Wednesday, October 31, 2012

Canadian Monthly GDP Growth

The Canadian economy contracted 0.1 per cent in August, following 0.2 per cent growth in July. Declining industry output was registered mainly in the goods production sector due to weakness in mining and oil and gas extraction and manufacturing. Declines were also registered in utilities and construction. Output in the services sector was unchanged as increases in wholesale trade, transportation and the public sector were offset by declines in real estate activity, retail trade and finance and insurance.

Our updated third quarter GDP tracking estimate is currently reading just 1 per cent growth, in-line with the Bank of Canada's most recent forecast. Therefore, while the economy underperformed in the third quarter, that weakness was expected and so will not move the Bank off of its rate tightening bias.  We are forecasting that the Canadian economy will grow at a modest pace of about 2.0 per cent this year followed by 2.1 per cent growth in 2013.  This moderate growth and low inflation combined with lingering global economic uncertainty will continue to keep the Bank of Canada on hold until mid-to-late 2013.

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Friday, October 26, 2012

US Real GDP Growth

The US economy expanded at a 2 per cent pace in the third quarter of 2012, led by an increase in consumer spending and a nascent recovery in residential construction investment which jumped over 14 per cent in the third quarter. If sustained, the bounce back in housing could meaningfully spur the US economy over the next year.

However, lingering domestic and global uncertainty are holding back growth and negatively impacting business investment plans and manufacturing output. The biggest obstacle on the horizon for the US economy is dealing with over $700 billion in expiring tax cuts and deep reductions in government spending - the so called "fiscal cliff". Though some kind of deal is likely to be reached before the end of the year, the shape of which will be determined by the fast approaching Presidential election, the impact of the fiscal cliff is still expected to subtract 1-1.5 per cent off of US GDP growth in 2013. The implication for the BC economy is another year of sluggish growth in its largest trading partner, with the upside that resurgent US residential construction will give a welcome boost to the BC forest products sector.

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BC Home Sales Forecast to Grow in 2013

The British Columbia Real Estate Association (BCREA) released its 2012 Fourth Quarter Housing Forecast today.

BC Multiple Listing Service® (MLS®) residential sales are forecast to decline 9.8 per cent to 69,200 units this year, before increasing 8.3 per cent to 74,920 units in 2013. The fifteen-year average is 79,000 unit sales, while a record 106,300 MLS® residential sales were recorded in 2005.

"Despite stronger consumer demand in the interior, BC home sales will fall short of last year’s total,” said Cameron Muir, BCREA Chief Economist. “A moderating trend in Vancouver has recently been exacerbated by tighter high-ratio mortgage regulation. The resulting decline in purchasing power has squeezed some potential buyers out of the market. However, strong full-time employment growth, persistently low mortgage interest rates and an expanding population base point to more robust consumer demand in 2013."  

"While the average MLS® residential price is forecast to decline 7.6 per cent to $518,600 this year, the change is largely the result of luxury home sales returning to more normal levels after an unusually active 2011,” added Muir. In addition, the Lower Mainland’s share of provincial home sales is expected to decline to 57 per cent this year from 62 per cent in 2011.The average MLS® residential price in BC is forecast to edge up 0.7 per cent to $522,000 in 2013.

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Wednesday, October 24, 2012

Bank of Canada

The Bank of Canada once again opted to hold its target for the overnight rate at 1 per cent this morning. Interest rates have been held constant for over two years, the longest such period since the 1950s.  The Bank somewhat tempered its bias for higher future interest rates, including a softer statement regarding the appropriateness of a gradual withdrawal of monetary stimulus as excess supply in the economy is absorbed. In a bit of a surprise, the Bank actually raised its forecast for the growth in the Canadian economy this year to 2.2 per cent, but kept its 2013 forecast at 2.3 per cent growth. The Bank judges that at that pace of growth, the Canadian economy will return to full capacity by the end of 2013.

It is our view that monetary policy at the Bank of Canada will continue to be constrained by external events in the global economy and household debt growth at home. While the Bank's preference for tighter policy is clear, it is difficult to make a case for higher interest rates when core inflation is below the Bank's 2 per cent target and already slow economic growth is threatened by global uncertainty. Therefore, we are forecasting that the Bank of Canada will hold its target overnight rate at 1 per cent until mid-to-late 2013 when, conditioned on an improved global economic outlook,  it may test the water with a 25 basis point rate increase.

