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
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
From what I see around me it’s quite possible to have sprawling wealthy homes sporadically occupied by wealthy retirees, civil servants and investors. As my area is somewhat isolated I asked myself
“What the hell do these people do for a living?”
It seems not much, but what these places do have is low overturn and momentum from past investments. Perfectly maintained homes in ‘ghost-towns’ may become the new norm.
From the budding ‘home for rent’ signs I’ve seen in past years I assume many of the recent sales have been bought up by the likes of Blackrock. It would appear that if you have a community of 100 homes and six are for sale, then if ‘Wall Street investor types” swoop in to buy up two or three of the homes at inflated prices then the ponzi melt up continues.
I’ll assume the mortgage approval standards in Canada are low.
I read that Norway has a trillion dollar sovereign wealth fund that’s roaming the earth like a paper Godzilla gobbling up homes. I assume other Nordic nations are doing the same and Vancouver’s scenic beauty is an attraction (although Vancouver has a high crime rate).
As public services will exist as long as someone pays the taxes I would think the Vancouver bubble will continue as long as interest rates stay low. Right now I don’t actually think the Fed will raise rates. The Fed is providing trading opportunities for the banks and for that you need bag-holders.
I live in Vancouver and can tell you it’s nowhere near as rosey as that. For Lease signs are everywhere downtown, malls are missing between 5-10 tenants, even popular malls like Pacific Center downtown. It has empty storefronts, and they’re growing in number.
And as for the housing boom, it’s purely speculative, fueled by dumb money, which is everyone. There’s nothing real about it, homeowners are maxed out and broke, too broke to shop, which is why chains like Future Shop are closing.
Canada’s retail sector is imploding, malls are empty, and looking for “creative” ways to fill their space.
Don’t believe the Vancouver housing story, it’s pure illusion.
Same thing happened in Tokyo. Commercial real estate prices flopped so low that the government had to proactively send police to go around preventing people renting offices as defacto apartments in order to prop up the residential market. Here we see the hypocrisy of business always banging the drum of supply and demand while ignoring the draconian punishment metered out to anyone who tries to actually implement the principle against the interests of established business interests.
Here, in Australia, our economy is almost a carbon copy of Canada’s.
In the last 12 months out property bubble has gone into hyperdrive.
The price of iron ore and coal (which underpins our economy) has totally collapsed. (Likewise oil in Canada)
Australia and Canada were neck and neck when it came to household debt but I believe that Australia’s household debt level has now surpassed Canada’s. A news report the other day claimed household debt in Australia is almost $2 trillion. Outrageous for a country of 24 million people.
I sometimes wonder if this bubble will ever burst.
My son quit his job as an oilfield industrial electrician about 6 months before the collapse started to hit. He has been working construction as a drywall contractor and electrical. He doesn’t get any time off, he is that busy. 7 days per week. The company he works for never missed a beat in 2008 building apartments all across Canada and then reaped the benefits in the subsequent boom. The same story is unfolding. There is still a demand for rental housing in parts of Canada, Alberta specifically. He will be too busy to come home (which is the east coast of Vancouver Island), just up the river a ways from Dad.
Vancouver and Toronto housing bubble is simply insane. They do not reflect reality or the rest of Canada beyond skewing the stats. Smart folks have bailed (when able) and relocated to more liveable places on Vancouver Island. A friend of mine is a good example. He sold out of North Vancouver and built a new home about 5 miles from where I live near Campbell River. Think about it, if you are close to retirement age, you can sell out and get twice the house for cash in a great place to live with little or no traffic, and still put another $500,000+ in the bank.
I say, let the chump money buy up property in the cities, especially overseas money (Chinese). I sold out of a small city (pop 35,000) and retired at 57. Selling my rancher on 1/2 acre allowed me to own riverfront and an additional 16 acres for the same price. I am just finishing off the last of my renovations as I am a carpenter. If this place was in Vancouver, I don’t have a clue what it would be worth? It would be in the millions for sure…..certainly more than 5 million. I have in total, $350,000 invested in it.
Who on earth lives in those places? And why? Those are the questions to ask. Using averaging stats to explain the reality of Canadian housing and debt levels is more than misleading. It simply does not cover this vast country and variations of lifestyle and choices. There should be two sets of books. One, for places like Vancouver and Toronto GTA….+ Calagary, Ottawa, and Montreal, and one for the rest of us. Those cities could disappear tomorrow and ‘us peasants’ would still keep chugging along, doing all right, thank you very much.
“Who on earth lives in those places? And why?”
Because that’s where the jobs (allegedly) are. As more and more of the populace are dis-employed by technology there’s an unseemly scramble to secure the next job to cover life’s massive ongoing expenses and the landlords sitting on the property located near these jobs know it. I said 10 years ago, the West is following the Thailand economy model. Property in the boondocks where the pool of labor sits idle is dirt cheap but a small apartment in one of the islands of employment costs millions.
My understanding of Vancouver’s housing bubble was that it’s based in large part on rich Chinese leaving China in search of clean air and a better overall living climate, which is why the oil collapse hasn’t had as much effect in Vancouver as elsewhere in Canada.
Interest rates won’t rise this year as nobody wants to be the one blamed for bursting “the mother of all bubbles.”
So, next year would be ok then? When the bubble is even bigger.
Methinks they will indeed raise rates, since the collapse will be so epic that most won’t survive, or complain.
Given all the homeland security drills recently it may very well be that the intended end game in the US is another financial crisis coupled with martial law. Who cares about GDP growth when your goal to is to keep what you’ve stolen?
See the world through the eyes of these thieves and you realize a shredding of the current system is the only way for this to end. Economics is sophistry plain and simple.
P.S- Bloggers will be rounded up and imprisoned with members of the opposite political affiliation. Forced to listen to Barry Manilow 24/7.
Barry Manilow? I’ll be begging for mercy after five minutes.
warren buffet bought $710 million in Suncor. He also put $100 million for Obama’s campaign (to shutdown keystone xl pipes) 2010 / 2011 he bought tons in CP Rail and CNR stock (to ship the oil by rail since xl was stop the pipeline is getting built). US fracking dumping 1.5 million extra barrels of oil in us/can market right now. And now IRAN deal extra 500,000 barrels coming to us/can market starting july.1. The billionaires are trying to crash oil then by it up cheap. PLUS buy homes, and everything else affected by low oil prices. We’re heading for $10 a barrel. I’ve said this last summer, but of course no one believes me. This winter in Alberta … 70-80% unemployment…. then 6months later 4.8% unemployment, but the billionaires will own around 10-15% of everything in Alberta. We’re looking at prices hitting $70 a barrel in 2019 !!! so yea leave Alberta. It’s done for now. Make money on your home, then come back with money in 2019.