Alberta sans Natural Gas

Those who have spent any time in Alberta know that the province might get all the hype for its conventional oil and oil sands assets, but it is really a natural gas driven province. What would happen if Alberta's natural gas was simply 'priced out' of the market? What would happen to the provincial royalties and the provincial budget that has gotten used to the cushy $7 to $8 prices?
This article in the Globe discusses just that:

Combine that with a technological revolution that has allowed firms to profitably extract shale gas at $4 to $5 per thousand cubic feet, compared with $7 or $8 for new Canadian conventional supplies, and Alberta gas may find itself simply priced out of the market.

...“Canadian plays in general have some challenges because of the higher cost structure and greater distance to market,” EnCana chief executive officer Randy Eresman said this month.

Could Encana's forthcoming splitting might have anything to do with this changed game?

In the article there are a few other critical insights:

“There may well be a ceiling on North American gas prices,” Gary Leach said. “We may be range-bound – at the top end, around $6, $6.50 – and a lot of Alberta natural gas needs prices higher than that.”

“Either they bring down the costs and there will be a larger industry, or the costs remain the same and it will be a much smaller industry,” he said.

But wage deflation in the oil and gas sector is simply impossible? After all, don't Albertans have to pay well over $300k just to get a little shoe box in the middle of prairies?
Too bad, those signing up for 35 year mortgages based on the very recent prosperity of the province might wake up to numerous economic surprises during the different stages of their mortgaged lives.

Painful Lessons

In the feel good world of Canadian news, employers have taken a big clue from the politicians. Instead of laying off hundreds or thousands of employers in one go, most employers, at least in Alberta, are laying off people in smaller batches of 30 to 50 every day. Engineering firms are the primary culprit. Others are likely to join them in this 'non sensational', 'feel not too bad' way of laying off people.
I ran into three friends during the last week who work for engineering companies. The story is the same everywhere. EPC companies have vacated 'floors and floor's of engineers who used to work on the energy industry projects. His own concern was, "How would they pay their mortgage?"
Good question. But asked a bit too late.
During the last three years, the overwhelming attitude in Alberta (or indeed worldwide) was that bad times had been defeated forever. Much like those talking about the 'End of History', the idea of conquest of the business cycle proved a bit premature.
In several parts of Alberta, new immigrants or those who recently moved to Alberta, got themselves into huge mortgages, driven by the propaganda of the usual suspects (realtors, realtor associations, banks, mortgage brokers, newspapers etc). Most of these people have not seen even one real business cycle. That is, they have never tasted the pain that usually follows any huge boom. The bigger the boom, usually the bigger the bust is, especially if there were speculative elements built into the boom.
I had first hand experience of this while working in the IT industry during the dot com bust. But that bust was confined to a specific sector of the economy and was 'cured' by the magic potion of cheap credit, which at that time, had already been in good circulation. The central bankers merely increased it dosage to extreme levels and ended up creating a cure far worse than the disease.
Thousands of engineers are in the process of getting laid off in Alberta and lot of these engineers have huge mortgages to pay. These are all well paying jobs, with a good multiplier effect. The pittance of EI will not even cover the basic mortgage for most of these people, increasing the chances of bankruptcy and foreclosure.
Not to mention the case of all speculators who have multiple properties and were so far insulated by the relatively good rental market. The rental market is becoming softer everyday (the layoffs have something to do with it) and will pressure a lot of these speculators.

Until a few decades ago, people's hands would tremble before they committed themselves to a 20 or 25 year long mortgage. Now, it's just become a no brainer activity and an absolute essential thing to do as most people try to keep up with Joneses.
The real meaning of paying $2000 to $3000 to your banking masters, no matter what-rain or shine, health or sickness,good times or bad, strong economy or weak, fruitful employment or despairs of unemployment- over a really long period of time has been lost. For people have forgotten that the borrower is a slave to the lender. When times are good, not too many borrowers recognize this (Even though more than half of their pay cheque goes on to pay the interest over their deprecating assets such as cars and houses), but when the pay cheque stops, the reality begins to sink in. Too bad, in this day and age, you have to be a heretic to not have a mortgage when you can easily afford to.
The real estate complex has been incredibly successful at luring people by all means- fear, deceit, greed and specious economic reasoning. Buy now or be priced out. Smart people buy houses. Renting is throwing money away. Houses have appreciated at over 7 per cent per annum since the dawn of civilization.
As job losses mount and foreclosures increase and new employment opportunities continue to dwindle, a whole generation of people is about to get painful lesson on the basics of economics. That those in the media lie. Realtors lie. Bankers lie, cheat and swindle. They lie because they are in the business of selling their services and lying comes as a part of their training.
If you- the individual or the family-does not take care of affairs on your own by being economically literate and proactive, you will keep on getting painful lessons.
Once this fresh generation of 'suckers' get their lessons, speculation in real estate will freeze for a decade or more. Until the next generation of freshly minted (by immigration, emigration or from our glorious education system) 'suckers' is ready to take their place and the story begins again.

