calgary?

 

Is there one? 

 

Maybe just short CIBC or Royal bank of Canada?

 

Thoughts?

Eternal Complainer's picture

I believe its CIBC with the most exposure

pitz's picture

Careful, nearly all of the at-risk mortgages in Canada's big banks are under some form of subprime mortgage insurance through CMHC or similar. 

Whootie_who's picture

All Canadian mortgages with less than 20% down are insured by the  CMHC a fedral mortgage insurance scheme, and foreclosures are cleared through the courts... no fire sales and all backstop by the taxpayers

pitz's picture

How many houses will the CMHC take into inventory before they eventually have to 'fire sale' them? 

Although in fairness, the inventory overhang in Canada doesn't appear to be anywhere near as severe as seen in the US. 

TheRedScourge's picture

Or perhaps REITs with the most Western Canada exposure?

NoDebt's picture

The headline says run for your life, yet the article sounds decidedly meh.

 

Pareto's picture

I agree ND.  I'm not seeing it.  Not even close.  Way to early to tell.  I'm hearing stories, but, for a major corection to ensue you have to see an exodus from these places - a reverse of the massive migration that came over the last 4 years.  Meh.  Not seeing it.  Reduced consumption - maybe.  But, therre are lots of other things you can do if not in the oil patch.  If things were really going to tank - the $CDN would not be rallying along with oil - recognizing that 2 or 3 days does not a trend make.  Still.  Just not seeing the panic.  Not even close.  Besides, folks could cash out their investments to pay down mortgage in the eventof a downturn with the expectation that while they are paying down their mortgage monthly with their investment(s) they can be doing something else while oil and gas recover.  Its a flesh wound.  Nothing more.

Abbie Normal's picture

For those that have gone through a real oil price crash in Alberta (think mid-1980s instead of 2008,) the price of houses dropped by 30% in less than a year once the panic selling ensued.  Best to get out of the smoking house-of-cards before the flames are evident.  At times like this, it's best to remember that if you don't cash out of the casino before it collapses, all you'll have is a handful of worthless chips.

 

pitz's picture

The decline started 2 years ago even with the high oil prices in Edmonton/Calgary and most of the rest of Canada.  The trigger point was the country's major subprime mortgage insurer tightening up the requirements for a subprime mortgage dramatically.   Same thing that marked the top of the US RE market circa 2005-2006. 

StandardDeviant's picture

Agreed.  Wake me up when the Vancouver bubble starts to burst.

youngman's picture

They are going to have a readjustment bigtime..they have been going up up and aways all this time....so they are due an education....

neidermeyer's picture

I'm in Florida and we've had visitors in our house in the last year from Toronto and B.C. ,,, I'm not 100% on this but in Canada I believe 20% down is an absolute minimum and if you default there is no forgiveness on a deficit/short sale. A lot of people could lose most of their savings ... sure sounded to me that Canadians were WAY too complacent about real estate pricing stability and overbought.

Abbie Normal's picture

The Canadian Mortgage Housing Corporation (equivalent to Fannie Mae) has allowed 5% down payment purchases since the '80s.  There are also huge penalties issued by the banks if you break a loan before the current term is finished.  For example, if you sign a 5-yr mortgage and end up having to leave after year one, you still owe the bank unearned interest for the next four years.

pitz's picture

CMHC is far bigger than Fannie/Freddie in Canada's marketplace.  They also occupy the role taken by companies such as PMI, Ambac, and the other private subprime mortgage insurers (and we know what ended up happening to most of them in the USA in the 2008/2009 period!).  At least Fannie Mae had a minimum standard of 20% down, and a limit to qualification. CMHC, until recently, was doing subprime insurance for 0% down loans for unlimited amounts.

CMHC = $900B of subprime insurance/re-insurance.  Fannie/Freddie were $5-$6T entities at their peak.  Using a traditional 1:10 ratio between Canada and the USA, the role of CMHC is far more pervasive.  Think of Fannie/Freddie on steriods.  With an unconditional guarantee of the taxpayer.

sun tzu's picture

Where will CMHC get the money to back the failed loans?

pitz's picture

Theoretically, it will be debt of the government.  However, the push back on such, politically, could create an enormous amount of volatility for Canada's banks.

FIAT CON's picture

When CMHC runs out of money the Canadian tax payer comes to the rescue

 

pitz's picture

CMHC-insured subprime mortgages were available, at least for a while, with 0-down, 40 year amortizations.  That practice was discontinued in the CMHC subprime mortgages, but some credit unions stlll lend with 0 down.  Oh, and nearly all of Canada's loans are either over-night adjustable rate, or for terms up to 5 years.  There is no viable long-term financing market in Canada for residential RE loans longer than 5 years.  Canada is basically a subprime ARM nation.  Shocking, eh?

August's picture

>>>There is no viable long-term financing market in Canada for residential RE loans longer than 5 years.  Canada is basically a subprime ARM nation.  Shocking, eh?

