Fueling Alberta

After this weeks announcement about the revised budget from the province, I thought it would be interesting take a look at historical revenues, particularly those coming from oil and gas. So, today's entry is more of a general interest post and not concerning the housing market (at least not directly anyway).

So, without further ado here is a look at revenues from the last decade or so, as well as the estimated revenues for this year.

As we can see, revenues have taken quite a dive, and it's now expected we'll be down over 8 billion from two and three years ago, and 6 billion from last year. We can also see that shortfall is pretty much entirely due to declining resource revenues.

This is effectively the same graph, but this time the resource figures are broken down into divisions, natural gas, oil (I lumped crude and synthetic crude/bitumen together), and other. Giving us a bit more perspective, we can see that while oil is certainly down from the last three years, historically it's actually about normal... gas on the otherhand, is very low by recent and historical measures... and other resource revenue is virtually non-existent.

This is looking at it from another angle, this time from a proportion of total revenues (that year). This again shows what we discussed earlier, and that gas is making up a mere fraction of the revenues it normally contributes to government coffers.

Now we'll isolate just the resource figures. As we can see here, when the government talks about how volatile our resource revenues are, they are not kidding. This year we're now projected to collect over eight billion less in resource revenue then last year (and over ten billion less then the high water mark in '05/06). That is expected to be only the second time in this span that such revenues came in below six billion for the year, and the first time below four billion.

This graph is also good to show that typically natural gas is what drives the province... some years the ratio of natural gas-to-oil revenues got as high as 4/1 or 5/1... as opposed to this year when for the first time oil revenues are expected to exceed gas revenues.

Again, we'll break it down by percentage of contribution. We can see in the last four years there has been a shift and oil is becoming more prominent and gas revenues has settled in just below the 50% mark. Quite the change from earlier in the decade when it was generally in the high 60's/low 70's.

What the future holds for this balance will be very interesting to follow. How will the increased gas production in the US effect production here and market price? How will changing environmental effect the oils sands?

Anywho, that was a little look at oil and gas revenues for the province from the last decade or so to send you off on your weekend. If you have any questions, comments and/or observations, fire away.

Where's the beef?

There's been a fair amount of news coming this week, none of which appears particularly helpful for the housing market. EI numbers for June came our yesterday, they're way up. The June Teranet HPI also came out, and they say even with the huge sales tally in Calgary, prices were still down month-over-month. And finally, this morning the Provinvial government held court and told us they're expected to run a 6.9 Billion dollar deficit this year... and this just days after the feds told us they were up to their ears in deficit too.

Now, I'm sure some of you wonder what any of that has to do with real estate in Edmonton. So, lets start at the beginning, the EI numbers. Well, rising EI numbers mean fewer people are working and a soft employment situation... typically people with no job and no money don't buy houses (though, as we've seen the last three years, it no longer seems to stop the banks from giving such people money, but I digress).

On to point two, the Calgary numbers. They are relevent because pretty much anything happening there, is happening here too. The sales and prices in both cities tend to track together, we both boomed at the same time, we both started "correcting" at the same times, and we both even had a big spring surge in our resale markets.

The bulls like to spout how that surge was a result of improving fundamentals, but as is becoming increasingly apparently, that wasn't so. Not only that, but the HPI numbers display the reported price gains in the resale were an illusion caused by an upward shift in what people were buying and not actual values of homes... and that as well as the sales, was caused by record low interest rates.

Which provides a nice segway into the deficit news. Interest rates at current levels are not sustainable even when governments are behaving themselves, but when they rack up deficits they need to issue debt... and when everyone is doing it, it floods the bond market, which drives up yields, which drive up interest rates. So, not only are interest rates bound to go up, they're bound to go WAY up.

Then of course there is the other ugly consequence of governments issuing debt... that's government having to pay it off. Which will inevitably mean higher taxes, and those hikes will be hitting us from all angles... federal, provincial, business, property and consumption. So, if interest rates going up wasn't going to have enough of a depressing effect on real estate prices, taxes will be taking a bite out of net earnings and providing a double whammy on housing.

Particularly troubling about the provincial deficit numbers is the effect natural gas is having on it. Oil seems to get all the press, but in truth it's actually gas that drives the province. Approximately 2/3rds of the provincial non-renewable resource revenue comes from gas, or in otherwords, gas kicks in about double the money oil does.

