Calgary Alberta Mortgage and Real Estate News

The Canadian economy should have modest growth at little more than two per cent in 2007 and interest rates will likely fall in reaction to a U.S. downturn, according to two new outlook reports.

Both the National Bank (TSX:NA) and the Canadian Chamber of Commerce are predicting the economy will grow between 2.2 and 2.4 per cent next year.

While the Canadian economy has among the most solid fundamentals of G7 countries, it’s still vulnerable to problems in the United States, said National Bank chief economist Clement Gignac.

But he predicted interest rate relief.

“We expect a 100-basis-point rate (one percentage point) cut from the Bank of Canada in 2007 to avoid a recession,” Gignac said in a webcast broadcast Wednesday.

The Canadian Chamber of Commerce said gross domestic product (GDP) growth will slow to 2.4 per cent in ‘07, mainly due to lower U.S. demand for Canadian exports as a resulting of continuing economic weakness in the United States.

“This is not the Christmas present Canadians are looking for, but it’s far from a lump of coal,” said Nancy Hughes Anthony, CEO of the chamber.

The Ottawa-based business lobby group is predicting the Bank of Canada will cut interest rates by a cumulative 50 basis points, or half a percentage point, next spring.

The chamber also predicted slightly higher unemployment for next year at 6.4 per cent, up from 6.3 per cent this year.

Gignac has pegged gross domestic product growth of 2.2 per cent next year as the pace of world economic growth moderates with a slowdown in the United States.

Economic powerhouses China and India will help ensure continued expansion of the world economy, but at a slower pace, he said.

Gignac predicted the Canadian dollar will hit parity with the U.S. dollar in 2009 or early in the following decade. The National Bank is predicting the loonie will settle between 85 and 88 cents US before then if interest rates drop.

On the energy front, he predicted that oil should settle at US$45 to $50 a barrel, down from the current $63.

He also said the U.S. slowdown will spread next year as “American households become more focused on savings in the wake of the real estate sector’s nosedive,” National Bank said.

He added the Canadian real estate market hasn’t seen the same kind of “euphoria and exuberance” as south of the border.

Gignac said the bank believes a regional divide will continue between the hard-hit manufacturing centres of Central and Eastern Canada and the burgeoning Western provinces in 2007.

As natural resources continue to drive the western economies, Ontario and Quebec will likely see economic growth under two per cent in the coming year.

In its forecast, the Canadian Chamber of Commerce also predicts:

-The Canadian dollar will trade in a range of 86 to 89 cents US.

-The Canadian economy could be even weaker than projected if the U.S. downturn proves sharper than expected.

The chamber’s analysis concludes Ontario and Quebec, the manufacturing centre of Canada, will be hurt more than other parts of the country as the U.S. slowdown squeezes exports of manufactured goods.

Edmonton apartment rents are climbing while vacancies have fallen to their lowest level in five years.”The apartment vacancy rate in the Edmonton region fell from 4.5 per cent in October 2005 to 1.2 per cent this October,” Canada Mortgage and Housing Corporation reported Thursday.

Demand is boosted by strong in-

migration and by a healthy job market that lets some young people leave their family homes — and others split from shared accommodation to their own apartments.

Meanwhile, the number of renters moving to home ownership has fallen as interest rates and house prices have risen.

“On the supply side, rental apartment completions have been weak in 2006,” CMHC noted. “A number of rental units have been converted to condominiums, further reducing the supply of apartments available for rent.”

Average rents for two-bedroom units in the Edmonton region now are $808 — up 10.4 per cent in the 12 months through October, 2006.

Compounding that, rental incentives were offered by 19 per cent of landlords in October, 2005 — but by only three per cent this October.

In 2007, “demand for rental accommodation will continue to outstrip new supply, with apartment vacancies expected near 0.9 per cent,” predicted Richard Goatcher, CMHC senior market analyst.

“A lot of landlords have told us there will be further increases in January,” Goatcher said. In 2007, he expects rents to rise about 12 per cent.

