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Bank of Canada still sees signs of overbuilding, ‘stretched’ housing values Add to ...

These are stories Report on Business is following Wednesday, April 17, 2013.

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Carney warns on housing
Canada’s housing market may be slowing, but the Bank of Canada still believes developers are “overbuilding” and that house values are still “stretched” in some areas.

The market has cooled rapidly for several reasons, the central bank said today. And while it didn’t come out and say it, clearly policy makers believe residential real estate has to come even more off the boil.

In their monetary policy report released this morning, Governor Mark Carney and his colleagues pointed specifically to the condo market, which has been a concern for some time now.

“Despite the recent moderation in the rate of new housing construction, there are still signs of overbuilding, particularly in some urban areas,” the central bank said.

“The resale housing market has shown some signs of stabilization in recent months, following the easing in both activity and prices from the high levels reached between the latter part of 2011 and early 2012,” it added.
“Still, valuations in some segments of the housing market remain stretched.”

Construction starts on new housing dropped in the first quarter to an average 177,000 units on an annualized basis, the central bank said, after two years of “remaining above demographic demand” of some 185,000.

Mr. Carney, through moral suasion, and Finance Minister Jim Flaherty, through several rounds of restrictions, have been trying to tame the mortgage market amid high consumer debt levels and a bubbly housing market.

The central bank went so far earlier as to threaten to raise interest rates to drive the point home, though has since backed off that as home sales plunged and credit growth slowed.

“The cumulative effects of changes to mortgage insurance rules and the tightening of mortgage underwriting guidelines, an increasing appreciation among consumers of the risks associated with elevated debt levels, and the tightening bias of the Bank of Canada have all contributed to this moderation,” the Bank of Canada said.

However, the key measure of household debt to disposable income remained at about a record 165 per cent in the fourth quarter of last year, and the central bank expects it to stay in that area.

But interest rates aren’t going anywhere any time soon.

As The Globe and Mail’s Kevin Carmichael reports, the Bank of Canada also cut its forecast for economic growth this year, and reiterated that the next move in rates will be up, not down, though economists believe it will be a long time before that happens.

The central bank now sees economic growth this year at just 1.5 per cent, though with activity picking up in the second half.

That would be followed by growth of 2.8 per cent in next year and 2.7 per cent in 2015, the Bank of Canada said as it held its benchmark rate steady at 1 per cent.

“Following a weak second half of 2012, growth in Canada is projected to regain some momentum through 2013 as net exports pick up and business investment returns to more solid growth,” the Bank of Canada said.

“Consumer spending is expected to grow at a moderate pace over the projection horizon, while residential investment declines further from historically high levels,” it added in a statement.

On a down note for Canadian exporters, the central bank projected a recovery in trade, though exports “are likely to remain below their pre-recession peak until the second half of 2014 owing to restrained foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.”

Today's statement raised speculation that the central bank could push a rate hike out even further.

"While the bank simply offset a lower 2013 outlook (now at 1.5 per cent, down from 2 per cent) with faster growth projections for 2014-15, even that pushed off the timetable to close the output gap until mid-2015," said chief economist Avery Shenfeld of CIBC World Markets.

"And that relies on a more brisk 2.8-per-cent forecast for 2014 that we see as about a half point higher than likely. So while the bank may still be thinking about a late second half 2014 rate hike, a more moderate growth path could well see no move until early 2015."

Home prices rise
Just before the Bank of Canada report, a fresh reading today showed Canadian house prices inching up in March, ending half a year of decline.

Prices rose 0.4 per cent from February, and were up 2.6 per cent from March, 2012, the Teranet-National Bank house price index showed.

The index, which measures 11 cities across Canada, showed prices rising in nine and slipping in two, notably Victoria, B.C., which chalked up the biggest monthly decline in more than 20 years.

Today’s reading leaves the index just 0.09 per cent lower this year, a good sign given the angst surrounding what has been a rapidly cooling housing market that has seen sales plunge since Finance Minister Jim Flaherty brought in his fourth round of mortgage restrictions last summer.

The March increase brought to a halt what had been six consecutive months of declining prices, to the tune of 1.8 per cent.

Here’s how cities fared in March compared to February:

  • Vancouver, up 0.8 per cent.
  • Victoria, down 3.2 per cent.
  • Calgary, up 1.3 per cent.
  • Edmonton, up 1 per cent.
  • Winnipeg, up 0.3 per cent.
  • Hamilton, down 0.9 per cent.
  • Toronto, up 0.2 per cent.
  • Montreal, up 0.7 per cent.
  • Quebec City, up 0.3 per cent.
  • Ottawa-Gatineau, up 0.1 per cent.
  • Halifax, up 0.3 per cent.