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Thursday, October 18, 2012

BCREA Housing Market Update (October 2012)

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Tighter Regulation Trims Home Sales

British Columbia Real Estate Association (BCREA) reports that the dollar volume of homes sold through the Multiple Listing Service® (MLS®) in BC declined 28.5 per cent to $2.2 billion in September compared to the same month last year. A total of 4,539 MLS® residential unit sales were recorded over the same period, down 24.3 per cent from September 2011. The average MLS® residential price was $494,213, down 5.6 per cent from a year ago.

“Stricter high-ratio mortgage regulation further exacerbated a moderating trend in consumer demand,” said Cameron Muir, BCREA Chief Economist. “Reducing the maximum amortization from 30 to 25 years had the equivalent impact to affordability as a 100 basis point increase in mortgage interest rates.”

“An expanding population, strong full-time employment growth and persistent low mortgage interest rates are expected to bolster housing demand in the months ahead,” added Muir.

Year-to-date, BC residential sales dollar volume declined 18.5 per cent to $28.4 billion, compared to the same period last year. Residential unit sales declined 10.6 per cent to 54,670 units, while the average MLS® residential price was 8.9 per cent lower at $519,289.

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Canadian home sales remain at lower levels in September

According to statistics released October 15, 2012  by The Canadian Real Estate Association (CREA), national resale housing activity rebounded slightly in September 2012, marking the first monthly increase since the spring. 

Home sales up 2.5% from August to September.
Actual (not seasonally adjusted) activity down 15.1% from September 2011.
Number of newly listed homes up 6.5% from August to September.
Market remains firmly in balanced territory, but conditions have eased.
National average home price up 1.1% on a year-over-year basis in September.
The MLS® HPI rose 3.9% in September, its smallest gain since May 2011.

The number of home sales processed through the MLS® Systems of real estate Boards and Associations in Canada rose 2.5 per cent on a month-over-month basis in September 2012. This marks the first monthly gain in activity since March 2012 and a partial recovery from the 6.2 per cent drop recorded in August in the wake of new mortgage rules.

Activity picked up in about 60 per cent of local markets in September, including Greater Vancouver, Calgary, Edmonton, Greater Toronto, and Quebec City.

Actual (not seasonally adjusted) activity nonetheless remained down 15.1 % from year-ago levels, with more than half of all local markets posting declines of at least 10 per cent.

“New mortgage rules continue to keep a lid on national sales activity,” said CREA President Wayne Moen. “That said, national figures mask diverging trends in different markets, with activity down in some places while sales elsewhere remain strong. As always, all real estate is local, so buyers and sellers should talk to their REALTOR® to understand how the housing market is shaping up where they live or might like to.”

“National activity is likely to remain down from year-ago levels over the fourth quarter of 2012,” said Gregory Klump, CREA’s Chief Economist. “In the shadow of the latest mortgage rule changes, activity has ratcheted down from higher levels seen during the fourth quarter last year. While some first time home buyers may no longer qualify for mortgage financing under the new rules, it is likely that many others are stepping back and reassessing how much house they can realistically afford, which is one of the things new mortgage rules were designed to do.”

National sales reached 110,376 units in the third quarter of 2012, down 6.5 per cent from the previous quarter. A total of 366,353 homes have traded hands over Canadian MLS® Systems so far this year, up one per cent from levels reported over the first nine months of 2011.

The number of newly listed homes rebounded by 6.5 per cent in September on a month-over-month basis after declines in each of the previous two months. Led by double-digit gains in Greater Toronto and Greater Vancouver, new supply was up in more than 60 per cent of all local markets in August, including most other large urban centres.

Calgary and Quebec City were the only two large markets where new listings eased in September, with declines of less than two per cent.

With the increase in new listings outstripping the increase in sales activity, the national housing market became further entrenched within balanced market territory in September.

The national sales-to-new listings ratio, a measure of market balance, stood at 49 per cent in September 2012, remaining near the midpoint of a balanced market. Based on a sales-to-new listings ratio of between 40 to 60 per cent, a little less than two thirds of all local markets were in balanced market territory in September.

