This week’s top stories include how the Bank of Canada states that the recession is coming to an end, how Canada’s GDP is out of the red, how Ottawa is scrutinizing mortgage brokers, how Flaherty chooses himself as the authority on banking oversight, how the HST will trigger a mini boom in the housing market, how Quebec is recovering better than other provinces, how Canada survived the recession better but won’t be the first one out, how Canada’s housing market is expected to make a strong rebound and how Toronto home sales are up again.
Bank of Canada states the recession is coming to an end
The current recession is the deepest recession since the Second World War and has ripped through our economy leaving 369 000 people without jobs and wiped away almost $40 billion of wealth. It has governments spending tens of billions of dollars and co-inciding stimulus spending to hold off a depression. This has finally come to a quick end as the Bank of Canada (BoC) indicated last Thursday that the recession has winded down. The BoC governor, Mark Carney, expects Canada to generate positive economic growth in the July to September quarter of this year and will mark the official end to the recession. Mr. Carney went on to state that it is early and there is a long road ahead of us but that things are unfolding even faster than they had previously expected in terms of the confidence in financial conditions. Analysts feel that the banks outlook shows how resilient the Canadian economy has proven to be during this global recession. The recession has forced governments from around the world to work in a co-ordinated fashion to inject trillions into economies and keep the financial system afloat as they prevent another depression from taking place. Canada was one of the few countries with an upper hand as we benefited from a banking system that was healthier than its industrialized peers and has a vast array of natural resources that the emerging economies of the world covet. This leads the way for the impact of federal and provincial government funding of infrastructure to take effect next year. The predictions are that, when it’s all said and done, Canada’s economic output will have dropped 3% from the previous peak before the recession began. That converts to a loss of $40 billion dollars in wealth which is still considerably less than the recession of the 1980′s, 4.9% output, and the 1990s, 3.5% output, but is also concentrated in a shorter span of time. Carney went on to state that we will not see the levels of activity, that we saw before the recession, until the middle of 2010 and to expect further rises in unemployment even though the economy has started to grow. We currently are running a three quarter recession where the 1980s saw a six quarter recession and the 1990s saw a downturn of eight quarters.
Canada’s GDP out of the red
June of this year saw the first signs of growth that Canada has seen in the last 11 months. Gross Domestic Product increased 0.1% in June, from the month of May, and was led by wholesalers, real estate agents and drillers of gas and oil. During the second quarter, GDP contracted at an annual rate of 3.4% compared with the contraction of 6.1% seen during the first three months of the year. The previous prediction was that GDP would contract at an annual rate of 3.5% in the second quarter and see an expansion of 1.3% in the third quarter. Now Mark Carney is saying that it will be a minimum of a year before the economy begins to expand at a pace that would cause concern over inflation. The recession has been deeper than originally thought but June’s real GDP number suggests that the recession has finally ended in June. Markets are proof as the gas and oil extraction sector has increased their output by 1.3% in June and commodity prices are on the rise. Wholesale trade also saw an increase of 1.3% in June while service producing industries gained 0.4% after generating zero growth in May. Exports of goods and services, considered more than 1/3 of Canada’s $1.3 trillion GDP, was down 5.2% in the second quarter after declining 8.7% in the first three months of 2009. With good signs of a recovery in the U.S and loads of government stimulus spending in China, economists expect Canada’s trade to pick up for the rest of 2009. What do you think? Please comment below.
Ottawa to scrutinize mortgage brokers
Finally the day has come. The federal privacy commissioner is auditing mortgage brokers due to concerns over the security of personal information of clients. The audit, which began this month, will look into the potential misuse of client’s information to carry out fraud. This has become a concerning issue as it was part of the basis for the subprime mortgage crisis which pushed brokers to request even more documentation and information from clients. Although the audit is still in the early stages, we do not know what practices within the industry that this audit may uncover. Canada’s broker channel is made up of over 16 000 brokers that are responsible for roughly 30% of the mortgage activity in Canada, this from the Canadian Association of Accredited Mortgage Professionals (CAAMP). Independent mortgage brokers and agents are subject to provincial laws and the standards governing the mortgage industry across Canada vary from province to province. Ontario recently tightened the standards of education for licensing while B.C and Alberta require a certain level of training. Manitoba introduced legislation in April that requires mortgage brokers to be licensed. Most brokerage firms have tight procedures and policies in place to deal with safeguarding client’s data as well as fraud avoidance. Privacy laws are so strict that there have been times where brokers couldn’t even share data with the police on cases they were working on. The privacy commissioner’s probe is much needed as it will continue to wean out all the bad brokers and tighten down on industry standards clearing way for the rest of us to have untarnished reputations. The Financial Services Commission of Ontario (FSCO) is responsible for the oversight of mortgage brokers in Ontario and recently stated that there were a number of complaints from mortgage brokers regarding fraudulent activities by their mortgage agents. The downfall is that this industry requires quite a bit of personal information to complete a mortgage transaction and is a high target for criminals looking to acquire that information. The privacy commissioner’s office has received 15 notifications of privacy breach in the GTA and has plans to target a handful of franchises in the area during its audit. Since Ontario’s new legislation took effect July 1, 2008, FSCO has conducted 68 investigations into the issuing of mortgage brokers/agents licenses and two investigations into unlicensed mortgage brokerage activities. It has also denied or revoked more than 25 licenses. The privacy commissioner’s audit is being conducted under the Personal Information Protection and Electronic Documents Act which governs how the private sector, including mortgage brokerages, must protect consumer’s data.