Sobering Factoid: Two years ago non-renewable resource revenue made up almost 30% of the provinces total revenues... this year, it's expected to make up just 13%.

And there does not appear to be much hope in sight for gas prices in the near-term either, prices just recently dropped below $3, and some are even calling for it to go below $2. A far cry from the $13 it was trading at not so long ago, and even the $3.75 the province is currently bemoaning in their budget.

Add to that, demand is low and no change in that expected in the near future, strategic reserves are overflowing, and with the improved feasibility of massive quantities of shale gas throughout the US... even if/when demand comes roaring back, there is a lot more domestic supply available for our neighbours to the south.

The current situation is all made worse by that while production at current prices is often uneconomical and there is already surplus supply, American producers have to keep pumping for fear that otherwise they could lose their leases. Suddenly natural gas is no longer a license to print money up in Wild Rose Country.

If real estate prices being at unsustainable levels weren't troubling enough, a softening job market and record deficits are foretelling even bigger troubles to come.

Albertan's continuing to fall behind

Sorry, this will be a bit of a quick one, I've been crazy busy, so the blogging is a luxury I don't really have time for... that's why the updates are going to be a little slow coming the next couple weeks. Anyway, the CBA released their latest (June) mortgage arrears figures... and no surprise, we're up again and have now eclipsed the 0.60% mark.

That's up from 0.58% last month, and 0.26% a year ago. Even the low interest rates and resulting hot housing market in June couldn't reverse the alarming trend in arrears, as we again draw closer to the previous high water mark of 0.69%.

Nationally arrears stand at 0.42%. Alberta continues to extend it's 'lead' as the next highest rates were in Atlantic Canada and Ontario where they held from May and came in at 0.46% and 0.43% respectively. Saskatchewan now has sole possession of the lowest rate at 0.22%, and Manitoba is next at 0.25%.

New home price decline largest in the nation

So, another week goes by, another apparent bull market rally turns out to be little more then a trap... but at least the Eskimos won last night!

Anywho, so I guess the big news this week for Edmonton real estate was that the decline in the new housing price index... down 11.7% year-over-year as of June, biggest drop in the country.

This of course if more then the 4.2% down the resale market was down year-over-year as of June (using the SFH Median fwiw). So you may be wondering why it's down so much more, but as we discussed a few months back, new home prices tend to lag the resale market.

That's predictable just from the nature of the transactions, resales generally go down over the span of weeks from deal to closing (sometimes even mere days)... whereas new construction can have months between the deal being made and it actually closing. Often they are bought on spec and construction doesn't start until there is a deal in principle. So most of those properties figuring in that 11.7% drop were actually negotiated back in the fall or winter (or even earlier).

So, long story slightly longer, while the June numbers for resales reflected a market surge, the June numbers for new homes reflect the major slump we were experiencing during the fall and winter.

As I don't think we've discussed this measure before, here are the historical figures for the new housing price index.

Here we see a pattern quite reminiscent of the resale market, but shifted about six months later. Beyond being down 11.7% year-over-year, we're also down 16.7% from the peak... which is in the ballpark of what's happened to the resale market.

So, in the coming months it will be interesting to see is the new construction market had a spring bounce of their own or not, unfortunately that won't show up until November or December.

Though, as we've been seeing with the Teranet HPI figures for Calgary, the overall market numbers trending up are not necessarily a reflection of actual property values as these HPI's more accurately measure... as while the market stats are increasing month-over-month, the HPI is actually still declining slightly... so property values are still actually dropping, but there has been a shift in what's selling and thus the market stats increasing is actually rooted in more activity at higher price ranges.

Since I had the numbers handy I figured I'd include this as well, it breaks the earlier graph into 'house only' and 'land only'.

It's interesting to see just how reactive the land prices have been, when before the boom they were actually lagging behind home vales in appreciation but then took off and ultimately ended up increasing far more then house values.

From January 2004 to their respective peaks, land values increased 139.5% and didn't actually top out until last fall... house only values increased 81.4%, and topped out in the fall of 2007 on the other hand, a year earlier.

So, food for thought, something to send you off on your weekends with. Have a good one guys and gals, and if you're looking for something to do, check out The Fringe!

