Economics Analysis
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TD Special Report on Canadian Housing
Highlights
· Speculation by homebuyers drove house prices beyond levels justified by fundamentals and induced an excess of new housing relative to sustainable levels – particularly on Canada’s prairies.
· Affordability eroded severely over the last two years, demonstrating an unsustainable disconnect between house prices and incomes that was due for a correction.
· Inventories of singles have burgeoned in western markets and unsold multiples are at worrying levels in Québec. The historically elevated construction of condos in Toronto and Vancouver mean that these cities’ inventories will spike during 2009 and only alleviate slightly during 2010.
· The cyclical downturn will depress housing demand during 2009, but recent overbuilding will prevent a quick recovery. In particular, as migration ebbs to the prairies, residential construction will experience a protracted slump.
- However, Canada will not experience a U.S.-style housing crash, owing to less overbuilding and more conservative lending institutions.
April 09 TD report Exec (PDF)
April 09 TD report (PDF)
Banks begin to decline federal aid in first sign of recovery
Credit conditions easing, banks no longer struggling to raise funds to make loans
From Tuesday's Globe and Mail
March 17, 2009 at 2:00 AM EDT
Canadian banks are turning down some of the funding that the government is making available to them, a sign that they are recuperating from the financial crisis.
The banks have stopped selling the government the full amount of mortgages they could under Ottawa's $125-billion mortgage purchase program, the centerpiece of the federal government's plan to help the industry.
�We actually don't need a lot of funding right now,� a senior banker at one of the big five banks said yesterday. �All of the Canadian banks are pretty flush right now with cash.�
That's not to suggest they aren't facing problems, with consumers increasingly losing their jobs and unable to pay off their debts. But the banks are no longer struggling to raise funds to make loans � at least for now.
Credit conditions for Canadian banks have improved since late last year, as Canadians jittery about the stock market have left more of their money in bank accounts, giving them a ready pot of cash to fuel lending. At the same time, global credit markets have eased slightly as central banks have pumped billions of dollars into the financial system.
Federal Finance Minister Jim Flaherty announced the creation of the mortgage purchase program in early October, when it was extremely difficult for banks around the world to fund their lending operations.
He originally said�Ottawa�would buy up to $25-billion of mortgages from the banks, through Canada Mortgage and Housing Corp., to free up capacity for them to make new loans.
The purchases take place in periodic auctions that actually turn a profit for the government. Ottawa tells the industry how much it is willing to buy � for instance, $5-billion worth of mortgages held by the banks on their balance sheets � and then the banks each say how much they would be willing to pay, in the form of interest, to sell mortgages to the government. CMHC accepts the most profitable bids.
Bankers have been griping that the program, which is projected to earn billions of dollars for�Ottawa, is expensive. But until last month, that hadn't stopped them from selling all of the mortgages that they could into it, and pressing Mr. Flaherty to buy even more. Well into the new year, banks continued to have trouble raising medium-term funds.
Ottawa�boosted the size of the program twice, most recently announcing in the federal budget that it would buy a total of up to $125-billion worth of mortgages. The program has been successful in leading to a reduction in mortgage rates for Canadians, with banks passing on their lower funding costs.
But in the last couple of auctions, the banks have not sold the full amount of mortgages�Ottawa�was willing to buy. The most recent one took place on March 11, when CMHC told the banks it would buy up to $4-billion worth. Banks sold it about half that, $2.1-billion.
That followed the Feb. 20 auction, when banks sold CMHC $2.3-billion worth after it said it would buy up to $7-billion from them.
There are a couple of reasons why the banks have lost some of their appetite for the government aid.
More Canadians are pulling their cash out of mutual funds and riskier investments and parking it in deposits, such as chequing accounts and GICs. Deposits are the largest source of funding for the banks. If stock markets recover, and customers shift their money back into mutual funds and equity investments, the banks could find themselves in need of funding help again, notes Toronto-Dominion Bank chief economist Don Drummond.
At the same time, the growth of banks' loan portfolios is slowing. The soft housing market led to very weak mortgage originations in January and February, Mr. Drummond said.
Still, the slackening demand for government help does suggest that credit conditions have eased. The lack of take-up on the mortgage auctions �seems to point to the fact that the Canadian banks are not in a big liquidity crunch themselves,� said Marlene Puffer, a managing director at Twist Financial Corp.
That means the banks' lending operations are not being held back by an inability to raise financing, she added: �Any constraints in terms of the banks lending are coming more from inside the banks than any constraints they're facing in terms of raising capital.�
The Canadian Bankers Association said in an e-mailed statement that the mortgage purchase program is still an effective tool, noting that it's already injected more than $53-billion worth of liquidity into the marketplace so far.
