Commodity Prices Historical Prices Macroeconomics

Precious Metals

With the recent rally in gold, we’ve been hearing a lot about precious metals. Actually ever since the financial meltdown last year the gold bugs out there has been much more boisterous… so I’ve finally broke down and prepared a post on gold and silver. This is another one that’s not particularly about real estate prices, but I will throw in a tie-in towards the end.

Here is a graph of the historical gold price per ounce, nominal prices in US and Canadian dollars, and in inflation adjusted Canadian dollars. Many investors generally look at precious metals as an inflation hedge, but it is prone to bubbles of it’s own… obviously as was witnessed in the early 80′s and is evidenced in the inflation adjusted figures.

For those thinking about buying gold you should take note of the tail end of this graph and that while gold has just recently reached it’s all time (nominal) high in US dollars, in Canadian dollars it actually peaked in the winter here and is a fair bit below that price currently.

So, if you’re thinking of putting money into gold, don’t just trade blindly based on what it’s value is in US dollars, you need to figure in the exchange rate into your calculations.

Here we have the same graph for silver, charts similar though it’s spike in 1980 was even more severe. Ignoring that, we can see that like gold, overtime it tends to hold it’s value without much if any appreciation, but is trending up the last few years.

For those interested in such things, here is a graph of the relationship between gold and silver prices. We can see the ratio has gone as high as 97.3 and as low as 17.2. Since 1971 the average has been 55.7, with a standard deviation of 18.1.

Finally we’ll do that tie-in with real estate, just for shits and giggles. This is a graph of the number of ounces of gold it would take to buy the “Average Residence” in Edmonton. There has been a fair bit of fluctuation, particularly in the 70′s. Over the period presented, the average has been 272, median 261 and standard deviation 101. So our current situation is right around normal, but it got as high as into the 500′s in 2007.

Interesting to note, the huge gold spike in 1980 coincided with the prior real estate bubble. While housing prices had somewhat plateaued from ’77-’82, the ratio plunged from north of 550, to less then 100.

Lastly, the same graph for silver. Average was 14,660, median 14,721 and standard deviation 5,723. In this case we’re currently well above the long term mean, and it’s interesting to look at the differences in pattern/scale of some of the movements between gold and silver with this measure.

So, take it for what it’s worth. Like any of the other commodity analysis’ I did earlier, any relationship with real estate appears anecdotal at best, but I included it because it’s been requested often. What I take from looking at this data is that like other assets, beware of bubbles, and be sure to figure in the exchange rate should you start putting your money into any investments.

Alberta Commodity Prices Macroeconomics

Fueling Alberta

After this weeks announcement about the revised budget from the province, I thought it would be interesting take a look at historical revenues, particularly those coming from oil and gas. So, today’s entry is more of a general interest post and not concerning the housing market (at least not directly anyway).

So, without further ado here is a look at revenues from the last decade or so, as well as the estimated revenues for this year.

As we can see, revenues have taken quite a dive, and it’s now expected we’ll be down over 8 billion from two and three years ago, and 6 billion from last year. We can also see that shortfall is pretty much entirely due to declining resource revenues.

This is effectively the same graph, but this time the resource figures are broken down into divisions, natural gas, oil (I lumped crude and synthetic crude/bitumen together), and other. Giving us a bit more perspective, we can see that while oil is certainly down from the last three years, historically it’s actually about normal… gas on the otherhand, is very low by recent and historical measures… and other resource revenue is virtually non-existent.

This is looking at it from another angle, this time from a proportion of total revenues (that year). This again shows what we discussed earlier, and that gas is making up a mere fraction of the revenues it normally contributes to government coffers.

Now we’ll isolate just the resource figures. As we can see here, when the government talks about how volatile our resource revenues are, they are not kidding. This year we’re now projected to collect over eight billion less in resource revenue then last year (and over ten billion less then the high water mark in ’05/06). That is expected to be only the second time in this span that such revenues came in below six billion for the year, and the first time below four billion.

This graph is also good to show that typically natural gas is what drives the province… some years the ratio of natural gas-to-oil revenues got as high as 4/1 or 5/1… as opposed to this year when for the first time oil revenues are expected to exceed gas revenues.

Again, we’ll break it down by percentage of contribution. We can see in the last four years there has been a shift and oil is becoming more prominent and gas revenues has settled in just below the 50% mark. Quite the change from earlier in the decade when it was generally in the high 60′s/low 70′s.

What the future holds for this balance will be very interesting to follow. How will the increased gas production in the US effect production here and market price? How will changing environmental effect the oils sands?