A Contemporary Story - The Sorta Happy Ending

Those you that have been following the blog for awhile, or have browsed the archives, you may have came across my musings on a couple friends of mine (original story, and the update).

Long story short, they bought a spec townhouse in mid 2006 for $200,000. Last October they decided they would be moving to Calgary post-haste and put their place up for sale at $285,000 figuring it would sell in a heartbeat (especially since a year or so earlier their neighbours units were selling for $350-400K). They also put in an offer on a house in Calgary that same week.

Didn't quite work out that way for them, and after several price cuts and relistings they were still holding it in March and asking price was then sitting at $260,000. Their offer was accepted for the house in Calgary, but fortunately for them the financing requirement saved them as they couldn't sell and thus the deal fell through. Which takes us to the end of the update I did on them.

The spring continued much the same, no action, and more cuts to the asking price... continued into the summer even. Finally in July they cut it down to $240,000 and it sold two weeks later for $230,000. Everything was finalized last week and they are now free and clear.

They are happy to have it over with, but as needless to say, are licking their wounds after not only getting $50,000 less then they thought they would, but going out of pocket for carrying a vacant property for almost 10 months, then there was the payout penalty.

Frankly they should be grateful interest rates plummeted and goosed the market, or they'd probably still wouldn't have sold and would be continuing their magic carpet ride to the bottom and negative equity. Fortunately they're out though, and on the surface ignoring what prices did during the boom, holding a property for three years and selling it for 15% more then you paid is really quite good. Could have been a lot worse.

Of course then you have to figure in all those other costs. The realtor commission takes a big $10,900 bite out first and foremost. Then they get hit with a $9,000 payout penalty because there were still over two years left on their mortgage term.

This should serve as a lesson for all those potential first-time buyers out there who only plan on living in the place for a couple years before trading up... know what you're getting into and be aware of the penalties for entering into a closed mortage. That lower rate comes with some steep penalties if you don't play your cards right. These two knew all along they weren't planning on living there the entire five years, but chased the lowest monthly payment they could get, and it bit them in the ass in a big way.

So, now that 15% windfall only resulted in 5% actually realized. Not quite as impressive.

Of course in their situation, since they immediately moved upon listing, over the ten months they also ate roughly another $13,000 in carrying costs (mortgage interest, strata fees, basic utilities). Which would technically put them in the red, but because of the way they did it you have to figure in even best case they were going to have to carry it for a couple months... so, we'll say they broke even on the venture.

Not quite the cash cow they envisioned when they listed it ten months ago. The ultimate irony being that is they had listed it agressively in the first place they probably could have sold it right away for $240,000-$250,000 before the market further slid, saved a bunch of carrying costs (though would have suffered a bigger payout penalty), and actually cleared some profit... but the idea of getting their price was too much for them at the time, and they ended up worse off for it.

They're currently renting down South, but have just signed on to get a custom house built. At least this time they waited to actually sell before committing, and this place they intend to stay in for the foreseeable future. They learned some expensive lessons the hard way, but were fortunate that it came out of unrealized gains and didn't ruin them.

Those that bought those townhomes at the height of the boom when they were going for $350,000-$400,000 on the otherhand... they're proper fucked.

Gazing into my crystal ball

So, in an e-mail I was asked why I haven't referenced the bond market in awhile since they're so important to interest rates.

Well, the reason is simple, because I haven't felt they've moved enough to warrant a change in interest rates, so their fluctuations are not really of much concern at this point. Interest rates tend to only adjust when they have too, so unless yields go up over 3% or drop below 2%, I don't see them interest rates changing.

The Bank of Canada rate isn't likely to change either. Even with the markets rallying, they want to keep the dollar down as much as possible, and raising their short term lending rates would cause the dollar to jump, and that would be disastrous for manufacturing, tourism, et al. So, their pledge to keep the rate at 0.25% into 2010 is still good at this point.

Now, if the market rallies continue, that would likely draw up bond yields, as investors become less risk adverse it takes a bigger payout to get them to put their money in bonds... and with governments around the world racking up massive deficits, there is a ton on the market so as time goes on yields will have to continue rising to absorb the increased supply.