A spokeswoman for CMHC declined to comment yesterday, noting that the details of the auctions are confidential.
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January 9, 2009
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A House is Still a Home, For All That and All That
by Ottawa Citizen
If there was ever a word seemingly unambiguous in meaning, it would be "house." Yet over the course of the past decade, our concept of what a house represents has changed dramatically.
Once considered places where you raise children and stake a claim in a community, houses instead came to be seen mainly as can't miss investments - generators of perpetual wealth. If there is anything good to come out of the financial downturn, it will be the demise of this unhealthy idea.
The Canadian Real Estate Association reports that Canadian home prices are falling. So now Canadians are "feeling" poorer, just as they "felt" richer when the values of their homes appeared to have no ceiling. But this is really much ado about nothing - or, at most, some ado about very little.
Homeowners not looking to sell will be unaffected. Those wanting but not needing to sell can just wait
if out. Even those who do need to sell will, most likely, be buying their next home in a depressed market (it's called a "global crisis for a reason) and their losses will be offset by their savings.
Falling home prices can result in positive change. For one, people will be less inclined to borrow against the equity in their homes to pay for things that don't appreciate in value - and that they don't really need - such as vacations or plasma TVs. Too many, when their equity was growing faster than their hydrangeas, treated their homes like shingle-clad credit cards.
Home buyers will also, one imagines, be more reluctant to purchase houses they can't really afford. In recent years, many people worried little about buying beyond their means because they believed home prices could only go up. Those who lost a job or experienced some other financial calamity could always
sell and reap a tidy profit. Why worry? But now, with home sales falling alongside prices, we now know that no plan is free of risk.
Another benefit to a more rational housing market is that people learn to diversify their investments. It is not uncommon for homeowners to have the vast majority of their net worth wrapped up in their houses.
But buying a big house is an inadequate retirement plan. After accounting for expenses - property taxes, insurance, repairs, renovations - it becomes clear that a house, while a sensible investment, should not be one's only investment.
Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies, is among those who regret that "house" became synonymous with "investment" a phenomenon, he writes, that was the product of "inflated values. Easy credit. and wild expectations of profit." He now expects that "the standard usage definition will hark back to the older one: an anchor in a community where a family can live, work and play."
Let's hope he's right, and let's further hope that when the next housing boom comes, homeowners won't forget the lessons they're learning now. Dictionary editors are busy enough as it is.
Why Canada Looks Likely to Escape a Severe Recession
From Jay Bryan for The Vancouver Sun
Stocks swooned again Monday amid new signs that the U.S. recession would be even more severe than expected, but there was a small ray of sunshine for ordinary Canadians.
While this country can't escape the serious drag from a U.S. recession, there's reason to believe that the slowdown in Canada will be a good deal less serious, says a new analysis by National Bank economist
Yanick Desnoyers.
Combing through the economic record, Desnoyers was pleased to see how inaccurate it is to believe that Canada's fate is tied to that of the U.S.
In fact, he concluded, our severe recessions are always self-inflicted, caused by inflation worries leading the Bank of Canada to hike interest sates too high. Happily, the opposite is happening now.
"I cannot exclude the possibility" that Canada will have a mild recession, he said yesterday, but if so, it will be much less painful than the one south of the border.
In terms of the average Canadian worker, for example, Desnoyers expects to see the unemployment rate rise by perhaps one percentage point before job conditions stabilize late in 2009.
That's certainly unwelcome, representing an addition of about 190,000 workers to the jobless rolls, but it's only a fraction of the 4.5 percentage points added to Canada's unemployment in the early 1990s.
That's when the last really severe U.S. recession struck. It's also a fraction of the deterioration expected in the U.S. this year and next.
The logic behind Desnoyers's logic is this: Export income in Canada will be cut by the U.S. downturn and a big drop in prices for Canada's resource products.
That's why we're entering a slowdown.
But to have a severe slump with soaring unemployment, we'd also need a swoon in domestic spending by consumers, businesses and governments.
That's not happening.
Domestic demand, which makes up three-quarters or more of Canadian economic activity, is on track to keep growing, thanks to a central bank that has already slashed interest rates and stands ready to cut even more.
As the last deep recession began here in 1990, the central bank's target interest rate was a punishing 13.5 per cent, or in more accurate "real" terms after subtracting inflation, fully 10 per cent.
That wasn't just restrictive, it was crushing.
Today, the target rate is 2.25 per cent - in real terms, just half of one percentage point. And it's likely still more cuts are coming. Could we even see a real rate below zero?