The number of months of inventory is another important measure of balance between housing supply and demand. It represents the number of months it would take to sell current inventories at the current rate of sales activity. The small monthly rise in national sales activity resulted in a decline in the months of inventory to 6.4 months at the end of September compared to 6.6 months at the end of August. Months of inventory readings declined from the previous month in more than half of all local markets.

The actual (not seasonally adjusted) national average price for homes sold in September 2012 was $355,777, up 1.1 per cent from the same month last year.

The national average price continues to be influenced by compositional factors, most notably by fewer sales in Greater Vancouver this year compared to much stronger levels last year. The result has been a downwardly skewed national average price this year compared to an upwardly skewed average selling price last year.

Excluding Greater Vancouver (which currently accounts for less than five per cent of national activity) from the national average price calculation yields a year-over-year increase of 3.4 per cent, reflecting average sale prices that rose in 70 per cent of all local markets in September 2012.

Unlike average price, the MLS® Home Price Index (MLS® HPI) is not affected by changes in the mix of sales, so it provides the best gauge of Canadian home price trends.

The index tracks home price trends in some of Canada’s most active housing markets, including Greater Vancouver, the Fraser Valley, Calgary, Greater Toronto, and Greater Montreal. The MLS® HPI is also being developed for additional markets whose results will be included in the Aggregate Composite index. Each time an additional market joins the MLS® HPI, the Aggregate Composite index will be revised beginning with January 2005.

This month, Regina joins the Aggregate Composite MLS® HPI.

The Aggregate Composite MLS® HPI rose 3.9 per cent year-over-year in September 2012. This was the fifth time in as many months that the year-over-year gain shrank, and marks the slowest rate of increase since May 2011.

Year-over-year price gains decelerated for all Benchmark property types tracked by the index. The increase was strongest for one-storey single family homes (+5.7 per cent) and two-storey single family homes (+5 per cent). Prices for townhouse and apartment units continue to post more modest gains, rising 1.1 per cent and 1.5 per cent respectively.

The MLS® HPI rose fastest in Regina (14.2% year-over-year), which was the only market covered by the index in which price growth accelerated.

The MLS® HPI also climbed in Calgary (6.5%), Greater Toronto (5.7%), Greater Montreal (2.2%), and the Fraser Valley (2.1%). In Greater Vancouver, the MLS® HPI posted a 0.8 per cent year-over-year decline in September.
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Thursday, October 4, 2012


Multiple Listing Service® (MLS®) residential sales in British Columbia are forecast to edge back 4 per cent to 73,400 units in 2012. The decline is almost entirely the result of a 15 per cent decline in unit sales in Vancouver. However, tepid consumer demand in Vancouver is expected to be short-lived as strong full-time employment growth in the first half of the year, combined with persistently low mortgage interest rates, boost consumer confidence and unit sales in 2013. MLS® residential sales are forecast to climb 7.5 per cent to 78,900 units next year. 

Consumer demand has strengthened in the interior and northern markets, with MLS® residential sales forecast to increase 15 per cent in both the Okanagan Mainline and BC Northern board areas this year. Kamloops and South Okanagan are also expected to post stronger unit sales. Broad-based economic recovery and investment in major projects are driving home sales higher in many BC regions.
The supply of homes for sale is sufficient to meet demand in most BC regions, with many markets tilted in favour of buyers. Overall, home prices are expected to remain relatively stable in 2012 and through 2013, with changes in average price statistics largely the result of a differing mix of home types sold and shifting regional demand patterns. Average price data for Vancouver was skewed artificially high in 2011 by a wave of detached home sales in the priciest neighbourhoods. The anomaly isn’t being repeated this year, with average residential price statistics reflecting more typical regional mix and product share patterns. In addition, the Lower Mainland’s share of provincial home sales is expected to decline to 58 per cent this year from 62 per cent in 2011. 

BC housing starts are forecast to increase 1.5 per cent to 26,800 units this year. After climbing significantly in 2011, multiple starts are forecast to rise 2 per cent to 17,900 units this year and a further 3 per cent to 18,500 units in 2013. Moderating consumer demand in Vancouver during 2012 will limit the expansion of the housing stock through 2013 as builders and developers pay close attention to inventory levels.  

