How Oil Prices will affect our Real Estate Values

Canada’s big banks weigh in on how falling oil prices will impact the country’s housing market

 

Photo: Sergio Russo/Flickr

It’s only mid-February, but 2015 has already proven to be full of shocks and surprises for the Canadian economy and the impact is being felt in the country’s housing market.

The steep decline in oil prices caused organizations monitoring the housing market to readjust their forecasts and backpedal on predictions for 2015 and 2016 in a relatively short period.

In November, the OECD predicted that the Bank of Canada would raise its overnight lending rate by May 2015. Many other analysts agreed that a rate hike would likely occur before the end of 2015. Instead, the central bank cut the overnight rate a quarter per cent to 0.75 per cent on January 21st.

As late as mid-November 2014, Calgary was still described as one of Canada’s “red hot” markets, along with Toronto and Vancouver. According to the Calgary Real Estate Board’s latest report, home sales were down 38.9 per cent and new listings were up 39 per cent year-over-year in January. The Globe and Mail published a story on February 4th profiling the negative effects of the oil price slide on the city’s luxury market in late 2014 and early 2015. Clearly the sentiment in the market is less than sunny.

On the heels of the latest release of housing starts data from the CMHC, we combed through some recent reports published by Canada’s major banks to get a reading on the current outlook from market experts.

Read on for a rundown on what the banks’ economics teams are looking at now and down the line for the country’s housing market:

Royal Bank of Canada

• RBC has had a lot to say on housing in 2015, thus far. In its housing forecast for 2015 and 2016 published in mid-January, RBC downgraded its annual projection for the Alberta resale market in light of oil price declines. The bank said it expected resales to fall by 6.5 per cent in the province in 2015 — a blow to the Alberta market, but not “a knock-out punch.” This report was published prior to the Bank of Canada rate cut and the release of housing sales and price data for January.
• On February 9th, the bank released an update to its Canadian housing forecast for 2015 and 2016, necessitated by the surprise overnight rate cut, a dimmer view on oil prices in 2015 and a weak Canadian dollar.
• In the update, the bank said that home resales and prices will benefit from low interest rates on the national level, but market performance will vary tremendously on a regional level with Ontario, BC, Manitoba and Quebec benefiting and Alberta, Saskatchewan and part of Atlantic Canada seeing sharper drops in sales and prices in 2015. The largest decline will be in Alberta, RBC predicted, where resales are now projected to drop by 16 per cent in 2015 and 2.6 per cent in 2016.
• In a research note published yesterday, economist Laura Cooper wrote that the slowing in housing starts in Canada’s energy-dependent regions “failed to materialize” in January, referring to the CMHC data that showed housing starts increasing month-over-month nationwide, with Alberta showing pronounced strength.
• Even so, Cooper concluded that housing activity across the country will gear down in 2016 with an interest rate hike expected at some point that year.

Bank of Montreal

• Reacting to the CMHC’s release of housing starts data for January, BMO economist Benjamin Reitzes called the regional breakdown “a bit curious” and noted that the Prairies were “a surprising source of strength.” Reitzes was quick to point out, however, that starts in the region, particularly Alberta, will likely follow declining home sales within the next few months.
• Reitzes wrote that starts in Central Canada and BC are expected to maintain last year’s levels while some deceleration is expected from 2014′s pace on the national level.

TD Bank

• Like most economists, TD was surprised by the strength of the Canadian housing market in 2014, but forecast a softening in sales and prices in the cards for 2015 and 2016. In a quarterly economic forecast report from December 2014, the bank said that it expected the Bank of Canada to remain on hold until October 2015 while describing falling oil prices as “a dark cloud on the horizon.”
• In a report published on February 9th following the release of housing starts data from the CMHC, economist Randall Bartlett explained that the strength seen in the Prairies “likely reflects momentum from a strong year in housing demand overall in 2014 as opposed to renewed strength.”
• Bartlett also said that January housing starts do not reflect the Bank of Canada overnight rate cut and that the subsequent drop in lending rates should keep the Canadian housing market “more buoyant than would otherwise be the case.”

Scotiabank

• The bank’s last major comment on the Canadian housing market came from economist Adrienne Warren on January 15th, before the surprise Bank of Canada rate cut announcement. Warren wrote that low borrowing costs, moderate economic growth and favourable demographics will continue to support national housing demand in 2015. She acknowledged that slumping oil prices impact economic fundamental in Western Canada.
• Responding yesterday to the CMHC’s housing starts data, Scotiabank’s economics team were surprised to see construction activity maintaining its strength in Alberta despite “softness in home prices” and large spike in new listings for December. In the note, the economists were tight-lipped on how they saw things shaking out in oil-producing regions in the next few months, though they said it would be a story they’d watch carefully in the months ahead.
• Scotiabank is expected to release a comment on CREA’s January home prices and sales data set to be released later this month.