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Business Briefing Canada’s housing market: The worst showing since 2008, an ‘ugly’ December, a big shift to condos

Briefing highlights

  • Housing: Downright ‘ugly’
  • Newmont to buy Goldcorp
  • Goldcorp rises in premarket
  • Markets at a glance
  • Lululemon raises outlook
  • Brexit, bank earnings in spotlight
  • Citigroup posts jump in profit
  • What to watch for this week
  • From today’s Globe and Mail

Some kind of ugly

Tuesday's report on home sales and prices won't just cap a tumultuous year for Canada's housing markets. It'll be downright "ugly."

Bank of Montreal expects the Canadian Real Estate Association report to show sales tumbled 16 per cent in December from a year earlier, with average prices down 4 per cent.

The MLS home price index, though, which is considered a better reading, is still expected to show a rise of 2 per cent.

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You've got to keep in mind that the December sales measure is being compared to a year-earlier period that saw Canadians scrambling to buy a home before the federal bank regulator's new mortgage-qualification rules came into effect at the beginning of 2018.

"December home sales are going to look ugly compared to a year ago, as buyers rushed to beat new mortgage rules in the late stages of 2017," said Benjamin Reitzes, BMO's Canadian rates and macro strategist.

Mr. Reitzes, who has already seen several local real estate board reports, also expects to see that sales fell about 11 per cent in 2018 as a whole, which would be the worst showing in a decade. As in, since 2008, when the financial crisis set in.

"Unfortunately, 2019 isn't likely to see much of a bounce, though sales should be generally steady instead of the sharp pullback seen last year," Mr. Reitzes said.

"Indeed, the big declines in the year-over-year pace of sales should largely reverse by the end of [the first quarter]," he added.

"Despite the expected chunky year-over-year decline in December, sales still look to be up decently on a seasonally adjusted basis from the prior month."

Separately, the Teranet-National Bank home price index, released today, showed a slump of 0.3 per cent in December, marking the third drop in a row.

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Over the course of the year, prices rose 2.5 per cent, the slowest pace since 2009.

“Higher mortgage rates and tougher qualification rules are causing the cooling in most major home resale markets in Canada,” National Bank senior economist Marc Pinsonneault said in releasing the numbers.

“The recent increase in vacant new dwellings may also add to downward price pressure in some markets, he added.

“At this juncture, we continue to expect a soft landing of the Canadian home resale market.”

Remember, too, this is a policy-engineered slowdown aimed at cooling inflated markets, such as the Vancouver and Toronto areas, and preventing a debt bubble from popping.

The B.C. and Ontario governments acted first, with tax measures on foreign buyers of local property, followed by the federal bank regulator, the Office of the Superintendent of Financial Institutions.

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The goal, of course, was a soft landing, and policy makers seem to have pulled that off, at least at this point.

The Bank of Canada, though, noted last week that the adjustment is taking longer than expected, possibly because of provincial or local measures.

"Or it may be that the economy is more sensitive to the combined effects of the new mortgage underwriting guidelines and higher interest rates," central bank governor Stephen Poloz said as he and his colleagues held interest rates steady, where they're expected to stay for some time yet, having increased earlier.

"Homebuyers are adapting by seeking smaller, lower-priced homes; home sellers are offering lower prices; and home builders are adapting to a growing demand for smaller homes," he told reporters.

"These adjustments are taking time, so we need to continue to monitor the situation carefully. But we must keep in mind that the markets in Toronto and Vancouver were exhibiting a degree of froth, and it is always difficult to judge where the market will stabilize once froth has been removed."

Bank of Canada governor Stephen Poloz

Chris Wattie/Reuters

The other part of all this, of course, is, as Mr. Poloz noted, the impact on construction of new homes.

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In fact, the Bank of Canada said in its accompanying monetary policy report last week that it “will continue to monitor developments in housing markets to assess how construction is adjusting to the shift in demand toward lower-value units.”

