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Why one analyst thinks housing is having a ‘Wile E. Coyote moment’

These are stories Report on Business is following Friday, Aug. 9, 2013.

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Why one analyst thinks housing is in trouble
While most economists believe Canada's housing market is basking in the glow of a soft landing, at least one sees it as a 'Wile E. Coyote moment' for the homebuilding industry.

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"Accordingly, as the popular cartoon story goes, there will soon be a moment when the housing construction industry looks down and realizes that it is standing on thin air before the plunge," David Madani of Capital Economics said today.

"With housing sales expected to remain sluggish this year and next, the anticipated downturn in new housing construction will weigh on overall economic growth over the next year or two."

As The Globe and Mail's Tara Perkins report, housing starts in Canada softened slightly in July, dipping to an annual pace of 192,853 units from 193,797 in June.

As Ms. Perkin's writes, today's report from Canada Mortgage and Housing Corp. indicates some caution among builders in what economists see as a good sign that helps put to rest concerns of overbuilding.

The Canadian housing market has shown remarkable resilience since it began to cool a year ago with the introduction of new mortgage restrictions.

But where others see a market that has drifted into a comfort zone, where housing starts will dip further, Mr. Madani sees something worse.

"The current pace of housing construction in important markets such as Toronto is unsustainable given that new home sales have slumped," he said.

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"This situation will only become more acute as, against the backdrop of more stricter government-imposed mortgage lending rules, residential mortgage rates drift higher this year and next."

Unemployment climbs
Canada is losing thousands of jobs among its youth and public sector workers.

The unemployment rate climbed in July to 7.2 per cent as employment levels fell by 39,000 positions, Statistics Canada said today.

The picture is particularly grim among Canada's young people, who lost 46,000 jobs and whose unemployment rate is 13.9 per cent.

The public sector, hit by fiscal restraint, also suffered a huge setback, with a loss of 74,000 jobs from June. There was a particularly sharp loss, of 47,000, in the health care sector, which analysts questioned. The private sector, in turn, gained more than 31,000 positions.

The employment picture is mixed across the country, but continuing the slowing trend that has marked the past several months.

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Job gains have averaged 11,000 a month in the past six months, Statistics Canada said, a marked slowdown from the 27,000 of the previous six-month period.

Across Canada now, almost 1.4 million people can't find work. Of those, almost 400,000 are between the ages of 15 and 24.

Over the course of the past 12 months, some 226,000 jobs have been created, for an increase of 1.3 per cent. But part-time jobs have been gaining at a faster pace, 2.2 per cent compared to the 1.1-per-cent rise in full-time positions.

Regionally, Quebec, British Columbia, Nova Scotia, Manitoba and Newfoundland and Labrador all lost jobs. But Alberta, New Brunswick and Saskatchewan gained positions. Ontario showed little change.

The country remains an east-west divide, with lower jobless levels in the west compared to central and eastern Canada.

BlackBerry soars
BlackBerry Ltd. shares climbed today after a news report that suggests the smartphone maker is examining the possibility of going private.

The Reuters report, which quotes sources, noted that there's nothing imminent, not even the beginning of a sale process. But BlackBerry shares still climbed by about 5 per cent.

"There is a change of tone on the board," one of the sources told the news agency.

Magna profit rises
Magna International Inc. reported a strong second quarter today as sales climbed 16 per cent to a record of almost $9-billion (U.S.).

The Canadian auto parts giant posted a jump in profit to $415-million or $1.78 a share in the quarter, up from $349-million or $1.48 a year earlier.

Sales rose from $7.7-billion in the year-earlier period, while sales of complete vehicles rose 23 per cent.

Magna also boosted its sales out look for the full year, now forecasting a range of $33.3-billion to $34.7-billion.

Tesla on a roll
Shares of Tesla Motors are on an astonishing run that has some asking if the surge is out of hand.

Tesla stock, which soared yesterday to close at $153.48 (U.S.) in the wake of Wednesday's second-quarter results, are down slightly so far today.

The electric car company is now valued at about $18-billion, which prompted Forbes to ask whether it's now "a case of irrational exuberance," borrowing Alan Greenspan's famous phrase about the tech bubble.

Tesla stock has surged this year, its 52-week low at $26.86 and its high at $158.88, reached yesterday. Analysts boosted their price targets after Wednesday's results, which showed its popular, and wildly expensive, Model S, making strong gains.

Second-quarter revenue climbed to $405.1-million from $26.7-million a year earlier, while its loss narrowed to $30.5-million or 26 cents a share from $105.6-million or $1.

Deliveries of the Model S – you're looking at about $80,000 there – rose by 5 per cent from the first quarter of the year to more than 5,000. According to Tesla's projections, it will be churning out 40,000 cars a year by late 2014.

Co-founder Elon Musk, by the way, is also riding high, now worth more than $7.5-billion based on the Bloomberg Billionaires Index.

The views of the company are wide-ranging.

"The bull argument for the stock could be that the CEO, Elon Musk, is the next Henry Ford – i.e., mass market success would be assured," said analyst Brian Johnson of Barclays, according to Reuters.

But Michael Lynch questions what's going on here, in a post on the Forbes website.

"Unquestionably, there are those who will pay extra for the cachet of an electric vehicle, just as people pay enormous amounts (relatively) for imported water," he says.

"But there is no sign that electric vehicles will be anything more than another niche product for the wealthy until the problems of cost, range, and recharging speed are solved," he adds in his post.

"Right now, Tesla looks more likely to reflect the experience of Ballard Power in the 1990s, when wild enthusiasm for its new fuel cell technology, and expectations of mass market vehicles in a few years, sent its stock price soaring - then right back down."

Here's what Tesla says:

"We believe that more than 100 years after the invention of the internal combustion engine, incumbent automobile manufacturers are at a crossroads and face significant industry-wide challenges. The reliance on the gasoline-powered internal combustion engine as the principal automobile powertrain technology has raised environmental concerns, created dependence among industrialized and developing nations on oil largely imported from foreign nations and exposed consumers to volatile fuel prices."

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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