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Bank of Canada issues harsh warning on condo market Add to ...

These are stories Report on Business is following Thursday, Dec. 6, 2012.

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Bank of Canada warns on condos
The Bank of Canada issued a harsh warning today about overbuilding of high-rise housing, notably condos.

“In the current context, a specific concern is that the total number of housing units under construction has been increasing and is now well above its historical average relative to the population,” the central bank said in its financial system review.

“This development is entirely accounted for by multiple-unit dwellings (which include condominium units), especially in major metropolitan areas.”

As Canada’s housing market cools, the condo sector has been of particular concern, notably in Toronto and Vancouver. Sales in both cities are down sharply after the federal government moved again in July to cool things down.

Canadian policy makers have been concerned over both the housing market and the record debt burdens among households, the central bank said earlier this week that credit growth has at least been slowing.

Today, as The Globe and Mail’s Barrie McKenna reports, the Bank of Canada again voiced in concern over the vulnerability of consumers to “economic shocks,” such as a housing bust or a spike in unemployment.

That doesn’t mean observers expect either, only that the central bank is concerned.

Today, it took a deeper look at the housing market, and at condos in particular, noting the rapid pace of construction and warning about speculative demand.

“If investor demand has helped spur levels of construction in the condominium market that are above those consistent with demographics, this market will be more susceptible to changes in buyer sentiment,” it said.

“If the upcoming supply of units is not absorbed by demand as they are completed over the next 18 to 36 months, the supply-demand imbalance will become more pronounced, increasing the risk of a sudden correction in prices”

That, in turn, could pressure house prices in general, which itself would spread through the broader economy.

“This would likely lead to a decline in housing activity, adversely affecting household incomes and employment, as well as confidence and household net worth, which would in turn reduce household spending,” the Bank of Canada said.

“As the declines in incomes and employment impair households’ ability to service their debt, loan losses at financial institutions would likely rise. These effects may be amplified by tighter borrowing conditions as lenders come under increased stress. These interrelated factors would further dampen economic activity and add to the strains on household and bank balance sheets. They may also cause house prices to fall below the level required to correct any initial overvaluation.”

The Bank of Canada has warned about this before. And where Toronto is concerned, there was a particular focus.

It cited the rise in the number of unsold units – to 14,000 from 7,000 since June 2011 where preconstruction is concerned, and to some 7,000 from less than 5,000 at the beginning of the year of those under construction – as sales drop and prices flat-line.

“This suggests that demand is slowing at a time when the potential supply of unsold units (including those in preconstruction) is still strong,” the central bank said.

“Discussions with developers indicate that they are seeking to mitigate the risk of overbuilding by phasing projects and adjusting new supply to reflect the evolution of demand. Delays (or cancellations) of projects, however, can be costly.”

It noted that developers are liable for up to $7,500 in expenses  because of delays, beyond scheduled occupancy, after a contract is signed in Ontario.

The Bank of Canada also cited the fact that the size of condo units has been shrinking for the past couple of years.

Anecdotal evidence suggests that’s what investors want but “greater involvement by investors could potentially increase the volatility of housing prices and sales, under stressed conditions.”

The central bank also repeated its warning that the biggest domestic threat to financial stability “continues to stem from the elevated level of household indebtedness and stretched valuations in some segments of the housing market.”

Loblaw to launch REIT
Loblaw Cos. Ltd. is taking advantage of the land on which it sits to launch a real estate investment trust, unveiling a plan that sent its stock soaring today.

The big Canadian grocery chain plans to sell units of the REIT via an initial public offering, The Globe and Mail’s Bertrand Marotte reports, and plans to initially kick in more than $7-billion worth of property.

It plans to hold a majority stake.

Loblaw said its real estate is now some 47 million square feet, valued at $9-billion to $10-billion. It will sell about 35 million square feet of that to the REIT, and then lease the property on a long-term basis.

“It will be a vehicle to manage and enhance our real estate portfolio with the potential for future expansion through incremental vending in of our own real estate and external investment opportunities,” said executive chairman Galen Weston.

