Why the oil crash is bad for Canadian house prices

The “virtuous circles” of rising oil prices, higher incomes and booming house prices, are about to turn “vicious”


Jeff McIntosh/The Canadian Press

As the collapse in oil prices picked up speed in recent months, it set off a debate about the overall impact—positive or negative—that lower oil will have on Canada.

You can put David Wolf, a former Bank of Canada adviser and now portfolio manager at Fidelity Investments Canada, firmly in the “it’s going to suck” camp. He spelled out his concerns in an investment commentary on Wednesday entitled “Canada’s oil slick,” and one of the biggest threats he sees is to house prices.

Rising resource prices over the last decade set in motion several “virtuous circles,” he writes. Pricier oil boosted incomes of businesses, governments and consumers across the country, even for those with no direct ties to the energy sector. The oil boom drove the value of the loonie to record highs, which helped to keep inflation in check, despite an economy firing on all cylinders. That, in turn, meant the Bank of Canada could keep interest rates down. The result, Wolf observes:

has been mutually reinforcing increases in Canadian confidence, spending, borrowing and asset prices, resulting, most notoriously, in record levels of Canadian household debt taken on against overvalued residential property across much of the country. These linkages are all difficult to quantify, which is why they’re under-appreciated. But we know they’ve all been working in the same direction—up.

And now they’ll all work in the same direction—down.

oil-house price link

Those virtuous circles are set to turn “vicious,” he warns—declining incomes, plunging confidence, falling asset prices (both real estate and equities).

Yet now, unlike during the 2008-09 oil collapse, if house prices begin to tank, the Bank of Canada has very little room to stimulate the economy, what with its benchmark rate already at just one per cent, where it’s been for more than three years. Besides, if it slashed rates (can you even use that verb with such tiny wiggle room? Perhaps snipped is more appropriate), it would only worsen household debt imbalances the Bank has warned are the biggest domestic threat to the economy.

Wolf’s recommendation to investors: Steer clear of Canadian stocks, which are likely to underperform U.S. equities for some time to come. (See here for more on that.)

As for everyone else, what can we say? Hold on, things are about to get bumpy.


Why the oil crash is bad for Canadian house prices

  1. It seems that it is only the media that is complaining about falling oil prices. I have yet to meet a single person who has complained about it. These financial pundits refuse to acknowledge the reality that oil prices are an integral component of modern life. Food, clothing, shelter, travel, entertainment, leisure and all other human activities require the burning of fossil fuels. An oil price cut directly raises disposable income which makes households more secure and more able to pay of that mountain of debt. The constant harping on deflation as something bad is ridiculous. Falling prices are bad??? For whom exactly?

    • People are making too much out of these lwo prices and its temporary, may last 2 years but them oil will hit $200 or more.

      What is happening is a hysteresis effect. Oil production ramping up, economy ramping down, then one day there was lots of oil. So in debt over extended countries, companies and people could maintain cash flow, they flood the market with cheap oil. Prices drop, and I think they even could dip below $40 and stay there for a bit.

      But then investors like me have sold off all investments in new oil to replace older sources. So the amount of future oil is slowly going negative….and as it does, at some point perhaps 2 years from now oil will be at $200++ barrel if any real economic recover does occur.

      But we are still on the down trend of a world wide depression, too much “thin air” bank fraud money being absorbed and common people are not seeing the money, so we are in a perfect economic storm of rapid inflation, pull back deflation, then devalution of money….

      People fail to realize that since 2006, the economic problems are about currency and debt fraud by our own corrupt bankrupt governments.

    • Exactly. The same people who are so “concerned” about low oil prices right now are the same ones who have always, and will again, scream bloody murder when prices at the pump hit a new record high. Alberta might have to run a deficit this year – which they borrow from their own Heritage Fund – and everybody thinks the sky is going to fall. You don’t even hear the biggest naysayers suggesting this is some kind of “new normal”.

  2. I am not saying buy a home but…..

    Fact is a home is your best bet. It appreciates without inflation taxes as money devalues. In 2006 economics changed to accommodate the fact that western governments, including Canada went bankrupt. No legitimate people were lending all that money government was consuming.

    As our currency loses value, so does debt. If you are young, debt up. As debt devalues with inflation and Canada has had negative value money fro some time and now is a rapidly depreciating economy in world terms. Do the math, in terms of USD and Yuan WORLD currencies, Canada has lost 19% value in the last 18 months.

    Media, finance types, govmint are denying that money has no future value in our negative value economy of debt fraud.

    Hey, save in USD or Yuan, buy debt in CAD…. as Canada’s currency is well, rapidly depreciating. Fiat money has no immutable value, having a home will always be worth a home. But having $400,000 will buy you less and less as time goes on.

    And best part of a home? It does not come with a cumulative inflation tax.

  3. As a professional in the field (I run a real estate website about Regina Condos for Sale), I think that smart consumers will simply wait out any oil-induced dips.

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