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April 2008

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Higher Gas Prices Yet to Come says Bank - April 24, 2008

Increasingly tight oil supplies will continue to push the price of oil higher with the cost of crude hitting US$150 a barrel by 2010 and soaring to US$225 a barrel by 2012, forecasts a new energy report from CIBC World Markets. This will result in skyrocketing consumer gas prices in Canada with the national average price topping $1.40 this summer, $1.80 in the summer of 2010 and $2.25 by 2012.

The report finds that current oil production estimates produced by the International Energy Agency (IEA) overstate supply by about nine per cent since it counts natural gas liquids in its numbers. The report notes that natural gas liquids, while valuable hydrocarbons, are not a viable substitute for oil and cannot be economically used as a feedstock for gasoline, diesel or jet fuel.

"While natural gas liquids only account for 10 per cent of total supply, they account for virtually all of the increase in petroleum liquids production since 2005," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. "Stripping out natural gas liquids, oil production has not grown for over two years, which certainly goes a long way to explaining why oil prices have doubled over that period.

"In light of these developments we have re-examined our projected supply increases. The distinction turns out to be critical. Roughly 50 per cent of the increase in expected production is likely to come from natural gas liquids, leaving only small marginal gains in petroleum supply over the next two years."

The ratio of natural gas liquids to total "oil" production has been rising steadily in recent years and is likely to continue to rise for the foreseeable future. Whereas these hydrocarbons represented only about four per cent of total oil production back in the 1970s, CIBC World Markets expects them to account for over 10 per cent of total production by 2012.

This increasing ratio is coincident with accelerating depletion rates in many of the world's largest and most mature oil fields. While natural gas can occur on its own, much of it is "associated" gas-found together with oil. As an oil field matures, the resulting loss of reservoir pressure releases dissolved natural gas. The released gas forms an expanding cap over many mature oil fields, resulting in a rising ratio of natural gas to oil and hence a rising ratio of natural gas liquids to oil production.

Given this trend, Mr. Rubin finds that the global oil market is much tighter than the IEA forecasts. He believes oil production will hardly grow at all with average daily production between now and 2012 rising by barely a million barrels per day. "Whether we have already seen the peak in world oil production remains to be seen, but it is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity," adds Mr. Rubin. "Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years, almost doubling from current levels."

The report also notes that while production increases are at a virtual standstill, global demand continues to grow. While higher prices and a weak economy have seen demand drop in the U.S. - as it has in other OECD nations - this has been more than offset by demand growth outside the OECD. "Car purchases in Russia, for example, are exploding as U.S. sales stagnate," says Mr. Rubin. "While in India the advent of the TATA, a car that will sell for as little as US$2,500, will allow millions of households in the developing world to own automobiles when they otherwise could not. Millions of new households will suddenly have straws to start sucking at the world's rapidly shrinking oil reserves."

Car sales in Russia grew by nearly 60 per cent in 2007, 30 per cent in Brazil and 20 per cent in China. During the same period, car sales declined in the U.S. and were flat in Europe. Transport fuels now account for half of the world's oil usage, and have driven over 90 per cent of demand growth in recent years.

Mr. Rubin adds that this new and growing market for oil will see world crude prices continue to rise and kill demand in the more price-sensitive OECD markets. This has been the case since 2005 where a virtual doubling in price has led to declining consumption, a phenomenon not seen since the early 1980s. He predicts that by 2012, consumption in the rest of the world will exceed OECD consumption, a virtually unthinkable prospect little over a decade ago, when consumption outside of the OECD measured little more than half of the OECD's annual oil intake.

"In order to accommodate more drivers on the road in Russia, China and India, there must be fewer drivers in the U.S. and the rest of the OECD. And so there will be. U.S. oil consumption is likely to fall by over two million barrels a day over the next five years as retail gasoline prices rise from their current $1.20 a litre mark to $2.25 a litre.