Weekend Open Thread

I woke up this morning to hear not so positive news on so many fronts. The chicken are coming home to roost now and the years of credit excesses, leverage, denial, 'Greenspan Put' and speculation are clearly hurting the mainstream economies both in Canada and the US.

• US unemployment rose by over a whopping half a million. Worst since 1982. Bye Bye Goldilocks economy. Bye Bye quick recovery.
  
• Canadian unemployment rose by 77,000, a much worse number than the US if we account for population.
  
• The West is fairing better at this time, but it's only a matter of time. Layoffs are occurring at GE, Jacobs etc and the full effect of the ensuing commodity bust is only starting to getting felt.
• Oil is at $43 and more importantly natural gas is below $6. A fall to $25 and $4 will kill the economy of West in a replay of 1982. But 1982 will look like a picnic as compared to what's unfolding right now. Just for perspective, the 1982 recession was 18 months long. This recession is already 12 months old and until recently leading economists did not even admit that there was a recession. And Canada is only in a 'technical recession' as per our esteemed leaders. Expect things to get much worse on the employment front with a double digit unemployment rate a very real possibility.
  
• With manufacturing tanking and the commodities bust about to show its ramifications, what's going to happen to the real estate? Not a very pretty picture.
  
• The bust is here. It can't be wished away and most readers of this blog knew what was coming. Yet a few delusional ones bought and even had the chutzpah to lure others into buying by making specious arguments. With a grim employment picture, it won't take much convincing to anyone to put off buying homes. Or will it? When people have sleepless nights before signing on the mortgage papers and committing themselves to a debt for 25 years, we'll know the market has become normal.
  
• Finally, the loonie is down to 77 cents and change. The true companion of $25 oil would be a 65 cents loonie. So much for the collapse of USD.
• And here's a little bit of humour on this otherwise gloomy news day(from Calculated Risk blog comment post):
  

Lawrence Livermore Laboratories has discovered the heaviest element yet known to science. The new element, Governmentium (symbol=Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Since Governmentium has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. A tiny amount of Governmentium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete. Governmentium has a normal half-life of 2 to 6 years. It does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places.

Have a great weekend everyone.

Intuit moving its head office

First it was Dell, then TD and now it is Intuit.

The crown jewel of software development in Edmonton- Intuit Canada-is shifting its head office to Toronto. No prizes for guessing the reason-it’s too hard to find talent here and too hard to sell Edmonton to potential employees from east and rest of the world.

"It used to be one of our big sellers that people could come out and start a family here, but the cost of living is working against us now."

A recruiter friend of mine says that it used to be an easy sell to bring someone from Halifax or Toronto- same or better wages and lower cost of living.

Now one part of the story has changed drastically-same or somewhat better wages but much higher cost of living. Of course, higher cost of living is predominately higher cost for housing. For both renting and owning.

Higher wages and higher cost of living together would not be such a deadly combination (Bay Area, NYC, London etc come to mind) if the city had something more to offer (Edmonton especially). Other than 9 month long winter, a huge mall, river valley, the 14 animal zoo, four glass pyramids and 400 kms separation from mountains, the city doesn’t offer much.

Edmonton used to be a good place-for all its worth-when things were not berserk here. Rampant inflation and exorbitant cost of housing is deterring companies in ICT industry to continue to operate here.

All along the ‘bust’ years of Alberta economy (mid 80s to until early 2000s), the Alberta and the municipal government tried hard to diversify the provincial economy. Information and Communication Technology industry, along with bio technology and life sciences were the focus area.

