This weeks top stories include how Canada will lead the G7 countries in growth next year, how Canadians are richer this year but also deeper in debt, how fixed interest rates are set to rise, how home sales are up 73% from this time last year, how Merrill Lynch Bank of America warns of a housing bubble forming in the Canadian market, how variable rates are set to rise in the second half of next year, how the housing market is reaching “bubble” territory, how factory sales beat analysts expectations, how apartment rental vacancy rates are on the rise and how inflation was up 0.9% in the month of November to reach 1%.
Canada to lead G7 in growth
The Bank of Canada (BoC) predicted this Monday that the Canadian economy is set to rebound next year and will lead growth among the G7 nations. The Royal Bank of Canada predicts that the Canadian economy will grow 2.6% next year and 3.9% in 2011 after seeing the economy shrink by an estimated 2.5% this year. Improving credit conditions, stimulus spending and consumer spending are expected to be the main drivers of growth with Saskatchewan expected to lead the country’s economic expansion in 2010.
Craig Wright, the bank’s chief economist for the report, stated, “While challenges remain, a peak in stimulus and infrastructure spending across the federal, provincial and municipal governments, along with low interest rates, should result in a sustained recovery.” He added by saying that the peak of stimulus spending will happen next year, while better credit conditions should lift growth through to 2011.
The recovery is coming at a high price tag. Budget deficits will be lower than the peaks reached in the early 1990’s relative to gross domestic product (GDP). Canada is expecting shortfalls of $38.2 billion in the 2009-2010 fiscal year and also expecting a minimum shortfall of $30.2 billion in the following year. These are both new records in terms of value says RBC.
Canadian consumer spending is expected to increase by 2.3% next year and accelerate to 2.7% the following year. The jobless rate is forecasted to be high next year, reaching 8.7% and peaking at 8.9% before declining to 7.8% in 2011. The unemployment rate in Canada is currently sitting at 8.5%. Housing market activity is expected to stay strong and begin to taper off in the second half of 2010 due to rising mortgage rates mixed with higher home prices.
Saskatchewan will see the largest growth spurt with 3.9% growth forecasted for next year and 4.6% expected in 2011 due to an up tick in demand for potash and natural gas. The province expected to see the slowest growth will be Quebec and Prince Edward Island at 2.2% each next year.
Canadians richer but deeper in debt
Canadians saw their net worth swell during the third quarter of 2009 increased by rising equity markets. Debt levels are also increasing with the household debt to income ratio reaching a record high. Household net worth was up 2.3% in the quarter as reported by Statistics Canada this Monday. Net worth reached $5.7 trillion, which marked the second quarter of gains after three consecutive declines.
Debts are rising just as rapidly with household debt reaching new highs in the third quarter as low interest rates caused Canadians to purchase more homes and renovate them to their liking. Canadians also purchased more cars, which sparked a further increase in consumer credit.
The report stated, “Falling mortgage rates, along with increased sales of existing homes and renovations, sustained increases in mortgage demand. Strength in auto purchases led to a further increase in consumer credit.” In correlation to this the household debt to income ratio rose 2 points to 145% which is the highest level seen since the inception of the data tracking.
Furthermore, this means that for every $100 of personal disposable income, Canadians now carry $145 in debt. Household debt is now being looked at as the biggest risk to the country’s financial system. The Bank of Canada (BoC) cautioned last week that household debt is running away on Canadians in its review of the financial system.
Canada’s national net worth dropped 1.3% to $5.9 billion which was the third consecutive drop and the largest decline on record which is largely due to an increase in Canada’s net foreign debt. Household per capita net worth is at $168 800 in the third quarter which is well below the peak of $179 000 seen during the second quarter of last year.
Fixed interest rates to rise
The chief economist at Bank of Nova Scotia stated this week that bond yields and mortgage rates could head higher well before the Bank of Canada’s (BoC’s) pledge to hold interest rates where they are until July of next year. Economists agree that there is a very good chance long term rates will increase before the deadline. New homeowners with variable rate mortgages should not be influenced by the BoC’s announcement on Tuesday to hold rates where they are.