First Timers Still Want to Own a Home - April 22, 2008

While higher housing values and tight inventory levels have hampered home-buying activity so far this year, longer amortization periods and alternative housing types have offset the impact on most major markets across the country, according to a report released today by RE/MAX.

Despite a higher degree of frustration in the marketplace than in previous years, the RE/MAX Affordability Report found that first-time buyers, in particular, remain steadfast in their determination to purchase a home. In fact, entry-level purchasers are adjusting their expectations by sacrificing size, location, and even long-term financial freedom, to overcome challenges such as rising prices and serious supply issues. Innovative financing has become key to homeownership in today's environment - with longer amortization periods gaining favour in 62 per cent of the major centres surveyed. Low or no down payments were popular with first-time buyers in 38 per cent of markets.

"First-time purchasers continue to play a pivotal role at both a local and national level," says Elton Ash, Regional Executive Vice President, RE/MAX of Western Canada. "The impact they have on the housing market is significant, as they are the impetus for sales in the mid-to-upper price ranges. As long as this segment of the market remains healthy, the real estate outlook will continue to be favourable."

Inventory levels, however, remain one of the foremost concerns facing purchasers across the country. A shortage of available entry-level product was identified as a major obstacle impeding buyer intentions in three-quarters of markets surveyed in the report, including St. John's, Moncton, Fredericton, Halifax-Dartmouth, Ottawa, Greater Toronto Area, Hamilton-Burlington, Niagara Falls, Winnipeg, Regina, Saskatoon, Greater Vancouver, Victoria and Kelowna.

"Doom and gloom reports coming from south of the border have yet to hinder overall momentum," says Michael Polzler, Executive Vice President and Regional Director, RE/MAX Ontario-Atlantic Canada. "First-time buyers are still leading the charge, taking advantage of every resource available to achieve homeownership. They're determined to get into the market sooner rather than later. If suburban locations, smaller condominiums and town homes, or a little sweat equity is what it takes to get into the market, these purchasers are game."

Although average price is the barometer for housing values in most major centres, first-time buyers looking to achieve homeownership consider starting prices a more meaningful gauge of affordability. Starting prices can be substantially lower than the market average. For example, average price has surpassed the $600,000 benchmark in Greater Vancouver, while the starting price for a detached home can hover as low as $237,500 in the peripheral areas.

The best value for the dollar continues to be found in the suburbs. For those unwilling to sacrifice on location, small condominium units in new developments and condominium conversions of rental buildings offer up the next best alternative. Condominium conversions in some of the country's major centres can be picked up as low as $150,000 to $175,000.

Landscape Ontario Supports New Provincial Law - April 22, 2008

Ontario's professional lawncare operators are encouraged with the general policy directions in the proposed Cosmetic Pesticide Ban Act, introduced today by Environment Minister John Gerretsen.

"The professional lawncare industry in Ontario supports the concept of a strong, province-wide pesticide law, to replace a patchwork of contradictory municipal bylaws," said Gavin Dawson, Chair of the Landscape Ontario, Lawncare Commodity Group. "While we recognize there is more work to be done on the details of this initiative, the McGuinty government has delivered on its promise with a Bill that ensures consistent standards everywhere, which apply equally to professionals servicing our green infrastructure and the do-it-yourself market."

In recent years, dozens of Ontario municipalities have introduced different standards for regulating lawncare treatment. The inconsistencies in rules and interpretations have made it extraordinarily difficult for companies to operate across city boundaries and spawned public confusion within the province.

The fact that homeowners could simply purchase and apply chemicals still readily available at retail outlets meant these bans accomplished virtually nothing in terms of reducing pesticide loads, while severely impacting the ability of highly-trained, professional operators to serve their clients in the creation of healthy lawns and landscapes.

The new legislation will add impetus for bringing new environmentally-friendly products and techniques to market. "The professional lawncare industry is on the forefront, and we are more than prepared to do our part to advance green alternatives," said Dawson. "We are calling on the provincial government to invest and partner with us to speed up the development and commercialization of the next generation of eco-safe alternatives for dealing with lawn and garden pests."