The Canadian Federation of Apartment Associations issued a news release Thursday, arguing that vacancy rates are misleading.

“Even where vacancy rates are low, rental suites are still available because of tenant turnover,” it said. “In Calgary, the vacancy rate is 0.5 per cent but the availability rate is 1.6 per cent.”

In October, only 241 Calgary apartments were vacant — but another 492 units were available through turnover.

The CFAA acknowledged that “due to very low incomes, some households cannot afford to rent apartments of the size they need.”

CFAA president John Dickie recommended that the federal government help with income supports rather than construction subsidies.

“Portable housing allowances are the most cost-effective way to make housing affordable for low-income Canadians,” he said. “Unlike many other housing programs, they also preserve choice for tenants.”

CFAA member groups represent owners and managers of more than one million rental units.

Canada’s dollar gained the most in three weeks as commodity prices climbed and a government report showed an rise in consumer costs.The currency tends to follow the price of commodities, which account for about 54 percent of Canada’s exports. Gold jumped after a drop in the U.S. dollar boosted the metal’s appeal. Crude oil rose on speculation the U.S. Energy Department tomorrow will report inventories fell for a fourth straight week.

“Strong commodity prices were helping this last move,” said C.J. Gavsie, vice president of North American foreign exchange sales at BMO Capital Markets in Toronto.

Canada’s dollar strengthened to 86.78 U.S. cents at 4:26 p.m. in Toronto from 86.41 cents yesterday, gaining the most since Nov. 24. The currency touched 86.84 cents. One U.S. dollar buys C$1.1523.

Orders to exit long positions, or bets on a Canadian dollar advance, were executed after the currency reached C$1.1520, halting its gains, Gavsie said.

Gold futures for February delivery rose $7.60, or 1.2 percent, to $621.60 on the New York Mercantile Exchange. The percentage increase was the biggest since Nov. 30. Crude oil for January delivery rose $0.94, or 1.51 percent, to $63.15 a barrel on the New York Merc.

The Canadian currency also rose after a government report showing a larger-than-expected increase in consumer prices excluding volatile items led currency traders to reduce bets for interest rate cuts early next year.

Statistics Canada said the year-over-year consumer price index excluding eight volatile items such as energy and fruit rose 2.2 percent November. The median forecast of 20 economists surveyed by Bloomberg News was for a 2.1 percent rise. Core prices gained 2.3 percent on an annual basis in October.

Rate Outlook

The Bank of Canada will cut its benchmark lending rate to 4 percent from 4.25 percent by the end of 2007, according to 11 economists polled by Bloomberg News on Dec. 8. Futures traders are pricing in just one cut for all of 2007.

“The projection of rate cuts has been cut back,” said Tim Mazanec, senior foreign-exchange strategist at Investors Bank & Trust Co. in Boston. The move gave a boost to the Canadian currency, he added.

Interest rate futures show investors see no chance that Canada’s central bank will cut its key interest rate for overnight loans between banks in the first half of 2007.

Futures show traders see a 40 percent chance the Bank of Canada will cut interest rates to 4 percent at its rate-setting meeting May 29. The yield on the June futures contract fell 2 basis points to 4.17 percent.

The yield on Canada’s benchmark 10-year note fell 1 basis point to 4.03 percent. The price of the 4 percent security maturing in June 2016 rose 6 cents to C$99.75. Bond yields move inversely with prices.

Canada’s consumer prices excluding eight volatile items such as energy and fruit advanced 2.2 percent in November from a year earlier, as food and shelter costs rose.The core inflation rate, which tracks prices minus the eight goods and the impact of tax changes, slowed from October’s 2.3 percent pace, Statistics Canada said today in Ottawa. Core prices rose 0.3 percent in November from October. The overall consumer price index rose 0.2 percent during the month and was 1.4 percent higher than in November 2005.

Economists predicted annual core inflation would advance 2.1 percent, and rise 0.2 percent in November, according to surveys by Bloomberg News. Overall inflation was expected to rise 0.3 percent in the month and 1.5 percent from a year ago.

