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business briefing

Briefing highlights

  • Canada slides in housing rankings
  • Home sales, prices slip in September
  • Markets at a glance
  • Sears collapses into Chapter 11
  • Oil rises on Saudi condemnation
  • Currency manipulation report on tap
  • What else to watch for this week
  • Optimism high among businesses
  • Bank of America profit beats estimates

Whither housing markets

Canada has fallen from grace on global housing markets.

That was supposed to happen, setting the stage for cooler, and hopefully more sustainable markets going forward.

Where once Canada ruled the roost, many markets have fallen in the quarterly rankings from Knight Frank, the latest report putting Toronto, Hamilton, Calgary, Edmonton and Winnipeg near the bottom of the list for house price gains.

Vancouver still ranks high for the second quarter of the year, but that can be expected to change as the market slumps even further.

RANK 12-MONTH % CHANGE
Q2 2017 Q2 2018 Q2 2017 Q2 2018
Toronto 1 137 29.3% -2.8%
Hamilton 3 128 25.6 -0.4
Victoria 12 n/a 17.4 n/a
Vancouver 52 10 8.1 13.3
Ottawa-Gatineau 97 62 3.3 4.7
Montreal 110 80 2.2 3.6
Halifax 113 85 1.8 3.2
Calgary 115 117 1.4 0.3
Winnipeg 117 107 1 1.3
Edmonton 127 119 -0.1 0.2
Quebec 129 113 -0.6 0.7

SOURCE: KNIGHT FRANK

This is what federal and provincial policy makers wanted, the former bringing in new Canada-wide mortgage-qualification rules and the latter initiatives including taxes in foreign buyers of real estate in British Columbia and Ontario.

Those measures were meant to cool down bubbly areas such as Vancouver and Toronto, and, indeed, economists say they've largely succeeded in staging a soft landing.

"In some cities, the performance of the mainstream and prime market is diverging," Knight Frank said.

“A lack of prime supply is cushioning the top segment of the market in Sydney and Dubai, where annual prime price growth is closer to 5.7 per cent and -0.8 per cent, respectively,” the real estate consulting group added.

"Elsewhere, tax stamp duty (Vancouver, Toronto, Hong Kong) has led to slower growth at the luxury end of the market."

Compare this to a year ago, when Knight Frank’s report for the second quarter of 2017 put Toronto in the No. 1 spot, with an annual price gain topping 29 per cent, and Hamilton at No. 3 and almost 26 per cent. At that point, though, Vancouver was well down the list, with an annual price rise of about just 8 per cent.

By the first quarter of this year, of course, as the new mortgage rules came into effect and as provincial policy measures had time to bite, the rankings had changed markedly where Canada is concerned.

Vancouver was then in the No. 4 spot, with a price jump of almost 15.5 per cent, while cities such as Toronto and Hamilton had faded from memory.

In time, Vancouver should fall further, as well. Note, too, the gap measured in the second quarter.

"Of those countries where a rate rise has taken place in 2018, a number have a significant gap between their strongest and weakest performing city (16 per cent in Canada, 11 per cent U.K., 10 per cent U.S.," Knight Frank said.

These are second-quarter numbers, of course.

The latest reading of the Teranet-National Bank home price index shows costs “recovering some of the ground lost in previous months.”

That’s largely because of Toronto, said National Bank senior economist Marc Pinsonneault, while Vancouver and Calgary continue to decline.

Montreal and Ottawa, though, are on fire, Friday’s measure showed.

“This is consistent with the performance of the home resale market,” Mr. Pinsonneault said.

Looking at those overall numbers, Capital Economics said home price inflation could temporarily “rise a touch further” in the short term,” but don’t expect much beyond that.

“On a nationwide basis, the sales-to-new listing ratio points to a further rise in house price inflation to more than 5 per cent,” said its senior Canada economist, Stephen Brown.

“We certainly wouldn’t bet on that,” he added.

“While the rebound in Toronto home sales earlier this year helped to support prices over the summer, sales appear have plateaued in recent months. And with many of the owners who are taking delivery of condos facing negative cash flows, there could well be a rise in new listings in the coming months.”

Toronto-Dominion Bank senior economist Brian DePratto also cited rising interest rates, with more to come, having an impact.

“More expensive debt crimps household budgets, with housing the most obvious point of impact (other rate sensitive areas, like auto sales, have also been moderating),” he said.

“As it stands, there doesn’t seem to be too much to get worried about.”

