Canadian home builders scramble to meet demand

Garry Marr, Financial Post 

The Canadian housing market’s surprising turnaround is spreading to new home construction as developers scramble to respond to a supply shortage that has sent pricing soaring for existing homes.

But any increase in construction on the new home side will likely not surface fast enough to feed the demand for housing that continues to be spurred on by record low interest rates.

Canada Mortgage and Housing Corp. said Monday there were 157,300 units constructed last month on a seasonally adjusted annualized basis, a 5.4% increase from a month earlier. Annualized starts at dropped as low as 118,500 in April.

“There is not a lot of inventory around,” said Gary Friend, president of the Canadian Home Builders’ Association, adding his industry has been careful not to speculate. “We have to watch our Ps and Qs, as we try to meet this demand.”

Any increase in supply would be welcomed as a shortage of new listings has lead to a spike in prices. The Canadian Real Estate Association said last month existing home prices across the country were up 13.6% in September from a year ago as a supply problem was evident in almost every city.

The shortage has yet to ease despite the suggestion higher prices would coax homeowners to sell. This month the Toronto Real Estate Board reported sale prices in October were up 20% from a year ago.

“The existing homes market is in short supply so we’ve gone from a buyer’s market to seller’s market. The way it gets linked is you get some spillover into the new homes market and that’s starting to happen,” said Bob Dugan, chief economist with CMHC.

The agency has already upped its forecast for new home construction for 2010 from 150,300 to 164,900. Even at that level though, construction is still well off the 211,000 new starts recorded in 2008.

Paul Ferley, assistant chief economist with the Royal Bank of Canada, said “at the margins” new home construction could help ease the housing crunch. “Builders are aware and will contribute where they can to advance construction activity but no they can’t turn on a dime.”

gmarr@nationalpost.com

Optimism returns to Canadian businesses, confidence highest since 2007   By Julian Beltrame        OTTAWA — Canada’s business leaders are turning bullish about the economy after a year of doom and gloom, a new survey suggests.

The Conference Board of Canada’s fall business confidence survey finds corporate leaders believe the recession is finally over and that the economy will rebound in the next six months.

The mood of confidence is particularly strong considering that recent indicators, particularly gross domestic product data for July and August, were disappointing.

Yet 63 per cent of business leaders surveyed said they expect the economy to improve over the next half-year, as opposed to only seven per cent who thought it will deteriorate.

Significantly, about a year ago the responses were almost exactly reversed.

The 16-point surge in the fall survey brought the confidence index to 97.8, the highest level since 2007.

The survey of about 2,000 representative firms from across the country was conducted between Sept. 14 and Oct. 22.

“After a year of despondency, Canadian business leaders are sensing an end to the deepest recession in a generation,” the Conference Board said about the results.

“Respondents appear very encouraged by signs of nascent recovery. More than half the respondents believe the present is a good time to expand their stock of machinery and equipment.”

Despite the apparent optimism, business still said they were concerned about under-utilization in their production levels, with 29 per cent describing their operations as substantially below capacity.

As well, leaders said they were concerned about the impact a strong dollar will have on their sales, the still weak demand, and about the ease of obtaining financing.

But it is in the forward indicators that business leaders were decidedly optimistic.

Almost 61 per cent said they expected their financial position to improve in the next six months, and more than half expect better profitability.

As well, more than half said it was a good time to expand, with 16 per cent saying they expected to increase their level of capital spending by more than 20 per cent in the next six months.

The Conference Board’s survey is roughly in line with results obtained by the Bank of Canada in September. The central bank’s survey of businesses showed 69 per cent of large firms optimistic their sales would increase in the coming year, and 42 per cent saying they expected to shift to hiring.

Canada’s Quiet Economic Strength

CMHC forecasts continued new housing rebound

The Canadian Press

OTTAWA — The national housing agency is reporting that housing starts have started to recover and it expects the recovery to continue.

Canada Mortgage and Housing Corp. predicts starts will reach 141,900 this year and increase to 164,900 in 2010.

The CMHC’s fourth-quarter market outlook forecasts housing markets will continue to strengthen over the next year as economic conditions improve.

It says demand for existing homes has rebounded and both new and existing home markets are characterized by lower inventory levels.

However, the national housing agency says the strong pace of sales in the second and third quarters partly reflects delayed activity and is not likely to be sustained.

The CMHC says it expects the level of sales to move back closer in line with anticipated economic conditions.