Anywho, that was a little look at oil and gas revenues for the province from the last decade or so to send you off on your weekend. If you have any questions, comments and/or observations, fire away.

Commodity Prices

Where are the July numbers?

Excellent question. The long of the short of it is the EREB hasn’t posted it yet, so it’s not available. They usually take two business days into the new month, so it’s not really late, it just seems so, and with the long weekend I’d expect it tomorrow.

So, once it’s out I’ll try to get to it as soon as possible. In the meantime, he’s an interesting interview with U of C professor Phil Verleger, one of ‘cwant’ linked to a couple weeks ago, and even if you don’t buy the guys prognostications he does give a good insight into the workings of the oil market.

Alberta Canada Commodity Prices Historical Prices

Oilberta Redux

Earlier this week I did an entry on the relationship between oil prices and housing prices in Edmonton, and there were some interesting findings which led to new hypothesis’. There was also some good ideas that came up in the resulting discussion.

So tonight I’m going to take a bit of a deeper look at possible relationships with housing prices… or maybe I’m just doing it because that last one got lots of comments and I’m an attention whore… it’s really hard to say.

In any case, beyond just oil we’re going to look at natural gas, stock markets, and several other possible indicators. Be forewarned, there is going to be a ton of charts and graphs in this one, so if that isn’t your thing, well, you’re probably on the wrong blog. Anyway, this one will be a big’uns.

Like the last entry, I’m going to use Toronto as my control sample. Partially because Toronto isn’t exactly known for oil and gas (well, other than hot air… I kid, I kid), and it’s also the city I have the next best data set on.

This time we’re going to be using yearly averages rather than monthly, so you’ll notice the graphs look a bit different. As real estate tends to be a bit of a lagging indicator and prone to a fair bit of seasonality, yearly may actually be the better measure. I also have the yearly averages for Toronto going much further back, so that should improve the findings.

And here we have a plot of oil (West Texas Intermediate) and natural gas (Henry Hub) over the same period, also yearly. You’ll notice they chart fairly similar paths. You may be thinking to yourself that this graph doesn’t show prices getting as high as you recall, or diving last fall, but remember, these are yearly averages and/or spot indexes. These won’t look nearly as volatile as daily, weekly or monthly figures… for example here is the the monthly figures semi-transparent over the yearly ones.

As discussed in the prior entry, oil and home monthly prices in Edmonton had a high correlation… but they also had a very high correlation with Toronto prices. Which led me to conclude it was a spurious relationship.

These correlations remain using the yearly figures over a longer term… and are also present with natural gas. Though that shouldn’t be surprising, as noted earlier, oil and gas followed quite similar paths and actually have a correlation of 0.89 from ’72-’08.

Over the full term, ’72-’08, Edmonton had a correlation of 0.90 with oil, and 0.86 with gas. Toronto came in at 0.71 with oil, and 0.82 with gas. While the gas values came in quite close, there was a fair difference in oil.

This appears to be a timing issue though, as over the last 10 years both cities came in at 0.89, and over the last 20 years Toronto came in at 0.91 and Edmonton at 0.92.

On the natural gas front Toronto actually came in higher over the shorter terms, 0.84 to 0.79 over the last 20, and 0.80 to 0.63 over the last 10. Quite a large difference there on the latter.

As a result, I would again hypothesize that the correlations are due to a spurious relationship, due to a common lurking variable.

Here are a couple scatter points to illustrate the what we’re looking at.

You’ll notice the R2 value is lower than the correlation. For those unfamiliar, R2 is the coefficient of determination, and is the correlation squared (so, obviously its symbol would just be R).

In those graphs you can see the general trend formed over time. The higher the correlation, the tighter the plot points correspond with the trendline.

You may be wondering if there is a relationship between year-over-year gains… and to answer that in a word… no. Regardless of the city and the commodity (or any of the multitude of other indicators discussed later for that matter) any relationships are negligible at best.

To give you an idea of that, lets contrast the above graph of Edmonton vs natural gas prices to Edmonton’s year-over-year price change plotted against those of natural gas. You’ll note in the earlier graph that the points are often grouped and you can see an overall trend.

Now note in this year-over-year graph that the points are all over the place with no apparent rhyme or reason. The R2 is also almost 0, which just reinforces that there is little or no relationship.

As I have said before, I think the relationship between oil/gas and real estate is a spurious relationship due to a common lurking variable… and I’ve theorized that variable could be the greater economy and/or financial markets as a whole.

To further explore that line of thinking, I compiled a couple spot indexes for the NYSE Composite and S&P/TSX Composite. Here is a look at how those have performed over time.