And today, the Canadian Real Estate Association reported that national sales slipped 0.4 per cent in September from August and 8.9 per cent from a year earlier.

Average prices barely moved, up 0.2 per cent from September, 2017, while the MLS home price index, which is considered a better measure gained 2.3 per cent.

“While sales activity is still somewhat stronger compared to the first half of this year, it remains well below most other months since 2014,” the real estate group said.

About 70 per cent of the regional markets slipped on an annual basis, driven down, as expected by the big B.C. markets, Calgary, Edmonton and Winnipeg.

Here, for the record, is the latest five-year outlook from Moody’s Analytics and RPS Real Property Solutions:

Average annualized projected single-family house price growth, per cent, 2018Q2-2023Q2

May 2018 forecast August 2018 forecast
Canada 3 1.5
Kelowna 2.9 3.5
Guelph 3.1 3
Saskatoon 4.5 2.9
Edmonton 5.3 2.8
Montréal 4.3 2.6
Vancouver 3.9 2.4
Barrie 2.3 2.3
St. John's 2.4 2.3
Ottawa-Gatineau 3.4 2.2
Halifax 4.3 2
Abbotsford 1.4 1.8
Oshawa 3.1 1.8
Victoria 2.9 1.6
Sherbrooke 3.7 1.6
Moncton -2 1.5
Toronto 2.9 1.3
Greater Sudbury -1.2 1.2
Québec 2.9 1.1
Saint John -1.5 1
Trois-Rivières -1.3 0.9
London 1.9 0.9
Winnipeg 2.4 0.6
Peterborough -0.5 0.6
Saguenay -1.6 0.5
Kitchener 1.7 0.3
Brantford -0.2 0.2
Kingston 0.5 0.2
Hamilton 1.6 0.1
St. Catharines-Niagara 1.6 0
Windsor 2.1 -0.3
Calgary 3.2 -0.4
Thunder Bay -1 -0.4
Regina 1.8 -0.7

Source: RPS, Moody's Analytics

Editor’s note: The first table is a corrected version of the Knight Frank numbers.

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Markets at a glance

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The really soft side of Sears

Sears Holdings Corp. collapsed into a Chapter 11 bankruptcy filing today, completing the downfall of a retailer that was once the king of its industry.

This followed the failure last year of Sears Canada Inc.

“U.S. retailers are likely to be in focus after Sears, after a long fight for survival, finally lost its battle with a changing retail environment, and after a 125-year history became the latest in a long line of big name retailers to file for Chapter 11 bankruptcy, under the weight of more than US$10-billion of debt,” said CMC Markets chief analyst Michael Hewson.

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Oil prices rise on Saudi condemnation

The global condemnation of Saudi Arabia over the disappearance of journalist Jamal Khashoggi is spilling into in the oil market.

Crude prices are rising after the Saudis threatened “even greater action” if sanctions are imposed, as The Globe and Mail’s Mark MacKinnon reports.

“Oil prices in particular have continued to edge back from their October lows on concerns that Saudi Arabia might use the oil price as a retaliatory measure on any sanctions that might come their way over the accusation about the disappearance,” said CMC’s Mr. Hewson.

“This would be a high risk strategy for the Kingdom given it would hurt their allies and enemies alike, as well as tipping the global economy into recession, which in turn could well slash demand,” he added.

“Any attempt to weaponize oil prices, while effective in the short term, would be enormously counterproductive, probably hastening the move away from fossil fuels even further, and potentially prompting the U.S. to open its Strategic Petroleum Reserve in an attempt to cap the upside.”

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What to watch for this week

The Trump administration is expected to ramp up its trade battle with China today, but with words rather than further action.

Or, as JPMorgan Chase global foreign exchange strategist Daniel Hui put it, “no sticks, no stones, just harsh language.”

Observers believe the Treasury Department’s semi-annual report on those it accuses of fiddling with their exchange rates will again fall short of calling China a currency manipulator, though that’s a possibility.

"We think the monitoring list should remain unchanged, with the usual suspects getting a nod: China, Germany, Japan, Korea and Switzerland," said Mark McCormick, North American head of foreign exchange strategy at TD Securities.

"We don't think the report will label China a currency manipulator, which is the anticipation for markets," he added.

“Indeed while Trump has lambasted both China and Germany for unfair currency practices, we suspect that rhetoric falls into the brinksmanship category rather than an official policy move.”

U.S. President Donald TrumpPool/Getty Images

This latest report, the fourth under the current administration, covers the first half of the year.

