2015 Oil and Gas Commentary

SPECIAL EDITION COMMENTARY (APRIL 1, 2015)

We lend our thoughts to friends and clients who are experiencing or anticipating an employment squeeze within the Alberta Oil and Gas Industry.While I do not confess to understand the science of world oil prices, I do understand the importance of the oil industry to the Alberta economy and how oil prices directly affect the company’s bottom lines, their expansion plans and their day to day operation.

The natural question that I get virtually every day is “how is the downturn going to affect the housing market in Red Deer”

In 2006 and 2007, the North American economy heated up and so did real estate market.House prices in Red Deer rose approximately $100,000 over a two year period.

In October 2008, the North American economy hit the brakes, sending a shiver of layoffs and home foreclosures across most of the USA and parts of Canada, including Red Deer.Prices here dropped $30,000 in 12 months and many homeowners found themselves in a reverse equity position. The aftermath of price drop was especially devastating for families who lost their employment and had to sell or, in some case, simply handed the keys back to the bank.

In 2009, the recovery began and empty houses became purchased by a fresh crop of first home buyers inspired by strong employment opportunity throughout the region.Year by year, house by house, average pricing clawed its way back to historic highs, giving most homeowners some breathing room and flexibility into their mortgages.

Now……..…in 2015, another storm is brewing on the horizon.Volume sales are down 20% in the first quarter. People are fearful of another real estate downturn…….…but wait, things are a bit different this time around.Here’s why:

  • In 2007, banks were lending buyers funds well beyond their reasonable means, offering zero down programs and much looser qualification measures, including stretched amortizations and allowing buyers to qualify on artificially low (deceptively low) 1 year interest terms. Since 2009, however, buyer’s qualifications have become much tougher including higher down payments, more stringent employment verifications, shortened amortizations and mandatory qualifying on 5 year term interest rates. The intent, and the result, was to help ensure Canadians were better equipped to handle “short term” job losses.
  • History shows that the inflationary period of 2007 was largely unsubstantiated and one that burst quickly like the proverbial bubble.Our price increases this time around have been more gradual and strongly supported by our local diversified economy including manufacturing, oil and gas, agriculture, health care and the thriving Joffre petrochemical plants.
  • In 2008, the stock market also crashed, wiping out the savings of many people by over 50%.That same 50% was intended to be a safe haven “rainy day” fund to be used by families in tough economic times.That fund simply was not there when homeowners needed it the most.
  • In 2006/2007 new home construction across North America went crazy. Banks and builders sensed opportunity and seized the same. In Red Deer there were 1104 brand new single family home constructed in 2006, absolutely crushing the more recent standard of 348 per year (based on the average new builds per year over the past five respective years).Our current inventory of homes for sale in March 2015 is at a very manageable balanced level, both in terms of new and resale homes.

In theory, the Red Deer market is in a better position to weather this storm. Let’s hope the clouds dissipate and the oil patch recovers sooner than later.

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