The Canadian Housing Bubble Has Begun To Burst

Don’t look now but slumping crude prices are hitting the Canadian housing market like a freight train. Energy accounts for 10% of Canadian GDP and around 25% of exports and the swift fall in oil prices is having a profound effect in the nation’s oil producing regions. Take Calgary for instance, where single-family home sales fell 34% last month. As the following chart shows, Alberta derives some 30% of its provincial revenues from energy royalties and as one TD analyst quoted by the Calgary Herald recently noted, “the effects of significantly lower oil prices had already turned up in resale activity, with sales in Calgary and Edmonton down more than 40 per cent and 30 per cent respectively, from October to January [and] as resale activity slows, prices usually follow.”

Depressed crude prices will create a $7 billion annual revenue shortfall for the province while GDP growth, which had been running at around 4%, is expected be just under half that this year, with some analysts predicting the economy will contract. Here’s CIBC’s outlook for instance: 

The Alberta government’s own assessment of the economic situation is deteriorating rapidly. 

From the Alberta fiscal update

The impact of lower oil prices on real economic growth is expected to be less severe than on incomes. Alberta’s real GDP, the volume of goods and services produced, is expected to expand in 2015, but at a much slower pace of 0.6%. This is down from the Second Quarter forecast of 2.8%. 

 

Although there are some similarities between the current [oil] price correction and previous ones, there are also key differences. Marginal extraction costs are significantly higher than in the past, with few sources of cheap supply remaining. In addition, current excess supply on the market can be attributable to price levels that encouraged the extraction of higher cost crude, rather than shrinking demand.

More broadly, there are significant signs that the housing market is starting to turn. For instance, the New Housing Price Index fell 0.1% in January. This was the first decrease at the national level in nearly a half decade.

Here’s more from The Herald:

Two housing reports released Thursday indicate year-over-year price gains for the Calgary market but on a monthly basis the real estate sector is starting to see declines indicating a correction is on its way.

 

“The abrupt shift in housing demand and supply conditions in some parts of the country indicate that potentially severe housing corrections have already begun. In Calgary, for example, the slump in existing home sales and jump in new properties listed for sale suggest that house prices will decline by 15 per cent this year,” said David Madani, economist with Capital Economics.

 

“Preliminary sales and listings figures for February reinforce this view: home sales fell by 35 per cent from a year ago, while the total number of properties listed for sale jumped by over 107 per cent.”

As you might imagine, the pain is particularly acute in the country’s oil boom towns. Here’s The Herald again:

Just take a look at what’s happening in the heart of Alberta’s oilsands industry as crude’s price collapse continues.

 

MLS sales of single-family homes in Fort McMurray and its surrounding area have plunged so far this year. In February, sales were down by a whopping 66 per cent from a year ago, at just 48 units. That followed an annual decline of 53.19 per cent in January.

...and more from RBC: 

Softening demographic fundamentals likely will weigh on Alberta’s housing sector. Already there are signs of impending housing market downturns in Calgary and Edmonton, although these so far primarily reflect a loss of confidence caused by the sharp drop in oil prices rather than weaker population growth. We project home resales to decline by nearly 16% in 2015 in Alberta and housing starts to moderate from 40.6K units last year to 27.5K units this year. 

 

We estimate that the direct impact of lower capital spending in the energy sector will reduce Alberta’s real GDP growth rate by more than 1.5 percentage points in 2015. Indirectly, the effect will spread to employment, net migration, the housing sector, consumer spending and, possibly, public sector spending. Our updated forecasts assume a decline in employment during the first half of 2015 in Alberta. Job losses could be as much as half the jobs created in 2014.

This isn't at all good for the country as a whole because as the Globe and Mail reports, Alberta has been a critical piece of the economic puzzle for Canada:

Alberta contributed one-third of Canada’s economic growth [in 2013] and is by far the fastest-growing province in the country again this year. Since the beginning of 2013, nearly half the jobs created in the country were in Alberta

Considering all of this, have a look at the following chart which shows the complete and total decoupling of Canadian housing prices and crude. 

Bringing it all together, it appears as though the 50% decline in crude prices may spell the end for the long-running Canadian housing boom. The data looks abysmal in oil-rich Alberta while at the national level, it looks as though January marked a tipping point. Add to this the fact that Canadian households are more leveraged than they have ever been as the following graphic from Statistics Canada shows: 

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We'll leave you with the following from Laurentian Bank: 

Canadian consumers are highly leveraged and thus cannot continue supporting the growth of the economy like they have done over the past decade unless jobs are added at the same pace as they are in the U.S. The housing sector is also fully valued.