The benchmark price of oil sunk almost 75 percent since mid2014, with global crude output exceeding demand by 1-2 million barrels per day, as reported by Globe and Mail’s Barani Krishnan in early February.
Bloomberg further reported Canadian oil sands producers were to the point of pushing bitumen at around US$8.35 a barrel, “down from as much as $80 two years ago.”
The situation for Canada’s oil industry is dire, which means so is the Canadian economy. So tightly tethered to the price of oil is the value of the Canadian dollar that any fluctuation in per barrel pricing has an almost direct correlation.
When the price of oil floated to below $30 per barrel in mid-January, for both Brent Crude, the global benchmark, and West Texas Intermediate, the U.S. benchmark, Canada’s loonie fell to around 70 cents U.S., its lowest point since the spring of 2003.
But, does the low dollar afford any advantages?
Further, how does the slumping loonie affect housing affordability in the Lower Mainland, a place where the market, as Thomas Davidoff, University of British Columbia (UBC) associate professor at the Sauder School of Business, plainly states: “is terrifying.”
First let’s understand why Canada is in such a position to begin with.
The economy in context
China’s economy hit its lowest growth in a generation as production worldwide peaked well beyond the demand.
And it’s not just oil. The price of coal, copper and iron, some of Canada’s other key resource exports, have also been hampered by the crawling global economy and this is in part due to China’s slowdown, which, an economy as large as it is will inevitably have ripple effects throughout the world.
However, according to Bloomberg, nonperforming loans in China, that is, loans which are in default or close thereof, climbed by 51 percent last year.
The loss to China’s banks will be staggering, estimated at 1.27 trillion yuan or nearly USD$196 billion dollars, signalling an impending financial distress not different to what transpired in 2008 in the U.S., but perhaps bigger.
China’s economy has shifted away from investment and toward consumer-based consumption. Their fiscal growth has since crept to a pace that is the weakest it has been in a quarter century and so China’s appetite for commodities, especially oil, but also metals and raw materials, has waned where before its ravenous demand forced prices skyward.
But it’s not just China contributing to the downwarddriving loonie. The rising U.S. dollar and global oil production as a whole are helping dampen the economic environment for Canada, a net energy exporter.
The strengthening U.S. dollar makes it much more costly for those nations with currency not pegged at or near the value of the greenback as oil, among other goods, are traded internationally against the U.S. dollar.
The rising U.S. dollar has also resulted in the Federal Reserve bumping interest rates up 0.25 percent. Then, finally, there’s the glut in stock further straining demand and therefore the overall price of oil.
As reported by Bloomberg’s Dan Murtaugh, the U.S. Energy Initiative stated that “there are more than two billion barrels of oil and oil products in the U.S. alone,” and production doesn’t appear primed to slow, in the U.S. or globally.
International Monetary Fund (IMF) economic counsellor Maury Obstfeld stated, “it’s hard to see oil going back to the $100 barrel level anytime soon,” with the agency stating in its World Economic Outlook in January that it forecasts economic growth to increase 3.4 percent globally this year, followed by 3.6 percent in 2017.
That assessment is a 0.2 percent decrease from the IMF’s previously published forecast in October.
Low loonie and housing
The one clear advantage to the low loonie, aside from tourism, which has already seen a significant boost likely to continue, is the jump in non-resource exports globally, as asserted by Bank of Canada Governor Stephen Poloz in January.
As a whole in 2015, Canadian exports, where commodities make up nearly half the lot, decreased 0.9 percent to $524 billion, “while the value of energy products exports shrunk by more than a third (down 34.6 percent),” as reported in Canada's International Merchandise Trade Performance.
While the loss in energy exports was in large part mitigated by gains in 10 of 11 major sectors, Canada posted a trade deficit of $23.3 billion for the years, compared to a $4.8 billion surplus in 2014.
Poloz predicts that the economic fallout – from the weakened commodities prices to the consequent higher import prices in lieu of Canada’s lowering purchasing power – will last up to five years and will drain the Canadian economy of around $50 billion each year.
It doesn’t paint too rosy a picture for housing affordability on the west coast where the benchmark price for a detached home rose 20.1 percent higher than its rate last year, to currently sit around $1.2 million.
Premier Christy Clark and her Liberal government have recognized the unaffordability of housing in the Metro Vancouver market, and beneath the tarpaulin of the low-flying loonie, changes were announced in February.
The 2016 budget released on February 16 addressed a host of items including modification to the property transfer tax, capital spending along with the proposed collection of foreign investment data, which has not been done since the late ‘90s. The property transfer tax exemption threshold was expanded to newly-built homes priced up to $750,000. The exemption will reportedly help buyers save up to $13,000 and is slated to provide $75 million in relief.
The government also announced it will provide $355 million in capital spending to support construction and renovation of affordable housing units throughout the province.
As elucidated by the government, the relatively high housing prices are driven by the increase in demand, which is the result of B.C.’s population growth and its constrained geography, namely the lack of available land to build on.
Capital investment is thus the other side of the equation to solving unaffordability. New construction is needed to boost supply, which in its currently constricted state only serves to increase housing costs, affecting both buyers and renters in the Lower Mainland.
On the backdrop of the cheapening dollar, however, it means cost of materials will increase, to be transferred on to the buyer, and an additional layer of demand – one that’s not domestic – may simply be further increased.
Davidoff referred to “eye-popping numbers” in Burnaby and elsewhere in the Lower Mainland and pointed to the proposed annual surcharge to be part of a B.C. Housing Affordability Fund (BCHAF). This recommendation was put forward to the provincial government, by Davidoff, Joshua Gottlieb and Tsur Somerville, all UBC real estate economists.
The surcharge would affect owners of vacant properties and owners who are not Canadian taxpayers, a problem experts view as contributing to the housing bubble and negatively affecting the economy on multiple levels.
“The goal is to support those living in parts of the province that have seen skyrocketing real estate prices, while also making our local markets less attractive to investors who wish to avoid taxation or park cash,” said Davidoff in a press release earlier this year.
But, as the UBC professor explained, “demand is notoriously hard to measure,” and while asserting foreign demand matters to the local market, evidence of it is very much anecdotal. Collecting data on foreign ownership is thus the first step to establishing an effective policy initiative.
Strong provincial winds
The one solace for British Columbians is the relatively strong economic forecast for the province. The Conference Board of Canada predicted B.C. will lead the country in economic growth in 2016, just as we had last year. And it isn’t just the Conference Board laying such claim.
Royal Bank of Canada followed up, stating B.C.’s economy will indeed lead Canada in growth slating 3.1 percent for 2016 and 2.9 percent in 2017. The B.C. government forecasted economic growth for 2016 at 2.4 percent. The IMF stated it foresees Canada’s economy will grow just 1.7 percent in 2016 and 2.1 percent in 2017.
With the price of oil the way it is and as the economy shifts from the global energy demand of the yesteryears, a rise in the loonie anytime soon should not be expected. Investment bank Macquarie predicts the loonie to fall to 59 cents U.S., but as economic predictions go, there is no certainty in any of it.
