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A softer Canadian housing market, the end of federal stimulus packages and guarded spending by U.S. consumers will be a drag on Canada’s economy, according to a report by Avery Shenfeld, Managing Director and Chief Economist with the wholesale banking arm of CIBC.
The CIBC projects the real Canadian gross domestic product, an inflation-adjusted measure of the economy, will grow by 1.9 per cent in 2011, compared with the 3.2 per cent pace assumed in the 2010 federal budget last March.
Ontario will take the brunt of the expected blow — falling an estimated 1.6 per cent below the forecast for next year — because about 80 per cent of its exports are shipped to the United States.
Meanwhile, other provinces heavily weighted in export industries will suffer notable declines. Quebec is expected to see provincial GDP fall 1.1 per cent, while Manitoba is projected to fall one per cent short of forecasts, CIBC said.
Resource-heavy provinces like B.C., Alberta, Saskatchewan and Newfoundland and Labrador will lead growth but are expected to also face challenges meeting their budget forecasts.
Western Canada could face a tougher challenge in its housing market, where prices have overshot fair market value by the largest margin. That’s expected to have a slowdown effect on residential construction, the report said.
Shenfeld said the federal government shouldn’t allow a softening economy to derail plans to return to a balanced budget, and instead the Bank of Canada could back off from plans for higher interest rates, to adjust for a more challenging economic environment.
“We have started the process of raising interest rates, presumably to prevent growth from being so brisk that inflation breaks out. If policy needs to adjust to a more challenging climate abroad, it should be done by backing away from plans for tightening through even higher interest rates,” elaborated Shenfeld.
“Only if the Bank of Canada were forced to take rates back to zero would it be appropriate to postpone a much-needed, if gradual, path back to fiscal rectitude.”
0% Commission Real Estate Network launches in Canada
Bytheowner.com, a new commission-free real estate network which combines five commission-free real estate companies, went online on Tuesday with a listing of more than 12,000 properties for sale across Canada.
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We recently finished standardizing and optimizing the websites,” said Bytheowner.com general manager Martin Rygiel, pictured left. “That was our first step in creating the network. The second step involves analyzing our ways of doing business, as we would like to implement the best practices in each of these companies.”
The five companies part of the network include ComFree in Alberta, Skhomes4sale.com in Saskatchewan, ComFree in Manitoba and PrivateRealEstate in Ontario (which is under the ownership of ByTheOwner.com / Duproprio.com in Quebec).
“When we combine the transactions done through the five companies that now make up our network,” said Rygiel. “We’ve helped people sell more than 85,000 properties. For our customers, this means they’ve saved more than $1 billion in commissions.”
Bytheowner.com began in 1997, and now claims to be the largest real estate network in Canada, a challenge to the dominant Canadian Real Estate Association’s Multiple Listing Service, which still handles the majority of properties being sold in Canada, and that has come under pressure from the Competition Bureau, which has raised concerns rules imposed on agents are anti-competitive.
Canada 2011: The Hangover
By Benjamin Tal and Krishen Rangasamy
CIBC WORLD MARKETS
Not surprisingly, the Canadian recovery didn’t play out as advertised. While we did see a spike late last year and early 2010, the momentum has faded lately, largely as a result of a strong C$ and a softening US economy. Growth in the second half of the year will be only a fraction of the Bank of Canada’s July Monetary Policy Report forecast. Early 2011 doesn’t look promising either, which should prompt major revisions in October’s MPR, forcing the Bank of Canada to defer further tightening.
Exports Will Underperform
Our pared-down outlook for the Canadian economy comes partly as a result of the downbeat export picture. The second quarter of 2010 provided insights into what lies ahead for Canadian trade. Despite the terms of trade remaining elevated by historic standards, that hasn’t prevented the current account balance from diving into red ink.
The Canadian dollar shoulders much of the blame for the disappointing trade performance in the second quarter. The loonie’s appreciating trend over the last decade has helped shrink our exporters’ market share in the US from around 20% in 2001 to under 15% today. So much so, that Canada hasn’t been able to fully capitalize on the American inventory restocking boom in this recovery, with some of that foregone benefit going to countries taking advantage of their more competitive currencies.
And with sub-2% US growth expected over the second half of this year and first half of 2011, it’s clear that Canadian exports won’t play a prominent role in the next phase of this recovery. Look for Canada’s trade sector to underperform the domestic economy this year and next.
Fiscal Withdrawal and the Labour Market
With all hopes resting on the domestic economy, which sectors could be the white knight for Canada next year? Certainly not the government. The withdrawal of fiscal stimulus next year should limit growth in real government spending to roughly 1%, the smallest contribution from the public sector to the overall economy in 14 years. But the impact of fiscal withdrawal runs deeper, and will also negatively impact economic activity through another channel, namely the labour market.