Dawson noted that there are many important details to be worked out in the Regulations and guidelines to follow. "We will be diligent in ensuring that the intent is reflected in the final package of rules," he said. "We look forward to working with Minister Gerretsen to address more detailed issues in Regulation, including the defined list of active ingredients and products to be banned, sign posting standards and reasonable approaches to treat potentially damaging pest infestations, from grub outbreaks to emerald ash borer for the protection of our lawns, landscapes and a greener planet." "Our industry's role and value in maintaining a green, healthy
environment will only add to the success on this initiative," Dawson concluded.

Non-Res Construction Investment Falls in BC - April 14, 2008

Last year's pace for investment in non-residential building construction continued into the first three months of 2008, again the result of major construction activity of office buildings underway in Alberta and Ontario. According to a report released this morning by Statistics Canada, first-quarter investment hit $10.3 billion, up 1.6% from the fourth quarter and the 20th consecutive quarterly increase. In constant dollars, investment in non-residential building construction declined 0.3% from the fourth quarter.

Investment increased in all three components from the fourth quarter. In the commercial component, it rose 1.6% to $6.3 billion; in the industrial component, it went up 4.0% to $1.5 billion; in the institutional component, it edged up 0.2% to $2.6 billion.

Provincially, the biggest first-quarter increase (in dollars) occurred in Alberta, where investment rose 5.1% to $2.5 billion, a 19th consecutive quarterly gain. In Ontario, which was a close second, investment increased 3.1% to $3.8 billion, as a result of gains in all three components. In contrast, British Columbia posted the biggest drop as a result of a decline in spending on construction of industrial and institutional projects. These projects were started in 2006 and early 2007 and are now almost complete.

The non-residential sector continued to be positively affected by low office vacancy rates, a vigorous retail sector and strong corporate profits. Furthermore, investment intentions (including engineering construction), according to Statistics Canada's Survey of Private and Public Investment, are forecast to increase by 6.8% in 2008 from 2007.

Of the 34 census metropolitan areas, 15 registered quarterly growth. The strongest gain (in dollars) was in Toronto, where investment rose 4.2% to $1.9 billion. It was followed by Hamilton, where investment increased 24.5% to $166 million, the result of higher spending in all three components.

Commercial component: Robust office activity in Alberta and Ontario

Investment in commercial building construction reached a quarterly record high, thanks to the strong activity underway on office building construction sites in Alberta and Ontario. Overall, four provinces and two territories showed increases in commercial investment in the first quarter. The largest contributions (in dollars) occurred in Alberta (+5.6% to $1.7 billion) and in Ontario (+1.9% to $2.2 billion). Both amounts are all-time highs.

After six consecutive quarterly increases, Quebec recorded the most significant decline as a result of a slowdown in investment in office buildings and shopping centres construction.

Among census metropolitan areas, 17 posted first-quarter gains. Commercial investment in Calgary and Toronto recorded the strongest gains in dollars. In contrast, Montréal posted the largest decline, following seven consecutive quarterly increases, as several commercial projects that started in 2006 and 2007 are now almost complete.

A decline in vacancy rates in the major urban centres continued to put positive pressure on office building construction. In addition, growth in retail and wholesale trade in 2007 appears to have had a favourable impact on the construction of warehouses, which have posted eight quarterly gains in the last two years.

Industrial component: Gains in manufacturing plants and utilities buildings

Investment in industrial building construction increased for the fourth straight quarter. This was the result of strong investment gains in the construction of manufacturing plants and utilities buildings in six provinces, particularly Alberta and Ontario.

At the provincial level, the largest contribution to the quarterly increase (in dollars) occurred in Alberta. This was the result of spending on the construction of major projects for manufacturing plants and utilities buildings that began in 2007.

