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Toronto real estate market ‘the hottest:’ BMO (Fred Lum/The Globe and Mail)
Toronto real estate market ‘the hottest:’ BMO (Fred Lum/The Globe and Mail)

The Week

Will housing decline be mild or 'something much nastier'? Add to ...

These are some of the major stories Report on Business followed this week. Get the top business stories on weekdays on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Whither the real estate market? Canada’s housing market is headed for a cooling-off period, which is no surprise, given the uncertain economic climate, a rising unemployment rate and recent changes to mortgage rules. The question is the path, and how steep that downturn will be.

By many accounts, the slowdown will not become a bust, with a moderate decline in prices over the next couple of years. Not all observers believe that, though.

“The conventional wisdom is that Canadian housing is headed for a slowdown (at best), with many looking for something much nastier,” deputy chief economist Douglas Porter of BMO Nesbitt Burns said in a report this week.

“While the timing of said slowdown remains up in the air (and it’s no foregone conclusion it will start this year), it is highly unlikely that Canada’s housing market can continue its recent winning ways.”

Mr. Porter’s colleague at BMO, senior economist Sal Guatieri, doesn’t expect the “nastier” turn, saying in a separate report that the market is losing steam, and that valuations remain a worry, but that there will still be “modest gains” in overall sales this year, along with steady prices, a dip in housing starts and more moderate mortgage growth compared to its pace of almost 8 per cent.

"If you listen closely you can hear the sound of air seeping out of Canada's housing balloon," Mr. Guatieri said in his report.

"(Unlike a bubble, a balloon can deflate slowly.) Outside of Toronto and Saskatchewan, home sales have moderated since new mortgage rules were introduced in March (for the third time in four years). Markets are balanced in over half the country, but sellers still rule in Toronto, Saskatchewan and Manitoba. Prices have pulled back moderately from spring highs, led by once white-hot Vancouver."

There are regional differences, of course. Senior economist Jacques Marcil of Toronto-Dominion Bank believes housing markets will weigh on the economies of British Columbia and Ontario.

Mr. Marcil said as he projected a “significant correction” this year, noting that the hot Vancouver market probably peaked in 2011.

Mr. Marcil expects resales in B.C. to sink 3.7 per cent this year, and prices 3.5 per cent.

"The correction will extend into 2013, as unit resales fall a further 5 per cent while prices slip 4.4 per cent," he said.

Indeed, the Real Estate Board of Greater Vancouver reported this week that sales last year climbed 5.9 per cent from 2010, but slowed at the end of the year. Sales in December fell 12.7 per cent from the same month a year earlier. And while prices were still up by 7.6 per cent, they were 1.5 per cent below their peak of June, 2011.

Mr. Marcil also expects Toronto’s condo market to slow.

"In addition to the growing pipeline of supply, the knock-on effects of financial market volatility to buyer confidence will likely result in a cooling down in condominium sales in the region in 2012 and 2013,” he said.

For now, the Toronto housing market is still going strong over all, The Globe and Mail’s Sean Silcoff reported this week.

According to the Toronto Real Estate Board, sales in December climbed 10.1 per cent from a year earlier, and prices rose 4 per cent. That marked the end of the second-strongest year in records dating back to 1994.

Markets will be watching next Tuesday when Canada Mortgage and Housing Corp. reports the level of home building in December. While housing starts are expected to begin dipping going forward, December's reading is expected to show an annualized reading in the area of 190,000.

"Analysts in recent months had been expecting housing construction to slow, led by weaker multiples construction - with the heated condo market losing its affordability edge over detached properties," said CIBC World Markets economists Emanuella Enenajor.

"But November’s 13,000 fall in starts to 181.000, the lowest level in nine months, came as an outsized surprise, even with the weakness driven by multiples (condo) building. While we expect housing starts to trend down in the quarters ahead, November’s sharp plunge could correct in December, with starts rising to 189,000. However, even with the year-end uptick in home building, weak housing starts readings in earlier months suggests that residential construction could be a drag on [fourth-quarter]GDP growth, after providing a generous lift in [the third quarter]"

As senior economist Michael Gregory, also of BMO Nesbitt Burns, sees it, Canada's housing market is "stabilizing" amid slow job growth in the second half of last year, waning consumer confidence, a drop-off in foreign investment from Asia, and the tighter mortgage rules. The bounce-back in housing starts that is believed to have taken place in December in fact marks just a partial rebound in starts of multiple units, such as condos, and poor weather in some regions in November.

"Nevertheless, stabilization is still a remarkably robust outcome given the abovementioned housing headwinds, and reflects the offset provided by low borrowing costs," he said.

"However, the allure of low interest rates is waning, as Canadian households amass record high debt burdens and policy makers sound the alarm on related risks to economic and financial stability, pointing to a cooler pace of housing activity this year."

Will U.S. slump end this year? While Canada’s housing market cools, however, there are suggestions that U.S. housing may finally be emerging from its long, deep slump.

Evidence is mounting that U.S. housing has finally hit bottom, and will contribute slightly to growth this year,” said BMO’s Mr. Porter.

But while the lengthy decline in house prices could end this year, analysts aren’t projecting marked increases.

"Tough credit conditions and rising foreclosures will prevent significant and sustained price gains until 2014," said Paul Dales, senior U.S. economist at Capital Economics in London.

"We now think that prices are close to finding a floor," he added in a report. "The key difference between this year and last is that banks are a little bit more willing to lend. For example, towards the end of last year lenders were willing to extend a loan worth 80 per cent of the home purchase price up from nearer 70 per cent in 2010."