Note that the public sector accounted for no less than 10% of all jobs created in the economy during the recovery versus less than 1% in other recoveries. And the construction industry, spurred in part by stimulus money, single-handedly added a quarter of all jobs since the recovery started, with growth of 10% versus negative growth at this stage in previous recoveries. Altogether, these two sectors have had a hand in spurring more than a third of all jobs created in this recovery. And those jobs are relatively high quality (higher-paid) which explains the significant jump in our employment quality index since early 2010.
With fiscal withdrawal, and the housing market losing ground, the economy will be unable to replace that sizable contribution from public sector and construction jobs. And it’s unlikely that the new jobs created in 2011 would be of the same high quality—limiting the upside potential in personal income.
Consumers Limited by Wealth Effect
In addition to the cooler labour market, there will be other sources that may act as a drag on consumer spending next year. It’s no secret that house prices have been falling recently, but less noted is that the performance of the housing market is already approaching levels seen during the recession. Even a modest 5% additional drop in average price in 2011, on top of the 6% it already shed from its peak, will lead to a negative wealth effect of $10 bn, stripping growth in consumer spending by more than a full percentage point.
The same goes for consumer credit, which has been a very important source of consumer spending. Consumer credit, of which an estimated 30% goes towards direct consumption, is mimicking recessionary trends on a month-to-month basis. Softness in consumer credit, partly due to supply factors, down from 6% annualized in the first half of 2010 to 3.5% in the coming 12 months, will also limit consumers’ appetite. Together, the negative wealth effect from housing and reduced use of credit will pare enough purchasing power from consumers to limit growth in consumer spending to under 3% next year.
Recent Improvement in Business Investment Will Not Last
While business investment has seen a strong rebound recently, mainly in machinery and equipment, this bounce is typical of recoveries. We have indeed seen the same trajectory in previous recoveries and in all cases, the upswing didn’t last long, because most of the improvement at this stage of the cycle is related to replacement, rather than expansion. With capacity utilization now at only 76%, a number that is inconsistent with a sustained expansion in investment, don’t expect a significant boost to business fixed investment in coming quarters.
Business investment in inventories will likely see a similar fate. Relative to past recoveries, inventory restocking has been brisk thus far, and with the inventory-to-sales ratio still above the pre-recession average the contribution of inventories in the coming quarters is set to be minimal.
After a two-quarter burst in output late last year and early this year, Canada got a reality check in Q2. The legacy of the Great Recession won’t disappear overnight. Excess capacity, fiscal withdrawal, de-leveraging, and a more cautious consumer will weigh on GDP for some time. While the domestic economy will fare better than exports next year, it will be less than spectacular with softness in virtually all categories, leaving growth for 2011 at a meagre 1.9%.
Two years after the recession, Canada is facing a global economy that still has a hangover from past excesses, and its local economy has already used up much of the juice from stimulus. The Bank of Canada will, at some point, resume normalizing interest rates next year, but at a very slow pace, given the slow growth, soft inflation picture.
Intergenerational Mortgages
Intergenerational Mortgages are based upon the idea that a homeowner can pass on the mortgage debt and interest repayments, along with the house, to their children when they die.
No such mortgages exist in Canada, due mostly because such mortgages are interest-only, and that’s practice currently banned for Canadian banks.
Intergenerational Mortgages, however, have made news in Vancouver last week, thanks to Patricia Croft, the retiring chief economist with RBC Global Asset Management, who spoke about the inflated Vancouver housing market to an audience of about 1,000 real estate executives this past week.
The gist of her comments was that prices and affordability had eroded so much in Vancouver that consumers might turn to intergenerational mortgages.
Reached by telephone the next day, she chuckled, agreeing she was being a little mischievous by throwing out the idea of a mortgage you pass on to the next generation.
“But how do people even afford to buy their homes?” asks Ms. Croft, noting that Royal Bank of Canada’s latest affordability index shows it takes 66% of pre-tax household income to carry a Vancouver bungalow. That’s 60% above the national average.
“They actually had intergenerational mortgages in Japan. When you passed on, you passed on the mortgage. If any city would qualify to market it, it would be Vancouver,” she says.
In other parts of the world, there has been little choice but to turn to longer amortization because it’s impossible for the average consumer to pay their home off in their lifetime.
Tony Loughran, head of customer services of England-based Kent Reliance Building Society, which is similar to a credit union, says his company has been providing intergenerational mortgages in the United Kingdom for about four years.
“The mortgage goes on in perpetuity,” says Mr. Loughran, who adds that customers simply pay the interest during their lifetime. “There is a niche for them. If property comes too expensive, it’s a way to buy it and then pass it on to the younger generation who might find prices beyond their reach.”
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http://www.financialpost.com