It predicts existing home sales will reach 441,300 units in 2009 and increase to 445,150 units in 2010, while the average price is expected to be $312,950 in 2009 and $324,500 in 2010.

October 30, 2009

Q. What can the Bank of Canada do about the value of the dollar?

A. Usually the Bank can use monetary policy to impact the value of the dollar. But given that the bank rate is already as low as it can go; the Bank cannot use monetary policy to weaken the dollar. But the Bank can intervene directly in the FX market by buying American dollars and selling Canadian dollars. History suggests that such intervention can be useful—at least to a degree. So far, the Bank is not talking about it but if the dollar regains upward momentum in the near future, such an action from the Bank is a real possibility.

Q. Will rising real estate prices force the Bank of Canada to raise interest rates?

A. It is very clear that the recent increase in house prices in Canada reflects a dramatic improvement in affordability. But is it too much of a good thing? The problem with any kind of a bubble is that, in most cases, you know that it’s happening, but you are not sure what do about it. Some argue that the Bank of Canada should raise interest rates in order to make housing less affordable. While this policy makes sense in a booming economy, it does not make sense in an economy that is still trying to find its poles.

The Bank will not raise rates just to deal with the housing market while sacrificing the rest of the economy and risk an even stronger Canadian dollar. So what to do? So far, the Bank is doing nothing, with the hope that we are simply stealing activity from next year. If that is the case then there is no urgency to do anything at this point. But if in the coming six months, house prices continue to rise at current rates and the economy is still in an early recovery mode, the market will start speculating about some direct intervention by the Bank/government in the housing market by altering current regulations regarding insurance and securitization.

Q  How sustainable is the economic growth in the US in the last quarter

A. The 3.5% third quarter GDP growth in the US is clearly unsustainable. Most of the increase was temporary in nature and reflects government spending and a short-lived improvement in the auto sector. My focus at this point is on US business investment which is still falling. That is important given that integral element in formatting the market’s current view is that the Fed will start hiking rates in the second half of 2010 and by that time, business capital spending in the US will be rising by no less than 5% on an annual basis. Given that business spending has been a huge contributor to the US GDP recession, the timing of its rebound will be critical to the timing of a turn to monetary tightening.

The conventional wisdom was that the US recession in the past year was consumer-led, as opposed to the investment-led recession of 2001. But the reality is that the current slump in capital spending is, infact, steeper than the IT meltdown. Back then, the burst of the bubble meant a 12% drop in real capital spending over a two-year period. Currently, as of the third quarter of 2009, and only a year removed from its peak, capital spending is already down by no less than 20%, qualifying it as the steepest slump in business spending in the post-war era. Even as a share of GDP, capital spending is already down to the

Another misconception is that the current decline in US business spending is largely due to the weak state of the American commercial real estate market. But the reality is that, so far, the largest slump in spending was in the machinery and equipment category, which is now down by 21% since the beginning of the recession, compared to a 15% decline in the non-residential real estate component.

Note that the descent in non-residential investment began 6-8 months after spending on machinery and equipment started its nosedive. This suggests that the adjustment in non-residential real estate investment is still in its early stages. Add to it the high correlation of this business investment category with employment growth and the fact that the industrial vacancy rate is now at a dazzling 12%—a record high and a full five percentage points above levels that in the past signaled a recovery, and it becomes painfully clear that any hopes of a turnaround in non-residential real estate investment by mid-2010 are nothing more than wishful thinking.

So, the continuing decline in business investment next year will leave the market’s overall US economic growth expectations light on fuel. While talk in some quarters of a double-dip recession looks to be too gloomy given the huge stimulus still flowing next year, the long wait for a capital spending turn will keep overnight rates at highly stimulative levels for longer than the market now thinks.

Q. To what extent monetary and fiscal policies are coordinated?

A. Officially the Bank of Canada is independent, but it does not mean that it does not take fiscal policy into account while making decisions regarding interest rates. And given the fact that by 2011, fiscal policy will act as a negative for the economy as government will stop spending and start looking for ways to reduce the deficit, it is highly possible that this situation will work to postpone the first hiking move by the Bank, or at the minimum, limits the magnitude of the tightening cycle.

Canada’s economy still sputtering

October 30, 2009

OTTAWA —Canada’s economy unexpectedly went into reverse again in August, adding new uncertainty about the strength and sustainability of the recovery.

