'15% Off'
The Vancouver and Toronto housing markets are the talk of observers far and wide, from the OECD to UBS, and what their frothy nature could mean for Canada going forward.
There’s more than those two markets, of course. There’s the generally worrisome level of household debt in Canada, much of it driven by mortgages in an era of ultra low interest rates.
But also of concern are foreign buyers who are being blamed for helping to drive up Canadian property values, putting housing affordability out of reach for many.
As The Globe and Mail’s David Parkinson reports, the Bank of Canada still projects a soft landing, as do many Canadian economists.
Having said that, some think this will play a role in the timing of the central bank’s first rate hike, likely some time in 2017, considering the vulnerability of many Canadians to that kind of change in monetary policy.
Given the level of interest and the angst, I thought it was time to round up some comments for a wider look at what observers have been saying since the OECD warned a week ago that Vancouver and Toronto looked problematic:
“Can anyone really be surprised that we have seen mortgage debt re-accelerate this year (to almost 6 per cent year over year from 5 per cent a year ago), when the Bank of Canada chopped rates twice and long-term mortgage rates then hit all-time lows? Or that the housing market in Toronto and Vancouver has exploded higher this year when the Canadian dollar dropped 15 per cent in a year, effectively slapping a ‘15% Off’ sale sign on Canadian properties for offshore buyers?” Douglas Porter, BMO Nesbitt Burns
“Over the past few weeks, even some housing bulls have become more alarmist about the continued upward trajectory of house prices in Vancouver and Toronto, where prices are completely detached from household income fundamentals. The concern is that foreign non-resident investors are driving up prices to unaffordable levels for most residents.” David Madani, Capital Economics
“New Zealand’s policy makers have embraced a more hands-on macroprudential approach, but in Australia and Canada, elevated household debt and housing activity continues to be an economic concern – one that will likely restrain the eventual exit from low rates in coming years.” Emanuella Enenajor and Alex Joiner, Bank of America Merrill Lynch
“House values in Ontario, led primarily by Toronto, have exceeded land values since 2007, while the opposite is true for British Columbia, led primarily by Vancouver. History suggests the value of houses and the value of land will eventually equate. This would correspond to a major price correction in both cities. Notably, if land prices in Toronto or house prices in Vancouver appreciate to offset the deviation to house prices, this will further build up concerns that credit debt is too high, and aggravate concerns of a wide-scale default. Conversely, if house prices in Toronto or land prices in Vancouver have a massive downsizing, investors will see their wealth deteriorate, and credit availability could collapse in the Canadian financial system. With interest rates expected to rise in the coming years, both housing markets will be greatly tested.” Paul Matsiras, Moody’s Analytics
“Our base case, and one that we outlined in the [October Monetary Policy Report], is that the housing market and household debt are going to evolve in a constructive way. We don’t see the risk as part of our base case at all.” Carolyn Wilkins, Bank of Canada
Manufacturing slips
Canada’s manufacturers suffered another down month in September as sales fell 5.1 per cent.
That followed a drop of 0.6 per cent in August and was led largely by the auto, oil and coal industries.
Sales fell in 13 of 21 industries measured, accounting for almost 79 per cent of the sector.
The largest drop was in Ontario, where shipments fell 2.5 per cent, Statistics Canada said today.
Japan in recession
Japan is back in recession despite the efforts behind the “Abenomics” stimulus measures.
Its economy contracted by 0.8 per cent, annualized, in the July-September quarter, according to government numbers released today, following a setback of 0.7 per cent in the previous three-month period.
The new numbers were another hit to Prime Minister Shinzo Abe, whose plan to get Japan back on track is clearly suffering.
It also means that “the economy has experienced two recessions in the last three years under PM Abe,” said observers at Société Générale.
What to watch for this week
The week closes with dual Statistics Canada reports on consumer prices last month and retail sales for September.
Given the drop in gas prices in October, expect a flat reading on the consumer price index for the month, and annual inflation in the area of 1 per cent.
“Indeed, with food prices also likely to only maintain their 3.5-per-cent or so annual trend, overall inflation is poised to register a flat monthly reading (0.1 per cent seasonally adjusted), leaving the annual trend at 1 per cent,” said Nick Exarhos of CIBC World Markets.
Gas prices will play into Friday’s retail sales report, too.
“Retail sales are expected to be little-changed in September, halting a four-month winning streak that saw 0.6-per-cent average gains,” said BMO senior economist Benjamin Reitzes.
“However, the softness will likely be driven entirely by a precipitous 8-per-cent plunge in seasonally adjusted gasoline prices. Auto sales were solid on the month, with dealers reporting a 3-per-cent increase in activity over August.”
On the corporate side, there is a handful of biggies still to come in the third-quarter earnings reporting season, including Home Depot, Loblaw, Wal-Mart, Target, Metro and Best Buy.