This week’s top stories include how the low interest rate environment will not last forever and is coming close to an end, how the pace of office vacancies have slowed to a point that has a positive outlook, how there are drastic changes on the way to the Multiple Listing Service, how recent reports have economists raising their growth forecasts, how many Canadians are worried over rising home prices and expected increases in mortgage interest rates, how the number of employment insurance claims are decreasing regularly and how the Bank of Canada has hinted that interest rate rises are just around the corner.
Low interest rates to end
Time is winding down as to when we will see the rise in interest rates. Canada’s borrowing costs are at a record low and inflation is setting in faster than the Bank of Canada (BoC) had expected. This gives more pull to the theory that the BoC will raise interest rates in June of this year. At the same time, economists are boosting their growth forecasts as Canada’s economy gathers more steam towards a rebound.
As consumer prices climb and inflation pushes forward with higher prices, the BoC’s policy on rate change is driven by the core rate of inflation. The BoC had not expected the core rate to reach the 2% target rate until the third quarter of next year. When you mix this with the improving economy, Governor Mark Carney may not have a choice but to raise interest rates sooner than later.
The assistant chief economist at the National Bank stated, “We’re progressively leaving the recovery phase. Policy makers are going to change their tone on the economy in April, and they’re going to move in June. The longer they wait, the more aggressive they’ll have to be.” This gives more way to the thoughts that the BoC will raise interest rates before their scheduled date and may be the first in the Group of Seven to raise borrowing costs since the beginning of the global economic downturn.
Office vacancy’s slow
The first quarter of this year saw a rise in office vacancy rates across the country but the pace is beginning to slow. This is a sign that stability may be returning to Canada’s commercial real estate markets. The national office vacancy rate rose to 10.1% in the first quarter of 2010, which is an increase of 7.5% from the first quarter of 2009. This is only a slight increase from the 9.9% witnessed in the final quarter of 2009.
The vice-chairman of CB Richard Ellis commented by saying that the small increase from the final quarter of 2009 is an indication that the commercial real estate market may be through the worst of the recession. He also stated, “A more promising employment picture, slowly improving leasing activity and the residual impact those factors have had on the country’s commercial real estate market is a welcome change from 2009 conditions. Expect to see a slow recovery progressively in 2010. With a few notable exceptions, the majority of Canada’s markets appear to be over the hump.”
Across Canada, vacancy rates were up in most of the major markets. Toronto currently has the largest office market in the country and market conditions are set to turn in favour of tenants, in Toronto, over the next few years. The overall vacancy rate in the city of Toronto was up to 9.6% in the first quarter of 2010, which was up 1.9% from the first quarter of 2009.
Changes to MLS
The Competition Bureau disagrees with the way that Canada’s real estate agents have opened up the Multiple Listing Service (MLS) to the public and was quoted as saying that it is a step in the wrong direction. In a last minute effort to avoid a legal battle with the Competition Tribunal, the Canadian Real Estate Association (CREA) approved changes at Monday’s general meeting allowing agents to post listings on its MLS service for a flat fee to the seller.
Previous to this change, a seller had to employ an agent through the process of the sale and pay a certain percentage of the sale price as commission. The Competition Commissioner dismissed CREA’s moves as not going far enough to allow new entrants to compete for listings. She stated, “There is nothing in these proposals that we haven’t seen before and they do not solve the problem. They are a step in the wrong direction. These amendments amount to a blank cheque allowing CREA and its members to create rules that could have even greater anti-competitive consequences.”
Before Monday’s approved changes, if you wanted to list your property for sale on MLS, you would have to employ an agent from the day of listing to the day of the final sale. As of Monday, you will be able to pay a flat fee to list on the MLS service. MLS is where 90% of all homes are sold. Costs for the flat fee service have not been determined as of yet but thoughts are that they will run you a few hundred dollars.
Agents will also be required to pass along phone numbers and other vital information, directly to an interested buyer if asked to do so. The buyer and seller will also be able to negotiate directly without the use of an agent. The changes are set to take effect as soon as possible across all boards in Canada but must be individually approved by each board. What do you think? Is this a step in the right direction or the wrong direction? Please comment below.
Growth boosts forecasts
Recent stronger than expected reports have economists changing their forecasts on the strength of the recovery. Recent numbers on manufacturing, retail sales and wholesale trade have shown a positive outlook and have the industry changing their own outlooks.