Factor in, too, the hit to oil prices, which are so key to the fortunes of Alberta and others.

"Because of the recent fall in oil prices, income growth in these provinces is expected to continue to lag the rest of Canada," the central bank said.

"In addition, inventories of vacant new homes in these areas have risen markedly over the past several years, and this latest episode could lead to further increases."

You can see it playing out in the building industry.

Look, for example, at Canada Mortgage and Housing Corp.'s latest housing starts numbers.

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The total of 214,000 doesn't really tell the story, down only a wee bit from 2017's strong 220,000.

But the breakdown sure does, as BMO senior economist Robert Kavcic noted.

"One of the clearest themes was the split between single- and multi-family construction," Mr. Kavcic said, the latter referring largely to condos.

"Single-family starts averaged just 54,900 for all of 2018, the lowest annual total for detached-home construction since the depth of the mid-1990s downturn," Mr. Kavcic added in a report.

“On the flip side, multis ran at a record high 138,800 for the year,” he added.

"The difference in new supply between these two segments couldn’t be starker, and various factors such as urban job growth, intensification requirements and greenbelts will likely keep this theme in play."

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Affordability, obviously, is also an issue, Mr. Kavcic added in an interview, though he stressed the demand is there, just not the supply.

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Newmont to buy Goldcorp

Newmont Mining Corp. has struck an all-stock deal for Goldcorp Inc. that the companies value at US$10-billion.

The proposed Newmont Goldcorp would be the “world’s leading gold company,” they said in a statement announcing the marriage today.

“The agreement will combine two gold industry leaders into Newmont Goldcorp to create an unmatched portfolio of operations, projects, exploration opportunities, reserves and people in the gold mining sector,” they said.

“Newmont Goldcorp’s world-class portfolio will feature operating assets in favourable jurisdictions, an unparalleled project pipeline, and exploration potential in the most prospective gold districts around the globe. In addition to providing shareholders the largest gold reserves per share, Newmont Goldcorp will offer the highest annual dividend among senior gold producers.”

Goldcorp stockholders would receive 0.3280 of a Newmont share.

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Markets at a glance

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Lululemon raises outlook

Lululemon Athletica Inc. is raising its fourth-quarter financial forecasts, based on what it says was a strong holiday season.

The yoga-wear retailer now expects diluted earnings per share of between US$1.72 to US$1.74, up from its prior forecast of US$1.64 to US$1.67.

Revenue is now estimated at $1.14-billion to $1.15-billion.

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What to watch for this week

British politicians and American bankers take centre and center stages this week, with a Brexit vote and quarterly results, respectively, each key to markets.

On Tuesday, British Prime Minister Theresa May takes her Brexit divorce deal with the European Union to Parliament for a vote that was delayed because she would have lost.

Not that the postponement is expected to have made any difference because she's expected to lose this one, too.

Prime Minister Theresa May

DANIEL LEAL-OLIVAS/AFP/Getty Images

“The vote was postponed last month to buy the PM some time to convince lawmakers to back the deal she made with the EU, but I don’t think the result will be any different,” said BMO senior economist Jennifer Lee.

"The majority won’t pass the deal as is, but it will be interesting to see how wide the margin will be," she added.

"Perhaps the fear of the unknown ... will push more members of Parliament to support her. A couple of major Brexit supporters seemed to throw in the towel on Friday, saying that they now believe that Brexit will not actually happen. "

The big question, of course, said Ms. Lee, is what happens after, and the scenarios abound.

"Mrs. May will have exactly three days to return to Parliament with her Plan B, as she is legally unable to wash her hands of the situation if/when she loses the vote," Ms. Lee said, noting that Labour Leader Jeremy Corbyn has said he'll seek a no-confidence vote at some point and then bargain for a sweeter deal with the EU.

“Did he ask the EU if they were agreeable to that? Last I heard, PM May’s deal was the deal. We’ve had two-and-a-half years of this. No more changes. (I’m paraphrasing.)”

