Back in December, the Bank of Canada said home prices were overvalued by as much as 30% and posed an “elevated” risk to the Canadian financial system. In January, Deutsche Bank found that Canada’s housing market was, more realistically, 63% overvalued.
In greater Vancouver, the “benchmark” price of all types of homes (detached, townhouse, and apartment) in March rose 7.2% from a year ago to C$660,700, according to the Real Estate Board of Greater Vancouver. Detached homes jumped 11.2% to C$1.05 million; and in Vancouver West, 12.3% to a breathtaking C$2.4 million.
Those are the Board’s “benchmark” prices. The average price for detached homes in Vancouver soared 16% from a year ago, surpassing $1.4 million for the first time. Transactions skyrocketed 54%; supply plunged 15%. Prices were doped by low interest rates, limited supply, and foreign investors. This market is hot.
But the oil patch of Canada is skidding into serious trouble.
“The recent international price war over oil has demonstrated the risks and dangers of relying on energy revenue to fund public services,” Alberta’s government explained on Thursday, as it presented a C$43.4 billion budget for fiscal 2015/2016. It projects a revenue decline of C$5.6 billion!
It’s “simply irresponsible” to rely on unstable oil revenues “to fund health, education, and other vital public services that Albertans depend upon,” the government said.
And things would change. Energy revenue would from now on – if they ever return to prior levels – be treated as “windfall” that would at least in part go into savings. And there would be a slew of new taxes and fees, such as a bump in gasoline taxes, steeper income taxes for high-income earners, and a new health-care levy. With these measures, the government hopes to balance the budget three years from now.
Corporations would be spared. They have enough trouble. As Finance Minister Robin Campbell put it: “In conventional oil and gas, there are companies hanging by a thread.”
Executives are fretting in Calgary, the epicenter of the oil bust.
“In January, we were a month or two into (the downturn) and most people said: ‘Let’s get through winter drilling and maybe it will all be gone by May,’” Bill Andrew, CEO of Long Run Exploration, an oil & gas exploration and production company based in Calgary, told the Financial Post. Drilling has already collapsed. Only 100 rigs were operating in Canada in the latest week, according to Baker Hughes, down 57% from a year ago.
“If we are still looking at a low price in May, people will just shut it down in the summer,” he said.
Housing in Calgary is on the verge of falling off a cliff. After abysmal home sales in January and February, and terrible housing starts in both months, March offered a repeat performance: inventory for sale nearly doubled from a year ago, but transactions plunged 30%.
Sellers, desperately clinging to the illusion of wealth, aren’t cutting their prices enough to make deals. So the market is mired down. The average sale price dropped only 2% to $475,000. Prices in mid-range homes are still “steady,” Calgary realtor Len Wong told CBC News. But the higher end market, which is most impacted by the oil bust, “has definitely been suffering,”
Inventory has ballooned for several reasons, he said. Some of the people who were laid off in the oil patch have put their home up for sale. Other oil-patch workers who are still employed but are worried about getting laid off are also trying to sell their home so they won’t be stuck with a home they would no longer be able to afford. And some people who were going to sell in the spring are trying to get a jumpstart.
Office space in downtown Calgary, where oil companies have been busy cutting jobs and slashing capital expenditures, is getting hit. In Canada overall, in the first quarter, 1.1 million sq. ft. of downtown office space was back on the market with no new office-construction completions, according to CBRE Canada. Downtown Calgary, accounted for 76% of it!
“We are nearly nine months into the decline in oil prices, and the Calgary office market has responded as expected,” said CBRE Director of Research Ross Moore. “Both sublet space and direct vacancy are on the rise,” he said, though they haven’t yet reached the terrible levels following the 2008 oil price crash and Financial Crisis.
The vacancy rate in downtown Calgary jumped to 11.8% in Q1, from 9.8% in the prior quarter, and from 9.1% a year ago. The average asking rental rate per square foot has dropped 8.3% from the prior quarter!
“Landlords are adjusting their expectations to new economic conditions,” CBRE explained.
While Calgary is getting crushed, the problem is spreading to other cities. In downtowns across the country, the vacancy rate rose to 8.9% in Q1 from 8.5% in the prior quarter. The vacancy rate for all office space, including suburban markets, jumped to 11.1% in Q1.
With impeccable timing, and driven by that vigorous optimism that you need in real estate, landlords are building 18.6 million sq. ft. of additional office space. Some of it will come on the market this year. With predictable results.
Once again, Vancouver begs to differ. Tech companies account for 42% of tenants pursuing office space. They’re “the bright spot in an otherwise subdued office market,” CBRE explained.
In that “bifurcated office market,” one end is “facing additional fallout from low oil prices.” But at the other end “where there is confidence, like in the tech sector, demand is strong and competition for both new and character-filled space is as strong as it’s ever been.”
While part of Canada teeters at the edge, contemplating what’s below, there’s no stopping the bubble in Vancouver, not yet, with interest rates that have been cut, and with billions of dollars pouring in from investors around the world, lured by the sirens of a magnificent housing bubble and by a tech bubble that has been fattening up Silicon Valley and a few other locations. But bubbles, we’re incessantly told, don’t even exist. Until they implode.
Just when oil collapses, housing stumbles, and layoffs begin, Canadian households go on another borrowing binge. Read… Household Debt Soars in Canada, “Stability” at Risk