Riding the Oil Boom to Investing Success

The Economy Points to Albertan Real Estate for High Returns

All real estate investors want the same things out of their investment rental properties: positive monthly cash flow, property value appreciation, investment safety and retirement security. To achieve these results and gain the highest returns possible, the sophisticated investor will place a lot of emphasis on determining a prime investment location. Every location has different markets and economies that directly affect how a property performs. With that in mind, when deciding where to invest, it’s important to pay particular attention to key economic indicators that signify a growing economy. A location with high population growth, high job growth, low unemployment, major area development and a business-growth atmosphere indicates a housing market with strong property value appreciation and low vacancy rates. Alberta is a perfect example of such a location.

It’s no secret Alberta has one of the strongest economies in Canada, if not the strongest – just look at the numbers. In the past 20 years, Alberta has experienced a 3.1 per cent average annual growth in GDP, beating out Ontario, B.C., Saskatchewan and outperforming Canada’s national average. This can largely be accredited to Alberta’s booming petrochemical industry and strong oil prices.

In 2010, the province’s energy sector contributed a whopping 26 per cent to Alberta’s total GDP of $263.5 billion. Long-term economic prospects look good for Alberta, as their oil reserve is considered to be one of the largest in the world, containing 1.8 trillion barrels of bitumen; and to date, only four percent of the initial established resources have been produced. This booming industry fuels Alberta’s economy, which in turn, provides all the key factors for a strong housing market. 

Population Growth

A booming economy is usually followed by a high population growth rate. This influx of people indicates that an area has an increase in job opportunities and that the area has a growing reputation that it is a good place to live. More importantly, it shows there will be a foreseeable increase in demand in housing. Compounded with a shortage of supply, high population growth will cause housing prices to be driven upwards.

In the last 5 years, Canada experienced a 6 per cent population increase, while Alberta experienced a 10.8 per cent increase. Alberta’s population boom is directly related to its booming oil industry. The number of people who immigrated to Alberta between 2006 and 2010 increased 57.6 per cent during the 4 years, and 60.5 per cent of those immigrants were under the economic class, meaning they immigrated to Canada with the intent to work. According to Statistic Canada, people will tend to go where they can find work, whether they are immigrants or inter-migrants between provinces. In fact, provincial inter-migration is the highest it’s been since 2008. The key point here is that all these people will need housing, which will drive up property value. 

Employment Growth

Population growth and job growth are closely related. Population growth can be due to natural reasons (ie: procreation), but when a population is growing at an especially high rate, it’s usually due to an increase in job supply. More people and more jobs mean more workers are making money and spending it, thereby injecting it back into the area and contributing to overall economy growth.

In Alberta, high oil prices are supporting a booming energy sector. But let’s take it a step further – this booming energy industry also fuels the expansion of other industries, such as the manufacturing industry, resulting in a fast growing, high demand labour market. Statistics Canada shows that Alberta has the highest job growth rate in all of Canada at 3.9 per cent and the lowest unemployment rate at 4.9 per cent. The lower Alberta’s unemployment rate is, the higher its average income. If Alberta’s average income is growing at a fast pace, housing prices will follow suit. It just so happens that Alberta’s average income is doing exactly that, as Albertans are spending at record levels, according to BMO Market Capitals Economics.

Area Development

If an area is full of development with the revitalization of old buildings or construction of new infrastructures, it reflects that money is being injected into the area. It also shows that the area is trying to accommodate demand. New infrastructures and building developments signify population growth in an area, which in turn forecasts an increase in housing demand.

Many multi-national gas and oil companies have head offices and on-going projects surrounding Albertan cities, such as Calgary and Edmonton. These petrochemical companies inject billions of dollars into cities to sustain their businesses, allowing for the development of cities. Calgary and Edmonton have now developed into two of Canada’s largest metropolitan cities, with Calgary being 5th largest and Edmonton following as 6th.

The Ripple Effect

The economic boom of a city like Calgary and Edmonton isn’t limited to just that particular city itself – its economic prosperity is extended to its surrounding areas. There’s a phenomenon where if a city experiences an economic boom, the surrounding areas will also experience a similar boom at a delayed rate.

Take the city of Fort Saskatchewan, for example, which lies just northeast of Edmonton. Most recently, Fort Saskatchewan has been following Edmonton’s positive economic footsteps. In the last five years, Fort Saskatchewan’s population has grown 27 per cent; unemployment rates are dropping due to the launch of oil upgrader projects in the area; and in 2011 alone, 24 major developments were launched and completed. With this ripple effect in mind, many Albertan cities are experiencing the positive effects of the oil boom, making them prime locations for real estate investment.

Business-friendly Atmosphere

Because a strong economy leads to high population growth, increases in job opportunities, low unemployment rates and major area development, which in turn facilitates a booming housing market, the ideal investment location should have an environment with political policies that favour businesses and business growth. A competitive business atmosphere goes a long way in bolstering and reinforcing a strong economy.

In recent years, Alberta’s investment per capita has been doubling that of Canada. It’s no question that Alberta’s abundance of desirable natural resources, such as oil, can be accredited for this, but equally important is Alberta’s competitive business climate that helps in attracting investment. The province has a young, skilled and productive workforce, strategic access to different markets and a cooperative government-business relationship. The biggest contributing factor to this positive business climate, however, is Alberta’s low taxation under the Alberta Competiveness Act, which includes: a globally competitive business tax environment (a 25 per cent combined federal/ provincial corporate income tax rate), low personal taxes (the general income tax rate was lowered from 16.5 per cent to 15 per cent in 2012), no provincial capital taxes, no sales tax, no payroll taxes, and as a bonus for real estate investors, Alberta also has the lowest property taxes.

Speaking from personal experience, as an investor of several years, I always keep in mind key economic indicators when investing in real estate. I’ve learned that population growth, employment rates, area development and business atmosphere are all factors that can make or break a property investment. As I’ve been paying close attention to key economic indicators, I’ve found that Alberta real estate is where I want to put my investment dollars right now. Properties in that area offer positive cash flow, high returns, property value appreciation and low vacancy rates due to the province’s booming energy sector and fast-growing economy.  When you understand the simplicity behind choosing high-returning investment locations and practice your due diligence, you’ll realize that real estate investment is not as challenging as it’s made out to be.