This weeks top stories include how factory sales are not meeting projections, how record high home sales have changed the outlook for 2009 and 2010, how the IMF tells Canada to keep its stimulus measures in place, the full picture on the Harmonized Sales Tax, how industrial profits have taken a large hit, how mortgage debt in Canada is on the rise, how Toronto home prices are surging, how inflation is above zero for the first time since May and how the banks decreased their fixed rate mortgage products.
Factory sales up but don’t meet predictions
September saw an increase in manufacturing sales through help from the automotive industry. Factory sales were up 1.4% during the month of September to $41.7 billion as reported by Statistics Canada. Manufacturing sales have been up in three of the last four months after declining to $38.5 billion during the month of May. Even with the recent gains that we have seen, sales were still 18.6% below the levels seen in September 2008.
Most of our manufacturing gains in the month of September were in the motor vehicles and motor vehicle parts industries. The durable goods industry did their part as well with fabricated and primary metals contributing to the increase. Motor vehicle sales were up 16.4% to $3.8 billion in the month of September which has been the highest level reached since the same time last year. Economists had previously predicted that factory sales would rise only 1.6% during the month and we are happy to say that they were wrong.
Millan Mulraine, economics strategist at TD securities, commented on the matter by saying, “In the months ahead, we expect the Canadian manufacturing sector to struggle as the combination of a strong domestic currency and weak global demand for Canadian goods dampen sales.”
Last week saw Statistics Canada report stronger than expected total exports for the month of September as the country’s trade deficit fell to $927 million during the month. This had analysts saying that the resurgence in exports is pointing to a much anticipated economic recovery for the country. Canada saw a slight increase in exports to the U.S with shipments of goods to other countries rising by a whopping 12.4% in September.
Record high sales change outlook
October saw home sales hit new record highs and has the Canadian Real Estate Association (CREA) increasing its outlook for 2009 and 2010. Resale activity increased 41.5% last month and reached a total of 42 288 units. On a seasonally adjusted basis, homes sold on the Multiple Listing Service (MLS) totaled 45 818 units for the month of October.
Low interest rates and an increase in consumer confidence are continuing to release the pent up demand that built over the latter part of last year and earlier this year. The release of that demand has increased national sales activity to new heights and is eating up inventory.
“We expect the recent strong gains in the housing market to remain largely intact, though we suspect that the back to back double digit advance in sales seen earlier this year may not be repeated.” those were the words from TD’s economics strategist Millan Mulraine.
In a reflection of the strong performance seen in the last month, CREA has increased its forecast for sales in 2009 to 460 200 units which is up 6.6%. They went on to increase the forecast for 2010 with the expectation that sales would reach 492 300 units or up 7%. Average home prices were also up in October reaching a new high of $341 079 which was up an astounding 20.7% from a year ago the same time. A separate measure of Canada’s major markets showed the average housing price up to $373 095 or 22.1%.
This sharp increase in housing demand is taking a bite out of inventories with only 194 994 homes listed for sale in Canada at the end of October. This leaves the number of listings 20.8% below the peak reached October of last year.
This was the sixth month in a row where inventories have fallen well below last years levels. The supply is now only at 4.1 months on a seasonally adjusted basis and is currently at the lowest level seen in more than two years. New monthly records were set in Toronto, Montreal and Ottawa in the month of October for cities with British Columbia, Quebec and Ontario setting new records provincially.
Canada told to keep stimulus in place
The International Monetary Fund (IMF) stated last week that Canada’s economic outlook is improving and that although Canada’s fiscal position is strong, the recovery could be derailed if our currency keeps extending at the recent rally that we have seen. The IMF encouraged the Canadian government and the central bank to keep stimulus policies in place until a recovery is firmly established.
Charles Kramer, IMF mission chief to Canada, stated, “Now is definitely not the time for exit. Now is the time for stimulus. The stimulus needs to be maintained while there are risks in the outlook.” Mr. Kramer said that authorities need to communicate their strategy for unwinding stimulus properly in order to instill confidence that the withdrawal will be smooth.
The recent improvements to the Canadian economy were largely due to a global recovery and aided through fiscal stimulus and monetary easing during the recent downturn. Risks still include weaker than expected growth and further gains on the Canadian dollar which is up more than 23% from the lows seen in March of this year. This took a toll on manufacturers and exporters alike and contributed to the 0.1% decline in the month of August’s gross domestic product (GDP) which left much doubt about whether or not we were really out of the recession.