It’s too bad that every time an energy boom arrives, it causes a ‘bust’ in all industries other than energy. And when the commodity cycle turns, there’s nothing left to counterbalance the energy industry weakening. So Alberta really experiences two busts-the commodity bust and the bust experienced during the boom years caused by the exodus of non-energy related businesses.

It’s hard to predict whether there will be another bust in Alberta, but if it does happen, there won’t be too many diversified employers available to pick up the slack.

Despite attempts by Alberta government and the city of Edmonton to attract high quality workforce, it will remain an uphill task. Initiatives such as this will help, but will only go so far. What this city needs is something substantial to retain the young professionals and/or cheaper cost of living to make up for its lack of ‘everything else.’

In other ‘non-news’, the current edition of Edmonton comfree is a sight to behold. It is perhaps the thickest comfree ever produced with over 186 page and each page has around 20 properties. With very tepid sales for this time of the year, I wonder if they'll need to produce a hardcover edition of comfree pretty soon!

Have a terrific weekend everyone.

Things are changing and people are now noticing....

I was surprised to read the latest column of Gary Lamphier, normally an Edmonton cheerleader and optimistic writer, in which he paints a not so rosy picture of Alberta economy.
Of course, for the 'bitter renters' frequenting this blog, this would not be anything new. The key things that we have harped on in the last several months are:

• Fewer people are moving to Alberta. The people who are moving in are mostly temporary labor with no plans of buying any capital goods, leave aside any houses or condos.
• Except oil sands, there isn't much positive to write about for Alberta's economy. Province's biggest contributor- natural gas industry-is in bad shape with massive under utilization of capacity.
• Retail sales are flat after accounting for population growth and the highest inflation in our country. Of course, as the home prices fall, expect this to get a lot worse as the home ATM's become useless. Read the post I wrote on this earlier this year on how retail sales are the big driver of Alberta's economy. I think this boom was less about oil sands and more about housing and retail spending, not unlike the boom in the US.

The rental market is changing as well. Pretty much all the big guys in Alberta are offering a free December move in, along with a number of incentives. For all the talk of rapid rent escalation, there's now a desperate need of renters to pay the over sized mortgages of the landlords. Of course, the 20,000 or so multi family units under construction in Edmonton and Calgary will be dumped into these markets by this time next year and it's unlikely to improve the situation.

But for those who are contemplating buying in this market, the real fall hasn't even begun. Properties are still selling for 200 to 300 times their current rents. The rents must rise or the prices must fall. The rents aren't really rising anymore, so we know which way the prices are likely to go.

Of course, the continued problems with more banks in the US is unlikely to change the lending and risk appetite of the mortgage industry. Happy flippers in Western Canada will be in a buying spree come January 2008 and the very short 'bear market' in Alberta housing will be over.

Is Alberta isolated from rest of the world?

As the markets tumble across Canada and the US and the sub-prime meltdown continues, and the US readies for a recession, we should pause for a moment and think whether any of these events are likely to have any meaningful impact on Alberta's real estate.
The 'specuvestors' will continue to believe that Alberta is different and in its own league and the entire world wants to live here and oil prices will always remain high. Their arguments may have had some merit if the market were playing on some fundamentals. As I've mentioned a number of times before, for a market that is no longer connected to fundamentals (300x monthly rent is the typical valuation these days in Alberta), any change in the underlying fundamentals simply won't matter. At least in the short run in which the real estate market has acquired a momentum of its own.
I think this market is driven a lot more by speculation, easy credit, equity locusts from BC, lure of easy money, fear of being priced out than by oil prices or trade/mcjobs. I also suspect that it will be the BC Real Estate market that will soften and then fall before Alberta experiences any real weakness.
If the MSM in Canada start talking about a US recession and a consequent Canadian recession, the falling housing market in the US, a lot of people are going to get worried. And I don't think very many Canadian banks will continue to dole out those 40 year zero down mortgages for too long.
A bull market that took over ten years in the making won't change direction or even weaken overnight.
And I will try my best to be around when all this unfolds-not so much for Schadenfreude
but for the experience it is going to provide to any observant student of markets.