The BoC pledged to keep rates at the historic low of 0.25% until the end of the second quarter of 2010 based on the outlook for inflation. If you read the fine print, they are only referring to variable rates. It is very likely that we will see 3 year fixed rates and 5 year fixed rates increase well before July of next year. Economists also believe that we will not see a double dip recession. 2010 is looking like the year that we will fill the hole we dug for ourselves during one of the worst recessions during our lifetimes.
The global economy is expected to grow at a slower pace than previously expected a few years ago and expansion is not expected to be that strong in 2011 so interest rates will not be climbing too high during that year. The 2008-2009 period was the worst period on record economically since the inception of the collection of data by the International Monetary Fund (IMF).
For the first time we have seen a contraction in the global economy with growth in world gross domestic product (GDP) falling from over 5% in 2007 to 3% in 2008 and a large decline to -2.5% this year. The low was seen during the first quarter of this year when the economy contracted at a rate of 6% annualized.
Economists now forecast a sustained but gradual recovery with GDP expecting to grow by 2.5% in the 2010 year. Last week’s positive employment numbers report suggests that we are already in the stages of recovery and may be close to achieving stability in the labour market. What do you think? Please comment below.
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Home sales rise 73%
Canadian home sales jumped 73% in November from a year earlier as the real estate market continues to recover from the economic downturn that we have been experiencing. Ontario and Quebec were the highest producing provinces with new monthly records reached as buyers continued to take advantage of record low interest rates to secure mortgages.
The national average price of homes were up 19% from the same time last year and reached $337 231 according to the Canadian Real Estate Association (CREA). Since the start of 2009 we have seen home prices rise 4.4% when compared to the same time in 2008. The year over year increase seen in the month of November continues to reflect the high degree to which the average was skewed downward last year due to plummeting activity in Canada’s priciest markets and then an increase as a result of rebounding activity.
CREA recorded 36 383 deals on its Multiple Listing Service (MLS) in the month of November. CREA also credited the housing market for leading the overall Canadian economy out of its recession as the numbers show signs of an entrenched recovery. Roughly 437 507 homes have been sold through the CREA owned MLS system so far in 2009 which is up 5% from last year at the same time. This number was still lower than the three previous years on record.
Home prices have been driven higher by a lack of supply on the market but higher prices are leading more sellers into the current market. Seasonally adjusted new listings were up 5% from the previous month as the numbers hit 69 110 which is the largest gain seen since January of 2008. There is still a shortage of supply on the market with the number of homes available for sale still 23% lower than they were this time last year.
Deteriorating housing affordability will take hold of further sales activity as the overall economy further improves and the pool of buyers who qualify for financing shrinks. Seller have definitely been happy by the premiums their homes have been fetching but a growing number of economists are expressing concern that the recover is not sustainable. However, with mortgage rates at extreme lows the seeds of a bubble are forming. Merrill Lynch Bank of America economist Sheryl King stated on Monday, “We’ve got a long way to go before we could put a bubble label on this market.” What do you think? Please comment below.
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Merrill Lynch warns of housing bubble
Bank of America Merrill Lynch warned this Monday in its 2010 investment outlook that Canada is likely inflating a housing bubble. Sheryl King, economist for Merrill Lynch, states, “We’ve got a long way to go before we could put a bubble label on this market. However, with mortgage rates at decade low and even more attractive if home buyers choose the variable rate mortgage option which carries rates as low as 2%, the seeds of a bubble are definitely in place.”
Sheryl stated that policy makers could underestimate the problem due to the way the Bank of Canada (BoC) calculates inflation. She says that the BoC overemphasizes new home sales and is currently ignoring the hot resale market in its consumer price index (CPI) calculations. She stated, “New home prices can vary greatly from resales, and new homes are only 20% of overall home transactions. There is a real question of whether the CPI captures the full real estate asset story.”
New home prices were up 0.3% month over month during in October of this year and rose 1.1% annualized during the third quarter after seeing 5% declines in the first two quarters of 2009. Teranet 6 city home price index shows that resale prices in the last three months rose 23% on an annualized basis. Sheryl commented by saying, “With monetary policy in such stimulus overdrive there is a real risk that the market could become overheated and an asset bubble could form.” What do you think? Are we forming an asset bubble here in Canada? Please comment below.