The REIT landscape is changing rather quickly. Just yesterday, a consortium of bidders said it plans to take a hostile run at Primaris Retail Real Estate Investment Trust and break up the properties.

TD in deal for asset manager
Toronto-Dominion Bank has struck a deal worth $668-million (U.S.) for Epoch Holding Corp., an American asset manager, The Globe and Mail’s Tara Perkins reports today.

The U.S. firm is young, just eight years old, with 65 employees, but will add some $24-billion in assets under management to the more than $200-billion already under TD’s control.

The deal was announced as the Canadian bank posted just a tiny gain in fourth-quarter profit, to $1.6-billion (Canadian) or $1.66 a share from $1.59-billion or $1.68 a year earlier.

Chief executive officer Ed Clark cited a “strong” 2012, but added that “we remain concerned about the low interest rate environment as well as a weak global economic recovery and ongoing regulatory uncertainty.”

CIBC profit climbs
Canadian Imperial Bank of Commerce posted a 13-per-cent gain in fourth-quarter profit, driven by its wholesale banking and wealth management business, The Globe and Mail’s Grant Robertson reports today.

Canada’s fifth-largest bank by assets earned $852-million or $2.02 a share, compared to $757-million or $1.79 a share a year earlier. It topped the estimates of analysts.

Separately, National Bank of Canada became the only one of the major six banks to boost its dividend.

Lululemon profit, revenue climb
Lululemon Athletica Inc. posted hefty gains in third-quarter profit and revenue, tweaked its outlook for the year, and said it is now looking to open a new store in Hong Kong while testing markets in up to 15 countries over the next couple of years.

The yoga wear retailer said today it earned $57.3-million (U.S. or 39 cents a share in the quarter, up from $38.8-million or 27 cents a year earlier.

Sales climbed 37 per cent to $316.5-million, while same-store sales, the key measure in the industry, rose 18 per cent.

Lululemon said it expects earnings per share of 71 cents to 73 cents in the fourth quarter, and revenue of $475-million to $480-million.

For the year, it projects earnings per share of between $1.81 and $1.83 and revenue of $1.36-billion to $1.365-billion.

In September, its projections for the 2012 called for earnings per share of between $1.76 and $1.81 and revenue of $1.345-billion to $1.36-billion.

Central banks hold firm
The euro zone and Britain may be in deep trouble, but their central banks aren't changing their key lending rates.

Both the European Central Bank and the Bank of England held firm today amid deteriorating outlooks for their economies, though the ECB said it discussed the possibility of cutting its benchmark at its meeting.

Just yesterday, Britain's Office for Budget Responsibility projected an over all contraction of the economy of 0.1 per cent this and cut its forecasts for the next two years.

Today, a fresh reading by Eurostat showed the economy of the 17-member euro zone slipping by 0.1 per cent in the third quarter of the year, and that of the wider 27-member European Union up 0.1 per cent.

As The Globe and Mail's Eric Reguly reports, the ECB also cut its growth forecasts for both this year and next.

It expects a contraction of 0.4 per cent to 0.6 per cent this year, with anywhere from a contraction of 0.9 per cent to an expansion of 0.3 per cent next in 2013. In 2014, the growth estimate ranges from 0.2 per cent to 2.2 per cent.

"He remains downbeat on the growth outlook with activity expected to be weak into next year," senior economist Benjamin Reitzes said of ECB chief Mario Draghi.

"Economic risks remain on the downside, which shouldn’t surprise anyone," he said in a research note.

"During the Q&A, in response to a question about potential rate cuts, Draghi said there was a 'wide discussion' but the consensus was to keep rates unchanged. He also noted that negative deposit rates and the potential repercussions were discussed. These statements highlight that further rate cuts remain possible."

Just sayin’
Clever thought of the day, from Bloomberg: “Three bears seek signs of Goldilocks economy as U.S. outperforms,” news agency says, referring to comments by David Rosenberg of Gluskin Sheff + Associates, Mohamed El-Erian of Pimco and David Levy of Jerome Levy Forecasting Center.

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