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What it would take for Canada's housing market to crash, and why Pimco says it won’t Add to ...

These are stories Report on Business is following Friday, Jan. 31, 2014.

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Pimco on housing
The world’s biggest bond fund manager expects a “cyclical decline” in Canada’s housing market, but says there’s little chance of a meltdown.

We touched on the comments from Pimco late yesterday, but, given the angst surrounding the residential real estate market, thought we’d go for a deeper look this morning.

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“There has been much media attention on Canada’s housing market lately, with some forecasters calling for ‘the bubble’ to pop in 2014,” Pimco says in latest look at Canada.

“While we think the housing market in Canada is overvalued and due for a correction, the correction will likely happen over several years.”

That said, Pimco’s Ed Devlin, the chief of Canadian portfolio management, believes the decline will begin this  year, though he stresses that a correction is not “a bubble bursting in a disorderly manner.”

Several Canadian economists are also calling for a slowdown, rather than a meltdown.

One of three things would have to happen this year to spark a full-on bust, Pimco’s Ed Devlin says:

1. Interest rates would have to spike sharply, which simply isn’t in the cards. The Bank of Canada isn’t anywhere near a rate hike, and in fact has left the door open to a cut from its current policy rate of 1 per cent. “With real growth of about 2 per cent and a relatively subdued inflation forecast, we see no reason for interest rates to substantially rise in 2014.”

2. Unemployment would have to spike. While the jobless rate isn’t projected to decline – rather, it’s expected to hover around the 7-per-cent mark – it’s not forecast to surge either. “Given this macroeconomic environment, it is also unlikely that the unemployment rate will spike to 8 per cent to 10 per cent (which, we estimate, would be needed to cause a disorderly housing correction).”

3. Mortgage credit would have to be “disrupted.” Also not in the cards. “The Canadian banking system continues to provide sufficient mortgage credit to keep the housing market financed.”

Over all, Pimco sees “modestly” higher mortgage rates, tighter mortgage rules, an ongoing “modest” economic rebound, and still-stretched property values.

All of which means home prices will erode this year, and sales will slip, but that’s about as far as it goes.

Keystone report buoys industry
The U.S. State Department has concluded the proposed Keystone XL pipeline would have little impact on greenhouse gases from Canada's oil sands, removing a key hurdle to final approval of the contentious project, The Globe and Mail's Shawn McCarthy reports.

U.S. President Barack Obama vowed to approve the cross-border pipeline only if it did not add to carbon concentrations in the atmosphere that are linked to climate change. The long-awaited State Department report said the pipeline is not essential to the development of the oil sands, and therefore, would have no impact on greenhouse gas emissions.

The release of the environmental impact statement triggers a 90-day review process, after which the president must decide whether to approve the project, which is opposed by his supporters in the environmental movement.

The oil industry welcomed the findings, and urged the president to act quickly.

Economy expands 0.2 per cent
Canada’s economy continues to chug along.

Gross domestic product expanded 0.2 per cent in November from October, marking the fifth month in a row of gains, albeit at a slower pace than the previous two months, Statistics Canada said today.

Goods production rose 0.4 per cent, while the service sector lagged at 0.2 per cent, the federal agency said.

The mining and energy sectors led the gains, while manufacturing slipped 0.5 per cent and construction 0.1 per cent, The Globe and Mail's Barrie McKenna reports.

The details of the report were better than the overall number might otherwise suggest, economists noted.

“While looking somewhat deep into the rear-view mirror, the decent month continues to point to a sturdy end to 2013 for the Canadian economy,” said chief economist Douglas Porter of Bank of Montreal.

“The three-month trend in growth is now running at a nifty 3.8-per-cent annualized clip, and output is up 2.6 per cent from a year ago,” he said in a research note.

“However, we look for a setback in next month’s report, as the brutal December weather (notably the ice storm in Ontario) is expected to produce a GDP decline for that month. Still, with the solid start to the quarter, we continue to look for Q4 growth of a bit better than the Bank of Canada’s latest estimate of 2.5 per cent.”

Wal-Mart warns on profit
Wal-Mart Stores Inc. sent something of a chill into the retail sector today with a warning that its fourth-quarter results are now expected to lag.

The giant retailer cited hits from a cut in benefits to the U.S. Supplemental Nutrition Assistance Program, better known as food stamps, and poor winter weather. There are also hits from international store closures and a restructuring to its Sam's Club operations.

Wal-Mart now projects underlying earnings per share to come in “at or slightly below the low end of our range of $1.60 to $1.70,” its chief financial officer said.

For the year, it projects the same for its earlier range of $5.11 to $5.21.

“Despite a holiday season that delivered positive comps, two factors contributed to lower comp sales performance for the 14-week period for Wa-Mart U.S.,” Charles Holley said.

“First, the sales impact from the reduction in SNAP (the U.S. government Supplemental Nutrition Assistance Program) benefits that went into effect Nov. 1 is greater than we expected. And, second, eight named winter storms resulted in store closures that impacted traffic throughout the quarter.”

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