Mourning Malinvestment: Canada's Oil Patch Confidence Crashes

Tyler Durden's picture

Submitted by Wolf Richter via WolfStreet.com,

Alberta, the province that has become the epicenter of Canada’s oil bust, does not yet have a budget for fiscal 2015-16. Premier Rachel Notley promised delivery by October. But it won’t be easy. Ideas are already floating around and are getting shot down. The problem: a budget crisis has set in after a sudden shortfall of C$7 billion in oil revenue.

There have been layoffs in the oil patch. Companies are retrenching. Home prices are tumbling in Calgary, the oil capital of Canada. In May, they plunged a record 3.3% and are now down 7% from their peak seven months ago.

In commercial real estate, it’s getting ugly. The number of transactions of C$1 million or more in the first quarter plummeted by 21%, and the dollar value of transactions dropped 11%, according to RealNet Canada, cited by the Calgary Herald.

Cushman & Wakefield reported that the premium office market in Calgary is “reeling from the sudden impact of downsizing companies.” Unless a miracle happens in the oil markets that sends prices back into the stratosphere, the premium office market will see vacancy rates climb to 12.4% by the end of this year, and to 15.4% by the end of 2016, the worst since the early 1990s. In the first quarter alone, a record 1.23 million square feet of office space were put back on the market as companies, mauled by the oil-price plunge and trying to stay alive, are slashing operating expenses where they can.

With impeccable timing, a flood of new space is being built and will soon come on the market. Bob McDougall, senior managing director of brokerage for Cushman & Wakefield in Calgary, explained:

“On top of low office demand and companies subletting record amounts of space, we’re in the midst of a major development cycle with about three million square feet under construction downtown. Right now, it’s a perfect storm.”

And this “perfect storm” has slammed into business confidence in Alberta, with a totally breathtaking force, as the Economics and Strategy group of National Bank Financial reported. Its chart of the CFIB small-business confidence index for Alberta (black line) and neighboring British Columbia (red line) shows “a record gap between the two provinces in June.”

And what a cliff dive small-business confidence has taken in Alberta over the past few months. In June, it hit the lowest level since the Financial Crisis in 2009:

Canada-Alberta-Business-Confidence-2015-06

That kind of plunge in confidence is rare. The Financial Crisis was a terrifying event for businesses. And the oil bust is having a similar effect in Alberta. It speaks of the deep turmoil and anxieties in the business community that is trying to survive somehow even while the oil bust batters their business models, revenues, profits, and balance sheets. And it speaks of the myriad side effects it has on the rest of the business community, the broader economy, and government.

So in Alberta, the “difficult conditions seem set to endure for a while longer,” wrote NBF Senior Economist Marc Pinsonneault.

But the rest of Canada seems to be fine, still: “Things are actually looking up for most of the larger provinces with Ontario, Quebec, and British Columbia carrying a good amount of momentum going into H2 2015.”

And he concludes:

All and all, the data remain consistent with our view that Alberta’s woes are not translating into a full-fledge contagion to the rest of the country. As such, we remain comfortable with our view that after a difficult start to 2015, firmer growth in Canada’s three most populous provinces is poised to offset still-mounting weakness in previously high-flying resource-levered jurisdictions.

And hopefully – the operative word – that will be the case. Because some terrific bubbles in housing and commercial real estate have bloomed into majestic maturity, particularly in Toronto and Vancouver. Household indebtedness has soared. The banks are exposed, And it wouldn’t take much of a trigger to send treacherous vibrations through the whole precarious, debt-funded construct.

“All of that negative news has kind of put a downer on consumer sentiment,” is how Jharonne Martis, director of consumer research at Thomson Reuters, explained the crummy consumer confidence reading. Read…  It Gets Messy in Canada

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
JustObserving's picture

Canada has one of the largest real estate bubbles in this world supported by high oil prices.  

Thank the Nobel Prize Winner and his economic war against Russia's energy exports for your housing collapse.

Russian economy attacked through oil prices – Obama

http://rt.com/usa/218731-obama-npr-interview-russia/

LawsofPhysics's picture

Yes, it will not be long before the American and Canadian oil patches are the new "middle east".

Interesting times.

Laowei Gweilo's picture

Canadian real estate boom was not supported by oil prices though

 

it's supported by record low interest rates, lending volume, debt-to-income for domestic buyers, and foreigners

 

oil crash has had and will continue to have no tangible effect on Vancouver and Toronto

FrankDrakman's picture

I don't see that Toronto housing prices are in a 'bubble'. My GF owns a semi-detached 3 bedroom on a small lot near Yonge and St. Clair (heart of 'mid-town' Toronto). It's worth $1.2 million CAD (~1.1 million US). Think you can buy a brownstone in the Upper West Side of Manhattan for that? (Just checked - 2 bed/2 bath co-op on 106th is $1.5 million US (~$.1.65 million CAD), and that's for an apartment, not a home with a two-car garage and a (small) backyard with deck and hot tub. 