These being composite indices they give you a good idea of the overall stock markets. With the NYSE being the largest stock exchange (by dollar value) in the world, and TSX being the dominant one in Canada they should be pretty good indicators for our situation.

The findings also may support my earlier musing, with both having significant correlations with real estate prices in both Edmonton (NYSE-0.87 TSX-0.92) and Toronto (NYSE-0.88 TSX-0.89).

To go a little deeper even, I consulted a Statcan report of the leading business indicators. These include ten different measures (including the S&P/TSX index) from various sectors of the economy.

Here is a list of the others, average work week-manufacturing, housing index, United States composite leading index, money supply, new orders-durable goods, retail trade-furniture and appliances, durable goods sales excluding furniture and appliances, shipment to inventory ratio, finished products, business and personal services employment.

Here is a look at just a few of those and how they’ve charted out.

I’m not going to look any deeper into these specifically, I just wanted to give you guys an idea of what they graphed out like. All the measures listed above appear to have a decent correlation on one level or another with real estate prices, except the average work week one which didn’t appear to have any correlation.

What I found most interesting was the composite of those ten different figures. As it covers many different sectors of the economy, it gives you a measure of the economy as a whole. As such, I’m going to focus primarily on that single measure, and here is how it graphs out.

And here is a scatter plot of the composite vs Edmonton real estate prices.

You’ll note that the points all plot fairly close to the trendline. Also interesting to see the snakelike pattern, which is present in the the natural gas plots earlier, but are not as clear as in this one.

Here is the time series for the leading indicators and Edmonton’s real estate prices. We can see there is far less variability in the composite than in housing, but they both are clearly trending up. This also reveals itself in a high correlation between the two, 0.92. The relationship also remains very strong regardless of the term, something that cannot be said for oil or gas which vary from very strong to moderate depending on the period.

Here we see the same composite graphed with Toronto prices. Again they look quite similar, and real estate remains the more volatile. The correlation for these two come in at 0.90.

FINALLY, we’ve arrived at the last graph. Here is the Edmonton prices plotted out with the composite, oil and natural gas prices for comparison. Yes it’s a bit of a mess, but I tried to make it as understandable as possible considering the multiple axis’ values. But I think it’s a good visual anyway.

I’m sure some will take exception with the scaling, but I tried to be as fair as possible and match up the various lines with housing prices long-term as best as possible. So just as a disclaimer, scaling can be misleading, so take it for what it’s worth and remember these can be made to appear to back up any conclusion.

Alright, here we can see the relative volatility of the four indicators. Oil and gas being the most so, then real estate, and finally the composite which is very smooth and relatively straight. It’s this smoothness is probably what yields the consistently high correlations, as all the prices increase over time.

I suppose one can see any number of things from the graphs, but I feel that these findings largely back up my earlier hypothesis that housing prices are probably more closely tied to the overall health of the economy, than to individual commodities.

While positive correlations exist between home prices and oil/gas in Edmonton, the same correlations exist in Toronto, a market without such resources close at hand… therefore implying a spurious relationship between the two factors.

While oil and gas certainly effect financial markets and the economy as a whole, throughout Alberta and Canada, it is still but one factor, granted one of the bigger.

That said, I’m not sure a direct causal relationship between be proved between the economy and real estate either. The economy is too complex for even an army of economists with lifetimes to study it to truly understand… much less one half-assed blogger.

So again, I conclude that while oil and gas certainly has a big effect on the local and national economy, I feel they do not have a direct causal relationship with real estate prices. But I don’t think any single indicator can claim a direct causal relationship. Real estate prices are effected by hundreds, if not thousands of variables… earnings, supply, demand, seasonality, land, labour, materials, just to name a few.

Oil and gas prices would certainly effect several of these, but there is a limitless interplay amongst these variables and countless others, and the effects of all these just cannot be quantified in an acceptable fashion.

That the same correlations exist between oil and gas prices and cities in both producing and non-producing regions indicate that real estate prices drill a lot deeper. Pardon the pun.

Canada Commodity Prices Historical Prices


One of our frequent commenters, Two-Thirds, offered up a couple local real estate folklore that he’d like to see tackled… his wish being my command, here is the first, the relationship between oil prices and real estate prices in Edmonton.

Those that have been reading this blog for awhile have already seen graphs of Edmonton’s historical prices several times, so we’ll start with a look at historical oil prices instead. For this post I’ll be using a spot index of West Texas Intermediate Crude… that seems to be the most commonly cited oil price, so should be a good standard.

To give you a better idea of the prices, here is the inflation adjusted price, and in Canadian dollars. As you can see from the graph, oil prices can be pretty volatile and undergo some very big swings, quickly.

