What is the leading indicator, of leading indicators, in Calgary’s Real Estate market related to Calgary Mortgages?

Oil.

Calgary, and Alberta Real Estate markets, tend to follow the oil market.  As of late, news has not been good.  There might be a silver lining …

A strong oil market results in companies hiring workers and paying them well.  This results in net migration of people, lower unemployment and wage growth.

Real Estate investors love this because it decreases rental vacancy, creating upward pressure on monthly rents.  

Employment and wage growth also help create confidence for people to enter the housing market purchasing a family home. 

With increasing purchase confidence and capacity, demand for resale and new build units are absorbed limiting housing supply.  

Ok, we know high oil prices equal good economic times.  If oil is at $50 – $60 dollars per barrel, isn’t that good??

There is a distinction of oil price to note …

World Oil Price vs Canadian Oil Price:

The world’s standard price per barrel of oil is set by the West Texas Intermediate (WTI) barrel. 

As of today, WTI is trading at $56 per barrel USD.  This is down from a August 2018 high of $75 per barrel USD. 

Here’s what’s important to note …

The majority of Canadian crude is called Western Canadian Select (WCS).  As of today, WCS is being traded at $14.68 per barrel. 

Canadian crude is being sold at a discount on the world market.  

Why?

Here’s an over simplified explanation: supply and demand.

Our capacity to get our product to market is maximized right now.  

Pipelines are raging full throttle with product, rail cars are filled to the brim chugging along, and storage facilities are maxed out with no additional capacity.  

So just stop producing then, right?  

Not that simple.

Our producers just can’t turn the taps off.  The economics of shutting in production, then ramping up again, are not there.  Our Western Canadian Select product keeps coming. 

Forward thinking and planning of pipelines, capable of getting our product to international markets faster and more efficiently, seem to always be stymied.   

We have oversupply.

Demand issues have also assisted the price differential between WTI and WCS.  

Refineries in the U.S seasonally shut down and are not taking on as much product for processing. 

Hurricanes also contributed to the shut down of U.S refineries that would process heavy Canadian crude.  

Calgary Mortgage Interest Rates: Why This Matters To You?

The oil shock of 2014 prompted the Bank of Canada to drop interest rates 0.50% in 2015.

… I’m NOT suggesting will this happen again. 

However, The Bank of Canada’s most recent Monetary Policy Report anticipated the price of Western Canadian Select oil to be $35 per barrel.  Again, today the market price is $15 per barrel.

Oil is one of Canada’s main exports and contributor to our Gross Domestic Product (GDP).  In fact, the Bank of Canada estimated Canada’s GDP dropped by 1% in 2015 due to the drop in oil prices. 

The hawkish tone from the Bank of Canada might change should a prolonged discount of Western Canadian Select oil remain. 

I’m also reading that anticipated Consumer Price Index (CPI – Canada’s inflation measurement) will be unchanged along with less than stellar GDP numbers to be released soon..

All of this leads to a very unlikely Bank of Canada interest rate hike in December.  

I’m not sure what positive macroeconomic data the Bank of Canada might use as reasonable justification to hike rates in January, as some are projecting?  I’m looking and reporting to you. 

Conclusion:

I think it’s important to note the distinction in price between Canadian heavy oil – Western Canadian Select (WCS) – and other grades of oil throughout the world.

Oil prices affect all levels of our economy both positively and negatively. 

They even trickle into influencing the Bank of Canada’s interest rate forecast, directly linked to your pocket-book. 

Next week I’m writing on recent commentary from the Bank of Canada’s Deputy Governor Carolyn Wilkens.  

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Do you know anyone buying or selling a home?  If so, trust me to advise them on their Mortgage strategy today, and helping them save money in the future.  

Talk soon,

Chad Moore

P.S

I KNOW some of my readers are in the oil and gas industry.  Please reply with your thoughts on today’s supply/demand WCS challenges.  Forgive my oversimplification above. 

P.P.S

I was out in Saskatoon this past weekend. Yeaaahh :-)

Many of you know I am a volunteer board member for the Calgary Colts Junior Football Association.  Saskatoon was hosting the National Championship game and the National AGM. 

If you’ve ever been to an AGM before, sometimes they are a go-through-the-motions kind of event.  There was some of that in Saskatoon, but also some actual business was conducted.

What I enjoy about these kinds of meetings is exposure to business planning, reporting, and budgeting.  I’m a solo-penure operating my Mortgage practice.  I have one associate whom I work with.

In the Colts Association, there are larger dollars, more moving parts, and people all around me in the organization.  This is experience I would not otherwise be exposed to.  

PLUS, it’s all volunteer work.  This creates a situation where I have to r-e-a-l-l-y connect with why I do what I do.  I also need to really inspire others to help me.  The leverage of “you’re being paid to do this” is not there.  I find that an interesting dynamic.   

One initiative I am taking on this Winter is actively recruiting more volunteers to help on our Board.  To do this, I’m helping create a solidified structure with small roles for people to initially take on.   

One big challenge in having people commit to volunteer is overcoming the objection of time.  To overcome this, I think chunking down roles into small, yet meaningful tasks will help.  I hope so anyway!