British Columbia posted the largest decline (in dollars), as investment in all industrial building categories fell after four consecutive quarterly gains. This decline was the result of several industrial projects, in particular warehouse and storage buildings, which started in 2006 and are now mostly complete.

Overall, 14 metropolitan areas registered quarterly growth, with the strongest gains in Edmonton and Toronto. Calgary experienced the largest drop. This decline was the result of several industrial projects that started in 2006 and 2007, and are now mostly complete.

Institutional component: Spending remains stable

Following previous declines, spending in the institutional component saw a slight rebound of 0.2% to $2.6 billion in first quarter. A strong gain in spending on health care facilities more than offset declines in all other institutional categories.

Provincially, by far the biggest first-quarter increase (in dollars) occurred in Ontario, where investment rose 5.0% to $1.0 billion. This was due mainly to strong spending in the construction of health care facilities.

In contrast, British Columbia saw investment fall 4.5% to $372 million. The decrease was the result of institutional construction projects that started in mid-2005 and early 2006 and are now mostly complete.

Among census metropolitan areas, Hamilton led first-quarter growth, with investments rising 44.9% to $75 million. The gain was driven by substantial investments in health care and educational facilities. For the second consecutive quarter, Calgary registered the most significant decline in dollars, in the wake of a drop in the majority of institutional construction building categories. Of the 34 census metropolitan areas, 22 posted declines.

Housing Starts Down 37 Per Cent in BC - April 8, 2008

The seasonally adjusted annual rate of housing starts was 254,700 units in March, slightly down from 255,600 units in February, according to Canada Mortgage and Housing Corporation (CMHC).

“The high level of starts posted in February continued in March, thanks to the multiple segment and particularly condominium starts, which registered a significant rise in Alberta” said Bob Dugan, Chief Economist at CMHC's Market Analysis Centre. “Nevertheless, the single-detached component, which is usually a strong trend indicator, decreased slightly. This is consistent with our view that the housing market will moderate gradually throughout 2008.”

In March the seasonally adjusted annual rate of urban starts edged down by 0.4 per cent to 221,500 units compared to February. Urban multiples were up 1.1 per cent to 141,000 units, while singles decreased 2.9 per cent to 80,500 units.

The seasonally adjusted annual rate of urban starts went down in three of Canada's five regions in March. Urban starts registered a decrease of 2.3 per cent in Ontario, 16.8 per cent in Quebec and 37.1 per cent in British Columbia. Meanwhile, urban starts jumped in the Atlantic and the Prairies with increases of 75.0 per cent and 52.5 per cent, respectively. These significant increases were mainly attributable to the urban multiple start segment which posted declines in the other regions of the country. Urban singles were up in all regions except Quebec and Ontario.

Rural starts were estimated at a seasonally adjusted annual rate of 33,200 units in March.

For the first quarter of 2008, actual starts, in rural and urban areas combined, were up an estimated 12.8 per cent compared to the same period last year. Actual starts in urban areas alone increased by an estimated 15.8 per cent year-to-date. Actual urban single starts for the first three months were 10.7 per cent lower than they were a year earlier, while multiple starts increased by 35.6 per cent over the same period.

Multi-Unit Construction Still Strong in the West - April 7, 2008

Construction intentions in Canada cooled for a fourth consecutive month in February, on the heels of a sharp decline in the value of building permits for non-residential construction in Ontario. According to a report issued this morning by Statistics Canada, municipalities issued $5.8 billion worth of building permits, down 1.0% from January. Intentions peaked in May and June 2007 at $7.0 billion.

February's decline resulted from much lower non-residential construction intentions in Ontario. If the province were excluded, the total value of building permits nationally would have increased 9.8%, instead of declining 1.0%. Nationally, a marked increase in residential intentions was not enough to offset a decline in intentions in the non-residential sector.

In the residential sector, the value of building permits increased 18.2% to $3.9 billion. This was fuelled by jumps in values of both multi- and single-family permits. The value of non-residential permits fell 25.6% to $1.9 billion, the lowest level over the last 12 months. February's loss was due to double-digit decreases in permits for all three components: institutional, commercial and industrial.

