This weeks top stories include how 33% of Canadians are planning to delay their retirement plans, how the U.S Federal Reserve unexpectedly raised their discount interest rate, how Ottawa has begun to tighten the deficit belt and cut costs, how February was the month where new home sales records were set as Toronto sales alone jumped by 74%, how the Bank of Canada is being urged to hike interest rates, how U.S. jobless claims had an unexpected rise in February and how a home listings shortage is causing home prices to rise in Toronto and across Canada.
1/3 of Canadians to delay retirement
According to an annual RRSP poll done by the Royal Bank of Canada, the majority of Canadians feel that there is no set age that they should retire with one in three Canadians saying that they will never retire. The poll found that 57% of those polled stated that deciding when to retire was a personal choice and 26% felt that the term old actually depends on how you feel inside. The current life expectancy is 83 years for women and 78 years for men.
Lee Anne Davies, head of retirement strategies at RBC said, “The average Canadian retirement age is about 62 years but boomers are increasingly choosing to stay working or return to the workforce after retirement. The form your retirement takes depends heavily on personal choices, but planning earlier will give you more options down the road.” Out of those polled, 35% felt that Canada’s aging population will be a financial strain on Canada with 46% of those being between the ages of 18 to 34.
Many Canadians delaying their retirement will work as a positive thing for Canada as Parliamentary Budget Officer Kevin Page released a report last week stating that by 2050 the number of retirement age Canadians will reach almost half of the number of working Canadians. That works out to roughly two and a half times the number of retiree’s in the population today. Page went on to state that since people are living longer than they used to, the financial stress put on the working Canadians will gain as time continues to move forward.
U.S raises interest rates
Last week was a shocking week for financial news as the U.S Federal Reserve announced plans to raise interest rates on Thursday. Friday saw a raise in the interest rate charged to the banks for emergency loans as the Feds cited improved financial market conditions. The raise took the lending rate from 0.5% to 0.75% in a quick overnight swoop. The U.S Federal Reserve commented by saying, “Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as further normalization of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.” This leaves us wondering whether or not Canada will follow suit ahead of schedule? What do you think? Please comment below.
Tightening the deficit belt
Next week will be when the new federal budget is released to all of us and is expected to hold the outline for spending cuts that will take place this year. Ottawa intends to start a budget restraint program ahead of their previously planned schedule.
Government officials commented on Monday by saying, “There will be spending cuts this year. The rate of growth of federal spending, government wide will be reduced. Government, just like families, must live within their means but we will not balance the budget on the backs of hard working Canadians by raising taxes and we will not reduce transfer payments to provinces for essential services or by cutting transfers to individuals.”
The March 4th budget is expected to have $19 billion in spending and show will show a drastic cut in future spending. The area’s which will not incur any cuts are pensions, healthcare spending and education. Officials said that reducing the deficit and returning to fiscal balance will happen through slowing federal spending. The budget will also contain no new spending measures moving forward.
The cut back program is meant to bring down the federal fiscal deficits to reach roughly $164 billion by the year 2014. Canada’s Finance Minister Jim Flaherty had previously said that the government would wait until the spring of 2011 before putting spending reduction measures in place. That is when the current economic stimulus program will come to an end.
Flaherty commented by saying, “The first thing to do is make sure that the economy recovers, that’s absolutely imperative. Once we see a sustained recovery, then we’ll start moving back toward deficit reduction and then balanced budgets.” As of now Flaherty still has $19 billion more in stimulus to spend this year and next year. The original stimulus program was for $46 billion, which was intended to pull our economy out of the recession.
February’s record home sales
The first two weeks of February posted an increase in home sales in the Greater Toronto Area (GTA) by 74% when compared to the same time last year. The first two weeks of February 2009 are considered to be the point in time when the recession was at its worst in Canada.
The Multiple Listing Service (MLS) recorded a record breaking 3555 sales in the first half of February this year compared to a measly 2044 during the same time last year. The activity seen this month even shattered the old record set in 2006 by 7.7% setting the pace for the first half of this year.
Tom Lebour, president of the Toronto Real Estate Board (TREB), commented by saying, “Home ownership demand remains strong in the GTA, as households remain confident that economic recovery is at hand and that ownership housing will continue to be a quality long-term investment.”
