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Why Toronto-Dominion Bank thinks Canada is 'overbuilt' Add to ...

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Canada 'overbuilt'
The latest measure of the residential construction sector shows no cracks in the foundation, prompting Toronto-Dominion Bank to warn that Canada is moderately “overbuilt.”

The latest numbers from Canada Mortgage and Housing Corp., released this week, showed housing starts in September dipping to an annual pace of about 220,000, which TD economist Francis Fong notes tops the average of about 209,000 over the past decade.

That added fuel to fears of overbuilding, given that the rate of construction is seemingly “out of sync” with the recent softening in the market for resale homes, he said.

“So is Canada overbuilt?” Mr. Fong asked.

“In our view, the answer is yes,” he wrote in his report.

“The current pace of construction is also well north of the average rate of household formation in Canada. According to the 2011 census, only 177,000 new households were created each year since 2006. This would imply that, over time, we have been building more than the demographic need requires.”

It’s not a problem across the nation, he added, but rather a threat in a “handful” of cities and in the condo sector.

There are particular concerns in the Toronto area, where households have been forming at a pace of 38,000 a year but housing starts have averaged almost 50,000, and in Vancouver, at 15,000 and 20,000, respectively.

“The issue itself is not that there are not enough buyers for these units,” Mr. Fong said.

“In fact, the large majority of these condo units must be pre-sold before the building can be completed. The concern is that, over the medium term, if these units were not bought by end-users, but by investors, that they will be put up for sale in a market where interest rates are rising, households are pulling back and there will be a large number of sellers competing for a relatively small pool of buyers.”

The bottom line for Mr. Fong is that the bank believes there’s a “moderate level of overbuilding” in some cities that will lead to a “gradual price correction” over the course of the next several years as the rate of construction eases.

For Mr. Fong's research, see the accompanying graphic or click here.

Just as an aside, while housing starts are back to pre-recession levels, take a look at Saskatchewan and Manitoba.

“That looks almost pedestrian compared to the explosion in homebuilding in Saskatchewan and Manitoba, which are both seeing activity close to multi-decade highs,” said Robert Kavcic of BMO Nesbitt Burns, though the numbers, as opposed to the performance, of course, are smaller, with Saskatchewan at 9,400 and Manitoba at 7,500 in the same period.

“Not coincidentally, these provinces also sport elevated population growth, relatively high affordability and two of the three lowest jobless rates (by a long shot) in Canada.”

For Mr. Kavcic’s research, see the accompanying graphic or click here.

IMF report downbeat
The International Monetary Fund sent a shiver through global markets Tuesday, taking a more downbeat view of the global economy.

As The Globe and Mail’s Brian Milner reported, the IMF said in no uncertain terms that the risks to the economy lie in Washington and Brussels, where politicians are grappling with budget and debt issues.

The IMF certainly isn’t the first, and in fact is late to the party, but it did add its influential voice to the global calls for the United States and Europe to act, citing the one in six chance of a new world recession.

“The timing could not have been worse after the World Bank cut China’s growth forecast on Monday,” said market analyst David Madden of IG in London.

“This shows investors the problem is not just confined to a couple of regions; it’s a worldwide slowdown.”

The IMF had a particular warning for Canada as it cuts its projection for the country’s growth to 1.9 per cent this year and 2 per cent, down 0.2 in each case from earlier forecasts.

“In Canada, the key priority is to ensure that risks from the housing sector and increases in household debt remain well contained and do not create financial sector vulnerabilities,” the IMF said in its world economic outlook.

“Thus far, mortgage credit growth has slightly decelerated in response to the measures taken by the authorities, including tighter mortgage insurance stands. If household leverage continues to rise, additional measures may need to be considered.”

CRTC plans code
This may be the moment you’ve been waiting for, when you actually get to tell someone other than the person at the end of the phone, after a wait of, say, 10 minutes, what you think about everything that bugs you where your cellphone’s concerned.

As The Globe and Mail’s Rita Trichur reported, Canada’s telecom regulator plans a national code that would govern the country’s wireless services.

And it’s asking for public input.

First up is dealing with the language on contracts, possibly followed by measures on such irritants as cancellation fees.

“In the past, Canadians have told us that contracts are confusing, and that terms and conditions can vary greatly from one company to another,” said Jean-Pierre Blais, the chairman of the Canadian Radio-television and Telecommunications Commission.

“We are asking them to assist us in developing a code that will help them better understand their rights as consumers and the responsibilities of wireless companies.”

10 things
1. Human Resources and Skills Development Minister Diane Finley, in an Oct. 10 news release: “Canadians with disabilities have a tremendous amount to offer employers but they remain underrepresented in our work force. Today, I am pleased to announce that our government is helping 1,600 hard-working Canadians with disabilities get jobs.”

MP Rodney Weston, on behalf of Ms. Finley, in a different Oct. 10 news release: “Our top priorities are job creation, economic growth and long-term prosperity, and we know that employers across this country are looking for workers. That’s why I am proud to announce that the Harper government is helping 1,600 Canadians with disabilities get jobs through the Opportunities Fund program.“

MP Kellie Leitch, Ms. Finley’s parliamentary secretary, in still a different Oct. 10 news release: “Our top priorities are job creation, economic growth and long-term prosperity, and we know that employers across this country are looking for workers. That’s why I am proud to announce that the Harper government is helping 1,600 Canadians with disabilities get jobs through the Opportunities Fund program.”