On a year-over-year basis, the 2.6-per-cent rise in prices was actually slightly slower than in both January and February, marking the smallest 12-month increase since November, 2009.

While prices did climb in February alone, National Bank said the increase doesn’t mean the residential real estate market has improved all that much.

“Among the 11 regions covered by the index, prices are still below the peak reached in 2012 in nine … the exceptions being Quebec City and Halifax,” said senior economist Marc Pinsonneault, noting the most recent numbers from the Canadian Real Estate Association, released earlier this week.

“CREA new listings and sales data suggest that market conditions are still weak in Montreal, Ottawa-Gatineau, Vancouver and Victoria,” he said in a report on the index.

“In our opinion, March’s rise does not mean that a trend of monthly prices changes well above inflation has started,” he added.

“Instead, it is very likely that year-over-year price inflation in the composite index will diminish substantially as monthly changes ranged from 0.6 per cent to 1.3 per cent from last April to last July.”

The Teranet-National Bank index differs from how prices are tracked on the Multiple Listings Service.

Apple stock sinks
Shares of Apple Inc. sank today on concerns that the technology giant is losing some steam, slipping about 5.5 per cent.

At one point, the stock dipped below $400 (U.S.), for the first time since 2011, but closed above that mark.

The decline followed a report late yesterday from an audio chip supplier, Cirrus Logic, which posted a weak outlook for the first quarter.

Investors fear what that means to Apple, whose iPhones and iPads use Cirrus chips.

 “The guide indicates that the recent fears of Apple’s lackluster iPhone demand … are warranted,” said Needham & Co. analyst Vernon Essi Jr., according to The Wall Street Journal.

Péladeau to head Hydro-Québec
The Quebec government has named Pierre Karl Péladeau as the new chairman of  Hydro-Québec.

Mr. Péladeau, vice-chiarman of Quebecor Inc. and chairman of Quebecor Media, volunteered for the post but is forgoing the $125,000 that comes with it, The Globe and Mail's Sophie Cousineau and Rhéal Seguin report.

“Mr. Péladeau approached me to tell me that he wanted to serve [Quebec],” Premier Pauline Marois said today.

Ten ways to talk to your kids about money (My version, not Rob Carrick's)
My colleague Rob Carrick took a smart look this week at how to talk to our kids about money.

His good advice was tied to today's “Talk With Our Kids About Money Day,” a worthy effort by the Canadian Foundation for Economic Education that will see students hearing about financial matters from teachers and parents.

Rob is The Globe and Mail’s personal finance expert, and, of course, raised 10 good points for starting the discussion. Then there are the less expert among us …

1. Saving vs. spending
Rob: Saving is a smart choice, and there’s a basic rule of saving 10 per cent of disposable income.
Me: Saving your money doesn’t mean spending mine.

2. College and university costs (Part One)
Rob: You need to understand how much this costs, so let me put it in context for you: One year of school away from home is worth two years of groceries, six years of vacation or a hefty payment on a new car.
Me: Yes, beer costs money.

3. College and university costs (Part Two)
Rob: Let’s talk about how we can afford this, through a combination of part-time work and student loans.
Me: No, the Bank of Mom and Dad isn't a real bank.

4. How banks work
Rob: You need to learn all about how bank fees work to understand how banks make money.
Me: You need to learn all about the financial crisis and executive bonuses to understand why banks need money.

5. How to save
Rob: Use a piggybank for coins, bank accounts for paper currency.
Me: Just because you find money under the couch cushion doesn't mean it's yours.

6. How much cars cost
Rob: Of course you want a car. But you need to understand the combined costs of insurance, maintenance, etc.
Me. Yes, you can borrow the car. Just not the gas.

7. Benefits of entrepreneurialism
Rob: I know it’s tough to get a part-time job. What about cutting lawns? Or shovelling snow?
Me: And while you’re at it, could you please for once cut our lawn and shovel our snow.

8. Junk food is bad for you
Rob: “It clogs your arteries and drains your bank account.”
Me: I'm told Kraft Dinner is cheap.

9. Don’t feel sorry for yourself
Rob: Someone will always have less and more money than you have.
Me: At this rate, I’m going to have less and you’re going to have more.

10. Delayed gratification
Rob: Save up for what you want, then take a day to think about it before making a big purchase.
Me: Delayed gratification? I thought we were discussing money, not having the talk.

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