This weeks top stories include how housing starts have surpassed analysts expectations, how the “Buy American” policy has finally come to an end, how home sales have shot through the roof with low interest rates fueling the way, how the Multiple Listing Service (MLS) is being challenged by the Competition Bureau, how home prices are ready to set records in 2010, how Canada’s trade deficit widened more than expected, how Toronto may privatize its asset portfolio and how there may be a tightening on the current mortgage rules being used across the country.
Housing starts boom
Canada Mortgage Housing Corporation (CMHC) released a report this week Monday outlining a rise in housing starts in Canada. The seasonally adjusted annual rate of 186 300 units in January was up significantly from the 176 100 units seen during the month of December. Actual housing starts reached 149 081 units as per CMHC with a seasonally adjusted annual rate of urban starts rising by 4.4% to reach 165 200 units in January which is up from the 158 300 starts seen during the month of December.
Urban starts were up 10 218 units on a monthly basis in January from the 7 309 starts seen in January of 2008. British Columbia saw a heavy increase in their starts with a seasonally adjusted annual rate of urban starts rising 19.8% followed by Quebec with a raise of 7.3%. Atlantic Canada also saw a rise in urban starts, up 2.3% followed by Ontario, which was up 1.5%.
Bob Dugan, chief economist for CMHC stated, “Housing starts improved in both the singles and multiples segments in January. These increases are similar to the ones that occurred in December.” Millan Mulraine, economics strategist at TD Bank feels that this is just temporary as he commented by saying, “With part of the uptick in starts likely to be coming as a result of temporary factors, namely the surge in Olympic-related housing in B.C, we believe that this report overstates the true strength of the recovery in residential construction and expect to see a modest pull back next month.”
Analysts had previously felt that we would only reach 180 000 starts in the month but were shocked to hear of the actual numbers. Canada’s real estate market has been on fire for the past few months, which has caused steep gains in home prices. The major banks are now expressing concern that home prices may begin to slide and have begun to push Ottawa to tighten mortgage rules. Jim Flaherty, Canada’s Finance Minister, has no plan in sight to tighten rules and stated that there is currently no compelling evidence of a mortgage bubble. What do you think? Is there a real estate bubble forming? Please comment below.
Buy American comes to an end
A U.S.-Canada deal on Buy American trade restrictions will pave the way for liberization of provincial and territorial procurement policies, including a proposed trade deal with the European Union. Peter Van Loan, the Federal Trade Minister, spoke of the agreement last week Friday which will allow Canadian companies to bid on infrastructure projects for the remaining $787 billion in stimulus that Washington has left.
Brad Wall, Saskatchewan’s Premier, said that the shorter-term benefits of the deal are limited due to the fact that most of the U.S stimulus dollars have already been allocated. He did state that this would provide some protection for future U.S.-Canada trade relations. “There is a lot protectionist sabre rattling down there (in the U.S.) in the face of a very difficult economic time so this is an important achievement.”
Mr. Wall went on further to state, “I think the longer term is even more significant. It opens the door for renewed or reinvigorated discussions with Europe (on a trade pact), and also the notion that there would be a mechanism to fast track exemptions from buy America like provisions in other U.S. stimulus initiatives.” Mr. Wall feels that the deal will provide momentum for further liberization of provincial procurement policies, which will include Crown corporations and municipalities that have been excluded from international trade agreements.
Under the new deal, the provinces and territories will provide commitments under the World Trade Organization’s Government Procurement Agreement, to provide access to foreign companies for procurement markets, for the first time, for everything from managing health records to construction contracts. 37 states have signed to be a part of the WTO’s agreement but have insisted on having broad exemptions.
Under the newly signed agreement, Ontario is hoping to exclude its energy and transportation sectors, which will preserve its domestic content rules under its renewable power contracts. The U.S has already exempted major transportation projects that are funded by Washington. John Manley, head of the Canadian Council of Chief Executives and former Liberal cabinet minister stated, “The fact that we’ve got the provinces to sign on to the WTO procurement agreement is a step forward.” I agree with Mr. Manley but what’s your take on it? Please comment below.
