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Briefing highlights

  • Toronto in ‘housing bubble’
  • EU Parliament approves Canadian trade deal
  • Prepare for market ‘extremes’
  • Canadian dollar at almost 76.5 cents
  • Manufacturing sales rise 2.3%
  • Teck resources swings to profit

‘Bubble’

It’s not often you hear something like this: “Let’s drop the pretense. The Toronto housing market - and the many cities surrounding it - are in a housing bubble.”

That comment from Bank of Montreal chief economist Douglas Porter came as the Canadian Real Estate Association released fresh numbers on the state of the country’s housing markets.

Given the sharp rise in prices in the Toronto region in January, it’s worth repeating the whole thing:

“Everyone may have a slightly different definition of what a bubble is, but most can agree it’s when prices become dangerously detached from economic fundamentals and start rising strongly simply because people believe they will keep rising strongly, encouraging more buying.

“Prices in Greater Toronto are now up a fiery 22.6 per cent from a year ago, the fastest increase since the late 1980s - a period pretty much everyone can agree was a true bubble - and a cool 21 percentage points faster than inflation and/or wage growth.

“And, the ratio of sales to new listings was a towering 93.5 per cent in the region last month adjusted for seasonality (and was above 100 in Hamilton, Kitchener and the Niagara Region). A normal range for this measure is 40-60, with anything above 60 seen as a seller’s market.

“Across the province of Ontario, months of inventory based on current sales trends has plunged below 1.8 - whereas something above five months would be closer to normal. True, all of these figures are for the month of January, a month of relatively low sales which can be pushed around by the weather, and it was a mild month. But, the data simply reinforce an obvious message that has very much been in place for many months now, and by all accounts is still going strong as we speak - the market is far too hot for comfort.

“Many in the industry readily reach for a ‘supply shortage’ as the main factor behind the housing heat. But we would remind that housing starts in Toronto and Vancouver have been chugging along at almost 70,000 units per year recently, an all-time high, while overall Canadian starts are above demographic demand at 200,000 units in the past year. And, we are seeing near 20-per-cent price gains in Toronto condo prices, where supply constraints are not a major issue. No, the massive price gains are being driven first and foremost by sizzling hot demand, whether from ultra-low interest rates (negative in real terms), robust population growth, or non-resident investor demand.”

Mr. Porter’s comments followed the realtors group’s report on January sales and prices, which, Canada-wide, showed a decline of 1.3 per cent in January from December.

On an annual basis, sales were up 1.9 per cent, and the MLS home price index up about 15 per cent, amid a listings drought.

“Despite January’s decline in activity, Canadian existing home sales are still well above their long-run average, underscoring our view that tighter mortgage regulations may temper housing demand in 2017, but are unlikely to derail it,” said Toronto-Dominion Bank economist Diana Petramala.

“Over all, the biggest factor expected to cool housing demand in 2017 will be higher mortgage rates,” she added.

“Mortgage rates have risen 30 basis points since their low in October of 2016. Combined with deteriorating affordability as home prices rise at more than four times income growth, the higher borrowing costs will start to bite into demand.”

EU approves trade deal

The European Parliament has approved its wide-ranging trade pact with Canada, though it’s not a done deal just yet.

The Comprehensive Economic and Trade Agreement passed in a 408-254 vote, which puts the bulk of the deal’s provisions into play now.

But other parts of the pact still have to go through individual parliaments. And remember Wallonia last year?

As The Globe and Mail’s Bill Curry reports, Prime Minister Justin Trudeau is scheduled to speak to the EU Parliament Thursday.

“By adopting CETA, we chose openness and growth and high standards over protectionism and stagnation,” said EU Parliament member Artis Pabriks.

“CETA will be a lighthouse for future trade deals all over the world,” he added.

Be nimble, bank says

Here’s some advice from a major American bank as markets ride fresh highs: Be nimble and flexible and prepare for “extremes” at the beginning of the Trump era.

Global markets are pushing fresh highs again in the wake of comments from Federal Reserve chair Janet Yellen, who signalled a path of interest rate increases in an appearance before policy makers Tuesday.

Ms. Yellen, whose testimony continues, this time to the House financial services committee, said the U.S. central bank shouldn’t wait too long for another rate hike lest it miss the ball.

Her comments were seen as raising the odds of the Fed raising rates in March, though that’s far from a certainty.

“Markets are pricing a 32-per-cent chance of a March hike now, versus a 30-per-cent chance two days ago, and the odds of a rate hike by May have moved above 50 per cent,” said Kit Juckes of Société Générale.

“That kind of rate re-think is dollar-friendly but too timid to derail the risk rally that starts in U.S. equities and spreads into emerging market currencies.”

Markets have been on a roll since Donald Trump won the presidency, albeit with some down moments, as investors applauded his promises for fiscal and economic reform.

Bank, industrial and consumer discretionary stocks have done well, while “risk measures” such as gold and credit spreads are shy of their pre-election performance, said Bank of America Merrill Lynch.

“Most of these price movements stem from the belief that policy changes seem more achievable with a Republican sweep of Congress and the White House,” said strategists Martin Mauro, Cheryl Rowan and Matthew Trapp.

“But our strategists see the risk that potential delays and uncertainty about the ultimate effect of the policy changes could set markets back, at least temporarily.”

It’s that but that the U.S. bank was flagging in a report this week titled “Preparing for extremes.”

“We expect monetary, fiscal and regulatory policies to be key drivers of financial markets for much of 2017, but there is considerable uncertainty over the timing, scope and direction of those actions” said Mr. Mauro, Ms. Rowan and Mr. Trapp.

“As these policy developments unfold, asset prices could show wide swings,” the Bank of America strategists said in their report.

“We suggest that investors prepare by implementing barbells in their stock and bond portfolios, and encourage them to be nimble and flexible throughout the year to adapt to changing circumstances,” they added, referring to an investment strategy of hedging your bets with both with both low- and higher-risk assets.

“There are plenty of reasons to be bearish, including an earnings season that has been so-so at best, plus ongoing geopolitical turmoil and the impending return of the Greek crisis, but once again we have all be reminded of the fact that, sometimes, markets just want to go up,” said IG chief market analyst Chris Beauchamp.

“Last year there were plenty of voices (including me) pointing out the potential tailwinds for markets once equity inflows came back in strength, and perhaps we are seeing some of this now,” he added.

“Valuations are stretched, that is certain, but for now this does not seem to matter. And when the dip does arrive, it will provide another great buying opportunity.”

How markets ended Tuesday

Factory sales rise

Canada’s manufacturers chalked up a hefty December. And, it turns out, a strong November, too.

Manufacturing sales rose 2.3 per cent in December, according to Statistics Canada, well above what economists expected to see. At the same time, the agency revised November’s growth to 2.3 per cent.

December’s gains were driven by transportation equipment, oil and coal.

However, sales rose in just eight of 21 industries measured, account for 41 per cent of the sector.

Inventories fell 0.3 per cent, unfilled orders 1.9 per cent, and new orders 0.6 per cent.

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