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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

February 9, 2016 | The Ugly Head

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

When a single reporter managed to find one credit counselling guy who knew of one dude who’s maybe walking away from his mortgage, it was enough. “Jingle mail rears its ugly head in Alberta again: Federal government worried about Albertans making strategic defaults on their mortgages,” read the CBC headline.

The gist of the story is simple: cowboy country has non-recourse mortgages. So if you don’t have CMHC insurance and bought with at least 20% equity, you can drive to the airport, park your dually Silverado with the keys inside, get on a flight for St. Johns and never make another truck or mortgage payment again. In theory.

BTW, a punted oil fields engineer I sat with yesterday, whose annual contract was pulled by her energy company nine days before its confirmed renewal, tells me Calgary airport officials collected over 150 abandoned vehicles there last month alone. “Just as many in Edmonton, too,” she said. “And in Fort Mac you can now walk for blocks and see nobody. In 34 years, I’ve never experienced anything like this.”

The afternoon after her termination letter arrived she had to write suppliers telling them the $1.2 billion project she was spearheading was kaput. “Every letter,” she said, “was a heartache.”

Well, the point is there’s enough misery in the oil patch right now without media vultures making stuff up. There’s no wave of jingle mail taking place. It may come. But we’re not there yet. Having said that, nobody should believe the stats coming out of the Calgary Real Estate Board, either. The realtors claim sales have declined slightly with median prices down less than 2%. Meanwhile on the street agents will tell you the million-dollar market has collapsed, and it takes a 20% haircut just to get a buyer to start talking.

As mentioned here previously, ‘average’ sale prices come after multiple price reductions, relistings, expiries and new listings, which also automatically reset the days-on-market odometer. This practice makes it impossible to get an accurate picture of real estate reality which is probably the point. If sellers read the published numbers and think a buyer will show up in the next 42 days (the official time it takes to sell a home in Cowtown), then the jingle mail can wait.

Well, what next? This ad from Alberta condo builder The Carlisle Group give you a clue…

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The storm is not blowing over. Actually it’s just gathering, if the price of oil is any good indication. Crude’s back to twenty-eight bucks, off 4% Tuesday and probably heading lower. The floor, said Goldman Sachs this week, is somewhere south of $20. That’s the same prediction made months ago, when it looked ridiculous. No so much now.

The logic is there. With Iran and Iraq pumping their derrieres off, with refracking being the new fracking and US production continuing, and with Canadian oil sands output increasing, plus every tanker, bunker and tank farm brimming with surplus crude, the only way a supply/demand balance will be struck is when the taps turn off. And that’ll require oil so cheap that producers fail.

“Once you breach storage capacity, prices have to spike below cash costs because you have to shut in production almost immediately,” the Goldman commodities guy says. “I wouldn’t be surprised if this market goes into the teens.” Concurrently the International Energy Agency reports the overall oil surplus will worsen with 1.75 million more barrels being pumped every day than the world needs. As for prices: “In these conditions the short term risk to the downside has increased.”

Well, all this commodity calamity is a death rattle for Calgary, and nowhere will that be more evident than with real estate – both residential and commercial (where there’s already blood on the floor). Those who decided to hang on for six or eight or ten months and wait for oil to recover made the wrong choice. Crude has lost 75% of its value, and by the summer that could be an even scarier number. The oil patch giants have responded by slashing capital expenditure budgets, punting tens of thousands of contractors and retreating into survival mode. Eventually oil will recover. But when you have no income and lots of outgo, eventually is the same as never.

This will hurt far beyond Calgary. Westjet, Ontario pipe manufacturers, recreational property in BC, the defeated engineer sitting in my office or families in Newfoundland. There’s a reason the TSX lost another 250 points today and Canadian government bond yields have declined by almost half in a single year.

If you still feel like buying a Calgary condo, definitely check out the insurance. And save some money for a shrink.

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February 9th, 2016

Posted In: The Greater Fool

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