Variable rates to rise
Canadians can expect to be hit with higher variable interest rates in the second half of next year and 2011 according to new report released by the Royal Bank of Canada. Economists at the Royal Bank say that the Bank of Canada (BoC) will be among the next group of central banks to raise interest rates. They also predict that 2010 will end with the BoC’s overnight lending rate reaching 1.25%. Economists believe that the same overnight lending rate could reach as much as 3.5% in 2011.
The overnight lending rate from the BoC has been sitting at 0.25% for the majority of 2009. The low interest rates have encouraged consumers to borrow money but are raising concerns at the same time that Canadians are over extending themselves. Although Canada has not been hit as badly as other economies during this recession, we will be following Australia and Norway to be part of the first to start raising interest rates.
The BoC has predicted growth rates to reach 2.6% in 2010 and 3.9% the following year. Canada will be leading the G7 countries in recovering from the economic downturn. Reports forecast that the peak of stimulus spending will happened during the 2010 year with improved credit conditions fuelling growth well into 2011.
Consumer spending is forecasted to rise as well with projections of an increase of 2.3% next year and an increase of another 2.7% in 2011. The BoC went further and forecasted that the rate of unemployment will be high at roughly 8.7% next year and fall to 7.8% in 2011. Craig Wright, RBC senior vice-president and chief economists, says “With the financial crisis behind us and the U.S. economy on the mend, Canada’s economic growth is expected to rise steadily throughout the next year. While challenges remain, a peak in stimulus and infrastructure spending across the federal, provincial and municipal governments, along with low interest rates, should result in a sustained recovery.”
Housing market into bubble territory
Top Canadian economists feel that the Canadian housing market is getting dangerously close to “bubble territory” and is likely headed for a correction during the second half of next year. BMO Nesbitt Burns deputy chief economist Doug Porter expects to see a modest market correction in 2010 with prices taking a hit. He commented on the matter by saying, “We are certainly at risk of a full blown bubble.”
The extent of the correction will depend heavily on how much home prices increase over the next six month period. After seeing a large decline at the beginning of this year, resale home prices have climbed past the peaks of the past year. BMO released a report on Wednesday outlining how housing valuations are likely richer than equity valuations in the current market. The higher home prices climb, the bigger the risk of a correction.
Characteristics of a bubble economy include a massive amount of credit on the market, speculative buying as well as sales and prices of homes increasing without the economy seeing an increase. Cities like Toronto and Vancouver are at most risk of a correction due to the significant amount of activity in their markets. These cities have a lot of lineups at sales centers and there is a degree of speculative buying that happens in those urban centers. This volatility leaves homebuyers nervous about the state of the economy.
Royal LePage polled their agents and found that 38% of their agents say that economic factors such as job security is the number one issue with buyers. 23% of their clients feel that they will not be able to get the price they want for their home and 12% of agents feel that some customers are hesitant to sell because the market had not hit rock bottom as of yet. 20% stated that there clients had no concerns about the current economy effecting them.
Factory sales beat expectations
A new report by Statistics Canada suggests that Canada’s economic recovery is gaining steam as factory sales were up more than expected at 2% in the month of October. The increase up to $42.5 billion was the fourth increase seen in the last five months. Economists that had been polled by Bloomberg had previously forecasted a gain of 1%. The factory numbers came in as a flurry of positive economic reports were released recently in regards to the labour market, retail sales, housing and bankruptcies. More strength is expected next week when the release of Canada’s gross domestic product (GDP) numbers for October are available.
Stewart Hall, economist at HSBC Securities Canada noted, “We will add this number set to the growing list of data points suggesting that October GDP is shaping up quite nicely. In October, Canada can be expected to have continued down that path to economic recovery.” The news that factory sales advanced in 15 out of 21 manufacturing industries, which reflects a broad demand for Canadian products, aided in Mr. Hall’s comments.