Bank of Canada Governor David Dodge says the risks of inflation straying from policy makers’ 2 percent target are balanced between higher consumer spending and home prices and slower exports. Dodge uses core inflation as his preferred guide to future trends, and says he’s ignoring the temporary impact of a July federal sales-tax cut on total inflation.

Housing costs, which account for 27 percent of Canada’s consumer price index, rose 2.9 percent in November from a year earlier. Food prices rose 3.1 percent, Statistics Canada said. Energy prices fell 2.8 percent.

Economists in another Bloomberg News survey this month said the Bank of Canada will cut its 4.25 percent benchmark interest rate a quarter point in the third quarter of 2007 because of a lingering economic slowdown.

Economic Growth

Canada’s economy grew at the slowest annual pace in three years during the third quarter, as residential construction and manufacturing fell. The fourth quarter hasn’t shown improvement, with factory shipments falling for the third-straight month in October to the lowest in almost two years.

The Canadian dollar’s rise to a 28-year high in May and slower U.S. demand has hit exports, and there’s no sign of a quick turnaround, economists such as Don Drummond at Toronto- Dominion Bank say.

DaimlerChrysler AG, the world’s largest truck maker, plans to lay off 800 employees at a St. Thomas, Ontario, Freightliner plant starting in March, because it expects sales to drop.

Still, there are signs inflation will persist in the months ahead. Existing-home prices will rise 6.5 percent next year even as sales fall 3 percent, Royal LePage Real Estate Services said Dec. 14.

Canada’s jobless rate was 6.3 percent in November, close to the three-decade low of 6.1 percent set in May and June. Half of small businesses plan to raise wages more than 2 percent next year, the Canadian Federation of Independent Business says.

Also, record energy and metals prices have commodities companies boosting production and scrambling to find enough workers. Suncor Energy Inc., the world’s biggest developer of oil from tar sands in the western province of Alberta, estimated last month that its annual capital spending on oil-sands projects will rise 43 percent through at least 2010.

The annual inflation rate rose to 1.4 per cent in November from 0.9 per cent the month before as housing costs rose and the effect of recent downward pressure from lower gasoline prices began to wear off.

Statistics Canada said prices at the gas pumps dropped just 3.1 per cent between November 2005 and November 2006. That compares with drops of more than 14 per cent during the previous two months.

Homeowners’ replacement costs, which represents the cost of new housing (excluding land), was also a big contributor to the annual rise in the CPI. Alberta was the big factor here. Its new housing costs have soared by more than 45 per cent in the past year. Alberta again led all provinces with an annual inflation rate of 3.7 per cent.

Mortgage interest costs had their largest increase in more than five years. “It was also the first time since March 2003 that interest rates have exerted a positive influence on the rise in mortgage interest cost,” Statistics Canada said.

On a monthly basis, consumer prices rose 0.2 per cent. Rising automobile prices accounted for much of that gain as November is the month when dealers introduce their 2007 models.

The core rate of inflation, which excludes the most volatile items like fuel and fresh produce, edged down a 10th of a percentage point to 2.2 per cent. On a monthly basis, core prices rose 0.3 per cent.

The core inflation rate came in slightly higher than economists’ expectations of 2.1 per cent, while the so-called “headline” rate was slightly lower than the 1.5 per cent expected.

“There are few major surprises in this report, with the underlying theme that core inflation is proving stubbornly sticky above two per cent, much like its U.S. counterpart,” said BMO Nesbitt Burns senior economist Douglas Porter in a morning commentary.

Porter said Canadians shouldn’t look for an interest rate cut soon. “With core inflation still above two per cent, the Bank of Canada is going nowhere fast,” he said.

Canada’s economic slowdown in 2007 will stem
from external demand rather than domestic spending according to TD Economics.
Its Chief Economist and Senior Vice President, Don Drummond, stated: “The
problem will be with the American not Canadian consumer.”
    The December issue of the TD Quarterly Economic Forecast states the
Canadian economy will expand at an average 2.1 percent pace per quarter over
the next three quarters. This is marginally below its potential pace of 2.8
percent. The report can be found at www.td.com/economics.
    South of the border, however, the U.S. economy will fall short of its
potential pace (3.3 percent) by a full percentage point, resulting in a
greater degree of economic slack. Moreover the American slowdown has only
reached its halfway mark.

