Weekly Mortgage News for August 28, 2009

This weeks top stories include how the month of June saw an increase in EI recipients, how the recession is on the run now that consumers have started spending again, how the Toronto housing market is defying gravity and how the Central Bank has promised to kill the loonies rise

EI recipients rise in the month of June

The month of June saw an increase in the number of Canadian receiving regular Employment Insurance benefits swell another 5.1% up another 39 500 people from the month of May. Increases were seen all across the boards with the largest numbers coming from Alberta, British Columbia, Newfoundland and Labrador. Beneficiaries increased 18.8% in the second quarter which was comparably down 25.2% from the numbers seen during the first quarter. The number of EI benefit recipients have drastically increased since the start of the recession by 316 300 people or up a whopping 63.2%. The positive point to look at throughout all of this commotion is that initial and renewal claims were down 26 100 claims in the month of June or 7.9% in all provinces and territories except in Ontario where we saw a slight increase. This is mainly due to Ontario’s dependency on the failing automotive sector.

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Recession on the run as consumers spend away

June may just be listed as a turning point in history for when we saw the end of this recession. Reports released Monday showed that retail sales have increased at a pace 5 times faster than economists had predicted. It seems that the governments stimulus efforts, mixed with consumer confidence, have come together to create an increase in Canada’s Gross Domestic Product (GDP) for the first time since the recession began. This proves that the general recovery, predicted by the Bank of Canada (BoC), is actually taking place. Retail sales were up 1% from the month of May where wholesale sales and factory shipments saw a rise in June. The BoC had earlier predicted that the economy would expand in the third quarter and then begin the long, slow period of reconstruction essentially taking us out of the recession. When looking at these numbers, it is important to note that the manufacturing, retail and wholesale industries make up 25% of Canada’s GDP and that insurance, finance and real estate make up another21%. When these sectors are strong, so is our economy. With GDP taking a turn and changing after 10 months of consecutive decline, economists are sure that our economy has bottomed out. This does not mean that we are completely free and clear. The rebound will be fragile as most of it was achieved through the aid of government stimulus packages and intervention from the central bank. The concern will be how we will attempt the removal of stimulus and whether or not our economy can flourish without the help of the government. Another concern is that we wait too long to stop the stimulus and run up deficits as well as risk inflation that will be reflected in large rises in interest rates. If sales of cars, automotive parts and gasoline keep going the way they are, we might have a fighting chance. Sales of cars, car parts and gasoline are what lead the increase in consumer spending.

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Toronto housing market defies gravity

Economists are currently revising their forecasts for the city of Toronto as housing prices keep going up. Original forecasts called for a decline of 5.6% in the Toronto housing market this year with houses averaging $358 100. Economists are now changing their tune as resale activity in Toronto is surpassing all expectations with three consistent months of strong activity. Economists now predict that the average price of Toronto housing will be up as high as $378 700 which is similar to the $379 347 average at the end of 2008. If this is the case then prices in our city will have increased every year since 1996 making it the thirteenth year in a row of straight increases. Given the economic backdrop of the current recession, no economist had predicted housing to bounce back the way it has. When dwelling on the last recession, it’s hard not to think of the seven year downturn in the housing market that lasted a total of seven years. The last recession bottomed out in 1996 when average housing prices dropped from $273 698 in 1989 to $198 150 by the end of that recession. What’s been shocking analysts even more is that this recession may not even see one year of retreating prices but looking at the big picture, if things are affordable enough, it will create demand. Affordability is currently being found through extremely low mortgage rates but is deteriorating as average housing prices rise in Ontario. What’s puzzling most is that this year began with sales down 50% in the month of January with a slight sign of positivity in May then went on to post two consecutive record breaking months in June and July. Most economists feel that the current strength in the market will have to slow down some time soon but over the next little bit their will be many mitigating factors. The main factor will be growth of employment as it will generate the need for the expanding of housing stock. With employment falling there is currently a limited need for new housing activity.

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Central bank to kill the loonies rise

The Bank of Canada (BoC) has stated again that it is prepared to intervene on the rising loonie in order to secure the fate of our economy. Deputy Governor Timothy Lane stated earlier in the week that the persistently strong loonie is restraining the recovery even though the economy is in the midst of a comeback. This is reflected through our exports as the higher dollar increases the costs of everything from auto parts, machinery and even newsprint. The concern is that U.S companies may cancel contract with Canadian companies and shift their business to cheaper alternatives such as buying local or even overseas. The loonie has taken a significant toll on the forestry sector as it squeezes the sales of lumber, paper and building products which has caused numerous mills to shut down or cut jobs. On the other hand, the cost to import goods has been significantly cheaper with auto parts, plastics, machinery, fruits and vegetables costing less. Although this sounds good, it may do more harm than help us for now as it will reduce real growth and delay the return of the inflation rate to the BoC’s target of 2%. The BoC is still retaining the right to use quantative easing to obtain the target rate and will do so through the purchasing of government treasuries. These purchases will lower the interest rates or bond yields and make the loonie less attractive to global investors. CIBC world markets went further and predicted that the BoC will not hike interest rates until 2011 due to the effects of the global economic meltdown. When do you think we will see a change in the prime rate? Please comment below.

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