This does not seem to be appreciated by most Amurican readers: many/most planetary home buyers do NOT have the option of locking in a 30 year loan at X%.  One's mortagage rate floats, or resets every X years, and X < 5.

Ghordius's picture

August, you are attacking the one favourite form of American Socialism? The State Interventionist Federal Supported 30 Year Mortgage?

Don't you know that if homeowners are less then so-and-so, the whole world goes up in flames and riots? Report to the nearest re-education camp

indaknow's picture

Look. Where is all the Canadians on this site? Now I'm not going to discuss the "environment" or global swarming or polar vortexes or wiarton willy here, but what the fuck? what in GODS name happened to us? We sit back and accept some US SAUDI global play to "hurt" Russia out of some fantasy that they stole the Crimea when in fact we all know it was the US who instigated this monster to begin with. If we follow the path of the devil we might just end up in hell. Let's Please reconsider  our path and think foremost of our workers and familys and stop this nonsensical delusion emnating from the south. FUCK OFF HARPER, FUCK OFF OBAMA

NoDebt's picture

Resistance is futile.  You will be assimilated.  You will be one with The Borg.

 

35 Whelen's picture

I don't blame anyone, just economics.  Canada and USA have been increasing oil production at enormous rates, as have a number of other regions around the world.  So, supply is way up.

Now, if you were a Saudi, would you decrease production to reduce supply, only to have a Canuck, or Texan, or Russian fill the void, or would you say enough is enough, we are holding the line, and let come what may.  Let the weak hands fail.

Over supply is actually not that much, and it will collapse come summer or fall IMO, and prices will simply come roaring back, over shoot, and settle down.  If, everyone goes back to pumping like crazy, we'll have the whole thing all over again with a collapse and rapid recovery. 

Add to this a sloppy global economy though, and oil supply will tend toward over supply for the next several years, or longer.  Either there will be some discipline among producers, or prices will juke all over the place.

Canada will do just find, simply because the oil sector has huge room for cost reductions ... for example, who the hell needs to pay a nubee rig pig $130K a year when he'll happily work for $100k.  Already, contractors in AB are taking 20% less for some work.  It's long overdue as the industry has become grossly expensive simply because money was so easy.

Abbie Normal's picture

Coincidentally, my brother-in-law was pulling in exactly that much ($130K) as a camp cook near Ft. McMurray -- 3 weeks in the field and one week back home in Calgary, courtesy of the corporate jet; until he received his layoff notice last month.  Now he's looking for any kind of a cooking position starting at $15/hr, assuming he can even get an interview.  Wonder how he'll make the $3200/mth mortgage payment now?

Matrix1984's picture

Does anyone have any thoughts on moving from the US to Canada? My mother is from Canada and has dual US/Canadian citizenship. We recently found out that by Canadian law her 1st generation of children are considered Canadian citizens. Long story short Ive recently confirmed Canadian citizenship and obtained a Canadian passport and a social insurance card. Will Canada fare better in the coming economic collapse??? Any ideas? Your comments would be greatly appreciated...

Gilnut's picture

You'll probably get a lot of responses from the "survivalist" crowd telling you to go to Canada, farm and live off the land.   In actuallity during an economic collapse most people move into urban areas during a time of crisis.  Not my opinion, just fact.  Take it from someone who grew up in Maine, going to Canada presents significant challenges during an economic collapse.....of course that's entirely dependant on which part of Canada you go to.  My 2 cents....if you live in an area that you have a support system in place, friends and family, stay there....if not, sure head to Canada.....just remember that come December it's frigging cold up there.   :)

TheRedScourge's picture

It doesn't get as cold near the great lakes or near the coasts though. Calgary has it especially good weather-wise, as it is sort of in a valley where warm air tends to pool and stay in place, while the cold air blows overtop, across the mountains to the west. When we get such an event, it is called a "chinook", and it can take the weather from -15c to +15c in a matter of a week.

35 Whelen's picture

Prior to 2008 I would have told you to stay put.  Now, I'd say "come on down" ... with caution.  It depends very much on what your recreational expectations are, your standing financially, and whether or not you are an urban or rural type; etc.  Canada varies tremendously from region to region, so you have to match your destination with where you are on a number of levels.

For example, if you are blue collar tradesmen, and like hunting, fishing, open space, and don't mind winter, Saskatchewan is a mecca with a huge shortage of trades.  Real Estate is still reasonable for the most part.  But, if you are an urban type, who needs the things only larger cities provide, Saskatchewan would be a desert for you ... then you have to head for the bigger centers.  Calgary will be offering great home buying opportunities starting about now, but they won't last for long if the oil price recovery is a V recovery.

BC is outstanding if you love warmer climate, ocean, mountains, lots of enviro-loons, and if you can bring reasonable assets in, as housing can be pricey.

I hate Ontario, so won't comment much, other than it offers everything from the lake life to Canada's most metropolitan city.

I could go on, but you get the picture.

