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Briefing highlights

  • What perkier housing market could mean
  • Canadian home sales, prices rise in July
  • ‘Inversion aversion’
  • China vows trade retaliation
  • Stocks, loonie, oil at a glance
  • U.S. retail sales surge in July
  • Walmart raises financial forecast
  • Hong Kong unveils support package
  • Required Reading

What strong housing market could mean

Canada faces the threat of a here-we-go-again scenario as the housing market perks up and interest rates promise to remain low.

Most housing markets across the country are now stable, but froth could reappear, notably in Toronto, if rates continue to fall, Bank of Montreal warns.

“A rapidly growing population and lower interest rates suggest Canada’s housing market is well positioned for at least moderate gains in sales and prices in the year ahead,” said BMO senior economist Sal Guatieri.

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“Prices could even fire up again in cities where new supply remains tight, namely Toronto and Vancouver.”

Mr. Guatieri was commenting in a recent report on how policy makers appear to have engineered a soft landing for what were then bubbly housing markets in the Vancouver and Toronto areas.

The B.C. and Ontario governments brought in tax and other measures to cool down those markets, while the federal bank regulator established new mortgage-qualification stress tests that came into effect early last year.

These measures indeed hosed down frothy markets, sending Vancouver into a slump, for example, and slowed the pace of borrowing.

But certain housing markets have been bouncing back, notably the Greater Toronto Area, while credit growth has picked up. Even Vancouver’s housing market is believed to be hitting bottom.

Asked whether Canada is at risk of a here-we-go-again scenario, Mr. Guatieri agreed it could happen.

“We could see prices take off again if interest rates keep falling, notably in the GTA given strong population growth,” he said.

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This comes amid a drop in mortgage rates – a five-year fixed has declined by about 80 basis points since last fall, Mr. Guatieri noted – along with lower home prices and higher incomes.

That’s a potent mix for borrowing in Canada, where household debts are already swollen.

On a seasonally adjusted basis, the key measure of household credit market debt to disposable income stands at an elevated 177.6 per cent. Expressed another way, we owe $1.78 for every dollar of disposable income.

And, in a warning sign, note the recent pickup here:

“Recent figures show that after a two-year period of deceleration, household debt has started to perk back up again,” Mr. Guatieri’s colleague, BMO chief economist Douglas Porter, said of those statistics.

“While still moderate, the growth rate in overall household credit has picked up to just above what we judge to be underlying growth in personal disposable incomes (about 3.5 per cent),” he added.

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“The modest resurgence is being led by mortgage borrowing. These borrowing figures only take us up to June, and even more recent home sales and prices (for July) suggest activity has gained a bit more momentum on falling long-term borrowing costs.”

Mr. Porter was referring to home sales and price reports from several local real estate boards.

We got a much fuller picture today when the Canadian Real Estate Association reported that national sales climbed 12.6 per cent in July from a year earlier, and 3.5 per cent from June.

This marked the fifth straight month of gains, the group said, noting sales are now about 15 per cent above the six-year low struck in February, but more than 10-per-cent shy of the 2016-17 highs.

The Vancouver and Toronto areas led the monthly gains, the group added.

Average prices climbed 3.9 per cent from a year earlier to almost $499,000, while the MLS home price index, which is considered a better gauge, rose 0.6 per cent from June and 0.2 per cent from a year earlier.

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“Sales are starting to rebound in places where they dropped when the mortgage stress test took effect at the beginning of 2018, but activity there remains well below levels recorded prior to its introduction,” CREA chief economist Gregory Klump said in a statement.

“By the same token, sales continue to rise in housing markets where the mortgage stress test had little impact due to upbeat local economic conditions and a supply of affordably priced homes.”

As economists noted, there’s an obvious issue here for the Bank of Canada, which risks fueling consumer borrowing if it follows its next-door neighbour, the Federal Reserve, in cutting interest rates.

Most economists don’t expect that to happen, not at this point, anyway. But the state of the economy in these uncertain times will dictate where the central bank goes next.

“One of the main counterpoints to those calling for BoC rate cuts, and very good reason for the bank to remain patient, is the housing market,” Mr. Porter said.

“With memories still fresh of the 2015 rate cuts sparking a surge in Vancouver and Toronto markets, the bank will tread cautiously.”

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‘Inversion aversion’

The U.S. yield curve inverted again today, and the yield on the 30-year Treasury slipped below that of the 2-year for the first time, reaching a fresh low of 1.98 per cent, according to Reuters.

Inversion of the yield curve, where longer-term rates fall below those of shorter terms, is seen as a recession signal, which is why markets have been in such a tizzy.

“The flight to havens we’ve seen in the past 24 hours has been as a consequence of what is known as a yield curve inversion in the U.S. and U.K. bond markets, which historically tends to be a harbinger of a possible recession,” said CMC Markets chief analyst Michael Hewson.

“An inversion such as this generally tends to support a view that short-term monetary conditions are too tight, and that these short rates need to be lower,” he added in a report titled “Inversion aversion keeps investors cautious.”

“That would be an eminently sensible viewpoint if interest rates were at normal levels. As we all know, they clearly aren’t at normal levels so it’s difficult to argue that historical precedents apply. When interest rates are at record low levels and yield curves are so flat, inversions tend to be a consequence of the flatness of the curve. As such cause doesn’t always lead to effect.”

Having said all that, “it isn’t hard to argue that from an economic conditions point of view that the global economy has its problems economically as well as politically.”

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China vows trade retaliation

From The Associated Press:

China threatened retaliation if Washington steps up their war over trade and technology by going ahead with planned Sept. 1 tariff hikes on additional Chinese imports.

Beijing will take unspecified “necessary countermeasures,” the Cabinet said in a one-sentence statement. It gave no details or any indication plans for trade talks in Washington in September might be affected.

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Markets at a glance

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U.S. retail sales surge 0.7 per cent

From Reuters: U.S. retail sales surged in July as consumers bought a range of goods even as they cut back on motor vehicle purchases, which could help to assuage market concerns that the economy is heading into recession.

Walmart raises forecast

From Reuters: Walmart Inc. reported an estimate-beating jump in second-quarter U.S. comparable sales, and boosted its earnings forecast for the year.

Hong Kong unveils package

From Reuters: Hong Kong’s government announced an economic support package worth US$2.44-billion as escalating political protests and the prolonged Sino-U.S. trade war weigh heavily on the Asian financial centre.

Berkshire boosts stake

From Reuters: Warren Buffett’s Berkshire Hathaway Inc. said it boosted its stake in Inc. by 11 per cent during the second quarter, increasing its bet on the powerful online retailer even as stocks traded near record highs.

Required Reading

Bad news for everyone

It’s fair to say that Germany is a pretty decent proxy for the state of the globalized, interconnected world economy, columnist David Parkinson writes. And it’s in trouble.

EDC admits loan was mistake

Canada’s export agency, admitting error in a much-criticized loan to a client of Bombardier Inc., has promised a tighter screening process to guard against the risks of doing business with politically influential customers. Geoffrey York reports.

Gold’s moment

With the global economy showing signs of faltering, gold is having a moment, Tim Shufelt writes.

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