Real estate hit by rising fuel costs
By Peter Diekmeyer • Bankrate.com

Energy costs are hitting Canadians like never before. Rising gas and heating prices are pressuring the economy, influencing inflation and causing the world's central banks to firm up interest rates. Recently, those effects started flowing into Canada's residential real estate market, too.

The good news is that as an energy-rich nation, the overall effects of those rising prices are far less onerous on Canadian consumers than they are on those in many other western nations.

That said, fuel prices aren't just rising, they are sky-rocketing. The price of a barrel of the benchmark Texas Light Crude Oil recently shot through the US$130-per-barrel mark -- a six-fold increase in just five years. According to one expert, those rising energy costs bring significant downsides. One sector being hit hard is residential real estate. "Fuel prices are affecting almost everything Canadians do," says Gary Siegle, regional manager at the Calgary office of Invis, a mortgage brokerage firm.

Lost jobs, gas prices, home heating prices
Siegle should know. The division he heads writes close to 2,000 new mortgages each year, worth about $500 million. However, business recently dropped off slightly, despite the fact that Alberta has been one of Canada's hottest real estate markets. "Last week, Air Canada cited increased fuel costs as a key reason that they were shutting some routes. And recently GM announced the shuttering of a truck plant," says Siegel. "When blue-chip companies lay off employees, it takes potential buyers off the market."

Of course, the effects of high fuel prices stretch beyond job losses. They also directly influence consumer spending because extra money spent on energy is money not spent on other stuff.

Those rising energy prices are most obvious at the gas pump. While Canadian statistics weren't immediately available, according to the Bureau of Labour Statistics, US households spent an average of US$1,422 on gasoline in 2003. By April of 2008, that total had shot up to an annual rate of US$3,196. That's close to US$2,000 a year in extra fuel costs for US families. The effects in Canada are likely roughly the same. Canadians have also been hit hard by the rise in home heating prices. According to one retailer in Hawkesbury, Ont., the company's clients will spend on average $2,400 this year in fuel costs, almost double the amount they paid last year.

The effects of those rising fuel prices don't end there. That's because many Canadian workers and businesses feel pressured to make up for the increasing costs by asking for higher salaries and by charging more for the products they sell. This creates the risk of an inflation spiral, in which one round of price increases sets off another, then another. Not surprisingly, the Bank of Canada has picked up on these inflation fears and is starting to firm up its monetary policy.  

This is likely already translating into higher interest costs than might otherwise be the case says Invis's Siegle. "Spreads (the difference between mortgage rates and bond rates) have risen to between two percent and three percent, when traditionally they are between one percent to 1.5 percent," says Siegle. "Part of the increase stems from the fact that the central bank did not cut rates earlier this month as many had expected."

Existing home sales and price increases are slowing
One thing is certain: Higher energy costs are leaving Canadians with less money left over to spend on housing. According to the Canadian Real Estate Association (CREA), unadjusted sales activity conducted through its Multiple Listing Service fell by 6.2 percent in April. The average price of homes sold that month rose by just four percent year-over-year to $317,619, the smallest increase in six years. While the CREA statistics only include Canada's largest urban areas, the pricing pressure was likely worse in rural areas, where fuel cost increases have an even greater effect.

That said, ironically, as an energy-rich economy, fuel price increases are mostly good for Canada. They improve the development potential of Alberta's tar sands, which are generally thought to include the world's biggest oil reserves. They also provide greater revenue from existing fields, much of which end up in government tax coffers.

The only problem is that right now many Canadians could use some of that extra cash in their own wallets.

Peter Diekmeyer (peter@peterdiekmeyer.com) is Bankrate.ca's economics columnist.