Overall construction intentions dropped 16.0% to $2.0 billion in Ontario, the lowest value since April 2007. Falls in all three non-residential components in Ontario led the non-residential sector to a 44.9% decrease in February. However, this decline was partly offset by a strong rebound in the province's residential sector (+21.3%). New Brunswick and Saskatchewan were the others provinces showing retreats, also the result of lower non-residential construction intentions.

The largest gains in dollar terms occurred in Alberta (+11.8% to $1.3 billion) and British Columbia (+16.1% to $945 million). In both, the demand for new dwellings largely drove the gain. Several large projects for multi-family dwellings were approved in Alberta, sending the value of multi-family permits to its second highest level on record. All provinces and territories posted gains in the residential sector.

Non-residential: Significant decline in every component

The value of building permits declined substantially in all three non-residential components in February.

Following a 27.0% gain in January, the institutional component plunged 35.7% to $452 million, the lowest level since April 2007. The decline was spread across various types of buildings (schools, medical buildings, administrative buildings, nursing homes). Overall, seven provinces posted declines, with the largest in Ontario, Alberta and Quebec.

In the commercial component, the value of permits fell 16.2% to $1.2 billion, largely the result of a significant decline in projects for office buildings and hotels. It was the second lowest level over the last 12 months. Again, Ontario recorded by far the largest share of this decrease, while intentions for retail space surged in Alberta.

On the industrial side, the value of permits plunged 39.4% to $265 million, the lowest level since March 2006. This followed a 32.2% gain in January. Significant declines in projects for manufacturing buildings in Ontario and utility buildings in Alberta were behind these results. In Ontario, the value of industrial permits hit its lowest level since April 2005.

Overall, the value of non-residential permits has been on a downward trend since last July. Intentions peaked for this component in May and June last year. Uncertainty related to the impact of a weakening US economy and the high dollar could have a negative impact on non-residential construction intentions. However, vigorous retail sales, low office vacancy rates, strong demand for health care facilities and large corporate profits are favourable factors for non-residential intentions.

Housing sector: Surge in demand for multi-family units

The value of permits for multi-family dwellings surged 31.0% in February to $1.5 billion. This level was nearly 5.0% above the average monthly results in 2007. Municipalities approved 9,767 multi-family units in February, up 20.9% from January. The value of single-family permits rose 11.6% to $2.4 billion, and municipalities approved 9,714 units, up 11.6%.

Despite the positive results in February, the number of residential units approved has been on a downward trend since the end of the summer 2007. Price increases in the housing sector and signs of a weakening US economy may have contributed to a softening of demand. However, several factors could have a positive impact on the demand for housing, including steadiness in employment, growth in disposable income, strong immigration as well as low interest rates.

Housing Market Remains Stable for Now - April 3, 2008

Canada's real estate market stands on stable footing, according to a House Price Survey report released today by Royal LePage Real Estate Services.. On average, healthy year-over-year house price gains were recorded during the first three months of 2008. While more modest price increases were observed when compared to previous quarters, the solid appreciations noted in the first quarter are largely due to the shared effects of resilient local economies, high immigration levels, and relatively low interest rates - all leading to enduring buyer demand.

While almost all markets surveyed experienced price increases, it was the smaller cities, with relatively affordable housing and strong economies based on resource industries that emerged with the most significant gains. Thriving Saskatoon saw appreciation as high as 66 per cent, while areas in Newfoundland posted increases above 20 per cent for the first time since Royal LePage started tracking house prices.

Of the housing types surveyed, detached bungalows increased to $336,834 (+8.3 %), followed by standard two-storey properties, which rose to $400,647 (+7.1%), and standard condominiums, which increased in price to $240,423 (+6.9 %), year-over-year.

