The Affect Oil Is Having On The Alberta Economy
For most people, the plunge in gas prices has been a good thing — it has dramatically shrunk what had been a part of their budget that had been growing out of control, with no end in sight. However, since the price of crude oil slid into a free fall in the middle of 2014, places like Ft. McMurray, Alberta, now sit at the edge of ruin. There are no jobs in the industry, and jobs in other sectors are fading. As a result, people are selling their homes as quickly as they can, and some news reports have home values down to 80 percent of their value at the start of 2014.
Things have gotten so bad that people who bought high-end homes and are now seeing them drop as much as a quarter below that value are just mailing the keys to those homes back to the bank and moving out. This is not happening as often as social media might make it seem, but it is becoming more and more frequent. Mortgages in arrears are still relatively low, but those do take several months to follow economic doldrums, because the homeowners generally have enough savings to keep their payments up for a short time before things become really desperate.
As the months go by since the downturn, though, Canadian lenders are beginning to feel the pinch as well. During a conference call for the Bank of Montreal’s quarterly report, management asked Chief Risk Officer Surjit Rajpal why the bank had not yet run into more problems in the area of household credit in given how poor the Alberta economy has become. His uncertainty in response showed that the provincial economy may be in more trouble than anyone knows.
In the first quarter earnings reports for 2016, bank revenues are definitely on the decline. RBC’s David McKay report that he saw delinquencies on the rise from historical lows within their portfolio of residential mortgages in Alberta. He went on to say that RBC was being proactive to communicate with affected clients.
Perhaps the most frightening number is the unemployment rate in Alberta, a number which generally predicts defaults quite well. In 2014, that number was at 4.7%. Today, it is well over the nation’s average, sitting at 7.4%. During that same time frame, the WTI oil price has dropped from $94.86 to $31.78. The value of all homes for sale in Alberta was $1.4 billion back then; today it is $846.2 million. There were only 4.4 months of residential inventory available then; today there are 9.8. The average sale price of a home has dropped from $388,073 to $371,620 during that time period.
One good question to ask here is why the average home price has not dropped by 20 percent if the high-end homes have. The answer is that the homes that are smaller and represent a better value on price have not dropped as much in value. However, the big-ticket homes have dropped that high in many cases.
Is this a problem all over Alberta? It is more pronounced in the smaller towns that need income from natural resources for their economic revenue. The larger towns and cities have a more diversified economic base, which means that their fortunes are not as tightly linked to the price of oil.
So what does this mean if you are looking for a mortgage in Alberta? You can expect some more scrutiny if you have a loan-to-value ratio that is above 80 percent. Refinances are becoming much tougher to get, as banks are giving those applications a closer look. The real problem comes with the appraised value. The drop in prices mean that people who were approved for a mortgage on a property now find themselves at a point where their appraised value is too close to what they owe to make a refinance palatable to the bank. Because a refinance involves removing equity from the home, banks are less and less likely to approve them.
If you own a house in Alberta for now, the best advice is to keep making your payments, even if your employment situation has changed. One thing that has been certain about the housing market in the past is that it is cyclical, and that the dips come to an end and the values rebound again. For those in the deep throes of economic depression, though, that advice is a lot easier to say than it is to follow.
What many homeowners don’t realize is that if they have adequate equity, they can seek some income replacement in the form of a private mortgage to assist in getting through these lean times while protecting the good credit that they have worked for. There is a misconception that private money equals bad credit. Private money in many cases is a bridge from 1 place to another. If you are interested in pursuing your options for a second mortgage or refinance? Talk to Amansad Financial to get a personalized recommendation for your own situation.
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