This weeks top stories include how housing starts beat expectations and were up by 5.9%, how there were more job postings in the month of December, how exporters feel that the only direction that the economy can go is up, how new home prices were up yet again making it the fifth consecutive month to see a rise, how the Bank of Canada refuses to raise interest rates just to cool off the heated real estate market, how Canada is set to face an $18.9 billion deficit in the near future, how Canadians are being prudent when it comes to their mortgage debts and how our recovery will start out strong in 2010 then come to an almost standstill during the second half of the year.
Housing starts up 5.9%
Canada Mortgage and Housing Corporation (CMHC) released a new report on Monday showing that housing starts were up 5.9% to a seasonally adjusted rate of 174 500 units from the previously upward revised 164 800 units in the month of November. The number of new starts in the month of December surpassed analysts expectations which had predicted between 160 000 units and 165 000 units.
CMHC chief economist Bob Dugan stated, “The improvement in housing starts was broad based in December. Solid increases occurred in both single and multiple starts to end the year.” Urban starts were up 6.6% to 157 100 units in the month of December. Multiple starts reached 77 700 in December up from the 72 800 units seen in the month of November and single unit starts reached 79 400 in December which was up 6.4% from the month of November.
Urban construction was also up by 17.8% in Quebec, 15% in Atlantic Canada, 8.7% in British Columbia and 2.9% in the province of Ontario. The prairies were the opposite where we saw a decline of 3.8% in urban starts. Rural starts remained unchanged at 17 400 units. The increase in Canadian residential starts underscores the improving response of builders to the dramatic rebound in overall Canadian housing market activity.
The trend from the existing home sales market is now making its way in to the new residential housing market which is being reflected through an increase in sales numbers. The previous permit strike has unwound as the value of building permits fell in the month of November by 4.6% to $5.9 billion. That was still 23.1% higher than November the previous year and 62.8% higher than February 2009.
November’s numbers are below the numbers seen in 2007 and 2008. The decline that was seen was due to a hefty drop in the non-residential sector which offset increases in the residential sector as per CMHC.
More jobs in December
December was the month where new job postings turned positive when compared to the same time last year as per the December 2009 Canadian Job Market Report that was released by CareerAIM.com on Monday. December was also the only month in 2009 where the job advertisements were higher than in the previous year.
The release stated, “Nationally, the number of new jobs notices, which is an indicator of future hiring intentions, was up 4.3% or 4540 more job postings, compared to December 2008 . However, in December 2008 recessionary pressures were causing considerable reductions in the rate of job postings.
Prince Edward Island saw a 36% increase in job postings as did Ontario with an increase of 11.8% with Quebec and Manitoba following closely at 9.4% and 3.5% respectively. In the rest of the provinces, the rate of job postings remained below December 2008 levels with British Columbia seeing a decrease of 18.7%, Alberta seeing a decrease of 8.7%, Saskatchewan seeing a decrease of 8%, Nova Scotia seeing a decrease of 7.4%, New Brunswick seeing a decrease of 6.7% and Labrador seeing a decrease of 2.8%
These results were a similar reflection of a survey released last week by CareerBuilder.ca that showed 29% of employers plan to increase the number of full time permanent employees in 2010 which is up 18% from the numbers seen during 2009.
Exporters say the only road is up
Canadian exporters are reaching for the sky when it comes to sales prospects for the next six months. This is based on the belief that conditions cannot get any worse says Export Development Canada (EDC) on Tuesday of this week. The index was up to 77.4 in the fall season of 2009 which was up from the previous reading of 68.5 when it comes to exporter confidence. This was the largest rebound seen since the 2001 world trade centre attacks. This reflects a mutual consensus that our global economic recovery is well underway.
2009 saw our sales overseas plunge 20% which is six times worse than any annual decline in recent history. Canada’s trade balance recorded a surplus of $503 million in the month of October and dipped back into negative territory in the month of November. However, November did see our exports rise 1.1% on a month over month basis and a heavy increase in imports of 3.9%. EDC now predicts that exports will rise 6% or reach $526 billion this year.
