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Things that go BOOM! August 9, 2008

Posted by DustinRJay in Calgary real estate, stock market.
Tags: , ,

The S&P/TSX Capped Energy Index is formed primarily of companies that have headquarters in Calgary.  Since 2001, the index has quadrupled creating wealth on a massive scale.  The boom in commodity prices has resulted in energy companies making more money, spending more money and allowing vested shareholders to cash out.

Excess liquidity brought about by the strong financial performance of Calgary energy companies was likely a major contributor to the Calgary house price boom.

The following graph shows that:

  • S&P/TSX Capped Energy Index outperformed Calgary real estate as an investment
  • Performance of the S&P/TSX Capped Energy Index was likely a leading indicator of the real estate boom


1. nonplused - August 9, 2008

I agree that the boom in energy stocks did increase the wealth in Calgary considerably over the last few years, however, 3 things:


The amount of wealth flowing to the average Calgarian due to this affect has been greatly exaggerated. I was in management for one of the big option issuers at the time and I can tell you the vast majority of employees granted options sold them as soon as they vested, leaving most of the gains on the table. Further, after it became apparent to the HR departments of most of these companies that the stock programs were costing real money, they replaced them all with “SPR’s” (Share performance rights) and such which basically eliminated the unbounded upside. One company called them PSU’s (Performance Share Units) which the employees took to stand for “pretty shitty upside”.

But back to the amount of wealth generated by options, I know a few employees of the company I worked for guaranteed their financial future through the options, but most of the employees had cashed them as soon as they were worth anything at all and realized only a fraction of what turned out to be the ultimate potential. And of those who did wait to exercise, the ones I know are all still in the same house they had before, it’s just paid off.

It’s also worth noting that all of these option programs are heavily weighted to just a few individuals at the very top. The big pig eats first, as they say. By the time you get down to the regular employee level, the thought that they could do more than pay off their visa with an option exercise is pretty far fetched. Nobody below senior engineer dramatically changed their life.


Almost everyone on the stock option programs already had a house before the big run on stock prices. Therefore they could not have added new net demand. Upgrade demand for sure, in the event some of the lucky option holders did wait until expiry to exercise, but not new demand. They already lived in Calgary and most already owned.


Most people employed in Alberta, and even Calgary, do not work directly for a stock option granting company. Companies like Shell, BP, Exxon, and the like have laughable stock option programs that are really only beneficial to top management back home. It’s only the Alberta based companies like EnCana, Suncor, Talisman, CNRL and the like that are at all generous with the options below the VP level. So you are maybe dealing with 10,000 employees in the whole of the city, not counting juniors. If you drive truck for a service company you don’t get options.

Therefore the conclusion to be drawn is that the boom in Calgary may have been aided by stock options, but the real driver was the credit orgy unleashed by the CMHC 0/40 (0 down, 40 year amortization) and the crazy interest rates at the Bank of Canada. Since “the boom” happened everywhere and not just Calgary, it is sufficient to look for a common cause. We already know who the criminals were. It was a credit induced bubble.

2. Brad Bender - August 9, 2008

Interesting hypothesis, but I don’t think there’s a connection. Calgary is just part of a much larger, much scarier, Global (gulp) real estate bubble. There’s no doubt that the energy sector put a lot of money in Calgarians’ pockets, and a lot of that money went into bidding up houses; but the spike isn’t localized to Calgary. The fact Saskatoon houses are up 60% in a year just screams bubble. I mean, have you been to Saskatoon? There’s just no way a spike like that is due to demand.

A much better comparison would be to compare the S&P TSX capped energy index (XEG) with the Canadian REIT index (XRE). You’ll note that REIT’s have lost -20% this year, whereas the energy index is up 6%. Usually the stock market will lead the economy by 6 months, and investors are definitely not betting on REITs right now.

The truth is your money is safe nowhere; but about the worst investment would be to leverage oneself 95% on a house in a market that just went up in the steepest climb in history. The global economy is slowing down, and first-time buyers are best to sit on their cash for a few quarters while things shake-out and we get a clear direction (and I really don’t see houses going up).

3. radley77 - August 10, 2008

It is more than just shareholders cashing out though… it is representative of the oil sands becoming economic post 2004 due to oil sands passing greater than $50 USD/BBL. Capital expenditures increased dramatically during this period and household income increased and population growth grew at higher than historical rates due to improved economic conditions.

