For the past three years Sam’s worked for one of the biggest well-servicing companies in northern BC and Alberta. A good gig. Until now, of course.
“When I started we had a base in 30 towns from Fort Nelson to Medicine Hat with approximately 1,000 guys working in the field. As I write this today we have a base in Red Deer and one in Fort Nelson and we’re down to 80 guys in the field.”
By the way, did you read about a major oil patch support company laying off 90% of its employees? Of course not. This is the new reality. Economic mutilation, one little lick at a time.
“Fort Nelson is a ghost town….people are turning in their keys,” says Sam. “Old timers up here say it’s the worst they’ve ever seen…worse than the 80’s. The news hasn’t given this any justice. People are losing their shirts and it’s not just the rig workers. It’s the local restaurants that are boarded up…the Boston pizza is laying off, companies are pulling out. People don’t realize but this will trickle down south of here too – it’s just a matter of time. The big companies aren’t investing in the patch because of all the uncertainty and it shows. I’m lucky, I don’t live up here I commute from the lower mainland. I couldn’t imagine if I moved up here for work like so many people have. When I read some of the comments on your blog I have to laugh. People who think this oil shock will never reach them…it’s coming.”
Oil creep’s something the feds are terrified of, even if you aren’t. Days ago the CEO of Canada Mortgage and Housing gave a private presentation to finance guys in New York and warned that if oil drops to $35 a barrel (it’s now $41) and stays there for five years (oil started crashing two years ago) that houses in Canada could lose 26% of their value. Just for context, the US middle class was decimated when real estate prices declined 32%.
Oil at thirty-five bucks is not a stretch, seeing prices have declined 40% in a year, supplies are at record levels, the US is about to sell off a big hunk of its strategic crude reserves, and Iran’s set to tell OPEC this week it will be pumping its bootie off, now that it’s got a nuke deal with the States. One thing we know for sure – those Calgary oil execs who a year ago said recovery to $80 was a done deal are busy trying to sell their Cowtown McMansions. There’s so much office space for lease there a local commercial realtor calls it “a bloodbath.”
But this is not about Alberta. It’s fairly hooped, especially with a government viewed as anti-oil, about to slap a carbon tax on everything. These will not be easy years for what was once the promised land where kid technicians made two hundred grand and spent half that on a truck, or $700,000 on a crap house in Fort Mac.
Instead let’s focus on the wider consequences. There have been three engines of economic growth in Canada since the financial crisis plunged the world into quasi-deflation. Oil. Houses. Debt. Now the first one has turned into an economic negative, resulting in serious job loss and a drop in national income. That leaves real estate and the money borrowed to support it (the banks).
Without a doubt, we’ve become more dependent on housing every month that oil’s tanked. One in five jobs created this year came from real estate, and 90% of all jobs created since the spring. But at the same time, the housing market has narrowed. Most markets are seeing sales slow, stagnate or decline, many with zero or negative price growth. It’s only in YVR or the GTA that the boom carries on – although in 416 average detached prices have dropped below peak levels.
At the same time, the meme is changing. Stories about a real estate correction are far more prevalent than a few months ago, which makes this pathetic blog seem less weird all the time. Last week a major bank started warning people of imminent mortgage rate increases, for example.
So, it’s reasonable to conclude we are past peak house.
What about the debt thing? The Bank of Canada dropped rates twice this year specifically to draw forward demand – a term the pointy heads use to describe how cheap money lures people into borrowing and buying stuff they wouldn’t have bought otherwise (or might purchase later). It worked. Household debt’s at a new record high. Mortgage debt bloated another $75 billion this year. We are pickled in it. This is now a debt culture.
So what happens when the Fed begins to normalize rates on December 16th, as seems likely? Well, we follow. Since 1989 there’s been a 0.91 correlation coefficient between US and Canadian five-year government bonds. That means the odds of our bond yields jumping along with theirs is 91%. The bond market is where fixed mortgage rates (that 86% of people have) are set.
As TD economist Brian DePratto told Bloomberg yesterday: “As they start to tighten, the direction is clear: you are going to see that pass through to the Canadian five-year.”
Oil’s in a funk. Real estate’s wobbly. Debt swells.
At least be glad you don’t live in Fort Nelson. No Boston Pizza? Seriously?