The Bay Street consensus is that the Canadian housing market skirted
the worst and managed a soft landing and homeowners are likely able to
absorb higher mortgage payments once interest rates head upward.But
one analyst warned Thursday that people are overlooking a key risk that
threatens to push down housing prices by as much as 25% over the next
several years: subdued wage growth in a low-inflation environment. That
mix could make mortgage payments increasingly onerous for households
already carrying record levels of indebtedness, David Madani of Capital
Economics said, adding the knock-on effects to consumer spending could
be so significant they could push Canada into another recession. “This
reality, we suspect, has not been given very much consideration at
all,” he said. “All I am trying to do is step back and look at the
longer-term picture of affordability.” In a low-inflation
environment, it’s harder for asset prices and wages to rise to make the
burden of debt more manageable, Mr. Madani said. In a report to
clients, he said the fall in prices could start this year if the Bank of
Canada raises its benchmark rate, which stands at 1%. Mr. Madani, one
of the few economists to predict no rate hikes for all of 2011, warned
an increase could mark the “tipping point” as consumer sentiment could
swing rapidly. The federal government last month decided to
toughen mortgage-lending standards for the third time in as many years
in an effort to curb Canadians’ appetite for taking on too much debt,
which is at a record 148% as measured as a ratio to disposable income. This pessimistic view isn’t widely shared. Gregory
Klump, chief economist at the Canadian Real Estate Association, said he
does not foresee such a scenario, given present economic fundamentals,
whereby housing prices would contract by a quarter. “The
continuation of low interest rates would [help] support housing activity
in 2011,” said Mr. Klump, who is in the process of updating his
forecast for this year and next. CREA has said it expects housing sales
to drop 9% this year, with the average house price falling 1.3%. In
a recent report, economists at Toronto-Dominion Bank said the
worst-case fears, such as a U.S.-style housing collapsed, had been
avoided. A trough in existing home sales emerged in the third quarter of
2010, or earlier than expected, TD said, and that “better”
affordability would provide momentum while the Bank of Canada holds its
policy rate as is until mid-2011. But Mr. Madani doesn’t see it
that way. The underlying theme in his analysis is that housing
affordability would deteriorate, as inflation remains relatively low for
some time. In a low-inflation environment, he argued, Canadians’ debt
burden doesn’t dwindle as nominal rates (not adjusted for inflation)
remain low and wage growth slows. In a separate report released
Thursday, economists at Goldman Sachs said concerns over higher
inflation in developed economies are “misplaced” and wouldn’t emerge
until there is real GDP growth that exceeds potential “for some time.” According
to Mr. Madani’s calculations, the average house price, of $314,000 as
of the third quarter of 2010, is roughly 5.5 times greater than the
average level of disposal income, at $58,347. Historical data indicate
the average house price is roughly 3.5 times greater than disposable
income — which, he suggested, translates into an average value of
$205,000 for a Canadian home, or 3.5 times above the $58,347 of
disposable income. To get back to a historical average, he
calculates a housing price decline of roughly 25% over a number of years
on the assumption that inflation-adjusted mortgage rates remain
unchanged and growth in disposable income of 2% -- which is “slightly
generous” given his low inflation outlook. The Bank of Canada
cited a “sudden weakening” in the housing sector as potential downside
risk to its recently updated economic outlook. Such an event “could have
sizable spillover effects on other areas of the economy, such as
consumption, given the high debt loads of some Canadians.” The central bank said inflation, both headline and core, would not converge to the preferred 2% target until late 2012.
" CAD- Building permits rise for the month of December .."..
" The largest declines were in permits for medical facilities in Quebec and educational institutions in Ontario ".....
A sharp rise in building permits for multi-family dwellings helped boost the overall value of Canadian building permits by 2.4 per cent in December from November, Statistics Canada said on Monday.
The total rise was slightly less than the 3.0 per cent predicted by
analysts in a Reuters poll and followed substantial declines in the
previous two months. All figures are seasonally adjusted.
Multi-family building permits rose 55.3 per cent in December to the
highest level since April 2008. The value of permits for single-family
units also rose, by a more modest 3.6 per cent.
The value of non-residential permits tumbled by 22.0 per cent to the
lowest level since January 2010. Commercial building permits were off by
21.7 per cent, institutional by 38.0 per cent, and industrial by 0.4
per cent.
The institutional side had been boosted by government stimulus spending,
which is being wound down. The largest declines were in permits for
medical facilities in Quebec and educational institutions in Ontario.
The overall rise capped a year in which permits rose by 19.8 per cent
from 2009, led by a 27.6 per cent increase in residential permits.
Want to manage currency risk and increase revenue? Learn more about Risk Management
| 