    U.S. Slowdown - Not All Doom and Gloom

    An ever-deepening housing correction is scarring the economic landscape.
A sharp backslide in residential investment shaved 1 percentage point off real
GDP growth in the third quarter, which marked the largest drag from this
sector in 16 years. TD Economics expects to see a repeat performance in the
final quarter of this year given that housing starts plummeted 13 percent in
October.
    Moreover American shoppers are already contributing about half a
percentage point less to GDP growth. And, estimates show that it takes at
least one year for the full impact of a change in real estate wealth to feed
through to consumption behaviour.
    Still, not all is doom and gloom. “The precipitous decline in housing
starts is a necessary evil to shrink the inventory of unsold homes and return
the market back to balance,” said Drummond who went on to note that
residential investment as a whole accounts for only 5 percent of the total
economy and it alone does not have the power to cause consumer spending to
retreat.
    Furthermore, there are no instances when a recession took hold that did
not correspond to mass job losses. The labour market backdrop is standing on
firm ground this time around. And, the current level of real interest rates is
still 2 percentage points below that seen heading into prior recessions.

    Weak Demand for Canadian Exports A Dominant Theme in 2007

    The slowing of U.S. demand, along with high resource costs and an
elevated Canadian dollar, will continue to hurt Canadian exports. Drummond,
who believes the weak export sector will be a dominant theme over the next 6
to 9 months, stated: “The challenges of the export sector are plain to see on
manufacturing, which has shed more than 170,000 jobs in the past two years.
Exports will be hard-pressed to expand at even a meager 1 percent rate in
2007. Meanwhile, import growth should remain reasonably firm underpinned by
domestic demand. As such the trade balance is will likely shave 1.3 percentage
points from the accounting of real GDP growth next year.”

    Canadian Household Finances On Solid Footing

    Canadian consumers should be less affected by developments in domestic
housing markets, which were never bloated to the extent of their American
counterparts. Likewise, the Canadian economy has not been confronted with a
severe adjustment in home construction, inventories, sales or prices, as has
been the case in the U.S.
    Even in cooling housing markets, such as those in central Canada, price
gains remain in the 3 to 5 percent range. Home price growth is expected to
remain in the black across the nation in 2007. Meanwhile, residential
construction is only marginally lower today than it was at the start of the
year. Any drag from cooling housing construction will be mild in comparison to
the U.S.
    This is not to say that the Canadian economy is free of housing risks.
For instance, residents in Vancouver dedicate an inordinate amount of pre-tax
income (+50%) to housing costs, while Alberta’s double-digit price growth
won’t be sustained. However, a boom-bust cycle can be avoided if price growth
cools in the near-term, which seems quite possible given ongoing supportive
fundamentals. Some hopeful signs for a potential soft landing have already
emerged. New listings are up substantially in Calgary (51% y/y), Edmonton
(27% y/y) and Vancouver (19% y/y), which should help alleviate price pressures
in time. If a hard landing were to befall the western provinces, it would
likely be due to the ripple effect of an unexpected collapse in the U.S.
economy, rather than a sharp reversal of domestic fundamentals.
    Household finances also look healthy enough to withstand the expected
moderation in economic growth, especially if gauged by 90-day mortgage
delinquency rates, which currently remain at a more than 15-year low.
Mortgages account for nearly 61 percent of total household liabilities. And,
the asset side of the ledger sheet has increased at a faster rate than debt,
such that net personal wealth (assets minus liabilities) has climbed steadily.
    “As expected, growth in real estate assets has played a key role in
wealth accumulation, representing more than one-third of total household
assets and growing at a 7-9 percent annual clip since 2001,” said Drummond.
“The cooling housing market will take some zip off of real estate appreciation
in the coming year, but the absence of a market collapse should position real
estate assets to still rise by a 6-7% clip in 2007, which is consistent with
historical norms.”
    Within this milieu, the Bank of Canada will likely ease rates by 50 basis
points in 2007, with the first of two cuts coming in April. This should be
viewed as a precautionary move on the part of the central bank. By the second
half of 2007 and into 2008, a revitalized American economy should help lift
the Canadian economy back to an average 3.2% quarterly pace in late 2007
through 2008.