It only goes back to 1971, this is because that is as far back as I could obtain exchange rates for… but that’s okay, since as you can see from the prior graph, prices were pretty much stagnant before the ’73 Oil Crisis, and Edmonton house prices were also pretty stable up to that point anyway.

It’s also good because creating these graphs over such long periods makes my year old iMac behave like a 486 trying to run Quake.

Now here is a look at how oil prices chart against Edmonton’s residential average price going back to 1971. We can see they have somewhat similar patterns, but it doesn’t appear that Edmonton’s real estate prices are nearly as reactive to oil prices as some may think. It is hard to say though, as real estate is something of a lagging market, not nearly as reactive as the oil market.

Realistically it takes time for the benefits of higher oil prices to makes its way through the economy. It takes months, if not years, for new projects to get off the ground, and the money from that to circulate.

So, when looking at the first boom in the 70′s, it could be argued that the rise in prices was, at least in part, due to the big spike in oil prices in January 1974. That delayed reaction could also explain why there was no apparent effect on real estate prices after the further spike in ’80 when prices briefly eclipsed $120/barrel (2009 dollars) then started shooting back down.

Also as oil prices started to move up in the late 90′s, real estate prices again started to creep up by the early 00′s… but real estate also started to decline while oil prices were still rocketing up too.

To counter that though, we can also see that real estate prices were declining during a period when oil prices, while dropping, were still well above what they were in the mid 70′s when they may have triggered the boom. Of course there were external factors at play at that time, like the NEP, which effect would be extremely difficult to quantify.

Then there is the big drop around 1986 when the price of oil plunged over 60%, and stayed there… while real estate prices seemed to have no effect, delayed or otherwise.

So, what’s it all mean? Hard to say, I guess one can see in those graphs what they wish.

To take a more statistical approach, we can take a look at the correlation between the two… this actually yields a seemingly remarkable result… a positive correlation of 0.68 since 1971. Anyone familiar with the measure knows that actually indicates a significant relationship.

But there could be many different factors at play, so to get an idea of what kind of correlation is normal I decided to also run the numbers against a control city that isn’t generally associated with oil and therefore one would not expect to find such a correlation… in this case, Toronto.

I only have the full numbers for Toronto going back to 1995, so to compare apples-to-apples as best as possible, I re-ran the number for Edmonton over the same period. Here are the graphs of those.

If you were shocked by the high correlation between Edmonton prices and oil prices earlier, you haven’t seen anything yet. Edmonton from 1995 to now is an astounding 0.87. Seems like that would make the relationship a slam dunk!

Not quite it seems. Sit down for this one. Toronto during the same period had an even higher correlation with oil prices… 0.89.

The two are very close, and this stays true (though in lower correlations) for the periods of the last 10 years and the last 5 years, inflation adjusted and nominal. Even figuring in moving averages with terms as long at 3 years to account for lagging reactions, there just doesn’t appear to be substantial differences between the two cities.

So, while a high positive correlation remains, I think that this finding of a non-oil and gas market having as high or higher correlations would pretty much refutes an actual relationship between oil prices and housing prices in Edmonton. Home prices here appear no more linked to oil prices then other cities in Canada.

To look at it from another angle, there is an equal correlation between real estate prices in Edmonton and Toronto, as their with between Toronto and oil prices. Though this should not be surprising since both also had similar correlations with oil.

In any case, I would have to conclude any kind of relationship between real estate prices and oil prices is anecdotal at best. It looks to be a spurious relationship caused by some lurking variable(s), and likely present in most if not all Canadian markets.

As is often said in statistics, correlation does not imply causation.

It seems that the real driver of real estate prices has probably more to do with the overall financial markets of which oil is a part of, or perhaps the economy as a whole… which would at least in part explain Toronto having just as high a correlation.

And just for shits and giggles, here is a little measure I derived… basically it’s how many barrels of oil it would take to buy an “average residence” in Edmonton at the market rates.

As we can see, this can be very volatile, with values anywhere from 2,500 all the way to 6,500 not being unusual over the last two decades. The median since 1971 has been 3,835 barrels, with a standard deviation of 1,270 barrels. Such a large range again would make me question any kind of hard relationship between oil price and house price, even figuring in real estate being a lagging indicator.

So in conclusion, while I’m sure oil prices have an overall economic impact on our fair city, of which housing prices would be a part of, from the data I’ve ran I see no tangible evidence of a direct causal relationship between oil and home prices. Any implication of such a relationship appears to be spurious. So, in the absence of any otherwise compelling evidence, this one is…