The country’s real gross domestic product slipped 0.1 per cent in August — the first outright decline in three months — in a broad set-back led by oil-and-gas extraction, mining, utilities, mining and manufacturing.

The markets reacted strongly to today’s news, led by the Canadian dollar’s one-cent dive to the mid-92-cent level.

Economists said the negative reading, after a flat July that was not revised upwards as some had hoped, will make it very difficult for the economy to match the Bank of Canada’s newest forecast announced last week that growth would average two per cent in the third quarter.

With only the September data remaining, it would take a massive bounce to meet the expectation.

If it’s a recovery, “it’s a pretty wimpy start of a recovery,” said Scotiabank senior economist Derek Holt.

With the strong dollar likely having cut into exports and boosted imports in September, Holt said it is not beyond the realm of possibility that the quarter as a whole could turn in a negative performance — which would mean the recession, technically, did not end.

“I don’t rule out a negative (reading) at all,” he said.

That is still not the base-case scenario envisioned by economists, however. Most, including Holt, believe the third quarter will show modest growth, but not enough to boost confidence and far behind the 3.5-per-cent pace set by the U.S. for the corresponding period.

The two-country comparison appears to support a report by the Canadian Centre for Policy Alternatives this week that argued the United States had done a far better job of rolling out stimulus spending than Ottawa. The report estimates the President Obama administration has outspent the Harper government seven-to-one so far.

About half of the gross domestic product jump in the U.S. during the third quarter was attributed to the wildly popular cash-for-clunkers program and government incentives for new home buyers, both of which have ended.

“We now put more hope in a strong quarter four, but there is no doubt that the Canadian economy has been slower out of the recessionary gate that we had initially expected,” said Meny Grauman, an economist with CIBC.

Grauman said the Bank of Canada is now likely to keep interest rates at the lowest practical level of 0.25 per cent until the end of 2010, well beyond the conditional commitment of next summer.

That changes the picture of the loonie going forward and puts into question earlier expectations it would reach parity by the end of the year, and possibly rise above next year.

The August fall-back was almost entirely due to continued weakness in the critical goods producing part of the economy, with consumer-generated activity remaining strong.

Oil-and-gas extraction fell 2.3 per cent, as maintenance work at some crude petroleum facilities on the East Coast slowed production. Natural gas production also retreated.

The output of the mining sector excluding oil and gas extraction declined 1.4 per cent.

Manufacturing activity decreased 0.7 per cent, with eight of the 21 major groups retreating. Wholesale declined 0.5 per cent, reflecting weakness in foreign and domestic demand.

Meanwhile, retail sales increased 0.3 per cent, the public sector advanced 0.4 per cent, construction gained 0.2 per cent, and the level of activity of real estate agents and brokers remained high for a third straight month.

The output of utilities also rose, 1.8 per cent, as natural-gas distribution and the production of electricity increased.

The Canadian Press

Globe and Mail Update Published on Monday, Oct. 19, 2009

While it’s tempting to think of a “housing correction” as a continent-wide phenomenon, National Bank Financial says the Canadian and U.S. markets couldn’t be more different.

“The two have absolutely nothing in common,” senior economist Marc Pinsonneault wrote in an economic update Monday. “In Canada, the correction got under way much later and lasted nowhere as long.”

Mr. Pinsonneault said “prudent lending practices” in Canada prevented the housing market from falling as hard as its American counterpart, and pointed out that Canada’s crisis was a side-effect of its recession rather than its cause.
Here are four ways the markets have differed:

Duration of slowdown
The Canadian market began to slide in October, 2008, while the American slump has lasted 2 1/2 years.

“People wishing to sell their homes either cut their asking price or quite simply took their property off the market,” he said of the Canadian market. “Lower interest rates, lower home prices and renewed consumer confidence led to a quick recovery in sales, so much so that as early as last May, these had surpassed pre-recession levels.

Price declines
According to Teranet, Canadian home prices fell 8.9 per cent from their August, 2008, highs to their recessionary lows eight months later. In the U.S., the S&P/Case Shiller index shows prices slid 33 per cent in 33 months.

Delinquency rates
Canadian banks have seen delinquency rates climb to 0.4 per cent, compared to the 0.65 per cent high reached in 1992. The number is far greater in the U.S., at 3.67 per cent.

Consumer spending
When home prices are under pressure, consumers tend to reel in the spending.
“According to Statistics Canada, from the end of Q3 2008 to mid-2009, the value of household real estate wealth sagged only 1.1 per cent,” he said. “The impact of this impoverishment on consumer spending has been negligible.”