Home sales on low interest rates
The forecast for home sales has been revised upwards by the Canadian Real Estate Association (CREA) due to better economic conditions than previously expected. CREA is forecasting a rise in sales of 13.3% from its 2009 numbers with sales expected to reach 527 300 this year, which is an increase of 6.3% from the previous forecast. The national average home price is forecasted to reach a record $337 500 this year, which is a rise of 5.4%.
2011 will be the year where we see an impact from higher interest rates as sales are expected to drop 7.1%. This would put 2011 levels to the same levels witnessed in 2005 and 2006. Prices are also expected to drop 1.5% nationally. Locally, Toronto is expected to see prices stay where they are with little or no appreciation over the next year. Housing starts in Toronto were down in the month of January as high-rise construction had a slow beginning to the year.
Total starts in Toronto were weighed down by muted new high-rise construction as the complexity and size of projects coming on stream combined with previously tight financing have resulted in longer preparation times. Actual starts dropped 6.5% from last year this time but a Canada Mortgage Housing Corporation report states that it will pick up later in the year.
CREA chief economist Gregory Klump stated, “A downward trend in national sales activity combined with an increase in listings will result in a more balanced market. Although builders are understandably more upbeat than they were during the depth of the recession, speculative building will likely be continued to be held in check.” Ontario Home Builders president James Bazely added a comment for policy makers, “More restrictive mortgages and higher interest rates are the last thing the industry needs now.”
I agree with Bazely. With talks of a housing bubble forming, only talk, we must plan for the here and now and right now we are trying to emerge from a recession. By increasing mortgage rates too quickly or restricting one of the few sectors that are helping our growth, we will choke, not only the economy, but also the people within that economy. What do you think? Please comment below.
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MLS targeted
The ongoing battle for lower real estate fees in Canada has just taken quite the twist. The Competition Bureau has challenged organized real estate and specifically the MLS system for anti-competitive behaviour and restricting consumer choice. The bureau has filed an application to the Competition Tribunal that will determine if the bureau’s complaints have merit. If the tribunal finds in their favour they could possibly force the realtors organization to change rules it sees as anti-competitive.
Melanie Aitken, Commissioner of Competition stated, “For so many Canadians it’s the biggest financial transaction of their life and to have choice is important. In our experience choice does lead to downward pressure on pricing.” The outcome will determine whether consumers will be able to obtain lower fees for real estate transactions and whether the Canadian Real Estate Association (CREA) will dictate how homes are being sold in Canada.
Aitken said, “What CREA is really doing is using their control over the MLS system in order to restrict choices for Canadian consumers and their own agents who may want to choose innovative models where consumers can get to pick and choose what services they want.” These talks have been ongoing for the past three years without resolve and now this may be the only option left.
CREA made a statement on Monday of this week saying that it was a shock when the bureau decided to go to tribunal. CREA president Dale Ripplinger commented by saying, “We do not agree with the bureau’s position that certain CREA rules are anti-competitive, either as a matter of fact or as a matter of law. CREA’s rules allow for innovative business models and provide a broad range of choice for consumers.”
The bureau’s stance against CREA is not very popular with agents who are taking this as an attack on their careers. This did however happen south of the border where homes can be listed on the MLS system for as little as $99. My concern is that without proper representation you may not have the expertise that you require to guide you when selling or purchasing a property. What do you think? Please comment below.
Home price records will be set in 2010
As of recently there has been an urgency to buy a home, which is due mainly to an expectation of higher mortgage rates to come along with the pending HST in Ontario and B.C. This has helped fuel a market rebound unseen in history before. This turnaround is taking effect as new home construction rises and resale prices are set to create new records this year. In areas like Vancouver prices have hit the point where detached homes are now out of reach for many buyers even with today’s low interest rates.
The Canadian Real Estate Association (CREA) forecasts that home prices in Canada will surge to new highs this year with average prices rising to $337 500 with sales activity reaching record highs before cooling in 2011. This has raised the debate as to whether or not the recent price increases seen are sustainable as job creation is still muted and interest rates are set to rise. The rise of 19% from last year December has caused Canada’s top bankers to worry. Some bankers have urged the government to cool off the overheated market by changing down payment and amortization rules.
Current demand is being driven by people looking to purchase before interest rates rise as well as those wanting to purchase before the harmonized sales tax takes effect. Peter Norman, senior director of economic consulting at Atlus Group stated, “It’s hard to get terribly excited about a strong sustained recovery in the housing market in a situation where the unemployment rate elevated nationally. It’s hard to imagine this strength is going to continue unabated.”
