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Canada's housing slowdown 'most dramatic'
The recent slowdown in Canada's real estate market is the "most dramatic" of a general global softening, Bank of Nova Scotia said today. While Canada and Australia led a post-recession surge as world housing markets entered 2010, activity seems to have cooled again amid softer demand and prices that came with moderating economic growth, financial market turmoil and a sluggish rebound in labour markets, economist Adrienne Warren said in a new report.
"The slowdown has been most dramatic in Canada," she said. "Average home prices in [the second quarter] were up just 6.8 per cent [year over year], compared with 16.6 per cent y/y in [the first quarter]. Sales, while still at a high level, have trended steadily lower alongside reduced affordability and exhausted pent-up demand. Meanwhile, increased listings are tilting overall market conditions back in favour of buyers. We expect demand to remain at a lower ebb into next year, and prices on average to be roughly flat."
Ms. Warren's report came as new numbers showed housing construction in Canada dipped in July by 1.6 per cent, largely because of a slowdown in single family homes. The annual rate of housing starts fell to 189,200 units from a revised pace of 192,300 a month earlier, Canada Mortgage and Housing Corp. said today. “Housing starts moved lower in July, largely due to a decrease in urban single starts and a reduction in rural starts,” said CMHC chief economist Bob Dugan. “Multiple starts partially offset this moderation.”
"After rebounding sharply earlier this year, the downward trend in homebuilding activity seen over the past three months should not come as a shock," said Toronto-Dominion Bank economist Dina Cover. "Starts running ahead of the household formation rate (estimated at 175,000-180,000 units) can only be temporarily sustained when prices are rising rapidly. This is no longer the case.
"Indeed, the moderation in starts is consistent with a cooling in the overall housing market. Existing home sales have been trending down since the start of this year – with the decline accelerating in May-July – while prices have been losing modest ground since May. In turn, lower home prices have dampened the incentive for homebuilding. With prices expected to slide a bit further, fewer home starts are likely to hit ground."
Fed to buy U.S. government debt
The Federal Reserve held its benchmark lending rate steady this afternoon, but announced plans to buy long-term Treasury securities amid signs of a fizzling recovery and mounting fears of deflation. The central bank said it will use its mortgage-bond holdings to buy the paper, while at the same time still rolling over the other Treasury securities it holds as they mature. “The pace of recovery in output and employment has slowed in recent months,” the central bank's policy-setting panel said. The move is seen as a small step. Here's what some economists think:
- "With recent economic data, including the ever-important jobs report, showing a slowing in the pace of U.S. economic activity, the Fed has moved its near-term stance away from potential withdrawal of monetary stimulus, towards the possibility of easing further. The decision to reinvest the proceeds of previous purchases of mortgage-backed securities in longer-term Treasury securities is an important signal of this change in stance. From a policy of passive balance sheet contraction, the Fed has opened the door to further monetary stimulus. Moreover, by purchasing Treasuries as opposed to agency debt, the Fed has made evident its preferred path should future easing become necessary." Toronto-Dominion Bank senior economist James Marple
- "The Fed gave a token nod in the direction of market worries by committing to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities ... This is a short-term confidence measure to offset what would have otherwise been post-statement prospects for a modest near-term market shock that was being priced in during the course of the day. But such a measure will do absolutely nothing to the real economy." Derek Holt and Gorica Djeric, Scotia Capital
- "This action likely signals that the Fed is prepared to take further steps should its economic outlook deteriorate further. The Fed noted that the pace of recovery in the economy and employment has 'slowed in recent months,' and that the recovery 'is likely to be more modest in the near term than had been anticipated.' However, it did not indicate a change in its medium-term outlook, suggesting it still believes policy is about right to reduce unemployment and prevent deflation." BMO Nesbitt Burns senior economist Sal Guatieri
- "The Fed's decision today to start reinvesting the proceeds from maturing agency and [mortgage-backed securities] holdings into Treasury securities is a largely symbolic gesture, designed to reassure the markets rather than boost the economy. Its MBS holdings aren't scheduled to mature for at least another 10 years and the maturity distribution of its much smaller holdings of agency debt are pretty evenly spread over the next 10 years. Basically, all the Fed will be doing is reinvesting the returned principal from mortgages that are prepaid earlier than scheduled." Senior U.S. economist Paul Ashworth, Capital Economics
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