In the U.S., the value of household real estate wealth dropped 18.2 per cent. The Federal Reserve estimates that for each dollar lost in housing wealth, consumer spending pulls back up to 15 cents.
Steve Ladurantaye

Bank of Canada maintains overnight rate target at 1/4 per cent and reiterates conditional commitment to hold current policy rate until the end of the second quarter of 2010

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.

Recent indicators point to the start of a global recovery from a deep, synchronous recession. Global economic and financial developments have been somewhat more favourable than expected at the time of the July Monetary Policy Report (MPR), although significant fragilities remain.

A recovery in economic activity is also under way in Canada. This resumption of growth is supported by monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence. However, heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures. The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July.

Given all of these factors, the Bank now projects that, relative to the July MPR, the composition of aggregate demand will shift further towards final domestic demand and away from net exports. Growth is expected to be slightly higher in the second half of this year than previously projected but to average slightly lower over the balance of the projection period. The Canadian economy is projected to grow by 3.0 per cent in 2010 and 3.3 per cent in 2011, after contracting by 2.4 per cent this year. This is a somewhat more modest recovery in Canada than the average of previous economic cycles.

The Bank now expects that the output gap will be closed in the third quarter of 2011, one quarter later than it had projected in July. Correspondingly, inflation is also expected to return to the 2 per cent target in the third quarter of 2011, one quarter later than in July’s projection.

While the underlying macroeconomic risks to the projection are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection are tilted slightly to the downside.

Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target. Consistent with this conditional commitment, the Bank will continue to conduct longer-term Purchase and Resale Agreements based on existing terms and conditions and according to the accompanying schedule: http://www.bankofcanada.ca/en/notices_fmd/2009/notice_fad201009.pdf.

In its conduct of monetary policy at low interest rates, the Bank retains considerable flexibility, consistent with the framework outlined in the April MPR.

Information note:
A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on Thursday, 22 October. The next scheduled date for announcing the overnight rate target is 8 December 2009.

Post Date: Tuesday, October 13, 2009

Most economists say recession is over and recovery is beginning

By Mae Anderson
NEW YORK — More than 80 per cent of economists believe the recession is over and an expansion has begun, but they expect the recovery will be slow as worries over unemployment and high federal debt persist.
That consensus comes from leading forecasters in a survey by the National Association for Business Economics released Monday.
“The survey found that the vast majority of business economists believe that the recession has ended but that the economic recovery is likely to be more moderate than those typically experienced following steep declines,” said association president-elect Lynn Reaser, chief economist at Point Loma Nazarene University.
The forecasters upgraded the economic outlook for the next several quarters, but cautioned that unemployment rates and the federal deficit are expected to remain high through the next year. Forecasters now expect the economy, as measured by gross domestic product, to advance at a 2.9 per cent pace in the second half of the year, after falling for four straight quarters for the first time on records dating to 1947. They expect a three per cent gain in 2010.
Still, the federal deficit has ballooned and the jobless rate is expected to lag behind, as employers remain cautious.
The unemployment rate rose to 9.8 per cent in September from 9.7 per cent, the Labour Department said earlier this month, the highest point in 26 years.
Forecasters expect the unemployment rate to continue to rise, to 10 per cent in the first quarter of next year, before edging down to 9.5 per cent by the end of 2010.
The recession, the worst since the 1930s, has eliminated a net total of 7.2 million jobs.
Worries about unemployment are likely to continue to constrain household spending. Personal consumption spending likely began rising in the second half of this year, but is expected to remain low in 2010. Still, Americans aren’t expected to save as much as they have in past decades. The savings rate is expected to be above the 2 per cent average of the past four years, but below the 9 per cent average in the 1970s and 1980s.
The housing recovery is one bright spot. Forecasters expect 2010 to be the first year since 2005 that the housing sector will contribute to overall growth. Home prices are expected to rise two per cent in 2010, but panellists do not believe that will stifle the housing recovery.
Inflation is expected to remain low due to the weak labour market and other factors. Thus, the association panel — which consists of 44 economists surveyed Sept. 2 through Sept. 24 — expects the federal funds rate to remain at its current record low near zero until late next spring, before a gradual rise begins.
“The good news is that this deep and long recession appears to be over, and with improving credit markets, the U.S. economy can return to solid growth next year without worry about rising inflation,” said Reaser.
The Associated Press