Myth Busted: McJobs in the recession

I think we have established that simple supply and demand drives real estate prices. So the key to my business is to understand what drives supply and demand.

On the demand side, one of the key drivers is jobs and incomes.

Lets take a look at the latest research from people who don't care if you buy real estate: CIBC.

CIBC World Markets measures employment quality through its employment quality index (EQI). The EQI measures the distribution of distribution of part-time vs. full-time jobs; self-employment vs. paid employment; and the compensation ranking of full-time paid employment jobs in more than 100 industry groups. Basically it measures if people are leaving high paying jobs to go into McDonald's (McJobs) or starting a new network marketing business.

From the latest EQI stats, despite employment has decreased 2.1% (or 356,000 jobs) the EQI has decreased 0.2%.This is quite different from past recessions where the EQI falls faster than the jobs.

From the report:

During the 1991 recession, the 3% drop in overall employment coincided with a 7.7% drop in the quality of employment.

So what is happening?

Most of the job losses have been in low paying jobs (gasoline station operators, real estate, textile and accommodation services). These are basically jobs by younger people who are less likely able to buy real estate (which won't drive down prices significantly).

So what is going on regionally?
Western Canada EQI is falling faster than the rest of the country because the high paying jobs in construction and in the Oil/Gas industry has fallen dramatically. This is perfect for people seeking opportunities in Alberta because these are the sectors poised to gain the most in 2010 and beyond.

Ontario EQI has fallen only a limited degree (despite losing high paying manufacturing jobs). Quebec and Atlantic Canada (Halifax real estate is kicking butt).

Employment Diversity and Effect on Job Loss during the Recession

Thanks to Don Campbell for keying me on this fundamental.

When the Conference Board of Canada publishes its quarterly economic outlook for Canadian cities we take a particular interest in how they rate the diversity in the amount of industry groups for the town.

Diversity is a strong indicator for how resilient the town will be in the future when shocks to the local economy happen.

Resilience, rhymes with Brilliance, is defined as “the power to return to the original form after being bent or stretched; elasticity; buoyancy; ability to recover readily from illness or adversity

During the current recession the oil and gas sector in Alberta had overall job losses as the price of oil faltered and investment in Oil sands was postponed. Edmonton and Calgary have weathered the storm of job losses (in fact they gained 0.2% and 0.4% new jobs respectively) in part because the cities were diverse outside of oil and gas.

Toronto with its massive job market (almost as big as the combined labor force of Alberta and Saskatchewan) is an example of great resiliency. The number of people employed in Toronto has decreased 2.0% vs. the 2.3% loss for the entire province of Ontario (Ottawa has a less diverse economy and lost 4.8% --more jobs than the provincial average).

Toronto has survived the Nortel crash and it has survived the NAFTA transition away from manufacturing in the past...and will survive the global financial meltdown and the auto sector mess today.

As for the anomalies in Quebec and Vancouver...who cares!

I won't even begin to explain Montreal and Quebec City because I would never invest their anyway....one of the most anti-landlord places in North America and Vancouver is currently the real estate bubble capital of Canada because the homes are not affordable.

In closing:

Why should the diversity the local economy is a factor to look at when looking at investing in real estate in a town?

Diversity = More jobs created in good times and less jobs lost in bad times = higher population growth in good times and less population loss in bad times = more stable real estate investments.