June 24, 2008

 

Title: Real estate hit by rising fuel costs

Sub-title: Housing demand has long been driven by interest rates and the job market. Now fuel prices are starting to have an effect too.

 

Energy costs are hitting Canadians as never before. Rising gas and heating prices are pressuring the economy, influencing inflation and causing the world’s central banks to firm up interest rates. Recently those effects started flowing into the country’s residential real estate market too.

 

The good news is that as an energy rich nation, the overall effects of those rising prices are far less onerous on Canadian consumers than they are on those in many other western nations.

 

That said, fuel prices aren’t just rising, they are sky-rocketing. The price of a barrel of the benchmark Texas Light Crude Oil recently shot through the US $130 per barrel: a six-fold increase in just five years. According to one expert, those rising energy costs bring significant downsides. And one sector being hit is residential real estate. “Fuel prices are affecting almost everything Canadians do,” said Gary Siegle, regional manager at the Calgary office of Invis, a mortgage brokerage firm.

 

Lost jobs, gas prices, home heating prices

Siegle should know. The division he heads writes close to 2,000 new mortgages each year, worth about $500 million. However business has recently dropped off slightly, despite the fact that Alberta has been one of Canada’s hottest real estate markets.  “Last week Air Canada cited increased fuel costs as a key reason that they were shutting some routes. And recently GM announced the shuttering of a truck plant,” said Siegel. “When blue-chip companies lay off employees, it takes potential buyers off of the market.”

 

Of course the effects of high fuel prices stretch beyond job losses. They also directly influence consumer spending: because extra money spent on energy is money not spent on other stuff...like housing.

 

Those rising energy are most obvious at the gas pump. While Canadian statistics weren’t immediately available, according to the Bureau of Labour Statistics, U.S. households spent an average of $1,422 on gasoline in 2003. By April of 2008, that total had shot up to an annual rate of $3,196. That’s close to $2,000 a year in extra fuel costs for U.S. families. The effects in Canada are likely roughly the same. Canadians have also been hit hard by the rise in home heating prices. According to one retailer in Hawkesbury Ontario, the company’s clients will spend on average $2,400 this year in fuel costs, almost double the amount they charged last year.

 

The effects of those rising fuel prices don’t end there. That’s because many Canadian workers and businesses feel pressured to make up for the increasing costs by asking for higher salaries and by charging more for products they sell. This creates the risk of an inflation spiral, in which one round of price increases sets off another, then another. Not surprisingly, the Bank of Canada has picked up on these inflation fears and is starting to firm up its monetary policy.  

 

This is likely already translating into higher interest costs than might otherwise be the case says Invis’s Siegle. “Spreads (the difference between mortgage rates and bond rates) have risen to between 2.0 percent and 3.0%, when traditionally they are between 1.0 percent to 1.5 percent,” says Siegle. “Part of the increase stems from the fact that the central bank did not cut rates earlier this month as many had expected.”

 

Existing home sales and price increases are slowing

One thin is certain: higher energy costs are leaving Canadians less money left over to spend on housing. According to the Canadian Real Estate Association, unadjusted sales activity conducted through its Multiple Listing Service fell by 6.2 percent in April. The average price of homes sold that month rose by just four percent year-over-year to $317,619, the smallest increase in six years. While the CREA statistics only include Canada’s largest urban areas, the pricing pressure was likely worse in the rural areas, where fuel cost increases have an even greater effect.

 

That said, ironically, as an energy rich economy, fuel price increases are mostly good for Canada. They improve the development potential of Alberta’s Tar Sands, which are generally thought to include the world’s biggest reserves. They also provide greater revenues from exiting fields, much of which end up in government tax coffers.

 

The only problem is that right now, many Canadians could use some of that extra cash in their own wallets.

 

Recent Bank of Canada rate moves:

June 10, 2008, No change

April 22, 2008, -1/2%, 3.0%

March 4, 2008, -1/2%, 3.5%

January 22, 2008, -1/4%, 4.0%

December 4, 2007, -1/4%, 4.25

October 16, 2007, No change

September 5, 2007, No change

July 10, 2007, 1/4%, 4.5%

 

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is Bankrate.ca’s economics columnist.

 

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