"Canada's housing market remains on solid footing. With the notable exception of a handful of small western cities, the country has returned to an environment characterized by moderate house price increases," said Phil Soper, president and chief executive, Royal LePage Real Estate Services. "These conditions are far more agreeable to those searching for a home, and are more sustainable in the long term than the sharp price increases recently experienced."

House prices in Vancouver and Victoria continued to climb during the first quarter of 2008 due to strong local and international buyer demand. In Vancouver, the upcoming 2010 Olympic Games has added extra fervor to the already strong economy. The city's high employment levels and relatively low cost of borrowing money continues to attract an in-flux of buyers to the market. While affordability in Vancouver appears to be decreasing, current rising wages and relatively low interest rates enable buyers to enter the housing market.

Victoria's real estate market started the year on strong and stable footing, with average house prices rising by double digits during the first quarter, compared to last year. A strong local economy and low lending rates continued to draw buyers into the housing market.

British Columbia's economic growth is expected to come in at 2.3 per cent in 2008 and 2.9 per cent in 2009, as the lead-up to Vancouver's 2010 Olympic and Paralympic Winter Games stimulates near-term growth via strong capital spending, increased tourism and retail sector gains, according to a provincial economic outlook released today by RBC.

"Relative to other provinces, British Columbia has the lowest exposure to U.S. demand and the highest exposure to demand from Asian markets," said Craig
Wright, senior vice-president and chief economist, RBC. "This diversification of exports offers the province some protection against a slowing U.S. economy,
but in no way provides immunity to the U.S. ailment."

B.C. has the lowest exposure to U.S. demand (60 per cent of B.C.'s exports) and the highest exposure to demand from Asia (27 per cent of B.C.'s exports).

Although slowing global economies have moderated the demand for Canada's natural resources, export regions continue to enjoy stronger local real estate markets. Atlantic Canada is characterized by strong growth, as healthy provincial economies and oil expansion projects lead to high in-migration levels. In Saskatchewan, gold, diamond and uranium mining, along with prospering agriculture industries, have retained many would-be out-migrates, and the more moderate cost of living has also lured skilled workers from Alberta. Winnipeg's growing population and robust economy is supported by the farming industry and the rising prices of grain.

Strong demand and rising house prices were also noted in cities not driven primarily by the natural resource sector. Average house prices increased in Toronto and Montreal during the first quarter, while unit sales activity dipped from the same period last year. While there was a decline in unit sales volumes, the current activity levels in both cities are amongst two of the best first quarters on record for Toronto and Montreal.

It is worth noting that record snowfall in Central Canada and Quebec left many city streets and sidewalks virtually inaccessible to potential homebuyers during the first quarter. As a result, many sellers held off listing their homes, choosing to wait for more conducive weather for open houses and viewings.

Despite Alberta's strong economy and continued buyer demand, house prices and market activity tempered from the frenetic pace that characterized the energy-fuelled province in the past few years. As global oil prices continue to fluctuate, some area buyers have grown weary of a housing market that is closely tied to the oil and gas sector. As a result, listing inventory and selling periods increased during the first quarter, while sales activity continued to normalize.

Helping fuel Canada's housing market is its status as having the fastest population growth amongst the G-7 countries. This is a stabilizing force within the Canadian housing market and is critical for price appreciation in the longer term. Canada continues to attract a high number of skilled immigrants; while immigrants have typically gravitated to larger cities such as Vancouver, Montreal and Toronto, trends now illustrate that secondary cities requiring skilled workers are regarded as home to many newcomers.

In addition to steady population growth, the structure of Canada's financial services industry, and the lending products they provide, has buffered the country from the credit issues that currently exist within the U.S. housing market.

Added Soper: "We know now that the Canadian real estate market has followed a markedly different path from that of the United States. Our tiny subprime mortgage market has exposed us to very few of the pitfalls that have created the unfortunate chaos south of the border. While Canada will not escape the negative impact of a troubled American economy, Canadians' home equity should remain safe, as the market moves into a period of slow growth, but growth nonetheless."

 

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