Toronto home owners are paying more for repairs - and helping drive up inflation - in large part because many skilled workers are being drawn into Alberta’s red-hot housing market, making an already fierce trades shortage even worse.

An 8 per cent rise in the cost of home repairs across Canada helped nudge inflation up slightly last month, Statistics Canada reported Tuesday.

The annual inflation rate rose to 1.4 per cent in November from 0.9 per cent the month before. It was pushed up by higher mortgage and house repairs, but kept in check by the lower cost of new cars, gas and heating oil. In Toronto, the rate rose to 1 per cent from 0.7 per cent, while the provincial rate rose to 1.1 per cent from 0.6 per cent.

Statistics Canada said the rise in home repairs is the driving force behind the inflation hike; the first time in three months that the annual inflation rate has climbed over 1 per cent.

Analysts were quick to point to the flight of skilled trade workers to the boomtowns of Calgary and Edmonton - where home repair costs have jumped 45 per cent in one year.

“Alberta has seen an absolute explosion in housing which is drawing skilled workers from around the country and making the labour shortage in the trades even worse and driving up costs,” said Doug Porter, deputy chief economist of BMO Capital Markets.

In Toronto, contractor Jeff Mowder says a shortage of skilled workers has sent home repair costs “skyrocketing in the past couple of years.

“When I’m looking for people in the specialty trades - tin ceilings, trim work, cabinet work - there’s a real lack of skilled workers, and the rising costs do get passed on to the customer,” said Mowder, president of Mowder Construction.

Add this to Toronto’s own competing renovation boom, especially in high-end neighbourhoods, and the demand for skilled workers is higher than ever, said Michael Tafts, owner of G. Pederson and Associates Construction.

“We’re stretched thin on trades with the amount of business we’re seeing in neighbourhoods like Rosedale and Lawrence Park - partly because of the renovation boom but also partly because consumer taste for renovation has gone up. Everyone wants the bells and whistles and they’re biting off more than they would have a few years ago,” said Tafts.

Even north of Toronto, contractor Scott Wootton has had to raise his pay for entry-level carpenters twice this year after losing five of them “in a mass exodus to a competitor who was paying more.

“In 20 years I’ve never had this kind of attrition — ever. But the bar is being raised for entry-level workers because there’s such a shortage,” said Wootton, president of Kawartha Lakes Construction Co. and chair of the Ontario Home Builders’ Association’s Renovation Council.

“There’s also the rising price of metals like copper and steel - which affect your plumbing and electrical trades - and sheet goods have gone up as much as 12 per cent.”

Yet customers often don’t realize the effect this has on their overall bill, notes Mowder.

“You don’t want to be a general contractor out there today - the costs of material have skyrocketed in the last couple of years, but homeowners are still back in the 1980s with what they expect to pay, and even I get surprised some times.

“They’re still looking for drywall to be installed for $2 or $2.50 per square foot when it’s actually about $3.50. We’re all a little ‘old school’ when it comes to the new prices.”

The Consumer Prince Index also reflected the fact that restaurant meals cost more last month, as did electricity. But auto purchases and the prices of gasoline, heating oil, natural gas and computers all went down.

Gasoline prices fell only 3.1 per cent between November 2005 and last month after dropping more than 14 per cent during the previous two months.

The core inflation rate, which is used by the Bank of Canada to gauge underlying inflation pressure in the economy, was at 2.2 per cent last month.

This core rate discounts volatile items such as energy and food and ignores changes in indirect taxes such as July’s GST cut. In setting interest rates, the bank aims to keep the core inflation rate at two per cent.

Canada’s economy is in a rut, but economists say it won’t take much to lift it out.