"So if Treasury again fails to use the ‘manipulator’ label, it will be more likely to do so next April, as the yuan weakened more in the latter half of this year," said BMO senior economist Jennifer Lee, also citing speculation that the U.S. and Chinese presidents may meet at the end of next month at a G20 gathering in Argentina.

That would be "a positive step," Ms. Lee said.

"By then, China’s just-announced record trade surplus with the U.S. in September will be old news (we will have October data by then)," she added.

"That’s a good thing as it would have made for a more uncomfortable meeting, unless October trade is worse."

Even a "manipulator" label wouldn't change the game all that much, said JPMorgan's Mr. Hui, because China and the U.S. have already hit each other with tariffs.

"There are no concrete additional actions that even an explicit currency manipulator finding would result in to further escalate the U.S.-China conflict," Mr. Hui said.

"At most, it would only reinforce and validate the existing U.S.-China tension over broad economic policy," he added.

"U.S. official rhetoric has already warned against a currency devaluation response to tariffs, although we still expect further [yuan] trend depreciation as one consequence of the likely further escalation of the trade war."

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The Treasury is just one thing to watch for in what’s shaping up to be a busy week for investors, with quarterly corporate results also picking up steam, key after last week’s market turmoil.

And, of course, this is the week marijuana becomes legal in Canada.

Here's what else is on tap:

TUESDAY

Okay, here we go: Quarterly earnings reports will set the tone, with biggies including BHP Billiton Ltd., BlackRock Inc., CSX Corp.., IBM, Johnson & Johnson, Morgan Stanley and Netflix Inc.

Markets will also be watching for Chinese inflation and euro zone trade numbers.

WEDNESDAY

No, Hump Day doesn't mean you get to take the day off to smoke pot.

But you could if you want to, as marijuana becomes legal.

Besides consumers, legalization is obviously having a huge impact on everything from business to the markets, as documented by our coverage, below.

"This will show up in the fourth-quarter GDP statistics, with Statistics Canada set to include both legal and illegal cannabis sales for the first time," said Mr. Brown of Capital Economics.

"Its estimates suggest sales will be $5-billion in annualized terms in the final quarter," he added.

"That would boost the annualized growth rate by around 0.7 of a percentage point and provide a favourable base for growth in 2019."

On perhaps less interesting but equally important matters, observers also project Statistics Canada's monthly manufacturing report will show a drop of about 0.7 per cent or more in factory sales in August, though some expect to see a slim gain.

"After taking a step forward in July, factory sales likely took a similar sized step back in August," said Royce Mendes of CIBC World Markets.

"Already released export data combined with information on auto production and the currency all point to a decline of 1 per cent in manufactured shipments," he added.

"While Canadian factories still have a bit more room to run before bumping up against capacity constraints, already high inventory levels could see production cool down, a negative for GDP."

Markets will also scour the minutes from the last Federal Reserve meeting for clues.

Earnings: Kinder Morgan Canada Ltd. and U.S. Bancorp are among the biggies.

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THURSDAY

European countries were to have given their budget plans to the EU Commission at the beginning of the week, setting the stage for a European Council summit in Brussels.

Watch for whatever Italy does, given that its fiscal stance has already helped roil markets, and, of course, the latest developments on the Brexit front.

"The Italian budget will be presented to the EU Commission (Monday), but the EU reportedly sees the draft as a significant deviation from the 1.9-per-cent budget deficit as recommended by the EU rules, and thus we expect the EU to officially reject the proposal," observers at Citigroup said in a report.

At the summit, they added, "we should expect more clarity on the key issues of the Irish border and a potential trade deal between the two sides after Brexit."

Earnings: American Express Co., Canadian Pacific Railway Co., Philip Morris International Inc., The Blackstone Group LP and The Travelers Cos.

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FRIDAY

Markets will be watching as China reports a raft of economic indicators, including gross domestic product for the third quarter.

"We expect them to show that the economy is slowing," said Chang Liu of Capital Economics.

"But the September data on infrastructure investment and credit growth could surprise to the upside."

And, have you weighed your wallet recently?

Economists expect Statistics Canada to report that annual inflation eased in September, but, at 2.7 per cent, may still be above the level of your pay raise.

"Energy prices remain a lift to inflation but should decelerate on a year-over-year basis, whereas food prices should pick up marginally," TD economists said in a lookahead.

The federal agency is also expected to report that retail sales rose by about 0.5 per cent in August.

Earnings: Corus Entertainment Inc., Procter & Gamble Co. and Rogers Communications Inc., among others.

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