According to the EDC survey, over 80% of those polled believe that the dollar will increase or remain at the current level in the near term. To offset the strength in the dollar some companies are using hedging strategies such as reconsidering decisions to increase foreign sourcing of inputs and altering their productions systems to accommodate a shift in the dollar.
New home prices up again
November was the fifth straight month where we witnessed a rise in new home prices. The increase beat all expectations by advancing 0.4% for another monthly gain as reported by Statistics Canada on Tuesday. Economists previously expected a month over month increase of only 0.3% but were definitely shocked by the strength in our real estate market.
On a yearly basis we saw prices fall by 1.4% in the month of November after seeing a hefty decline of 2.1% in the month of October. The Bank of Canada (BoC) has been staying on the sidelines but did say on Monday that talks of a housing bubble are premature and that raising interest rates to slow down the rising prices would stunt the economy’s growth.
The survey by Statistics Canada was of 21 metropolitan cities out of which only four cities recorded monthly declines. Hamilton, Sudbury, Thunder Bay and Saskatoon were the only ones listed on the decline list. The largest gains posted out of the cities surveyed were St. Catherine’s / Niagara Falls which were up 1.4% month over month, Quebec which was up 0.9% month over month, St. John’s and Windsor which were both up 0.7% month over month.
BoC will not raise rates to cool market
The Bank of Canada (BoC) will not raise its interest rates just to cool off the housing market as said by a spokesperson on Monday of this week. Instead they will leave it up to the country’s Finance Minister to intervene. Those who foresee a housing bubble forming feel that since the low interest rates have stimulated the housing market, the BoC should raise interest rates to cool off the overheated market.
Existing home sales are currently up 73% year over year and prices have climbed almost 20% as purchasers take advantage of the historically low interest rates to finance their property purchases. The concern in the industry is that the same clients will not be able to afford their mortgages in a couple of years at renewal time which will ultimately lead to a crash in housing prices.
The BoC’s deputy governor Timothy Lane says that the bank understands the concern, but uses its lending rate to keep inflation in check for the entire economy and the housing market is only one of several factors that influence inflation. Other sectors could be adversely effected if the rate increases before the rest of the economy is ready for it. He stated, “If the Bank were to raise interest rates to cool the housing market now we would, in essence, be dousing the entire Canadian economy with cold water just as it emerges from recession.”
The other option is that the government could increase capital requirements for lending institutions, change the terms and conditions required to obtain mandatory mortgage insurance or adjust loan to value ratios. Finance Minister Jim Flaherty stated that the government would consider raising the minimum down payment amount from 5% to a larger figure and reduce the amortization period from the current 35 years to something shorter but has not made a decision as of yet.
He commented by saying, “If there is, in the future, evidence of a residential real estate bubble, the tools we have are the tools we’ve used before, relating to insured mortgages, lending standards, down payments and amortization periods, which is what we acted on in the summer of 2008.” How do you feel about Flaherty’s comment? Please comment below.
We face a $18.9 billion deficit
Ottawa is now short on cash that it desperately needs to return to a balanced book. This is partially due to Finance Minister Jim Flaherty’s lowering of corporate taxes which has helped in aiding in our shortfall. Cutting the goods and service tax along with the corporate taxes were early measures taken by the Conservatives at the beginning of their term. Flaherty stated that lower corporate taxes were key for attracting international investments and urged other provinces to follow suit. These cuts were done at a time with increased spending being transferred to the provinces and was followed by recent deficit spending to help aid the economy through the economic downturn.
Parliamentary Budget Officer Kevin Page is downplaying Flaherty’s assumptions in a report that was released on Wednesday. With the government beginning to lay the foundation to erase the deficit, Page is knocking down the pillars and showing how the plan will not work. Flaherty is expecting that economic growth will be the key factor to create an upswing in government revenues in the up and coming years but Page says don’t count on it.