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Mortgage Rate Outlook

The biggest change to the mortgage market this year had nothing to do with mortgage rates, but rather with further changes to mortgage regulations. In June, the federal government announced a number of new regulations for the Canadian mortgage market, the most important of which was reducing the maximum insurable mortgage amortization period from 30 years to 25 years.

In lowering amortization from 30 years back to 25 years (the prevailing amortization period in 2004) the government has now completely undone its prior, and probably misguided, forays into the mortgage market. The change from 30 years to 25 year amortizations will have a fairly significant impact on monthly mortgage costs, similar to the impact of roughly 1 per cent increase in mortgage rates.

In order to offset the impact on consumer demand from stricter mortgage regulations, Banks and other lenders will likely keep mortgage rates low with perhaps more competitive discounting for homebuyers with strong credit histories. Moreover, ongoing uncertainty in the global economy will translate into a persistence of very low Canadian bond yields.

We forecast that the posted five-year mortgage rate will remain at 5.24 per cent for the balance of 2012 before gradually rising in 2013 to 5.85. Little change is expected to the 1-year rate over the next six months at 3.1 per cent, but it is expected to rise when the Bank of Canada raises interest rates in early to mid-2013.


Economic Outlook

Canadian economic growth remains challenged by a difficult global economy and lacklustre growth in the United States. Export growth through the first half of 2012 slowed and the overall trade balance (exports minus imports) was a drag on GDP for two consecutive quarters.

Moreover, there are signs that Canadian consumers are starting to slow their purchases due to modest job growth and elevated household debt. The accumulation of household debt in recent years, when combined with higher interest rates in the future, may cause a significant amount of consumer deleveraging over the medium-term. This will mean lower levels of consumer spending, particularly spending financed through home-equity loans and other forms of consumer credit. The Bank of Canada has estimated the required consumer deleveraging at nearly $50 billion or close to 3 per cent of Canadian GDP.

If such deleveraging is to take place, the burden of economic growth will need to shift from consumers to exporters and Canadian businesses in order to fill the gap left by a slower rate of consumer spending. While a slower rate of consumption will act as a drag on growth, the consequent reduction in household debt means that the economy should emerge even stronger and less vulnerable to external shocks. We forecast that growth in the Canadian economy will remain modest over the next two years, expanding 2 per cent this year and 2.2 per cent in 2013.


Interest Rate Outlook

The Bank of Canada remains caught in a delicate balancing act. The trajectory of the output gap and the stickiness of consumer prices would under normal conditions, and under conventional monetary economics (see adjacent chart), have pushed the Bank towards tightening interest rates. However, potential interest rate increases have been deferred by a near crisis environment in Europe, a stop-and-go US economy, and perhaps most importantly, the highly indebted position of Canadian households.

A slowing global economy and a high dollar continue to exert pressure on Canadian exporters. Furthermore, while the Bank has carefully communicated that US monetary policy will not determine Bank of Canada rate actions, the explicit stance of the US Federal Reserve to keep interest rates low past 2014 does somewhat constrain the Bank’s ability to raise interest rates without putting further upward pressure on the loonie and harming much needed export growth.

In terms of the domestic economy, the Bank has been consistently exhorting Canadian businesses to spend and households to save. In a best-case scenario, consumers would be deleveraging while businesses invested in productivity enhancing capital. This would facilitate a necessary shifting of the burden of growth from consumers to Canadian firms.

A scenario of consumer deleveraging paired with ramped-up business investment and export growth will require interest rates to remain low. That said, the Bank is also serious about maintaining its mandate of price stability and is increasingly indicating a desire to move rates off of historically low levels. Balancing these objectives will require a delicate fine-tuning of monetary policy which we expect to proceed cautiously, perhaps with a rate-tightening of 25 to 50 basis points beginning in early to mid-2013. This slight increase in interest rates would allow the Bank to signal to households that higher interest rates are on the horizon while still maintaining a substantial degree of monetary stimulus to encourage business investment.

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BCREA Housing Market Update (September 2012)

BC Real Estate Association (BCREA) Chief Economist Cameron Muir discusses the August 2012 statistics.

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