The government is now forecasting a deficit of $55.9 billion for the current fiscal year which is up form the $5.8 billion deficit seen in the 2008-2009 year. Canada’s deficit and Debt-to-GDP ratios are low when compared to the U.S. and other western countries which leaves room for a response if the economy see’s another decline. Mr. Kramer stated, “In the event there was a shock of whatever type that put some downward pressure on growth, certainly Canada would be well positioned to participate in additional stimulus in concert with other countries.” What do you think? Please comment below.
HST the full picture
This Monday saw the introduction of a controversial legislation to harmonize the 5% federal GST with the 8% provincial sales tax. The legislation included cuts to income, corporate and small business taxes with a rebate of up to $1000 for families to offset the HST. The HST will add 8% to a list of items that are currently exempt from the provincial sales tax.
Finance Minister Dwight Duncan said that the harmonization is intended to make Ontario businesses more competitive by lowering their taxes. “Right now, there’s a hidden tax as businesses pay tax on tax. This unbuttons that, puts the money back into their pockets. They in turn hire people and also lower prices.”
Critics are livid, pointing out that businesses may not pass on their tax savings by lowering prices. The government insists that the competition will lead to lower prices, as it has done in other places that have harmonized the sales tax.
The expectation is that more than $1.1 billion annually in personal income tax relief will be attained from a 16.5% cut on the first $37 000 of taxable income. Individuals and families that earn up to $80 000 will see a personal income tax cut of 10%. The small business tax rate will be cut from 5.5% to 4.5% and the 4.25% small business surtax will become a thing of the past. There are also plans to change the general corporate tax rate from 14% down to 12% and further down to 10% over three years. The rate on manufacturing, resource and processing sectors will also be cut from 12% down to 10%.
The province had commissioned a study that concluded its change to taxes will create roughly 600 000 jobs over the next ten years. The National Citizens Coalition estimated that the HST will cost the average tax payer up to $1000 more a year and has taken a stance on the matter, vowing to fight the move. The New Democrats feel that the HST will drive up the prices for consumers on a slew of everyday items while providing corporations with a big tax break. NDP Leader Andrea Horwath said, “There’s no doubt that people see this as an unfair tax because it creates a burden on people and it’s unfair because, at the time when the little guy is struggling, big corporations are going to get a huge tax giveaway.” Although I usually stay partial on political views, Andrea really summed it up concisely on this one. What do you think? How do you feel? Please comment below.
Industrial profits take a hit
Canada’s economy has been showing signs of a tepid recovery but most industries are still experiencing financial trouble. The Conference Board released a report this week that says profits are expected to fall more than 20% this year in most of the six industries monitored by the company and include such sectors as food services, transportation, wholesale and retail.
Profitability has been effected by lower demand and a pressure to bring down prices. The study also noted that wholesale and transportation profits have fallen 29% to only $5.2 billion as lower demand for global trade and manufacturing production take their toll. Retail has also suffered from weaker demand and price cuts which have eaten into profits by 32% to a meager $8.6 billion.
On the brighter side of things, food and beverage manufacturing have held their own through the recession with food demand holding steady and exports rising despite the strength of the loonie.
Mortgage debt up in Canada
This week and last saw major players in the mortgage industry come forth against consumers over extending themselves when it comes to mortgage debt. Their stance is that consumers should be prudent when taking on household debt as Canadian gain an appetite for risk by taking on longer mortgage terms and extend themselves to the maximum amounts allowed. A survey released on Monday of this week from the Canadian Association of Accredited Mortgage Professionals (CAAMP) provided numbers that shows 18% of mortgages are long term when compared to 16% a year earlier and only 9% in 2007.
If consumers stretch themselves too far they could face major problems down the road. This is the general consensus with industry professionals being concerned that consumers are buying more expensive properties than they normally would and loading up excessively on debt due to the artificially low interest rates. Consumers will be in for a real shock when renewal time comes up in a couple of years and the mortgage rates are at 6%, 7% or maybe even 8%.
The average mortgage interest rate reported through the study was 4.55% down from the 5.41% that was seen at last year’s time of study. In all reality, with the rates so low, they have nowhere to go but up. Last week we had Peter Aceto, CEO of ING Direct Canada, say almost the same thing as he was concerned that consumers were using longer amortizations to get a foot in the market. Most consumers take five year fixed rate mortgages which insulates them from short term risk but if the economy falters, the long term risk to those consumers could easily have them losing their homes a couple of years down the road.
Canadians have never been more optimistic about buying into a house as they are now. 40% of Canadians are expecting that housing prices will increase which is up from last years 18% that felt home prices would increase. Continuing optimism in the market has prompted the Canadian Real Estate Association (CREA) to upgrade its outlook for 2009 and 2010. The new sales forecast puts activity on par with levels seen during 2004 but still below the peaks seen from 2005 – 2007.