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Flaherty chooses Flaherty as authority on banking oversight
Finance Minister Jim Flaherty has been in the spotlight for the last six months as he ponders whom he will entrust with the responsibility of overseeing Canada’s financial system. Well the wait is up and guess who he chose, himself. As countries, including the U.S, are debating whether or not to provide more authority to central banks and other regulatory agencies, Flaherty stated that he will stick with his current approach to systemic oversight. This decision means a previous grouping of senior officials, the Financial Institutions Supervisory Committee, will be brought forth as Canada goes on to respond to the pledge of the federal government and the Group of 20 made to prevent regulatory failings that aided in the financial crisis. Flaherty went on to state that even though unelected public servants will play pivotal roles, the responsibility of ensuring that Canada stays out of financial trouble will rest with him. He also stated “The Minister of Finance, supported by the Department of Finance, has ultimate responsibility for the financial system and authority for all financial sector legislation. It is our job to ensure effective co-ordination of all pillars, and that a balance of non-overlapping responsibilities is maintained.” Flaherty’s point on accountability is important as a major weakness in the current regulatory structures is that they lack clarity over who is responsible for safeguarding the entire system. The agreed upon theory is that the credit crisis in the U.S could have been avoided if a central authority had seen the danger poised by the aggressive selling of securities backed by complex financial products such as subprime loans. Although the financial institutions were able to satisfy the regulators that their books were sound, better macro prudential oversight may have noticed how the sale of those assets was building the financial system on damaged pillars and stopped the selling of those products before disaster had struck. With this came the introduction of the Financial Institutions Supervisory Committee (FISC). FISC is chaired by the superintendant of financial institutions, Julie Dickonson, but the minister hasn’t decided whether she would continue to lead the committee. FISC also includes BoC Governor Mark Carney, Canada Deposit Insurance Corp. chairman Bryan Davies, deputy finance minister Michael Horgan, and Financial Consumer Agency commissioner Ursula Menke. The committee’s role is to collectively identify and correct weaknesses in a timely fashion and stop problems before they become crises in the financial system. The only real question is if Carney is busy setting monetary policies, will taking on an official regulatory role serve as a distraction from his current responsibilities?
Predictions that HST will trigger a mini boom in housing market
Any home purchase after July 1, 2010 will be subject to the proposed Harmonized Sales Tax but will it effect you? If you are planning to purchase a home priced $400 000 or less, the new tax should not effect you much, and this is due to a rebate of 75% of the provincial tax portion. If your purchase is above that, be prepared to pay significantly more. When looking at a $600 000 property, you will be paying an extra $12 000 in tax more than you currently would. The suggested rebate will only apply to principal residences so ski chalets, cottages, secondary properties and rentals will be subject to the full additional 8% tax. If you close before June 30th of next year you will only be paying GST on your purchase but if your closing is delayed for any which reason, you will be subject to the full tax of 13%. If you are looking to purchase, your agreement should specify whether you or the builder will pay the tax in the event of a delay. There may also be large potential for material change to condominium budgets for condo’s currently marketed but closing after the July 1st deadline. The impact of this tax could increase an individual’s budget beyond an acceptable level and could result in such a material change that the purchaser could very well walk away from their deal. Looking at other provinces that have adopted the blended tax, home sales will be effected for roughly three years before the market will return to normal conditions. Anyone planning on purchasing a home over the $400 000 marker should move up their plans and purchase now and builders should try and beef up their inventory to capitalize on a pre-HST sales rush. The government considers that the HST will make it easier for corporations to file taxes and may even help stimulate the economy as their will be a rush of purchases before the effective date. More sales equal more houses required which converts into more jobs as new home sales are currently weaker than they could be. People intending to purchase after the July 1st deadline will still do so but will likely look at smaller homes or smaller condo’s than they originally intended to purchase. When looking financially at the tax, housing is considered to be an investment good and other investment goods such as stocks are not taxed. The governments prospective is that the tax will raise $375 million in tax revenues a year from new home sales and another $765 million from the renovation sector. That is $1.1 billion a year just from the new tax. The downfall is that the renovation sector will be so hard hit from the tax that people will look to non legitimate contractors to provide renovations and cause the underground work for cash economy to flourish. This means less premiums paid to WSIB and a reason for the underground cash economy to expand. Although the HST still hasn’t received legislative approval, the consensus across the board is that it will become law. How do you feel about the HST? Please comment below.