Recent U.S. data and some signs of strength in Canada suggest that the continent may be ready to exit the doldrums by the middle of next year From today’s lethargic 2-per-cent annual pace, the Canadian economy is widely expected to kick into a higher gear within about six months, edging up to almost 3 per cent.

And if that’s the case, the current downturn will be one more proof that the economy is generally on an even keel, with the ups and downs much less pronounced and much less painful than in previous decades.

“It’s certainly no disaster,” said Avery Shenfeld, a senior economist with CIBC World Markets Inc.

The reluctant recognition by Bank of Canada Governor David Dodge last week that Canada was indeed enduring a slowdown jolted observers and sent the Canadian dollar sinking. But things probably won’t get much worse than they are now, economists say.

Canada has just come through two quarters of sluggish growth and this year’s fourth quarter and the first half of are expected to be much the same.

But with a bit of help from American consumers, Canadian governments and central banks on both sides of the border, Canada’s economy should pick up by next summer.

There are signs that help is on its way. Data for retail sales in the United States last week was surprisingly strong, rising 1.0 per cent in November — despite continuing troubles in the housing market.

For now, the U.S. economy has some strong signs that it is struggling: the decline of the housing sector, falling employment in construction, and withdrawals of mortgage equity, points out Michael Gregory, senior economist with BMO Nesbitt Burns.

But it also has some encouraging signs: energy prices are falling, equity markets are rising, interest rates are low, and tight labour markets mean wages are accelerating and jobs are secure. Business investment is strong, and consumers are showing signs of resilience.

For Mr. Gregory, the key signal that the tailwinds are beginning to win out over the headwinds was the fact that applications for new mortgages are rising.

“It has definitely turned,” he said. “It’s definitely a sign that people are taking out mortgages to buy houses.”

The fate of the U.S. housing market is important for Canada’s economy, partly because American consumers draw much of their spending power from their real estate wealth, and partly because Canada’s exporters supply many of the materials used in building and furnishing new homes.

The softest spots in the Canadian economy have been exports and manufacturing — both which would benefit from a recovery in U.S. housing.

Still, few economists want to declare the housing rout over, and consumption could yet become weaker in the United States, said Don Drummond, chief economist for Toronto-Dominion Bank.

But that’s where central banks come in, he adds. He expects the U.S. Federal Reserve will cut its benchmark interest rate by three-quarters of a percentage point starting next spring, helping to boost the U.S. economy.

In Canada, many economists believe the Bank of Canada will cut rates a little bit as well, once it sees that inflation is well under control.

The Canadian economy could also get a lift from a slow depreciation of the currency, back down to the 83-cent (U.S.) level, said David Wolf, economist and strategist with Merrill Lynch Canada Inc. And with elections pending in Quebec, Ontario and at the federal level, significant fiscal stimulus is probably on the horizon, he said.

Economists differ in their estimate of the timing of the turnaround for Canada and the United States, but they agree that the downturn, for Canada, has been shallow by historical standards.

The manufacturing sector has suffered deeply, with tens of thousands of jobs lost, and profits taking a hit. And exporters have struggled to deal with the rapid rise in the Canadian dollar.

But the damage has not spread too far, and Canadian households have been able to depend on low interest rates and a healthy job market.

Interest rates and inflation are the main difference between this downturn and downturns of the past that turned into recessions, said Mr. Drummond.

In the past, inflation was usually high when the economy lost steam, and the central bank had to raise rates to fight inflationary pressure, exacerbating the downturn, he said.

“Those other cycles went down a lot further because they were monetary-induced slowdowns,” he said. Now, with rates relatively low and inflation in check, “we don’t need to slam the breaks on the economy.”

And while Canada’s recovery depends to a great deal on what happens in the United States, the fact that the Bank of Canada has kept its key rate below U.S. rates is helping the economy maintain some strength now, and will help it recover more quickly than the United States, Mr. Shenfeld said.

“They [the Bank of Canada] protected the domestic side of the economy,” Mr. Shenfeld said. “They made a wise decision.”