I think it's a great country to build a life in.  You'd be simply joining millions of "legal" immigrants who are flooding in from every corner of the planet; including Europe.

Bunga Bunga's picture

Plenty of ressources to survive by hunting and fishing. Buy some land in the middle of nowhere. People from urban areas will hardly find you when TSHTF.

armageddon addahere's picture

Move to Canada and you will notice an immediate, big drop in your standard of living. You will earn less and pay more for everything. You will drive a smaller car, pay twice as much for gas, live in a smaller house and so on.

If you stick around a while you may notice that there is a lot less gunfire in the night, hardly anybody gets killed, if you get sick you have free medical insurance, and in a lot of small ways life is better.

Suggest you start with a vacation trip and see how things look.

nufio's picture

i just moved back from vancouver to seattle because the housing bubble there is insane! I found it impossible to raise a faimly there with the costs in vancover eventhough we were 3x median household income. I really dont understand how most of the population that live there are able to buy groceries after paying their mortgage or rent.

That said. Canada has the biggest fresh water reserve in the world so a few decades down the line that might count. 

August's picture

>>>Move to Canada and you will notice an immediate, big drop in your standard of living. You will earn less and pay more for everything. You will drive a smaller car, pay twice as much for gas, live in a smaller house and so on.

Quoted for truth.   Leaving the USA will generally see the leaver dealing with a standard of living that he may find challenging.  However, as per armageddon addahere's comment, you will likely find that your community is more stable, and your government not quite as contemptuous of your freedoms. 

In other words, Amuricans have been bought, and are owned, by their country's reserve currency status, in ways that they may not have perceived.  If they leave the womb, they become, economically, just another Canuckistani, Chilean, or Portugese.

I'd suggest you get used to the above new status, since you will be getting there shortly, whether you relocate or not.  The good news is that there is no fucking way that Portugal, Canada or Chile can maintain military bases in 100+ countries across the globe, and intervene where they have no business doing so. 

Soon, very soon, the tide of Amurican Empire will recede, leaving only a dirty bath-tub ring behind it, marking its "high points" in Riyadh, Seoul and Mariupol.

FIAT CON's picture

Canada's medical insursnce is not free, It is almost free compared to the USSA.

Abbie Normal's picture

It's "free" in that there are no monthly premiums (depending on your province of residence) and no co-pays.  But prescription drugs, out-patient therapy, dental, homecare, etc. is not covered by the national medical insurance.

Oh, and don't forget the combined 60% federal/provincial tax rate too.  Which means that in Canada, tax freedom day doesn't arrive until mid-June for average income earners, compared to early-May for Americans.

TrulyStupid's picture

Depending on where you go to you may take an upgrade in standard of living... Alberta for instance. Having made many American friends in my snowbirding sojourns to the US...Arizona, Florida, Eastern seaboard, we have noticed that the biggest Canadian advantage is the "free" (not really) Medicare. The high cost of medical insurancee in the US is the main topic of conversation and the biggest fear amongst Americans is not having any or being unable to pay the deductible or co-pay fees. Sudden medical costs remain the largest source of personal bankruptcy. Most Americans are scared shitless of "terrorism" as well... the freedom from these fears is probably the biggest advantage of Canadian citizenship over American, though the current government is trying to push the terrorism fear button for idealogical advantage.

pitz's picture

Approxiately $900B out of Canada's $1.2T mortgage market is under CMHC subprime mortgage insurance.  Which makes Fannie Mae/Freddie Mac's subprime activity look like a walk in the park.    Can't see this turning out well. 

The Shape's picture

Exactly, the Canadian banks got the government to insure all their shitty mortgages.

And they insured some SHIT.

pitz's picture

They'll deny, till the cows come home, that the mortgages under CMHC subprime insurance are even subprime.  I believe the CMHC even has a webpage claiming they don't insure subprime mortgages.  What a bunch of lies!  Claiming that CMHC doesn't insure subprime is like a school claiming that all of their students are "above average".  May sound good, but when you really think about it, it adds up to a bunch of nonsense. 

teslaberry's picture

canadians will be the new vikings with drone terminator technology , like ice zombies from the north. 

 

they will kill everyone!

patb's picture

the real test is Mortgages vs Rents.

 

If the GRMs are high, a lot of people will prefer to rent, if the GRMs are low people will still buy.

 

During the oil bust, prices in OKC for houses were dirt cheap, you could get a house for 10K.

Oddly enough these houses still rented for $800/month...  No kidding... Damnedest thing I ever

heard of so, people who were in the area for a short period of time would buy, oftentimes for cash.

 

When it came time to sell, they'd leave the keys at city hall.

 

 

pitz's picture

The reason this occurred was that there literally weren't any credit-worthy buyers.  Anyone who had income was probably using it to service old debt.  And anyone who was unemployed, of course, had no income to service any debt.  Some very bizarre things can happen during such severe deflationary periods.

The Shape's picture

I think it's the Saudis. They're trying to get a cheap Calgary McMansion.