These are stories Report on Business is following Thursday, July 3, 2014.
Price gap widens
Home buyers are going to find it tougher trading up from a condo to a house given the economics of the real estate market, a new report warns.
In all, Toronto-Dominion Bank still expects a soft landing in Canadian housing, and predicts the shift to a buyer’s market over the next 18 months. That matches what many other observers project.
“As home buyers have more choice, they will also have more bargaining power and price pressure will ease,” economist Diana Petramala said in today’s report, citing softer demand and more listings.
“These features would be consistent with the makings of a soft landing in Canada’s housing market.”
There are many regional differences, of course, and markets east of Toronto are already at that soft-landing stage, she said.
Vancouver, Toronto and Victoria are more vulnerable, but “even in those markets, prospects for a gradual rise in interest rates and relatively stable employment point to orderly adjustments over the medium term with some over-valuation persisting,” Ms. Petramala added.
Calgary and Edmonton will see the fastest pace of price increases over the next few years.
Her take on the condominium market is interesting as “the implications of overbuilding are already starting to be felt.”
Condo resale listings have doubled in some cities, and there’s also an “ample supply” of new but unoccupied units.
This is already a buyer’s market, with just modest price growth, said Ms. Petramala, who expects condo prices to fall by about 2 per cent next year and who cites the 135,000 units now under construction.
“The economics of investing will likely continue to deteriorate with the rental market well supplied, the rental vacancy rate rising and rents stagnating,” she said.
“Meanwhile, softer conditions in the condo market will eventually have knock-on effects to the single-family home market.”
That means that “more choice and better affordability” in the condo market may well keep people from buying up to single family homes, as will the widening price difference that now stands at some $200,000.
“As such, move-up buyers who would like to upgrade their condos to a single family home may find it difficult,” Ms. Petramala said.
“After increasing by an estimated 8 per cent this year, single family home prices are expected to rise 2 per cent next year.”
U.S. sees better jobs market
America’s jobless rate is now at its lowest level since the month that the meltdown began.
The U.S. economy churned out a better-than-expected 288,000 jobs last month, and the unemployment rate declined to 6.1 per cent, its lowest since September 2008.
At the same time, the U.S. Labor Department revised its numbers from April and May, showing even greater job creation, our Washington correspondent Kevin Carmichael reports.
Today’s reading is the latest in a string of positive economic reports from the United States, and helped drive stock markets to fresh highs today.
“Despite the rapid decline in the unemployment rate, which is now getting pretty close to the 5.5-per-cent rate that Fed officials view as the long-run equilibrium rate, we are still not seeing any significant pick-up in wage growth,” said Paul Ashworth, the chief U.S. economist at Capital Economics, referring to the fact that the report showed average hourly earnings rising 2 per cent from a year earlier, down from 2.1 per cent in May.
“Accordingly, we suspect that Fed officials will continue to cling to the view that there is still plenty of slack in the labour market,” he added.
“We are not convinced, however, and expect wage growth to accelerate in the second half of this year.”
- Kevin Carmichael: U.S. jobless rate at lowest since meltdown
- U.S. jobless claims rise slightly, labour market improving
- Euro zone economy still at risk, interest rates to stay low, Draghi says
- Follow our Inside the Market blog (for subscribers)
Trade deficit shrinks
Canada’s exporters have something to cheer about today: A marked pick-up in May.
The country’s trade deficit narrowed to just $152-million in May from $961-million in April as exports rose 3.5 per cent, outpacing the 1.6-per-cent jump in April, Statistics Canada said.
Exports are now at their second-highest value on record, according to the federal agency.
Actually, export volumes rose 4.2 per cent in May, while prices slipped 0.7 per cent.
Import volumes rose 2.4 per cent, with a price dip of 0.8 per cent.
The auto and related parts industries led the push on both sides of the ledger.
Exports to the United States rose 2.1 per cent, while imports from America dipped 0.2 per cent, widening Canada’s surplus with its biggest trading partner to $4.8-billion.
There was a noticeable push in exports to other countries, up 8.3 per cent, which again outpaced the rise in imports of 5.1 per cent.
“The gain in exports is a positive from the [Bank of Canada’s view, though the recent strength in the loonie could hamper performance from here,” said Nick Exarhos of CIBC World Markets.
- David Parkinson in ROB Insight (for subscribers): What the incredible shrinking trade deficit means for Canada
- Canadian trade deficit narrows to $152-million in May
- U.S. trade deficit narrows as exports hit record high
The warning to Ontario by Moody’s Investor Service is a shot across the bow that threatens a full-scale downgrade.
“The risks are clearly to another downward ratings adjustment,” chief economist Craig Wright of Royal Bank of Canada said today.
As The Globe and Mail’s Adrian Morrow reports, Moody’s changed its outlook for Ontario to “negative” and warned of a downgrade late yesterday.
Ontario plans to miss its short-term deficit targets, though has pledged to meet its original timeline. Economists, though, have warned of the difficulty given the province’s weak economic outlook, raising questions about the ability to balance the books.
“Ontario’s newly elected majority Liberal government will deliver a throne speech today with a long-term plan that will echo much of what was outlined in this year’s budget,” said senior economist Robert Kavcic of Bank of Montreal, referring to the proposed budget that sparked the election and is expected to be re-introduced.
“With that in mind, Moody’s came knocking last night, slapping a negative outlook on the province’s credit rating.”
Ontario’s fiscal 2014-15 deficit is projected at $12.5-billion, or 1.7 per cent of gross domestic product.
- Adrian Morrow: Moody's issues warning about Ontario's growing deficit
- Why Ontario needs deficit 'credibility' fast
Lululemon on rise
Shares of Lululemon Athletica Inc. jumped today amid reports that its founder and former chief is testing the private equity waters on a potential bid.
It was already known that Chip Wilson, who lost an initial round to take on the board of the yoga wear retailer, was talking with Goldman Sachs Group Inc. about what to do next given his 28-per-cent stake in the company.
Now, The Wall Street Journal reports that Mr. Wilson’s advisers are talking to private-equity firms, Leonard Green & Partners among them.
Lululemon has suffered a series of setbacks, eroding the value of its shares. But that doesn’t mean a takeover wouldn’t be costly given that it’s worth some $6-billion (U.S.), and Mr. Wilson would have to pay a hefty premium to win control.
No deal is near, the news organization reported, but investors are clearly relishing the idea of a takeover.
A spokesman for Mr. Wilson wouldn’t say much about the report, telling the Reuters news agency that there has been much speculation about what he may decide.
“Chip will decide if and when he wants to do a transaction of any sort,” he said.
- David Parkinson in ROB Insight (for subscribers); Wilson's going-private idea may be Lululemon's best option
Streetwise (for subscribers)
ROB Insight (for subscribers)
- Legendary Canadian ad agency Cossette up for sale
- BlackBerry sells German-based R&D assets to Volkswagen unit
- Ousted American Apparel CEO hands over stake to hedge fund
- Crowdfunder Indiegogo chooses to launch mobile app in Canada