Hilliard MacBeth is an Edmonton-based portfolio manager and the author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash.
Will Albertans look at reality or just blame the New Democrats?
While voters and business leaders try to recover from the shock of the May 5 election, Canadian financial and political pundits are trying to see into Alberta's future with a murky crystal ball.
Commentators are wasting time looking into campaign promises of premier-designate Rachel Notley's orange crush. It's true that dramatic change is coming and taxes will rise for most Albertans; that was going to happen under the Progressive Conservatives anyway. But those fiscal adjustments are a sideshow compared with the slowdown that was written in stone before the NDP victory.
The oil-and-natural-gas surplus in the United States, the province's only customer for its most valuable exports, ensures that Alberta's energy industry will shrink, guaranteeing lower income and employment. And that's going to be a difficult challenge.
For more than a decade, Alberta experienced unprecedented growth in two areas of activity: energy and construction. These booming sectors provided a massive boost for Alberta corporations and households alike.
Household incomes in Alberta are much higher than the rest of Canada, distorting housing affordability measures. While much attention has been directed on Vancouver as one of the world's most expensive housing markets, Alberta's elevated home prices seldom get mentioned. That's because housing in Calgary and Edmonton seems almost affordable, even though prices have increased dramatically. The Teranet-National Bank house price index shows gains of 82 and 84 per cent for Edmonton and Calgary respectively since June, 2005.
Even with those gains, house prices in Alberta's two largest cities stayed within reach because median household incomes have rivalled San Jose, Calif., the "capital of Silicon Valley." Calgary and Edmonton average more than $90,000, while Canada's average is $72,000 and Torontonians get by on $74,000. So Albertans, buoyed by higher incomes, willing lenders and frenetic home construction, found houses that they could buy, if not really afford.
Many of these Albertans were young, first-time buyers with minimum down payments – the loan amounts were mind-boggling. I talked to several couples with high-paying jobs who were offered up to $1-million dollars in loans. The Canadian Mortgage and Housing Corp. confirms that Albertans led the way in 2014 borrowing, soaking up 23 per cent of insured mortgage funds despite having just 11 per cent of Canada's population. The average down payment was 7 per cent.
So Alberta's workers are well housed but saddled with debt and overdependent on employment in the most cyclical sectors of the economy. That economy is already in a slowdown or worse, although most economists still predict modest growth. The Bank of Canada forecasts a 30-per-cent drop in oil and gas investment for 2015.
And now along comes an NDP majority government.
Will observers criticize the imprudent lenders who funnelled oceans of debt into the overheated Alberta economy? Will they blame the perennial optimism of the construction industry or the sudden cuts in oil companies' investment plans?
No. The NDP will step into the front line to take the heat for decisions that were taken months and years before anyone imagined an NDP majority. And that's one reason that Ms. Notley's party should expect to achieve no more than a fraction of the longevity of its predecessors.
The new government must not get seduced by the "balance the budget" mantra. Managing the economic slowdown requires that they ignore those who will urge spending cuts. Hopefully their ideological bent will make it easier for them to stay the course.
Alberta still enjoys an excellent credit rating, allowing it to borrow plenty of money at bargain rates. In a countercyclical manner, the government should increase spending to alleviate the impact of the expected drop in private-sector demand.
That course of action will ensure harsh and vocal criticism from those who dislike deficit financing. The NDP majority government will have to push back against these fiscal hawks if Alberta is to get through this difficult time unscathed.