At the current pace of sales, Mr. Dales said, it would take seven months to sell all the unsold stock in the pipeline. And when you exclude the 2010 "distortion" of a temporary tax credit, it's the first time in five years that that measure of the demand and supply balance is close to its long-term average.

Still, it won't be a rapid rise, and much still depends on how the euro crisis plays out.

"The loosening of credit criteria has so far been modest," Mr. Dales wrote. "And by reducing the ability of households to extract a down payment from their home, the previous fall in prices has shut out up to half of all mortgage borrowers from the mortgage market. Moreover, given how many people were burned during the crash, it will take many years to rekindle America's love affair with home ownership."

He also projected a further three million foreclosures.

RIM heads for change Research In Motion Ltd. is heading for change, after what can only be described as one ugly year. But, as The Globe and Mail’s Iain Marlow reported this week, that change may not be enough to satisfy investors.

The BlackBerry maker, whose shares plunged over the past year by more than 70 per cent, has been under pressure to, among other things, change its governance structure. Mike Lazaridis and Jim Balsillie, who are co-CEOs, also chair the board, despite a trend in recent years for companies to separate those functions.

A RIM committee is now studying the governance structure, and is expected to make its recommendations by the end of this month. It is expected to propose a new chair, and analysts and other observers expect director Barbara Stymiest to take the helm.

She’s well known in the business community, as the former CEO of what’s now TMX Group Inc. and the former COO of Royal Bank of Canada. The betting is that Ms. Stymiest would then launch a deep look at the wide range of strategic options as the company readies its new BlackBerry 10 software.

“Ms. Stymiest is considered one of the top executives in Canada,” Jefferies & Co. analyst Peter Misek said in a report this week.

“We would view such an announcement positively as we believe she will initiate a formal strategic review, possibly trim costs in the hardware business, and possibly announce additional partnerships; however, we continue to see an outright sale in the near term as unlikely and see near-term results as challenged.

In fact, RIM stock rallied this week on word that Ms. Stymiest could become chair. Though, as Mr. Marlow reported, there are questions about just how much she could achieve. Change will take time, he wrote.

What to watch for next week The Bank of Canada will get the week started when it releases its business outlook survey and senior loan officers survey for the fourth quarter on Monday morning. The business outlook survey is expected to be "a slightly more downbeat report, other than perhaps in terms of capital spending intentions," said chief economist Avery Shenfeld of CIBC World Markets.

Economists and market players will be watching for what businesses say about their plans for investing and hiring.

"Any negative survey responses would be quite worrying, since the other sectors of the economy, such as government, external trade and housing, are unlikely to contribute positively to overall GDP growth in 2012," said David Madani of Capital Economics.

"For now, we are still cautiously optimistic that business investment will remain fairly robust and that the business sector will contribute strongly to economic growth this year. This view is supported by financing conditions, which according to the [senior loan officers survey] have eased over the last few quarters."

The focus will shift later in the week to the European Central Bank, which announces its decision on interest rates Thursday. It's under pressure amid the euro zone’s debt crisis and a projected recession in the 17-member monetary union, but is still expected to leave its key rate unchanged at 1 per cent. But watch for what its new chief, Mario Draghi, has to say.

Mr. Draghi has already undone the rate increases of his predecessor, and is expected to cut still further, though not on Thursday. He is expected to lay the groundwork next week, however, says RBC Dominion Securities.

“We think that President Draghi will deliver a dovish message at the press conference, which will pave the way for a further rate cut in February,” said RBC’s James Ashley in London.

“There has been material progress since the prior governing council meeting, but the crisis is far from over, and the growth outlook is anemic at best,” Mr. Ashley said in a report.

“Paradoxically, the looming recession in the euro area could have one conceivable positive byproduct: If output in the core starts to decline, then the Tier 1 economies may be forced to rethink the current ‘muddle through’ approach and reappraise the relative costs of the alternative crisis resolution options.”

The Bank of England also meets, and announces its decision on the same day, but, like the ECB, isn’t expected to change direction.

Fourth-quarter earnings season kicks off with results from Alcoa Inc. on Monday, though, as BMO's Robert Kavcic notes, it will take a couple of weeks to get into fulls wing.

"Expectations are currently for 7.8-per-cent year-over-year growth in S&P 500 operating earnings, down from a near-18-per-cent year-over-year pace in Q3," Mr. Kavcic said.

"There was a notable uptick in negative preannouncements ahead of this coming earnings season, suggesting that some momentum is being lost. Indeed, the 7.8-per-cent year-over-year consensus estimate for Q4 growth has been trimmed from 15 per cent year-over-year back in early October, but at least the expectations bar is that much lower."



Required reading this week Increased production, expanded terminal capacity, and reduced-but-steady demand from Asia bode well for the coal industry, David Ebner and Brenda Bouw report.

Canadian Pacific Railway Ltd.’s establishment directors are embroiled in what is fast becoming a nasty fight with a restless New York activist shareholder over who will lead the company, Jacquie McNish and Brent Jang report.

At some point in the spring of next year, a San Francisco startup is going to start demoing a product that’s designed to predict the future, Omar El Akkad writes.

China is shifting away from being a passive investor in Canada’s vast oil sands, striking its first deal for an entire project. Carrie Tait reports on PetroChina's deal.

Private mergers and acquisitions will be driven by the unlikeliest of sources in 2012, public governments, according to the latest annual report on M&A trends by Torys LLP, Tim Kiladze writes.

Barrie McKenna examines five things Ottawa and the provinces can do to brighten Canada’s economic landscape in 2012.

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