"Certainly," Desnoyers said. "It's already true in the US,'' he said, and the Bank of Canada is aggressively boosting the economy in this downturn.
Beyond this, as the government adds more economic stimulus through tax cuts or new spending. "We're in the best position in the world," notes Desnoyers, since Canada enjoys surpluses in good times.
Of course, the U.S. is also slashing rates and spending like crazy. But it's starting from a much more difficult position, with its housing market in collapse and the financial system badly damaged.
A new forecast from economist Kurt Karl with Swiss Re, a big insurance firm, makes the point. Karl predicts a "mild" recession in Canada, with the economy shrinking for three quarters, but says that the shrinkage won't come close to what he expects in the U.S.
By the end of the recession, in the second quarter of next year, Canada's economic output will be down
by a tiny 0.1 per cent from a year earlier. In the U.S, it will have fallen by 1.2 per cent.
Don't Panic. Now's the Time to Start Building Wealth
From Harvey Enchin for The Vancouver Sun - November 2008
"Those who have knowledge, don't predict. Those who predict, don't have knowledge." - Lao Tzu
Hogwash. It's hard to believe that so much drivel attributed to Taoist philosopher Lao Tzu emanated from him. Of course those who predict have knowledge, as well as a multitude of techniques including time series analysis, econometrics and informed conjecture.
They have used these tools to forecast the state of the economy in 2009, and the picture they paint isn't pretty. The consensus is that most western economies are already in, or are headed for, recession - a real decline in output as measured by gross national product for two or more consecutive quarters.
Canada's strong fiscal position, conservative lending practices, high levels of employment, and continued growth in consumer spending - up 1.1 per cent in September - led some prognosticators to suggest Canada could avert a recession. But the Organization for Economic Cooperation and Development put the kibosh
to that optimism with a forecast of 1.6 per cent GDP contraction in the fourth quarter of 2008,1.4 percent in the first quarter of 2009, and 0.3 per cent in the second. The unemployment rate would rise, the OECD said, to seven percent in 2009 and 7.5 per cent in 2010, from the current 6.2 percent - meaning a total 1.4 million Canadians would be out of work. It added that declining tax revenues would force federal and provincial governments to post deficits next year and in 2010. Meanwhile, housing starts are down, bankruptcies are up, and access to capital remains constricted.
The OECD said 21 of its 30 member economies will experience a protracted recession of a magnitude not seen since the early 1980s. In its November poll, the Conference Board of Canada found consumer confidence dropped 2.9 points to the levels of the early 1980s recession.
Roughly 10 million Canadians are too young to have lived through that recession, and another four million too young to remember it. So it might be worth recalling that the recession that gripped Canada from 1981 through 1982 was accompanied by double-digit inflation, an unemployment rate near 13 percent, interest rates of 20 per cent, and an Iranian revolution that drove oil prices up 200 per cent. Over six declining quarters, from the third quarter of 1981 to the fourth quarter of 1982, GDP fell by five per cent. One of the lingering legacies of that recession was an addiction to deficits. Compare this to the backdrop of the 2008-2009 recession: Inflation below two percent, unemployment projected at no more than 7.5 per cent, interest rates at historic lows, oh prices down 50 percent from their peak, and an estimated drop in GDP of 3.3 percent over three declining quarters.
Parallels between the two recessions are hard to establish. But perhaps there is one: As in 1981-1982, the current U.S. recession was triggered by a collapse in residential investment; Canada's by a drop in net exports.
Some forecasts that warn of a recession similar in scale and scope to 1981-1982 fail to consider the unprecedented global action taken to resolve the credit crisis - and stave off deflation. Stimulative monetary and fiscal policies are helping to stabilize the financial system, improve liquidity and offset a withdrawal of private sector investment with public infrastructure spending.
There is little doubt that at least the first half of 2009 will be in an economic trough, and employment will lag the recovery of GDP as it always does. But recessions have a purpose in a free market economy, to squeeze the excesses out of the system, to realistically revalue assets, to compel inefficient, under-capitalized companies to restructure, to force regulatory reform to better meet the needs of a changing marketplace, and to rebalance incomes with the cost of living.
Just as the stock market has overreacted to worsening economic conditions, consumers have been unduly alarmed by a necessary and inevitable correction. Once they overcome their shock, it will become clear that
this is the time to begin to build wealth.