Quebec recovering better than other provinces
A recent report showed that Quebec is emerging from the global recession at a better pace than other Canadian provinces, including Alberta, British Columbia and Ontario. Although these other provinces are considered to be the financial hubs of Canada, Quebec has avoided the worst and will return to growth later this year. The return to growth will mark the end of the recession for Quebec which was considerably weak and short when compared to previous recessions. The steady performance of the province was held up through a stable housing market and a lack of dependency on the automotive sector. Quebec relied more on its robust goods producing industries such as pharmaceuticals and aerospace to carry them through the recession. Quebec also differs greatly from the other provinces as it is far less reliant on resources to aid the economy. The province also came out on top due to billions that were invested in infrastructure programs which were already underway when the recession took place. This kept people working and the jobs flowing right through the recession. Quebec will still have obstacles to deal with when looking at its longer term challenges such as an aging workforce, increased international competition, and a large budget deficit in the coming years. Does this mean that they really faired that well? A good position now doesn’t necessarily mean a good position later. What do you think? Please comment below.
Canada survived better but won’t be out first
Although majority of what you have been hearing is that Canada will lead the world out of the current recession, it is untrue. Canada is now behind the advanced economies in Gross Domestic Product (GDP) growth which is currently the most reliable way to measure an economies health. Output in Canada, between the months of April and June, shrank 3.4% which is the worst performance amongst all of the G7 countries. Economists are forecasting that the U.S will outpace Canadian growth for the remainder of the year as new figures show that production is increasing quickly south of the border. Douglas Porter of BMO Capital Markets stated, “Canada has held up far better throughout and will continue to but the story is that our weakness in the exports sector is the great equalizer. The huge divide between Canada and the U.S. was on the net export side in the second quarter and part of that weakness in U.S. spending hit our exports, and the high Canadian dollar hit our exports.” During the second quarter of this year, Canada’s domestic economy performed better than expected as consumer spending increased 1.8% and was led by a 19% increase in auto sales and a 6.2% increase in home investments. While those numbers showed some positivity, exports declined for the seventh straight quarter with a decline of almost 30% in a two year time frame. The goods sector of our economy declined 11.1% between the months of April and June alone as manufacturing took a large hit of 16.4%. When looking at the larger picture, things are not all bad. It’s true that the rest of the world is coming out of the recession earlier but the rest of the world also went into the recession sooner and fell further than Canada. Although our economy shrank 3.3% during the 11 month downturn, we still came out on top when compared to other countries. Japan’s economy shrank 6.5%, Europe shrank by 4.7% and the U.S. contracted by 3.9% leaving Canada’s 3.3% not looking that bad. Canada’s job losses are not large in comparison to the rest of the world as we lost half the jobs that were lost in the U.S. when factoring in the disparity in populations. The U.S. economy also has benefited more from government intervention than Canada as the size of stimulus spending was greater south of the border and the money entered the economy at a quicker pace than our stimulus did. The numbers may not be so hot right now but there are expectations that Canada will outgrow the U.S. by the end of next year.
Canada housing market to make a strong comeback
The housing market in Canada is expected to see some spectacular numbers with a strong rebound projected for the remainder of this year and well into 2010. Canada Mortgage and Housing Corporation (CMHC) stated that housing starts are expected to reach 141 900 this year and increase to 150 300 in 2010. Bob Dugan, CMHC’s chief economist, stated “Improving activity on the resale market and lower inventory levels in both the new and existing home markets are expected to prompt builders to increase residential construction.” He also said “economic uncertainty and lower levels of employment tempered new housing construction in the first half of this year. In the second half of 2009 and in 2010, we expect housing markets across Canada to strengthen.” CMHC also stated that existing home sales have rebounded strongly since January and will reach a total of 420 700 units in 2009 and 419 400 units next year. They also commented that the average sales prices will be down slightly for the remainder of the year at $301 400 before we see an increase to $306 300 in 2010. One thing is for sure, the market is definitely on fire right now.
Toronto home sales up again
In another shocker to most real estate agents and mortgage brokers, Toronto home sales surpassed analyst’s expectations yet again. The Toronto Real Estate Board (TREB) has reported 8035 sales in the month of August which is up 27% from the same time last year. The increase was not just seen in sales as average prices were up 6% to $382 921 in August. TREB president Tom Lebour commented, “The increase in demand for existing homes has been widespread across different housing types and price ranges.” As August came to a close the year to date sales were up 2% over the first eight months of last year. August represents the fourth consecutive month of year over year increases in sales as the Toronto market continues to gain strength during its current turnaround. Part of the recovery is the lack of active listings available on the market as listings are down 37% when compared to the same time last year. Analysts are urging people to make a move on the market as higher interest rates are just around the corner and will put a significant damper on the current demand for real estate.
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