NYC is a world city and Toronto's not? How about Chicago? found a similar place in Ravenswood, just north of Wrigley Field - $1.4 million US. And Chicago and Toronto are roughly the same size, and at the same latitude, so the climate's about the same. I don't hear anyone saying Chicago real estate's in a bubble. 

People around the world are beginning to realize that Vancouver and Toronto offer almost the same amenities as you would get in New York or London (theatre, great restaurants, good shopping, etc.), although I would never contend that either Van or T.O. is the equal of NYC or London. However, in Toronto you get a feeling of safety (54 murders annually in a city of 2.6 million/GTA 6+ million; in Chicago, that's a couple of bad weekends) that many foreign buyers want. Vancouver is similar. 

asteroids's picture

Eh? Compare takehome pay vs mortage servicing. Average Torontonian forks over almost 60% of takehome to service mortgage. They poor bastards in Vancouver, almost 80%! Both Ontario and Illinois are bankrupt as far as I can figure.

Bay of Pigs's picture

Not sure why you are getting junked.

Denying that a Canadian RE bubble exists is the height of absurdity.

angel_of_joy's picture

Canadians are in denial even about the denial itself ! That's because the laws of reality will make an exception when it comes to them (or, at least that's what they believe...). However, if you look at that graph, ain't BC a great place ?! (LOL...)

Bearwagon's picture

Alberta has become a lunar landscape, thanks to this idiocy. The sooner this ends, the better.

taketheredpill's picture

 

 

 

It's the NDPs fault!

Lady Jessica's picture

Yes.  What an epic poisoned chalice the NDP have accepted.

Event Horizon's picture

yup, it is a reaction to the anti resource hard left environmental activist NDP Government that got elected to power in Alberta when the two right parties split the vote.

Again ZH, gets the context wrong..

 

Yukajub's picture

Incorrect. PC govt took many wrong turns and the voters were fed up. NDPs won by a massive landslide. PC gov't went into the election with 70 Members and ended up with 10. That was not just vote splitting. NDP party went from 4 Members to becoming NDP govt with 53 seats.

Edit: Agree with sentiment change due to new gov't. Corporate tax were increased 20%. Puts a damper on things.

The Ingenious Gentleman's picture

20% increase in corporate tax is not that important when everyone is losing money anyway. :)

freedogger's picture

Corporate tax went from 10% to 12% on par with rest of Canada. Yes its 20% increase, but not that much impact to most corps.

Event Horizon's picture

Not incorrect, the PCs were taken over by Redford and "Liberals" who were a disaster. Prentice took over, another disaster, the NDP won a majority of seats with 40% of the vote... There was a protest vote against the PCs, but had there been only one "right wing" party, they would have nearly 60% of the vote. The Wild Rose and PCs split the right vote allowing the NDP to gain a majority.

This is political, a rejection of the NDP by investors, they have radical anti oil activists on staff in their new Alberta Government.. <<< That is why the sentiment is falling.

The NDP running Alberta will be a disaster, I bet they get turfed in the next election.

Yukajub's picture

>but had there been only one "right wing" party, they would have nearly 60% of the vote.

Yes, if you assuming vote splitting. If there was no WildRose, would ALL those voters really back the PC's again? 

>The NDP running Alberta will be a disaster, I bet they get turfed in the next election.

Nothing like the PCs, that's for sure. But historically a party in Alberta tends to stay in power. PCs were in power for 43 years, and SocCreds for decades before that.


Event Horizon's picture

Yes, the PCs lost votes to Wild Rose which gained and to NDP,  the PCs were really "Liberal Progressives" under Redford who was a disaster, Prentice tried to move them right and took some Wild Rose people but he was also a disater, the PCs still wore the Redford stench, if the Wild Rose leader Danielle Smith had not defected to the PCs she would likely have won a Wild Rose Alberta government. 

IMO, of course, Albertas economy will be dessimated under this NDP government and they will never survive the next election. Investment is fleeing and people are starting to leave.. years of pain ahead.

This sentiment survey is reflecting economic confidence level in the new NDP Government, not the oil price..

angel_of_joy's picture

Don't you worry, my friend! Next elections time the Wilde Rose will mop the floor...

Sages wife's picture

It's very simple. The PC and Wildrose parties jumped ship. They know what's coming, and they don't want any part of it. The NDP has been set up to fail. They're all idiot puppets anyway. You think the big oil players would let them call the shots? The smart money has left the building.

Zoomorph's picture

NDP had 40% of the vote with the two right parties having 25% and 28%, so he was absolutely correct about vote splitting. The queers and free shit army won in AB. Let's see if they can deliver anything without running the economy into the ground. If they fail, the libertarian party should get the next chance. Sadly, giving people free shit (even if you have to borrow to get it) usually wins them over.