(I’m a bit confused over who said what and exactly who’s proud to announce that the Harper government is helping 1,600 hard-working Canadians with disabilities. And why Mr. Weston and Ms. Leitch failed to mention how hard-working they are.)

2. Kellogg Co. has recalled 2.8 million packages of Frosted Mini-Wheats over the possibility of contamination with bits of metal mesh. Just pointing out how it describes the product on its website: “Other choices may do little more than leave a heavy feeling in your stomach.”

3. Florida Governor Rick Scott mistakenly gave out a number for a phone sex line, rather than the number for the information line about the outbreak of meningitis, according to reports. A spokeswoman said he misread the phone number. As opposed to knowing it off by heart.

4. Headline in German newspaper after Chancellor Angela Merkel’s short visit to Greece Tuesday was marked by protests, according to Reuters: “Germany does not deserve this!” Headline in Greek paper: “She came ... she saw ... she promised.”

5. Sugar rush? According to CNN, some U.S. farmers are giving their cows everything from gummy worms to hard candy amid record prices for corn.

6. I’ll admit that when I was a kid, I might have “borrowed” some money from my mom. To buy a treat, or something like that. Reuters reports that a German teen swiped some of his mom’s jewelry, worth up to €3,000 and pawned it for far less, so he and a friend could visit a brothel. Twice.

7. From the Financial Times: “A glut of German castles at rock-bottom prices is offering the promise of a baronial lifestyle - or opulent corporate HQ - often within striking distance of major cities.”

8. Yellow Pages Group said this week that it’s “proud to announce that is among Canada’s Top 100 Employers for the seventh year in a row” based on Mediacorp rankings. Some of its other news releases of late: “Yellow Media obtains safeguard order” and “Yellow Media’s debtholders and shareholders approve recapitalization,”

9. CanaccordGenuity analyst Aravinda Galappatthige on Cineplex Inc.’s coming third-quarter results: “Expecting a soft Q3 with EBITDA projected to be down 11.4% y/y: Based on the latest numbers from the Motion Picture Theatre Association of Canada (MPTAC), we estimate that Canadian Q3/12 box office sales were down 5% y/y. We were originally expecting a flat box office in Canada on a y/y basis. Despite a seemingly strong slate that included The Dark Knight Rises and The Amazing Spiderman, it lost ground quite quickly after the initial weeks.” Just wait for Iron Man 3, The Avengers 2, Hunger Games 2, X-Men First Class 2, Paranormal Activity 4, Zoolander 2, Die Hard 5 and Star Trek I Lost Count.

10. According to Harvard Business Review, the “sexiest job of the 21st Century” is that of data scientist.

Required reading this week

Long viewed as one of the world’s most attractive mining jurisdictions, Australia is now facing challenges that go beyond just the global economic slowdown, Pav Jordan reports.

Retailers bracing for next year’s arrival of U.S. discount juggernaut Target Corp. face a more immediate threat, Marina Strauss writes: The lowly dollar store.

Angela Merkel’s first visit to Athens since the Greek-inspired debt crisis began almost three years ago was a brave, if impossible, mission, Eric Reguly reports.

The battle over Alberta’s oil sands is spreading east as governments in Quebec and the eastern U.S. are confronted with aggressive moves by western crude producers to access new markets, Shawn McCarthy writes.

Canada’s western energy powerhouses are feeling the chill from sluggish natural gas markets, Brent Jang reports.

What to watch for next week
Monday could look somewhat ugly for the housing industry when the Canadian Real Estate Association reports September sales and prices.

Economists expect to see that sales fell by about 15 per cent from a year earlier, with average prices just about flat. Several local real estate boards have already reported their numbers.

“By all available accounts, Canadian home buyers took a big step back in September,” said deputy chief economist Douglas Porter of BMO Nesbitt Burns.

“Of the 10 major cities we track closely, eight recorded double-digit declines in sales from year-ago levels last month, with Vancouver’s 32.5 per cent drop the most spectacular, and Toronto’s 21 per cent slide the most notable,” Mr. Porter said in a research note.

“Moreover, previously solid cities - Winnipeg, Ottawa and Montreal - all saw sales drop at least 14 per cent. True, the declines were likely accentuated by calendar effects (there were only 20 weekdays this September, versus 22 a year ago), but there is no denying that underlying sales have softened meaningfully since the new mortgage insurance rules kicked in on July 9.”

Manufacturers may have fared better than real estate agents as economists project Statistics Canada will report Tuesday that sales in sector bounced back in August.

“We expect that manufacturing sales rebounded 1.2 per cent in August to partially retrace the 1.5-per-cent drop recorded in July,” said economists at Royal Bank of Canada.

“This, in part, reflects an expected strengthening in transportation sales following a 6.4 per cent drop in July.”

For investors, third-quarter earnings season kicks into much higher gear, with major banks such as Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley, Bank of America Corp. and others reporting throughout the week.

Markets will also get a good reading of the tech sector, with quarterly results from Intel Corp., IBM Corp., Advanced Micro Devices Inc., Google Inc. and Microsoft Corp.

Where consumers are concerned, look for earnings from Johnson & Johnson, Coke and Pepsi, and McDonald’s Corp.

"The Q3 earnings season unofficially got underway this week, and despite the S&P 500 not far off a 52-week high, expectations are not exactly rosy," said BMO's Mr. Kavcic. "The consensus bottom-up call is for a 2.5 per cent year-over-year decline in S&P 500 operating earnings in the quarter, which would be the first year-over-year drop since the recession."

Follow on Twitter: @michaelbabad

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