And it won't end this week.

"There will be more to’ing and fro’ing, and we will likely see PM May return to Brussels to make some tweaks, then return to London to share it with her colleagues, then go back to Brussels, and so on."

So watch the pound as the week wears on, and the impact of the currency’s fortunes on British stocks.

"Although recent Brexit developments have led us to abandon our central view that PM May’s deal will be ratified, when we weigh up the possible Brexit outcomes we still think that there is more upside than downside risk for sterling," said Liam Peach of Capital Economics.

"Sterling’s recent resilience following a number of defeats over Brexit in Parliament for the government suggests that a lot of bad news has already been discounted. Arguably, the only uncertainty over Tuesday’s parliamentary vote on May’s Brexit deal is the size of the government's defeat."

Over the longer term, Mr. Peach said, “we think that investors will rediscover their appetite for risk in 2020 and that, over the course of the next two years as a whole, sterling will still be driven up by tighter-than-expected monetary policy and stronger-than-expected growth in the U.K.”

Across the pond, as they say, the CEOs of the major U.S. banks roll out their fourth-quarter results, starting with Citigroup Inc. today and followed by JPMorgan Chase, Goldman Sachs Group Inc., Wells Fargo and Bank of America later in the week.

Citigroup kicked it off with a jump in quarterly profit.

"In their Q3 updates, earnings and revenues all came in better than expected, helped by improvements in both retail and investment banking operations," CMC Markets chief analyst Michael Hewson said in a lookahead.

“That didn’t stop heavy falls in the share prices of all the major banks since those updates as investors fretted about the prospects for the U.S. economy and an over-aggressive [Federal Reserve] and a flattening yield curve,” he added.

“Since the lows in December we have seen evidence of the beginnings of a rebound helped by a continued resilience in U.S. economic data, as well as some decent moves in equity markets, which are likely to have helped drive increased trading activity. This won’t help their bond trading operations, where yields have started to slide back, and the yield curve has continued to flatten.”

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There’s more on tap this week, too, with some U.S. government economic indicators likely to be delayed by the partial shutdown. Here’s what to watch for:

MONDAY

Citigroup and Shaw Communications Inc. report results.

TUESDAY

A biggie, this. Besides the Brexit vote and the CREA home sales release, European Central Bank chief Mario Draghi gives his annual report to the European Parliament.

ECB chief Mario Draghi

Michael Probst/The Associated Press

JPMorgan and Wells Fargo also report results.

WEDNESDAY

Corporate results pick up, with Alcoa Corp., Bank of America, BlackRock Inc., Goldman Sachs, Kinder Morgan Inc. and its Canadian subsidiary, and US Bancorp on tap.

We'll also see Britain's latest inflation reading.

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THURSDAY

Netflix Inc. raised its prices, and it'll be interesting to see if it raised its quarterly profit, as well.

American Express Co. also reports, and the euro zone releases its latest inflation measure.

Preliminary December inflation numbers in the EU showed consumer price growth slipping to 1.6 per cent from 1.9 per cent, with so-called core prices holding at 1 per cent, noted CMC's Mr. Hewson.

"Against this type of deflationary backdrop it is hard to imagine a scenario where the ECB can credibly conceive of any sort of rate rise this year, or any year for that matter, particularly at a time when economic growth in Europe appears to be stalling."

FRIDAY

Economists expect Statistics Canada to report that consumer prices dipped again in December on a monthly basis, by 0.3 or 0.4 per cent, as prices at the gas pump eased.

They peg the headline annual inflation rate at 1.7 per cent, the same as in November, or possibly 1.8 per cent.

Going forward, "even with oil prices stabilizing in January, the headline rate of inflation will decelerate further as a strong reading is set to fall out of the annual calculation," said CIBC World Markets senior economist Royce Mendes.

“Given the low starting point, though, even just a partial rebound in oil prices could have inflation running near 3 per cent by the end of the year, if only for a very short while.”

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