BMO raised its forecast for Canada’s first quarter gross domestic product (GDP) by 1% to 4.7% revised from the earlier forecast of 3.7%. It also believes that the economy will expand by 3.2% this year, up 0.2% from the 3% previously forecasted. Deputy chief economist Douglas Porter commented by saying, “With the housing sector almost back to pre-recession highs, employment recouping almost 40% of its recession losses and real retail spending and auto sales close to their highs, can we really call this a fragile recovery? It looks more and more V-shaped by the day.”
Canada’s economy went on a tear, coming back to life in the last quarter of 2009 when it expanded by 5% due to strength in the housing market, trade and consumer spending. Royal Bank of Canada also raised its forecast from 3.8% to 4.6%. Assistant chief economist Paul Ferley commented by saying, “In early 2010, it looks like the strong momentum is being maintained and that strength does look fairly broad based.” He did note that some trouble remains. His concern is the demand from trading partners, such as Europe and the U.S, is still in some trouble and may pose a risk to Canada.
The Bank of Canada (BoC) stated in the month of January that it expects the economy to expand 3.5% in the first quarter and 2.9% later this year. What do you think? Is this a V-shaped recovery? Are we out of the woodwork? Please comment below.
Worries of home prices & mortgage rates
A survey released on Wednesday showed that Canadians are concerned about rising home prices and rising interest rates. Although this has not stopped many from purchasing a home sooner or taking on more debt than they would like to.
According to a survey by BMO, 71% of future and current homeowners feel that home prices are too high. 33% have even complained about a lack of sleep due to the stresses of purchasing a new home. The feeling that housing prices may increase dramatically has led first time home buyers to feel the pressure of purchasing sooner. 33% state that the talk of rising interest rates has influenced them to enter the home market sooner.
Sal Guatieri, senior economist at BMO Capital Markets said, “Housing prices have risen 89% since 2002 and is vastly outpacing family income gains.” The Canadian Real Estate Association (CREA) released a report recently saying that the average price of all homes sold through the Multiple Listing Service (MLS) in the month of February was up 18.2% from a year earlier to $335 655.
Rising interest rates and the introduction of the Harmonized Sales Tax (HST) later this year is expected to help cool off the real estate market that is currently on fire. 64% of Canadians are expecting mortgage rates to rise over the next year and 66% of Canadians are feeling concerned about the higher interest rates. 84% of mortgage holders feel that they are doing a good job of paying down their mortgage but 49% feel that their mortgage balance should be a lot lower at this stage in their life. How do you feel about the outlook for interest rates? Please comment below.
Less EI claims
The number of new Employment Insurance (EI) claims has continued to decline and there are fewer Canadians receiving EI at the start of 2010. The number of people receiving EI has dropped to 698 800, which is a decrease of 6.4% from a year earlier. This is the fourth straight monthly decline seen adding to the notion that we are out of our recession. This number does not include people who have exhausted their EI benefits.
New claims also decreased as the economy gained steam at the end of 2009. The number of renewal and initial claims were also down to 239 100, which is a reduction of 7.8%. This decrease was seen in all provinces with the exception of Newfoundland and Labrador. The largest decrease was seen in Ontario.
Statistics Canada commented by saying, “The number of initial and renewal claims received has been on a downward trend since May of 2009, with declines in every province.” This caused the jobless rate to decline to 8.2% last month, which was a 10 month low. Employers are also recorded as adding jobs in the past five of seven months. This leaves 1.5 million Canadians still unemployed today.
The largest decreases in January’s numbers were seen in Ontario, British Columbia, Alberta and Quebec. The overall number of EI recipients is still 19.8% higher than a last year this time. How do you feel about the EI numbers? Please comment below.
Carney warns of higher interest rates
In a statement made this week from Bank of Canada (BoC) Governor Mark Carney, he has stated to Canadians that the low interest rate environment that we have been taking advantage of, is coming to an end by midsummer or sooner. He also stated that inflation and economic growth are both rising faster than they had expected. This leaves the gates wide open for a rise in interest rates from the BoC.
Carney did state that the central bank could raise interest rates sooner and may re-examine their stance if inflation starts to get out of control. Carney commented by saying, “The bank has an unwavering commitment to price stability. This means keeping inflation low, stable and predictable.”
If the BoC decides to raise interest rates, all the commercial banks will quickly follow suit and drive up borrowing costs for Canadians. This will slow economic expansion and cool inflation but will come with risks. If the BoC decides to raise interest rates too quickly, it may slow Canada’s current rebound from the recession. With inflation already on the rise, analysts are already speculating about whether or not the bank can afford to wait until July before raising interest rates. What do you think? Please comment below.
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