Page is putting Canada’s gross domestic product (GDP) on a downward trend and is forecasting that it will grow only 1.9% on average between 2009 and 2014. He states that his view takes into account changing demographics in the workforce. Even if the government could successfully stop stimulus spending by next year and keep government growth below the 4% marker, there will still not be enough money to erase the huge deficit that we have built up.
Page says that as a result there will be a structural deficit of $18.9 billion in the 2013 to 2014 period when Ottawa forecasts to have a balance budget. The decline in the government’s structural balance relative to potential income during this period will largely be due to lower revenues. Despite the increased employment insurance premiums and the personal income tax revenues, GST rate reductions and statutory corporate income tax will force the projected level of structural revenues relative to potential income near the low levels seen in 1976 and 1977.
The conservative government previously lowered the GST rate from 7% down to 5% and has caused an annual revenue loss of $12 billion. Flaherty has also cut the corporate tax rate to 15% in 2012 from the 22.12% seen in 2007. The government has ruled out increasing taxes as an option to help balance the budget but Page says that Ottawa will need to be more aggressive in cutting spending.
Flaherty closed off by saying that if economic growth comes in lower than expected, savings can be attained by not renewing government programs that already have set dates to end. He also stated that savings could be found in the government’s $35 billion staffing bill if we decide not to retire the baby boomers. What do you think about all of this? Please comment below.
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Canadians not taking mortgage risks
A recent survey completed by the Canadian Association of Accredited Mortgage Professionals (CAAMP) shows that Canadians are definitely showing some reserve when borrowing money for a home purchase. This is even with talks of a housing bubble forming and talks of high household debt. The survey, which was released yesterday, shows that 86% of home buyers are opting to go with a fixed rate mortgage over variable rate mortgages.
The survey also showed that 70% of the people surveyed decided to take terms of five years or more. This is a signal that buyers are aware of the higher interest rates to come and are capitalizing off of the historically low interest rates being offered right now. Jim Murphy, CAAMP’s president and chief executive stated, “This new research shows that Canadians are assessing their abilities and vulnerabilities. They are being prudent and the vast majority of Canadian mortgage borrowers are not taking on undue risks. They have factored rising interest rates in to their mortgage decisions.”
Bank of Canada officials have stated that it is too early to begin to speak of a housing bubble that is forming in the country but have commented regularly about the rising household debt levels and consumer’s ability to finance their debts once the interest rates begin to rise. Last year we saw consumers, who took out their first mortgage, borrow less than they could afford to and keep their debt service ratios well below the allowed maximums.
CAAMP also commented on the survey by stating, “The high share of fixed rate mortgages and low debt service ratios for home buyers are contrary to perceptions that consumers and financial institutions are taking on more risk.” What do you think? Are consumers being prudent when it comes to their debts? Please comment below.
Recovery to be short pressed
Canada’s economic recovery is set to speed away then come to an almost standstill in the near future. This is CIBC’s forecast for the up and coming year as the big bank states that the economy will grow by a hefty 3% annualized in the first half of 2010 as factory work will be high to restock depleted inventories and housing continues to remain strong.
The second half of 2010 is set to be dead as home prices level out and factory activity will come to a standstill. This will result in a stoppage of job creation moving late into the year. Growth is expected to fall below 2% in the second half of this year according to CIBC. The current outlook, based on CIBC, is that 2010 will see an average growth of only 2.3% which falls well below the Bank of Canada’s forecast of 3%.
CIBC further forecasts that the Bank of Canada will raise interest rates before the U.S does but that slow growth in the second half of the year mixed with a rise in the loonie will prevent the Bank of Canada from raising interest rates further. What do you think? Will the Bank of Canada stop raising interest rates even though inflation might set in? Please comment below.
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