Toronto home prices surge
The first half of November saw existing home sales in the Toronto area up 84% when compared with the same time last year. Figures released by the Toronto Real Estate Board (TREB) this Wednesday showed that the average price of a home in Toronto was also up by 10% year over year to $415 066. The recent gains seen in the market are mind boggling when compared to the numbers seen last fall when the economic downturn had started.
TREB president, Tom Lebour, commented on the numbers by saying, “It is important to point out that we are now making comparisons to the fall of 2008 when we experienced a market decline in sales and average prices.” Average sales prices in the city of Toronto have now reached $441893 when compared to last years average sale price of $400 305. In comparison, the 905 region also saw an increase in average sales prices of homes which are now at $395 195 and were at $358 130 the same time last year.
Inflation jumps above zero
Wednesday had Statistics Canada speak on a long overdue correction to the negative inflation rate that we had witnessed for majority of this year. Canada is no longer experiencing a period of negative inflation as the annual inflation rate jumped a full point and edged above the zero marker at 0.1% in the month of October. This reverses the previous situation where overall prices were lower than they were a year earlier, a phenomenon that we have been witnessing since May of this year. It is now highly unlikely that inflation will fall below zero again for many years to come.
Canada’s negative inflation situation was not a threat to the Canadian economy as it was based solely on the one circumstance of high gasoline prices seen last year. The correction for this began in October, as the gap between this year’s gas prices and the previous year came closer together from 23% to 13.1%. Taking energy prices out of the picture, Canada’s annual inflation rate should sit at 1.4%.
Statistics Canada stated that six out of eight major components it uses to measure inflation came in higher last month than a year ago. This includes clothing, food, household operations and furnishings, personal and health care, recreation, alcohol and tobacco. Food is still a main driver for higher inflation with prices up 2.3% this October from the same time last year.
Transportation costs saw a decline of 3.1% due to lower gas prices and a 4.1% decrease in the cost of vehicles. Shelter costs also fell 1.6% due mainly to a decrease in the cost of natural gas and other fuels as well as lower costs for housing and low mortgage rates. The Bank of Canada’s (BoC) core inflation rate was up to 1.8% from 1.5% which brings the BoC near their 2% target rate. Below you will find a list of some daily items that have gone up in price from the same time last year.
Fast food and takeout restaurants (+3%), Processed meat (+2.9%), Fresh or frozen fish (+9.9%), Ice cream (+5.2%), Bananas (+12.9%), Canned vegetables (+12.5%), Property taxes (+4.3%), Homeowners maintenance and repairs (+7.2%), Child care (+4.3%), Pet food and supplies (+11%), Prescribed medicine (+4%), Tuition fees (+4.1%), Newspapers (+6.4%)
Here are a few items that cost less this year than they did last year
Flour (-6.9%), Apples (-18.1%), Potatoes (-9.2%), Mortgage interest costs (-3.1%), Natural gas (-30.3%), Fuel oil (-29.4%), Traveler accommodation (-3.4%), Gasoline (-13.1%), Buying a vehicle (-4.1%), Inter-city transport by rail or highway bus (-1.6%).
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Banks decrease fixed rate mortgages
Canada’s big banks cut their fixed rate mortgage products this week starting with their posted rates which are down by 0.25% or 25 Basis Points (Bps). The Royal Bank of Canada lead the way for the cuts as it reduced its rates for one, two and three year mortgages by 0.2% or 20 Bps effective yesterday. As Canada’s largest bank they decided to cut their 5 year fixed mortgage rates by 0.15% or 15 Bps to 5.59% on their available posted rate.
The Bank of Montreal followed suit by cutting nearly all of their posted rates including their one and ten year fixed rates by 0.25% or 25 Bps. They also dropped their five year closed mortgage rate by 19 Bps or 0.19% to a rate of 5.59%. The Toronto Dominion Bank also cut its five year fixed mortgage rate by 15 Bps or 0.15% down to 5.63%. These changes are a reflection of lower interest rates available on the bond market which is where banks raise money to finance mortgage lending. The banks did keep their variable closed mortgage rates in line with the rest of the industry staying unchanged at prime.
If you are looking for a fixed rate mortgage give me a call. Today our best 5 year fixed rate mortgage is at 4.15% and our best variable product is the 3 year variable at Prime – 0.25% or 25 Bps which comes in at 2% today. To find out more about rates and products that we offer click here for my contact information.
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Amazing as always