Bringing it all back home- Part 2

Part  2-  Sources of Demand

Oil and Gas Economy A key to understanding an economy’s capacity and resilience to sustain demand for a basic “commodity” such as housing is to begin with the key sources of export earnings that Alberta, as an economic unit, receive to support payments for products and services produced inside and outside Alberta. cansim-2280059-eng-2036980603856893405_7584_image001

The chart beside shows the change in the monthly exports of three petroleum products for the country as a whole. From a peak of nearly $9.1 billion a month in July 2014, exports of crude oil and bitumen fell to a low of $3.2 billion in April 2016. Average export values from  January 2012 to July 2014 were roughly $6.9 billion then averaged $5.4 billion a month, or a loss to the Canadian economy of close to $1.5 billion a month.  Fortunately this loss was cushioned by a deep fall in the Canadian dollar from $1.07 CAD/U.S. in July 2014 to levels of $1.42 CAD/U.S. early in 2016. Assuming that Alberta accounts for approximately 80 per cent of this loss of revenue, the decline was $14 billion per year in current dollars.[1] Since one-quarter of Alberta’s production is either sold in Alberta or Canada, an additional loss of about $7 billion was likewise absorbed by Alberta petroleum companies.  Thus with this decline in world oil prices, Alberta’s $300 billion economy had “given up” at least $20 billion annually or nearly seven per cent through this change in the “terms of trade” with the rest of the world.

Image result for Oil sands plant

In November 2016, Alberta Treasury Board and Finance estimated that nominal GDP had dropped by $45 billion or a staggering 12.5 per cent in 2015 and is estimating another drop of 4.8 per cent in 2016.[2]  Real GDP fell by 3.6 per cent in 2015 and is expected to drop another 2.8 per cent in 2016 even though production of oil and natural gas has not declined materially (save for the temporary production losses due to the Fort McMurray fire).  However, this source of revenue is not the only income lost to the Alberta economy.

The knock on effects of falling oil prices are reflected in investment pull-back as energy corporations struggled to staunch their losses.  According to the Canadian Association of Petroleum Producers (CAPP), total expenditures before royalty payments in Alberta were about $40 billion in 2014 declining to $32.4 billion in 2015 or a drop of $7.5 billion, or nearly 20 per cent. Employment in the energy sector declined from 177,500 in June 2014 to 124,700 in June 2016 or a loss of 52,800 high paid jobs. As the average weekly salary for oil and gas workers is about $2,200  according to Statistics Canada, the loss of income to these workers and their families (excluding severance or Employment Insurance) is a staggering $5.8 billion alone. [3]

Households and Incomes The most common measure used by the housing industry to gauge demand for new housing stock is household formation. According to the Canada Mortgage and Housing Corporation (CMHC) “(T)he trend in household formation is closely linked to that for new housing construction. Over time, the housing stock must grow in order to accommodate increasing numbers of households. Household formation is the main component of the demand for new housing construction. New construction in the future can therefore be expected to generally follow the trend in household formation.” (The following link is the detailed projections based on age group, household type, tenure, ownership type, and dwelling type https://www.cmhc-schl.gc.ca/en/inpr/rehi/rehi_030.cfm)

In CMHC’s March 2016 Long-term Household Growth Projections 2015 Update, Alberta was projected to have the strongest annual growth in all scenarios, as a result of cansim-0510001-eng-2709870162910094321population2_30983_image001high population  growth and strong net inter-provincial migration.  However “these household formation projections …were made before the large reduction in oil prices. It remains to be seen what will be the extent and timing of oil price recovery and what impact the reduction and recovery will have over the period to 2036 on the size of populations in oil-producing provinces populations.”

From 2006 to 2011, that is, before the financial crisis and after, Alberta household formation grew from 1.305 million to 1.447 million and was estimated to grow to 1.676 million in 2016.

These CMHC projections are very carefully parsed by the real estate, home-building, and construction industries. Population growth and net immigration drive household formation.  The next Chart illustrates recent and historical trends. Alberta has continued to have the fastest population growth of any province. Abundant, highly paid, job opportunities have attracted a younger population to Alberta from other parts of Canada and, increasingly, from abroad. Until the past year, international and inter-provincial net migration has boosted Alberta’s population. This source of growth has now been arrested and will undoubtedly have consequences for the housing market. Families with young children and mortgages, whose disposable income have fallen, may be less willing to “give up” on Alberta and therefore prolong a local job hunt. Single earners may be more prepared to seek employment elsewhere. Other factors that would retard movement to British Columbia or Ontario are the relative high cost of housing in these provinces and the lower pay for equivalent employment. Thus, persons who have lost their jobs and are attached to their communities (schools, religious organizations, etc.) will likely hold out for higher prices before they accept lower offers.

cansim-0510004-eng-1507948145028379700population-total_540_image001Given the fall of disposable income to Alberta households, one would expect that housing prices would reflect the decline in the average weekly wage which has now fallen from $998 per week (June 2014) in the services industries to $971 per week in October 2016 but risen from $1617 to $1635 in the goods-producing industries.

In June 2014 the Labour Force Survey found 2.317 million Albertans employed while in November 2016 there were 2.258 million employed or a loss of 59 thousand workers. In fact, the decline in disposable income has been less than would be expected as pay in the goods producing sector has risen (despite lower employment- 113,000 fewer jobs June 2014-Nov 2016) while the services sector has seen increased employment (from 1.638  million to 1.692 million in November 2016) but a decline in average wages.

The labour market appears to be fairly  resilient in spite of the media attention to the job losses in the oil and gas sectors [See Employment section under Economic Data tab].  Another stabilizing source has been provincial fiscal policy which has been responsible for increasing employment in education, health care and public administration with roughly 40,000 jobs added over the past 18 months.cansim-2820007-eng-4944254622192396411lfs-nov-2016_15253_image001The chart below also illustrates the employment volatility in three key sectors: oil and gas, construction, and accommodation. In the mining and oil and gas sector at the beginning of 2012, unemployment rates were very low. The changes  in these rates are highly seasonal but we can see the progressively higher levels of unemployment commencing in the spring of 2015. Construction is also a seasonal industry and in spite of significant infrastructure investment and the winding down of major office towers in Calgary, construction too is displaying higher unemployment levels. The accommodation industry, which employs about 150,000 is also seeing rises in unemployment in spite of wage reductions in this largely non-unionized sector.

cansim-2820007-eng-4944254622192396411lfs-nov-2016_12836_image001

While this survey of factors influencing aggregate demand for housing is not exhaustive, several  key conclusions are evident:1) employment has fallen materially in key segments of the provincial economy and it is highly likely that lay-offs will spread to the labour-intensive service sector in coming months; 2)  population growth has slowed and this will result in slower demand for new housing; and 3) should employment prospects improve materially in British Columbia or Ontario in particular, then inter-provincial out-migration will drive housing demand significantly lower and home prices accordingly.

property-values-take-a-tumble4-1-17-ej

Footnotes

[1] Industry receipts in 2014 according to the Canadian Association of Petroleum Producers were $116.4 billion in 2014 falling to $70.5 billion in 2015 for all of Canada or a drop of $46 billion. Assuming Alberta accounted for 80 per cent of this lost revenue would mean that $37 billion was lost to Alberta’s economy.

[2] http://www.finance.alberta.ca/aboutalberta/economic-trends/current-economic-trends.pdf

[3] Average weekly earnings in mining, oil and gas and quarrying in Alberta peaked at $2179 per week in June 2014.  By October 2016, the average was $2329, a remarkable increase of 6.9 per cent.  To the survivors go the spoils! See CANSIM Table 281-0026.

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