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From the National Association of Realtors:
FOREIGN INVESTMENT
Canada Most Transparent Real Estate Market
Emerging markets have significantly improved their levels of real estate transparency according to the latest Global Real Estate Transparency Index from Jones Lang LaSalle, The 2008 survey reveals that eight countries moved up a full transparency tier since the last index in 2006. Dubai, Romania, Ukraine and Russia showed the biggest improvements over the last two years. The Index, which provides a rigorous framework for comparing the level of real estate transparency in 82 world markets, shows that nearly half of the countries surveyed in 2006 demonstrated a significant improvement in their transparency score two years later. Transparency levels globally are improving as governments seek to streamline regulatory and legal hurdles to aid cross-border movement of capital and corporate facilities. Only Venezuela posted a lower transparency score this year compared with 2006, principally due to changes in government regulations and new taxation policies targeting foreign investors. Canada now ranks as the world's most transparent real estate market, up from the 4th position in 2006. The U.S. and Australia are tied for second place on the list. The lower end of the scale includes Oman, Qatar, Morocco, Kuwait, Pakistan and Kazakhstan.
U.S.-Japan Investment Initiative 2008 Report
Since its formation in 2001, the United States-Japan Investment Initiative has facilitated discussion and cooperation on ways to improve the climate for foreign direct investment (FDI) in Japan and the U.S. The Initiative is part of the U.S.-Japan Economic Partnership for Growth, jointly chaired by Japan's Ministry of Economy, Trade and Industry and the U.S. Department of State. The 2008 Investment Initiative Report, published in early July, details the work of the Investment Working Group, which has led to greater understanding of the critical contribution of FDI to economic growth and the most effective ways to promote cross-border investment. The report describes policy initiatives to promote FDI and addresses recently enacted rules governing cross-border stock swaps to assess their impact in facilitating mergers and acquisitions. The report also discusses how both countries have improved understanding of each other's procedures for reviewing FDI with regard to national security implications. The U.S. continues to attract significant FDI inflows from countries around the world because of its open economy, strong long-term growth, and high rate of return to capital. In Japan, FDI has increased significantly since the latter half of the 1990s due to reforms in corporate and bankruptcy laws and systems, corporate accounting systems, and the expansion of business fields open to foreign companies as a result of deregulation. Access or download the full report.
CULTURALLY CORRECT
American Dream In Reverse
A growing number of U.S. immigrants are pursuing the American Dream--but not in America. High prices, foreclosures and tight credit has resulted in some immigrants looking to their homeland to find the better life they came to the U.S. to pursue. Latin American developers are increasingly targeting nationals living in the U.S. who, with their U.S. wages, can afford much more than when they lived in the country. Each year an estimated 5% of U.S. immigrants invest in a home in their country of origin, according to a 2005 survey by The Inter-American Dialogue. Many immigrants are unable to qualify for a home loan in the U.S. so they send money home to relatives who oversee the home's construction. Increasingly, though, developers, private lenders and governments are making it easier for immigrants to buy directly. This comes at a good time for immigrants as in 2007 total remittances to Latin America and the Caribbean reached $65.5 billion, but the growth rate has slowed and, in some countries, is in decline. A 2008 poll by the Inter-American Development Bank (IDB) found that only 50% of respondents were still sending money on a regular basis to their families, down from 73% in 2006. IDB reports that the Dominican Republic's government allows immigrants to apply for up to $10,000 for down payments. Mexico's mortgage lender Su Casita had loaned about $66 million in mortgages to 1,420 Mexican immigrants in the U. S. since early 2007. El Salvador's government began coordinating housing fairs in the U.S. in 2006 to minimize fraudulent contractors, attracting more than 4,000 Salvadorans to date. With slow U.S. sales, REALTORS® can grow their business by offering services to assist immigrant clients in tapping into such resources and use NAR's global network to locate professionals worldwide to assist with locating properties.
Is France the Best Place in the World to Live?
Aging baby boomers are providing REALTORS® with opportunities to assist this huge generation of Americans with retirement or second home housing. For an increasingly number of them, it will be outside the United States. For those looking to live abroad in their golden years--year round or seasonally--REALTORS® may be asked about which countries are best. Clearly, there is no single answer. For each person, the quality of life and lifestyle issues will differ, but International Living magazine provides insight into 192 countries which might be useful. The magazine annually rates and ranks countries by a Quality of Life Index, which considers nine categories, including cost of living, climate, culture/leisure and safety. After all the number crunching, France tops the list, followed by Switzerland, U.S., Luxemburg, and Germany. Complete sets of scores for each country are available. Wondering where NOT to recommend? Iraq ranks dead last on the list of 192 countries preceded by Somalia, Afghanistan, Yemen and Sudan.