Though, peaking in my crystal ball, I'm still wary of the current market rallies... these gains haven't been based on much, and the fundamentals of the economy still don't appear to have turned the corner even if stock prices indicate otherwise... so at this point, I still think we could have another mini-crash or two left before stability truly returns.

Thus, six months from now I don't expect interest rates to be much above where they are today, though there could be a hike and cut or two between then and now as the markets fluctuate. When interest rates do start climbing for real it will be hard and steep, but for the next few months at least I think they will remain around current levels.

But that's just my two cents on what's happening and where we're heading in the short term. Of course as we've seen, the markets are anything but rational, so your guess is as good as mine and a lot can change in six months... and you need look no farther then the last six to see that.

Late addition: The July employment numbers were released today, and again they weren't good. Another 11,900 full-time jobs were lost in Alberta, putting the tally since last fall at 82,000 lost, which has erased some gains made in the spring and is now at a new low. The unemployment rate was also up, now standing at 7.2%.

July numbers are in...

Another big month in July sales wise, setting a record even. Amazing what record low interest rates can do even in a recession. Prices were more mixed, as we've seemed to have turned the corner into the summer and the traditional cooling of the market.

Obviously sales were strong for July, but were down month-over-month. That is quite typical though as usually sales peak in May or June then cool through the winter, and start amping back up... 2003 being the exception when they actually peaked in July.

Inventory dipped a bit in response to the increased activity, but remains very high by historical measures.

Prices as I mentioned were a mixed bag. SFH median was about the same, SFH average and townhomes were up a point or two, while the residential average and condos were both down a tick.

As everything but condos were up, but the residential average was down, that would suggest there were a whole lot of condos sold last month... which I think could signal the return of the speculator to the market. Which would be consistent with a couple friends of mine behaviour as they're into the house flipping game, and the last couple months have been suddenly emboldened and dusted off their cheque books. Time will tell whether that pays off.

Obviously with sales down from June, absorption rate went up a bit. Again this is quite typical for this time of year, as sales start to drop off faster then inventory. Expect that to continue for the next few months.

So, the executive summary for July, sales were strong but are falling with typical seasonality, prices are about the same, and speculators may be returning judging from increased activity in the condo market.

As always, here are the hard goods:

Sales = 2,277
Since two years ago = +45.5% (+712)
Since one year ago = +27.6% (+493)
Since last month = -10.8% (-275)

Active Listings = 6,592
Since two years ago = -19.4% (-1,591)
Since one year ago = -37.2% (-3,909)
Since last month = -2.8% (-193)

Single Family Homes Median= $350,000
Since peak (May '07) = -12.5% (-$50,000)
Since one year ago = -3.3% (-$12,000)
Since six months ago = +6.1% (+$20,000)
Since last month = +0.1% (+$500)

Residential Average = $324,847
Since peak (July '07) = -8.4% (-$29,871)
Since one year ago = -3.1% (-$10,253)
Since six months ago = +2.5% (+$7,798)
Since last month = -1.1% (-$3,452)

Single Family Homes Average = $372,741
Since peak (May '07) = -12.5% (-$53,287)
Since one year ago = -1.7% (-$6,483)
Since six months ago = +5.7% (+$20,052)
Since last month = +0.8% (+$2,882)

Condo Average = $244,265
Since peak (July '07) = -10.2% (-$27,643)
Since one year ago = -3.8% (-$9,585)
Since six months ago = +2.4% (+$5,730)
Since last month = -1.1% (-$2,806)

Townhome Average= $296,284
Since peak (Oct '07) = -19.5% (-$71,680)
Since one year ago = -6.5% (-$20,548)
Since six months ago = -1.0% (-$2,938)
Since last month = +1.8% (+$5,213)

Where are the July numbers?

Excellent question. The long of the short of it is the EREB hasn't posted it yet, so it's not available. They usually take two business days into the new month, so it's not really late, it just seems so, and with the long weekend I'd expect it tomorrow.

So, once it's out I'll try to get to it as soon as possible. In the meantime, he's an interesting interview with U of C professor Phil Verleger, one of 'cwant' linked to a couple weeks ago, and even if you don't buy the guys prognostications he does give a good insight into the workings of the oil market.

http://media.bloomberg.com/bb/avfile/Economics/On_Economy/vHHE4QWaAwIs.mp3