The increase in activity has also pushed home prices in an upward direction with the average price of a home for the mid month transactions in February reaching $429 997. This figure was up a whopping 18% from the prices of homes in February 2009. This is drawing more sellers to the market in hopes of cashing in on this housing peek which has led to a 15% increase in home listings that are also up by 6212.
The expectation is that double digit price increases will continue through the first quarter of this year. This also means that as new listings continue to increase, we will get a better supplied market, which will moderate the annual rate of price growth into the single digits. What do you think? Please comment below.
Interest rate hikes urged
Analysts seem to be convinced that the Bank of Canada (BoC) will keep its previous pledge to wait until July before they begin to raise interest rates. The concern that analysts do have is how aggressively rates should be increased by. Some analysts are stating 50 basis points (Bps), which is half a percentage point, at a time for each meeting between July of this year and July of next year.
Keeping with this thought, there are 8 meetings in regards to the overnight lending rate a year. If the BoC was to raise rates by 50 Bps at each meeting, this would put the overnight lending rate at 4.25% by mid next year. With the banks staying roughly 2% above the lending rate, which would put the variable rate at 6.25% which I feel is too aggressive.
Economics professor, Michael Parkin, at the University of Western Ontario said, “Steep increases would be required to make up of keeping the benchmark rate so low for so long.” Sebastien Lavoie, economist at Laurentian Bank Securities stated, “In order to move from an exceptionally low to low rate environment, you need to move fast.” This is the same economist that stated Mr. Carney should consider increasing interest rates by a full percentage point, 100 Bps, at a time.
Mr. Parkin also stated that the BoC needs to raise interest rates at the same pace that they had cut rates in response to the financial crisis. This method is called the Taylor rule. The Taylor rule dictates by how much a central bank should move its overnight lending rate in response to inflation. Economists feel that the central bank cannot raise interest rates early and break its pledge because reversing its previous statement would damage the credibility of the BoC.
Last year the BoC cut its benchmark lending rate to a record low of 0.25% and reiterated a pledge to keep it there until the end of June this year to try and revive the economy after the economic downturn. The move worked well as gross domestic product (GDP) surpassed the Bank of Canada’s expectations in the fourth quarter of last year growing by roughly 4%. Inflation is also close to reaching the BoC’s target rate of 2%.
Regardless of how fast the BoC decides to move on the benchmark interest rate, the central bank will have to take into account the strength of the loonie when making its decision to raise interest rates and by how much. What do you think? Will we see hefty increases in interest rates? Please comment below.
U.S jobless claims rise
Oddly, the number of workers that filed claims for unemployment benefits in the U.S rose last week unexpectedly to 496 000. This comes from a new U.S Labour Department report that was released yesterday. Analysts that were surveyed, prior to the release of the report, had previously expected jobless claims to drop to 455 000 from the 474 000 claims from the week ending February 13. This number was previously reported to be only 473 000.
Labour Department officials are speculating that the unexpected rises in claims are partially reflecting a backlog that was unable to be processed due to heavy snowfall in the Mid-Atlantic and New England states. The snow storm is also another reason why more workers would file jobless claims due to them being unable to work, or make it to work, in the chaotic weather.
Listing shortage raises Toronto home prices
Toronto leads the pack again, this time for having a lack of available home listings across all of Canada. The lacks of listings are creating an upward pressure on home prices in the Toronto area as per a new report released this week by ReMax Ontario Atlantic Canada.
January saw 41% less homes listed for sale in the Greater Toronto Area (GTA) when compared to the same period during the previous year. The overall pressure on sales and price is significant across the board and is not likely to subside until more inventory comes on stream according to ReMax.
Across Canada, 81% of markets that were surveyed showed a sharp decline in listings. Behind Toronto was Saskatoon with 37% less listings with Kitchener Waterloo closely behind with 33% fewer listings. Victoria and Ottawa were both in fourth place with 30% less listings on the market and Vancouver rounded out at fifth spot with 27% less active listings on the market.
A lack of available real estate listing on the market means that buyers have fewer choices and that prices will rise causing a sellers market. This lack of available listings has created a spill into the new home sales market with buyers turning to new developments to try and satisfy demand. Proof is in the pudding as new home sales in the Greater Toronto Area have more than doubled in January when compared to the same time last year.
This comparison can be a little misleading as January last year was the peak of the economic downturn and was a point when home sales had hit rock bottom. When compared to a regular year, such as January of 2008, sales only climbed by 11%. What do you think? Is this lack of listings helping raise your home value? Please comment below.
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