GLOBAL MARKETS
End of Global Housing Boom
A recent survey of home price indicators suggests that the worldwide housing boom is over according to the Global Property Guide. Of 34 countries in which home price indices are regularly published, 21 saw home prices fall after adjusting for inflation over the past year (y-o-y ending 1Q 2008). In the majority of markets where house prices did not fall, they are losing momentum. Latvia saw the biggest price drop--down 38.2%. The global credit crunch and inflation due to rising prices of oil, food and commodity prices are seen as the primary causes. The drop in U.S. prices range from -4.2% to -18.1%, after inflation, depending on which index is used, and Europe saw the most significant drops in Ireland (- 13.2%), Luxembourg (-5.8%), Portugal (-4.3%) and Malta (-4.9%). Emerging markets are the source of good news in terms of price growth, with Slovakia topping the list where, after adjusting for inflation, house prices rose 29.3%. Other markets with home prices increases during the past year include China (Shanghai), Bulgaria, Hong Kong, and Singapore. Looking ahead, the Global Property Guide forecasts that the world's house prices will continue to decline. Read more about the causes and impact of the drop in home prices, and view charts on both actual and inflation-adjusted prices for 39 markets.
U.S. Projected to Drop from Top FDI Spot by 2014
The United States is number one when it comes to attracting foreign investment, but emerging markets such as China and India may overtake the U.S. in the race for foreign cash within the next few years, according to a survey of CFOs and other senior executives conducted by audit, tax, and advisory firm KPMG. The survey of 300 executives found 27% think U.S. markets will be the leader in foreign investment this year and next. China was ranked highest by 17% of respondents, the United Kingdom by 14% and Germany by 13%. The U.S. may not stay in the top position for long though. China is projected to surpass the U.S. as the lead investment target by 2014, according to 24% of respondents, while 23% said the U.S. would remain the top target in 2014, with 19% citing Russia and 18% citing India. Although India comes in fourth, it is expected to see the largest growth in foreign investment across all business sectors and is also expected to take the lead in investment in manufacturing. KPMG says that the strong cash flow into the U.S. is likely a result of foreign companies' interest in taking advantage of the weak dollar. Read KPMG's press release on the foreign investment study.
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April 2008
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The New Job Got a Lot Tougher
Let's hope Mark Carney likes a challenge, because his new posting at the top of the Bank of Canada could be a lot tougher than it was for his predecessor.
The Bank's single instruction is to contain inflation, but presumably, to do so without wrecking the economy in the process. Governor Dodge's mandate wasn't without its own bumps in the road. But he had one major trend smoothing the way, a general decline in global inflationary forces, and in the last few years, a skyrocketing Canadian dollar that countered the sharp climb in energy costs.
As a result, Dodge never had to face a truly tough decision in terms of sacrificing growth to keep the CPI at 2%. When the economy faltered, he could be aggressive in cutting interest rates. When it boomed, he could test the waters of ever-lower unemployment rates and the associated pick-up in wage rates, counting on falling prices for Chinese imports, cheap global food prices, and new and more aggressive competitors in retailing to keep inflation at bay.
In terms of their inflation impacts, energy aside, all of the global shocks in the past decade were in the direction of tamer prices. The stagflation of the 1970s, when inflation was heightened even when growth was depressed, was not a risk.
For now, that's where things still stand in Canada. In the wake of the prior year's C$ climb and a resulting tumble in prices for autos and other imports, inflation is low enough to provide the cover for an additional rate cut or two as a means of helping the economy avoid the worst of the US slump.
But looking further out, the choices will become much tougher. On commodities, the Bank's monetary policy report can't seem to make up its mind, citing, in two adjacent paragraphs, the risks of higher or lower resource prices.
But it concedes that much of the rise in resource costs relates to the economic boom in developing economies, one that has a long road ahead of it. If, as we expect, food and energy prices continue to climb, keeping the Canadian CPI reigned in at 2% will mean that other prices are going to have to be well under than pace.
And there's the rub. With a likely diminishing disinflationary benefit from retail competition and Chinese exports, to accomplish that feat, Carney might have to keep interest rate settings high enough to send the C$ soaring ever higher, making life even more difficult for Canada's non-resource exporters.
Or, those same interest rates are going to have to be at settings that leave much more economic slack in Canada's labour market than we've been used to of late, in order to keep wages and services prices under wraps. The David Dodge world of a sub-6% unemployment rate coexisting with a 2% inflation rate might simply not be possible for Mark Carney.
Avery Shenfeld
Senior Economist
Economics & Strategy
CIBC WORLD MARKETS INC.
Weekly Market Insight April 25, 2008
March 2008
Household Credit Analysis
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