Canadian Consumer Price Index – November 23, 2012

Canadian consumer price inflation was tame in October, registering just 1.2 per cent year-over-year.  The Bank of Canada’s core inflation index, which excludes the eight most volatile components of the CPI like energy and food, rose 1.3 per cent in October, matching the rate from September.  Inflation in BC fell to just 0.5 per cent year-over-year.

Very low core inflation suggests that the Canadian economy is still operating with a substantial amount of excess supply. So, in spite of a clear tightening bias, inflation running near the bottom of the Bank of Canada’s target control range suggests that rising interest rates remain far off on the horizon.

For more information, please contact: Gino Pezzani

US Housing Starts – November 19, 2012

US housing starts rose to a four-year high in October, increasing 3.6 per cent month-over-month to a seasonally adjusted annual rate (SAAR) of 894,000. Building permit data, a proxy for future housing starts, declined slightly but was still strong at 866,000 (SAAR), suggesting that the recovery in the US homebuilding sector will be sustained.

A pick-up in US new home construction seems to already be stimulating increased shipments of BC wood products. The uptick in housing starts this year, and especially the acceleration of construction activity in the third quarter, has coincided with a 25 cent year-over-year increase in BC softwood lumber exports and a 27 per cent increase in all housing related wood product exports to the United States through the end of the third quarter.

For more information, please contact: Gino Pezzani


Canadian Manufacturing Sales – November 15, 2012

Canadian manufacturing sales rose 0.4 per cent in September, following a 1.5 per cent increase in August.   However, the headline number masks underlying weakness. Excluding the aerospace and primary metals industries which accounted for most of September’s gain, sales were actually 0.7 per cent lower.  Indeed, sales rose in just 8 of 21 manufacturing industries. Canadian manufacturing sales finished the third quarter roughly flat from the second quarter and were 3 per cent higher than 2011.

A slowdown in global economic growth is clearly impacting the BC manufacturing sector, one of BC’s largest employers. Manufacturing sales fell 1.2 per cent in September, offsetting a similar gain in August and were off 0.4 per cent year-over-year. Third quarter manufacturing sales grew 2.1 per cent from the second quarter of the year but are just 0.8 per cent higher year-to-date.

For more information, please contact: Gino Pezzani

What Is The value Of A Home Sale To The Economy?

Each time a home changes hands in British Columbia, the transaction generates significant spin-offs, creates jobs and wealth and helps keep our communities growing.

Exactly how much economic activity does a home sale generate?  It depends on how it is measured.

A new report from the Canadian Real Estate Association (CREA) and Altus Group, Economic Impacts of MLS® Home Sales and Purchases in Canada and the Provinces 2006-2008 (April 2009), finds that in BC, a residential home sale transaction generates $60,200 in economic spin-offs and 0.42 jobs.

When multiplied by the 24,626 homes that changed hands in the Real Estate Board of Greater Vancouver (REBGV) area in 2008, total spin-offs amount to $1.48 billion and 10,343 jobs.

A September 2008 report from BC Real Estate Association, Multiple Listing Service® Residential Sales, finds that each residential sale in BC generates about $42,000 in spending and about 0.28 jobs. This amounts to $1.03 billion in economic activity and 6,895 jobs in the REBGV area in 2008.

What accounts for this difference?

“BCREA research focuses on the Gross Domestic Product (GDP) impacts the year of purchase, which in our study was 2007,” explains BC Real Estate Association Chief Economist Cameron Muir. “Whereas the CREA/Altus Group research focuses on GDP impacts during the first, second and third years after a home buyer purchases a home, which was 2006-2008.”

If we think about what home buyers might buy in the second year of owning their home, the amounts certainly do add up. Renovation expenses alone could be a large cost, as could new appliances or even new drapes or window coverings. And in the third year of owning their home, home buyers might landscape or get new drain tiles or gutters, all of which add to the spin-offs of the original purchase.

Thus, both studies are accurate. Each covers a different time period, which is the reason for the difference.

What is also interesting is that the dollar amount of spin-offs has been growing each year for Canada as a whole.

Canada-wide, using data from 2006 to 2008, CREA/Altus Group estimates a resale transaction Canada-wide generated $46,400 in economic spin-offs. From 2004 to 2006, that same resale transaction generated $32,200 in spin-offs, while from 2002 to 2004, spin-off spending was $24,697.

“No matter which numbers you choose to use,” says Muir, “one thing is certain: real estate continues to be a major engine driving our economy.”

BCREA Mortgage Rate Outlook

The biggest change to the mortgage market this year had nothing to do with mortgage rates, but rather with further changes to mortgage regulations. In June, the federal government announced a number of new regulations for the Canadian mortgage market, the most important of which was reducing the maximum insurable mortgage amortization period from 30 years to 25 years.

imageIn lowering amortization from 30 years back to 25 years (the prevailing amortization period in 2004) the government has now completely undone its prior, and probably misguided, forays into the mortgage market. The change from 30 year to 25 year amortizations will have a fairly significant impact on monthly mortgage costs, similar to the impact of roughly one per cent increase in mortgage rates.

In order to offset the impact on consumer demand from stricter mortgage regulations, banks and other lenders will likely keep mortgage rates low with perhaps more competitive discounting for homebuyers with strong credit histories. Moreover, ongoing uncertainty in the global economy will translate into a persistence of very low Canadian bond yields.

We forecast that the posted five-year mortgage rate will remain at 5.24 per cent for the balance of 2012 before gradually rising in 2013 to 5.85. Little change is expected to the one-year rate over the next six months at 3.1 per cent, but it is expected to rise when the Bank of Canada raises interest rates in early to mid-2013.

The Bank of Canada is caught in a delicate balancing act. The trajectory of the output gap and the stickiness of consumer prices would under normal conditions, and under conventional monetary economics, have pushed the bank towards tightening interest rates. However, potential interest rate increases have been deferred by a near crisis environment in Europe, a stop-and-go US economy and, perhaps most importantly, the highly indebted position of Canadian households.

In terms of the domestic economy, the bank has been consistently exhorting Canadian businesses to spend and households to save. In a best-case scenario, consumers would be deleveraging while businesses invested in productivity enhancing capital. This would facilitate a necessary shifting of the burden of growth from consumers to Canadian firms.A slowing global economy and a high dollar continue to exert pressure on Canadian exporters. Furthermore, while the bank has carefully communicated that US monetary policy will not determine Bank of Canada rate actions, the explicit stance of the US Federal Reserve to keep interest rates low past 2014 does somewhat constrain the bank’s ability to raise interest rates without putting further upward pressure on the loonie and harming export growth.

A scenario of consumer deleveraging paired with ramped-up business investment and export growth will require interest rates to remain low. That said, the bank is also serious about maintaining its mandate of price stability and is increasingly indicating a desire to move rates off of historically low levels.

Balancing these objectives will require a delicate fine-tuning of monetary policy which we expect to proceed cautiously, perhaps with a rate-tightening of 25 to 50 basis points beginning in early to mid-2013. This slight increase in interest rates would allow the bank to signal to households that higher interest rates are on the horizon while still maintaining a substantial degree of monetary stimulus to encourage business investment.

For more information, please contact: Gino Pezzani