Millan Mulraine, economist strategist at TD Securities noted, “The report suggest that the Canadian manufacturing sector is benefiting tremendously from the improving global economy. Even with these recent gains, manufacturing sales remain 16.6% below last Octobers level and the recent strength in the sector could ebb in the coming months as a strong dollar erodes the competitiveness of Canadian goods.” Constant dollar manufacturing sales were up 1.2% and has also seen gains in the last 4 out of 5 months.
Much of the monthly manufacturing gains came from the aerospace products and parts industry as well as the petroleum and coal products industry. Aerospace products and parts production jumped up by 54.1% in the month of October after seeing two straight months of consecutive drastic declines as production in this industry has been volatile over the past year. Auto sales were also up 2.9% in October which was the third gain seen in the past four months for the sector.
Apartment vacancy rates rise
Weakness in youth employment and low mortgage rates took their toll on the rental housing market as vacancy rates rose and rents increased in Canada’s apartment market in the month of October. The average rental vacancy rate for Canada’s 35 major centres was up to 2.8% from a previous number of 2.2% according to Canada Mortgage and Housing Corporation (CMHC). Average rent in all markets, except new buildings whose higher rents skew the numbers, were up in all centres. Regina saw the largest increase and now sits at 10.2%.
Bob Dugan, chief economist at CMHC stated, “Demand for rental housing in Canada decreased due to slower growth in youth employment and improved affordability of home ownership options. Rental construction and competition from the condominium market also added upward pressure on vacancy rates.” These comments were reflected in the report which showed that from October 2008 to September 2009 15 657 rental units and 45 655 condominium units were completed in the major centres which provided pressure on the rental market.
Vacancy rates in the month of October increased in 8 out of 10 provinces with the largest increases seen in Alberta. Alberta saw a 3% increase to 5.5% on their vacancy rate with British Columbia following behind where the vacancy rate was up 1.8% to 2.8%. Newfoundland and Labrador saw a decrease in their vacancy rates to 1% which was a decrease of 0.1% and Nova Scotia also saw a decrease of 0.4% to a vacancy rate of 3.1%
The centres with the highest vacancy rates this year was Windsor at 13%, Abbotsford at 6.1%, Peterborough at 6%, Calgary at 5.3% followed by London at 5%. The markets with the lowest vacancy rates were Regina at 0.6%, Quebec at 0.6%, St. John’s at 0.9%, Winnipeg at 1.1%, Kingston at 1.3% and Victoria at 1.4%
Inflation rises to 1%
Statistics Canada released a report on Thursday showing that Canada’s annual rate of inflation had rose for the second consecutive month in November and was led by higher gas prices. The consumer price index (CPI) was up 1% during the month which was more than anyone had expected and rose at the fastest pace seen in eight months. The rate was at 0.1% in the month of October and increased by 0.9% during the month.
The federal agency commented on the matter by saying, “Prices at the pump are now exerting upward pressure on the CPI after an extended period in which they were the main contributors to year over year declines in overall consumer prices.” They also stated that gas prices were 14.1% higher in the month when compared to the same month last year. The annual core inflation rate, which does not include volatile items like certain food products and energy, dropped to 1.5% from 1.8% in the month of October. The figure was released after experiencing four straight months of declines in consumer prices.
Economists had forecasted an overall inflation rate of 0.8% with a core rate of roughly 1.3%. The Bank of Canada’s (BoC’s) target inflation rate was previously set at 2% and that is what they are aiming for now. Douglas Porter, deputy chief economist for BMO Capital Markets, wrote a note stating, “While headline inflation is bouncing back from the extraordinary lows seen earlier this year, the more important story here is core inflation, away from the madness of gasoline prices. Underlying inflation remains a bit hotter than the BoC expected, at 1.5%, it’s hardly a source of concern, but at the margin, makes that much more of a case that normal interest rates will return before too much longer.”
Transportation prices were up 1.9% in the 12 months leading up to this November and exerted the most upward pressure on prices due to the large spike in gasoline prices. The costs of furnishing and equipment as well as household operations saw an increase of 2.8% followed by food prices which were up 1.7% It seems that housing costs were the only component to see a decline with a drop of 1.7% between November of last year and November of this year. The decline came on the heels of lower home heating costs as natural gas was down 29.7% as well as fuel oil and other fuels dropping 10.6%.
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