TrulyStupid's picture

The free shit army in Alberta are all the toadies to sole sourced government contracts. Add in all the patronage appointees and paid cheerleaders and the tax break recipients and you have the total of folks who voted PC.

 

Zoomorph's picture

You sound like a typical NDP supporter, constantly telling us how bad you think the PCs were (complete with hyperbole and ad hominem attacks) even when nobody is defending them. The PCs being bad doesn't make the NDP good or better. At least you picked an apt username.

TrulyStupid's picture

Its actually a reaction to the oil price crash that started a year before Albertans came to their senses and booted out the most corrupt, incompetent corporatist government they ever had.

Incidentally the right left paradigm is ancient history in Alberta as it is elsewhere. Post election polling reveals that NDP got there support from middle class progressives (particularly women) , those under 35 and surprisingly those in the 90 percentile in household income. Joe sixpack voted for the rural right wing Wild Rose.But please continue to hammer unions and socialists for the upcoming federal election in which the same demographic is going to hand Harper his head if they can pull it out of his ass.

 

Event Horizon's picture

delusional, the oil price has been recovering, the NEW sentiment drop is because the NDP and anti oil activists (funded by US billionaires) are now in control of Alberta.

TrulyStupid's picture

The revenue shortfall is a direct result of the low oil prices. Alberta has been running budget deficits for years under the PCs to fund the tax holiday for big business. The province will end up with the environmental calamity of the tar sands eventually....and no amount of teaching to the corporate p.r. word track will change that.   Continue to delude yourself at the risk of becoming irrelevant.

Event Horizon's picture

I agree entirely that the PCs were a disaster, they were run by a "Progressive/Liberal in Redford" and the NDP vote was a rejection, but the oil price dropped long ago, the new sentiment reading is after the oil price has been stable and recovering.

The NEW here is the election of the NDP with ANTI FUCKING OIL activists IN control of the Alberta Government.

It is delusional and irrational to think that this sentiment is NOT due to radical anti oil activists in control.

 

 

Sages wife's picture

Politicians in 'control' of big oil?

Event Horizon's picture

The Alberta NDP are not typical "politicians", they are radical anti captialists, most of whom were funded by foreign interests as aggitators to undermine the Canadian energy industry..

 

 

McCormick No. 9's picture

I'm begining to think the Saudis are pretty smart, for a bunch of backwards, inbred, crypto-hoo camel-fuckers. Somehow they have managed to come out on top every time since 2001. Maybe someone should send the memo re: -House of Saud Very Clever- to Yemen.

Omen IV's picture

They never had a debt balance at each downturn

Red Raspberry's picture

They still make money on $10 a barrel.

fowlerja's picture

Damn... I choose the wrong market to be invested in....again. Guess I have (egg) ..I mean oil all over my face again!

JLM's picture

It can always get worse!  Wait for $30 oil.  Long term average.

Lyman54's picture

Soros bought the election for the NDP.  Volunteers were paid $20/hour to put up campaign signs.  Notley is a complete half wit, as are most of her supporters.

Yesterday I noticed 2/3rds of the pump jacks were idle.  I have never seen that in 40 years.  The cost of electricity is more than they get for the oil right now in some of the marginal wells and others that need a service rig to work over are being left until they figure out what the Dips are doing.

Vengeance's picture

I love how many of the people debating this plunge in Albertan small business confidence can't even read a chart, but yet they seem to know exactly why confidence has plunged. They keep blaming the large drop on sentiment to the NDPs being elected, but if you actually look at the chart, you'd notice that the majority of the drop came (Jan-Feb) well before the elections ever happened.

So trying to ascribe [most of] the plunge in sentiment to the NDP being elected is pretty thin!

On another tangent, I've lived in Calgary for years and still do. I deal with lots of clients in the SME space and many of them are having great years (some the best I've seen). From people I talk with in Calgary, most seem to be taking the NDP win as a welcome change as the PCs were bloody useless. Time will tell, but I can't see how'd they be worse.

Most of the drop in oil has been hurting upstream, but midstream hasn't been affected overly much and some of the downstream comapnies I deal with are doing fine as well.

Lot of companies have been using the drop as an excuse to get rid of the deadwood as many companies are then re-titling those same jobs and hiring new staff.

I think real estate here is still ridiculously overpriced, and I personally refuse to buy anything as perhaps we haven't yet and maybe I can grab something far cheaper down the road... Maybe... That being said, condo prices downtown have come down a bit in price, and rent seems to be a shade cheaper...

*edited a couple of grammatical errors

Abbie Normal's picture

Just give it time, the real estate plunge will occur once people bother to look down and see no floor beneath them.

My in-laws bought their house during the '81 boom/bust for $240K and within nine months, it was barely worth $150K.  Triple the price today and a $720K house will drop to $450K or likely a lot lower before this is over.  $200K/yr dump truck driver jobs are long gone and the replacement $40K jobs won't pay the mortgage...