What Will Happen to the Calgary Economy if the Price of Oil Changes? Calgary’s economy is more reliant on oil and gas than the rest of Canada’s economy. How will changes to the price of oil affect Calgary’s economy and, more importantly, its real estate market?
If the Price of Oil Remains At Today’s Prices
There is a roughly four month lag between the price of oil and its impact on Calgary’s real estate market. The housing market has already adjusted to the early 2015 decline in oil prices. These adjustments include a dramatic decline in new housing starts and halt of planned development in the suburbs. Housing supply is now overwhelmingly current residents selling their homes and a few redevelopment real estate projects coming onto the market. If oil prices remain at today’s prices, you can expect new housing starts to remain at the current low rate. You will see very few brand new homes coming onto the market except for the planned dream home built on an infill lot coming up on the market after the couple that was building it divorced or went bankrupt and the other cases where people build a new property and have to give it up. Housing prices have declined slightly already, with single family homes declining less than five percent. If the price of oil remains at today’s prices, home prices may decline another five to ten percent as the loss of many high paying jobs ripples through the
The lower price of oil has already hit real estate markets like Hawaii and Phoenix, where Calgary residents bought several percent of the retirement community homes and condos on the beach. The price of vacation properties in those areas haven’t dropped, but the percentage of homes bought by Canadians has declined significantly. If Oil Goes Down Even Further Oil prices fell to roughly half their 2014 highs by the middle of 2015. The question is whether oil prices will stabilize at current prices, go back up or drop. There is a real risk that prices will drop further because fracking is brining new oil supplies onto the market, Saudi Arabia pumping oil at higher rates to continue to bankroll its state and the nearly neutering of OPEC in controlling supply. If oil goes down even further, there will be more layoffs in the extraction industry. While oil shale projects were built with a forty year investment time frame, they cannot stay in business if the company owning it is hemorrhaging money. If oil prices drop further, Calgary will see a spike in unemployment in its highest paying job sector. Housing prices will decline at least 10% unless the job market in Calgary expands enough in other sectors. A long term impact of oil prices going down even further is that Alberta will have to consider tax increases to pay for services that the extraction industry was paying. Whether this takes the form of income taxes, sales taxes or property taxes is to be determined.
If Nothing Changes
If nothing changes with regard to the price of oil, Calgary’s housing market will remain at the same sluggish state it has been since mid-2015. Housing prices will drop a little more, since the rate of immigrants to the city will slow, but it won’t crater because the supply of new housing has already adjusted to the expectation of low demand. Housing prices will drop most in areas closest to the oil sands, like Calgary’s northern suburbs. However, Calgary won’t see a buyer’s market with fire sales of homes as Fort McMurray has seen.
If Oil Prices Rise Significantly
If oil prices rise significantly from today’s prices, even if they don’t return to their 2013 peaks, Calgary will see a drop in its unemployment rate and wage growth. Housing prices will rise to their former levels if not start to rise match the inflation rate of other Canadian property markets. If oil prices approach the old normal and more people start moving to Calgary to work in the energy sector, the suburbs will resume their prior rate of home construction. However, the infill development rate in downtown will be relatively unchanged, because many people tearing down old bungalows to build luxury homes near downtown typically do so because they live and work in downtown. If Oil Prices Exceed 2014 Peaks It is unlikely oil prices will return to their highs of June 2014 in the near term. The loosening of sanctions on Iran will allow more of their oil to come to market, while Saudi Arabia and Russia are pumping at full bore to pay for their regimes’ bills. However, it is not out of the realm of possibility that rigs shutting down due to low prices today will result in supplies getting so constrained that prices rise again. Prices could also spike if war broke out in the Middle East. If the price of oil spikes past 2014 peaks, you can be assured that the oil sands will call back many workers to resume production. It will take time for the economic impact of this to ripple through the real estate market beyond the communities that provided temporary housing for oil field workers. However, if oil prices return to their old highs, real estate in Calgary would see price increases of 5% to 10%; in this case, we would see prices inflating as much as Vancouver and Toronto have been. If oil prices rose and remained high for several months, you would see the number of new housing starts also increase.