Date: September 9, 2010
Canada Not in Danger of US-Style Housing Bust
ARTICLE REVIEW: Jim MacGee, August 31, 2010, “Not Here? Housing Market Policy and the Risk of a Housing Bust”, CD Howe Institute.
Link to Release: http://www.cdhowe.org/pdf/ebrief_105.pdf
The CD Howe Institute recently released a study written by Professor Jim MacGee (University of Western Ontario), which poses the question of whether or not the Canadian housing market could experience a US-style bust, including a steep drop-off in the average selling price.
MacGee argues that mortgage underwriting standards evolved much differently in the US and Canada leading up to the economic downturn in both countries. As early as 2003, US sub-prime borrowers (i.e. those with troubled credit histories) were gaining access to more exotic mortgage products that included the option for interest only payments and negative amortization. Riskier borrowers and borrowing terms prompted mortgage defaults and declining average selling prices in advance of the economic downturn in the US. In Canada, in contrast, defaults rose only in conjunction with the economic downturn and remained much lower than in the US (see Chart 1). The lower default rate in Canada, bolstered by the comparatively low percentage of riskier “exotic” mortgage types in this country, helped support home prices and also supports the view that Canada’s Federal Governmentguaranteed mortgage insurance program is not exposed to the same risk as government sponsored and private insurance programs in the US.
Home price growth in the GTA has been supported by a sustained period of affordability, as evidenced by TREB’s Affordability Indicator (see Chart 2). Even with the strong price increases experienced over the better part of the last year, the average combined mortgage, property tax and utility payment as a percentage of average gross household income remains in line with the accepted mortgage lending standard, which requires a gross debt service ratio (GDS) of 32 per cent or less.
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Date: September 8, 2010
Bank of Canada, Overnight Rate Target Announcement
Source: Bank of Canada
Link to Release: http://www.bankofcanada.ca/en/fixed-dates/2010/rate_080910.html
Summary: The Bank Of Canada raised its target for the Overnight Lending Rate 25 basis points (0.25 percentage points) to 1.0 per cent. The Bank reasoned that while economic growth both in Canada and other developed countries like the United States had not unfolded as well as forecast, personal consumption and business expenditure in Canada was progressing more or less in line with expectations. It was against this backdrop that the Bank felt a further rate increase was warranted to ensure that the rate of inflation would remain near its two per cent target. The Bank was non-committal on future rate increases, pointing to “unusual uncertainty” surrounding their economic outlook.
Analysis: The consensus in the Canadian treasury bill market suggests that this latest Bank of Canada hike will be the last until the spring or early summer of 2011. However, if the rate of inflation remains close to the Bank’s two per cent target and consumer and business spending continues to track the Bank of Canada’s outlook, it is possible that the further rate hikes could be brought on line either this year or earlier than expected in 2011. The recent rate hike will impact mortgages and lines of credit which have floating interest rates based on the prime lending rate. Fixed rate mortgage products will not necessarily be affected, given that the market has already priced in expectations for future Bank of Canada interest rate decisions. For example, the yield on five-year government of Canada bonds, which influence five-year fixed mortgage rates, has been dropping in recent months. This reflects the market view that the Bank will not raise its policy rate as much or as quickly as anticipated earlier this year.
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Date: September 3, 2010
US Employment Situation, July 2010 Results
Source: United States Department of Labor, Bureau of Labor Statistics
Link to Release: http://www.bls.gov/news.release/pdf/empsit.pdf
Summary: The American economy shed 54,000 jobs in August as temporary workers hired for the US census continued to complete their work and were subsequently laid off. In total, census-related layoffs drove a 114,000 job decline in the government sector. Private sector employment actually edged up by 67,000 positions. The largest private sector gains were in healthcare and construction. It should be noted, however, that the majority of construction job gains were due to workers returning to their jobs following a strike. The manufacturing sector shed 27,000 jobs.
Analysis: The US labour market situation report for August presented a good news/bad new story. Obviously three straight months of declines following a short lived period of recovery was not good news. At the same time, however, the job losses in August were much smaller than most commentators were expecting following disappointing economic growth in recent months. The fact that the private sector actually saw positions increase was another positive storyline. With this said, the US economy needs to create 300,000+ jobs on a monthly basis for a sustained period of time before the unemployment rate will trend downward in any meaningful way. Personal consumption, which historically accounts for over 70 per cent of US GDP, is being hampered by the lack of confidence brought about by the high unemployment rate, which in turn hampers job creation. This drag on US GDP growth is problematic for US trading partners like Canada, who provide raw materials, finished goods and services to meet US consumer demand. The potential ripple effect of sluggish US recovery on Canadian economic fortunes is clear.
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Date: August 31, 2010
Canadian Gross Domestic Product, Second Quarter and June 2010
Source: Statistics Canada
Link to Release: http://www.statcan.gc.ca/daily-quotidien/100831/dq100831a-eng.htm
Summary: Canada’s Real Gross Domestic Product (GDP), the most common measure of economic growth, increased 0.5 per cent in the second quarter for an annualized growth rate of 2.0 per cent. This is well below the 5.8 per cent annualized growth rate reported for the first quarter of this year. In June, Canadian GDP rose 0.2 per cent over May for the strongest monthly gain of the second quarter. The goods producing sector led second quarter economic growth, while service sector output remained flat.
Analysis: The decline in the GDP growth rate between the first and second quarters can be traced to several sources, but the impact of housing-related sectors was quite notable. Housing investment, which drove GDP growth through much of the initial 2009 recovery, increased by only 0.3 per cent in the second quarter. Economic activity specifically related to real estate agents and brokers was down. Renovation activity also declined. Declines related to residential real estate contributed to an overall dip in consumer spending. A slowdown in the consumer-driven side of the economy was not necessarily unexpected, as second quarter interest rate increases and stricter mortgage lending guidelines came on line. With this said, the second quarter GDP result was well below the Bank of Canada’s latest published forecast of three per cent annualized growth. This coupled with less than stellar employment releases in recent months increases the odds that we could see an earlier than expected interruption in Bank of Canada interest rate hikes.
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Date: August 24, 2010
US Existing Home Sales, July 2010 Results
Source: National Association of REALTORS
Link to Release: http://www.realtor.org/press_room/news_releases/2010/08/ehs_fall
Summary: U.S. existing home sales were sharply lower in July, down 27.2 percent to a seasonally adjusted annual rate of 3.83 million units compared to the downwardly revised June rate of 5.26 million. Compared to June 2009, sales were also down approximately 27 per cent. The annual rate of sales was at the lowest level since 1999. The median selling price rose 0.7 per cent over year-ago levels to $182,600. The percentage of sales accounted for by distressed properties remained at 32 per cent.
Analysis: U.S. existing home sales continued to decline in July as high unemployment, rising economic uncertainty and the expiry of the federal government’s first time buyer’s tax rebate dampened the confidence of potential home-buyers. While prices continued upward in July, a spike in active listings to 3.98 million existing homes available for sale (resulting in months of supply measure jumping to 12.5 months) suggests that sustained price growth may not be a safe bet moving forward.
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