The factors that normally drive home prices are population growth, economic activity and income trends. Home prices are currently looking overvalued because these factors were not the reason for the rise in prices. It also raises the risk of softening over the next several years. Both Bank of Canada (BoC) Governor Mark Carney and Finance Minister Jim Flaherty are playing down the idea of a housing bubble in Canada but they are keeping a close eye on it, as is everyone else in the industry. It seems like deja vu but do you feel that there is a housing bubble forming? Please comment below.
Country’s trade deficit widens
The worlds trade deficit, including Canada, widened more than forecasted in the month of December as imports outpaced exports mainly in the automotive products sector. This was the latest news from Statistics Canada in a report released on Wednesday. Canada’s deficit reached $246 million in December from a revised $201 million seen a month earlier in November. Originally, November’s deficit was forecasted by economists to be roughly $344 million and December’s deficit was projected to be $100 million. December was the fifth deficit in six months, which was a drastic change from not seeing a monthly trade deficit in more than 30 years.
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Will Toronto privatize assets?
Some candidates running for mayor of the city of Toronto are suggesting that we sell some of Toronto’s best assets. These assets include Ontario’s biggest local electric utility, the downtown districts heating and cooling system that serves some of Toronto’s biggest office towers and our parking authority. Mayoral candidate Rocco Rossi, along with his business advisors, fell that sales should be considered.
Dana Levenson was the man with a plan in Chicago. He put management of some of Chicago’s most valuable assets under private management. He feels that we should lease civic business enterprises to private companies for a decade at a time with several benefits. These benefits include a large sum of cash up front. He feels that instead of Toronto money being tied up in a specific asset, we can use it for capital projects around the city.
Levenson commented by saying, “It’s a redeployment of capital. You’re taking cash in and you’re turning it into capital assets throughout the city.” This will avoid taxpayer risk as the private operator will oversee the headaches of how to set prices and how to attract customers. Levenson added, “There are core competencies that cities should be proud of including fire protection and police protection. Running a commercial enterprise is probably not one of them.”
If an asset doesn’t fall under the cities core duties, this leaves the question of whether or not there is a ready market. In this case there is a market for infrastructure and it is currently asset starved. There’s a tax problem to be solved and currently the province levies a 33% tax on the sale of municipal electric utilities if they are sold to private operators. This makes them less attractive and possibly ready to set a change in policy.
Another person siding with Dana Levenson is Jim Stanford, an economist for the Canadian Auto Workers who previously served on a special panel to advise the city on its finances. He feels that outright sales are foolish but is willing to explore options to monetize assets. I think Mr. Levenson is on the right track as leasing will put our assets back into the cities hands within ten years with a large upfront fee to help aid our deficit. What do you think? Should we sell or lease our assets? Please comment below.
Tightening of mortgage rules
Ottawa is currently under talks about new mortgage rules that will force banks to use tougher criteria evaluations on mortgage borrowers. This move has been in talks for a while as concern over consumers taking on more debt than they can handle when they purchase a home has been in the spotlight for months now. The proposal has new conditions the banks would be forced to follow when determining whether or not a customer can afford their mortgage including “rate shock” analysis in the event that the rates were to drastically rise.
Canada’s Finance Minister Jim Flaherty has been under pressure from many experts to slow down the rampage that the housing market is currently on. Major concerns are forming around consumers that are buying homes with low mortgage interest rates as a rise in rates may cripple their ability to meet their mortgage obligations. If this happens, it will also take a toll on our economy with many people cutting back regular spending just to make their mortgage payments.
Ottawa is currently advising that there is no housing bubble but have done some analysis work to determine the impact of higher downpayments and shorter amortizations. Flaherty’s concern is that cooling off the housing market would damage our economic recovery. Another option is to qualify all borrowers that are taking variable rate mortgages at the five year fixed mortgage rate. This would guarantee some leeway in the event that rates were to rise drastically.
I personally check what impact a 200 basis point increase would have on every Toronto mortgage and consult my clients to not borrow over their means or even close to their maximum affordable amount. I feel that Ottawa should do the same and not shorten amortization periods or change down payment structure requirements as this will hamper Canadian’s options of becoming a home owner. What do you think? Please comment below.
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