Whether rational or not, speculators likely realized that economic conditions had changed and bought Calgary real estate as a way to make money when demand was high and supply was tight.

Labour conditions are still very strong and in June 2008 in Alberta the employment rate of 72.2 per cent is the highest ever recorded.

The development of the oil sands is a fundamental shift in the economy, and I don’t believe that the S&P/TSX Capped Energy Index is an economic bubble.

While I think that easing of credit conditions was a major part of the boom, I believe that the biggest catalyst for dramatically increasing real estate prices was soaring commodity prices and the growth in Calgary’s energy corporations.

4. radley77 - August 10, 2008

As for Saskatchewan, I grew up in Saskatchewan so am appreciative of the fact that wheat prices on the Minneapolis Grain Exchange have gone from $5/bushel to $15/bushel since 2007. My dad said his farmland rent doubled last year.

As another illustrative example, Saskatchewan Potash Corporation (POT) is up 1500% since 2001 due to soaring fertilizer prices.

In Q2 of 2007, Saskatchewan’s population growth grew at it’s highest since the 1970’s.
( http://www.stats.gov.sk.ca/pop/pop2.pdf )

My point is that there are plenty of valid reasons why house prices boomed as a result of high commodity prices vs. easy credit conditions.

I believe that had commodity prices not increased (and more directly corporate earnings), there would have been no or to a much lesser extent real estate boom.

Examples of poor performing economies with poor performing real estate are Detroit, Michigan or Windsor, Ontario. Examples of bubble cities in the US include Phoenix, Arizona, Los Angeles, California and Miami, Florida. None of these US bubble cities can boast the same kind of real economic growth that Calgary has had due to commodity prices.

Had there been no relaxation in credit conditions then real demand would have increased to the same extent, but there would have been less supply due to tighter lending conditions. This may have resulted in insufficient or inadequate housing… Equally problematic as high real estate prices caused by relaxed credit conditions.

I posit that one of the best leading indicators for the real estate boom was the strength of commodity prices and more particularly corporate earnings for the city/region.

5. nonplused - August 10, 2008

I agree that the factors you sight can cause growth in the real estate market, and have, but from 2006 on we had a credit induced bubble. Prior to 2006 I would buy the “strong economy” arguement, but that created 10%/y growth at best not 50%. 50% is a bubble.

6. RJT - August 11, 2008

It’s a very good point Radley. I think that it is important to understand that prices are set at the margin, not on the “average”. So, while housing supply was very tight in 2004-2006, the top 20% of wage earners/stock option people etc set the marginal price for housing and drove up prices. These huge prices could not be paid by the “median” earning household. The median households participated due to easy financing (40 year, 0 down etc).

Now that supply is not tight, in fact, I would argue we actually have an oversupply of housing, the prices are no longer set by the top 20% of earners, but perhaps by the median household. This is why sales volume has collapsed. Sellers do not accept the fact that the high prices they want from their homes were an divergence, and not the norm. Now that mortgage financing is going to tighten up in the fall, it will put even more downward pressure on demand. The median household can not afford to purchase the median house (at current prices), regardless of how much top executives at EnCana are making.

For your typical nurse, teacher, construction worker, university prof, fireman, policeman, paramedic etc etc: These people have no upside from high energy prices or stock options. They are simply crushed by general inflation and house price inflation in particular. Hence, a collapse in high levels of net migration.

Also, if you believe that economic growth (and growing stock prices) are what cause long term (moderate) real-estate inflation, I’d agree. However, bubbles are caused by financial manias, and that happened all over the world in the past 5 years. Hence we’ve seen massive home price increases in the United States, all over Canada, Mexico, England, Ireland, Spain, Poland, Russia, China, Vietnam, South Africa, Colombia and so on and so on. Some of these are commodity exporters, some are net commodity importers (USA, China, Spain). So the explanation for 50% annual increases in RE prices can not be solely based on the high prices of oil or commodities, but those high prices are only one part of the larger picture.

7. section31 - August 13, 2008

I agree with Radley’s follow up comments. There is definetly a correlation as you say, wealth has been created by the oils sands and massive migration because of that is what has driven up house prices in the short term. Now that supply has caught up with the short term demand, we can expect rationalization of housing prices in 18 months.

8. Annass Rammer - November 27, 2014

Calgary is awesome!! But we do need higher oil prices. Close to the mountains, lots of oil and money

Montgomery triangle is awesome!

Montgomery is the hottest community in all of Canada

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