Calgary Alberta Mortgage and Real Estate News

The Canadian dollar slipped
against the U.S. dollar on Wednesday, after comments by Bank of
Canada Governor David Dodge seemed to do away with any thoughts
of higher interest rates any time soon.
Domestic bond prices, with no major Canadian data to
consider, followed U.S. Treasuries lower.
At 9:25 a.m. (1325 GMT), the Canadian dollar was at
C$1.0056 to the U.S. dollar, or 99.44 U.S. cents, down from
C$1.0036 to the U.S. dollar, or 99.64 U.S. cents, at Tuesday’s
close.
In a Vancouver news conference on Tuesday, Dodge said the
Canadian dollar’s surge to parity with the U.S. dollar was not
entirely justified by economic fundamentals, suggesting the
central bank was fretting about the currency’s rise.
The market, which had previously priced in the chance of
higher interest rates in the near to medium term, has had to
reassess outlooks to take into account the impact of the recent
credit crunch and the soaring currency.
“I think (the bank is) going to be on hold certainly next
month and there’s probably a little bit of doubt creeping into
the market’s mind…about rate increases period,” said Shaun
Osborne chief currency strategist at TD Securities.
The Canadian dollar last week reached parity with the
greenback for the first time in 31 years, reflecting steady
Canadian interest rates — the Bank of Canada left its key rate
steady at 4.50 percent in September — and a U.S. Federal
Reserve rate cut of 50 basis points to 4.75 percent.
A raft of weak U.S. data after the U.S. subprime mortgage
induced credit crunch has increased expectations of further
interest rate cuts in the U.S.
Meanwhile, oil prices spurted back above $80 a barrel ahead
of U.S. data expected to show a further decline in crude
stocks. Part of the commodity-linked Canadian dollar’s rise in
recent weeks has been on the back of soaring oil prices.
“Around these ($80 a barrel) levels, it would suggest that
the Canadian dollar is probably going to trade around this
parity level, but we’d probably need higher levels again to see
the Canadian dollar really take off,” said Osborne.
BONDS SLIP
Canadian bond prices followed U.S. Treasuries lower,
retracing some of the gains made over the past week.
Weaker-than-expected U.S. durable goods figures did little
to help bond prices, as the data is often volatile, said Chris
Holmes, Canadian fixed income strategist at J.P. Morgan
Canada.
With no Canadian data due until the end of the week,
domestic bond prices will likely continue to follow the lead of
U.S. treasuries and North American equity markets.
Friday’s figures are for July gross domestic product, and
August industrial producer prices and raw materials.
The overnight Canadian dollar Libor rate <LIBOR01> was
set at 4.7667 percent, still above the Bank of Canada’s 4.5
percent target for the overnight rate.
And Tuesday’s CORRA rate <CORRA=>, the weighted average of
the day’s rates on Canadian repurchases rose to 4.4840 percent
from 4.4709 percent on Monday. The Bank of Canada publishes the
rate at around 9 a.m. daily.
The two-year bond fell 7 Canadian cents to C$100.15 to
yield 4.174 percent, while the 10-year bond dropped 27 Canadian
cents to C$96.72 to yield 4.420 percent.
The yield spread between the two-year and 10-year bond
moved to 24.8 basis points from 24.0 at the previous close.
The 30-year bond lost 35 Canadian cents to C$108.36 to
yield 4.487 percent. In the United States, the 30-year treasury
yielded 4.920 percent.
The three-month when-issued T-bill yielded 4.03 percent,
unchanged from the previous close.

The Bank of Canada’s 4.5-per-cent overnight lending rate “is appropriate” but the bank must “look at the causes” of the rising loonie over the next three and a half weeks as it drafts its Oct. 16 interest-rate announcement, governor David Dodge said in speech Tuesday.”We need to assess the effect of movements in the exchange rate on the balance of aggregate demand and supply in the Canadian economy,” Dodge said, in what observers took as a hint that an immediate interest rate hike is unlikely as the bank examines the ongoing fall-out from this summer’s market turbulence.

“Overall, it looks like the bank is solidly on hold until they have a chance to assess the impact of the tightening of credit conditions on the real economy, and the impact of the most recent appreciation of the Canadian dollar,” Jacquie Douglas, an economics strategist with TD Securities, wrote in a note following the speech.

In his speech, Dodge noted “significant upside and downside” inflationary risks, observing that stronger-than-expected household demand could drive up inflation while spillover from the sputtering U.S. housing market could have the opposite effect.

Assessing which of those risks is more serious is what “we will be concentrating on between now and our next interest rate announcement,” Dodge told reporters after his speech to the Vancouver Board of Trade.

Of particular concern are rising housing prices, he said, which make up about five per cent of the country’s consumer price index.

“When, on average, new housing is rising at eight per cent, that really puts an upward bias into the CPI and it’s clearly something that in hitting our target we are very concerned about,” he said.

But he offered little hope to Canadian manufacturers, who have pressed the bank to cut interest rates as a way of dropping the value of the loonie, whose flight to parity has slashed returns in the auto and forestry sectors.

The rise in the price of resource products relative to manufactured goods “sends a signal that real resource labour and capital really have to be diverted from now lower value-added activities in manufacturing to higher value-added activity in the resource sector or in a number of service sectors,” Dodge said. “The lesson of history is that not to adjust is just not an option. And we have to find ways to get on with it.”

Still, while noting that a rising currency has little direct impact on inflation, “to the extent the rise in the Canadian dollar affects our exports in a negative direction and our imports in a positive direction, obviously that effect really does flow-through into the balance of demand and supply of Canadian goods and services. And that precisely is what we will have to take into account,” Dodge said.

His comments suggest that “a tighter Canadian monetary policy is not likely and, if anything, pointed to a higher probability of an easing if economic conditions get much worse,” Scotia Capital economist Karen Cordes wrote in a note.

For a generation, Americans have had a reason to feel superior to Canadians: Our dollar was worth more than theirs. Ours was a full dollar; theirs was discounted. And thus it was a shock last week when the Canadian loonie stole across the line of superiority and registered a value of $1.0008.

There were several reasons for this. Oil is the obvious one. Canada is endowed with much oil and gas, and the rise in its value tends to lift the currency. Americans have a large appetite for that oil and gas, perhaps more than is good for them. Another reason for the muscular loonie has been the financial probity of Canada’s conservative government. Unlike our conservative government, Canada’s has really and honestly balanced its budget.

This year, Canada is planning to run a 2-percent budget surplus. Canada’s Treasury has announced a long-term plan to pay off the central government’s debt, allowing cuts in the rates of personal income tax.

Imagine that: Pay off the debt, then cut the tax.

Our conservative government doesn’t think that way. It cuts taxes first, increases domestic spending and starts a war. Our conservative government put the whole smorgasbord on the credit card and argued that there would be no financial indigestion.

When indigestion arrived in the form of a subprime-mortgage crisis, Fed Chairman Ben Bernanke slashed the interbank lending rate. Probably by that time, it had to be done but it was not what a prudent, fiscally sound country should have had to do.

With the interest-rate cut, the dollar fell again, because it is less rewarding to park one’s funds at a lower rate of pay.

Now the greenback swims in the same pond as the loonie, which as recently as January 2002 was worth just 62 cents on the dollar.

And it’s not just Canada: The dollar has fallen this year against the euro, the pound, the yuan and the yen, and also against such proud players as the Polish zloty, the Russian ruble, the Philippine peso, the Mexican peso and the Brazilian real.

We shall have to be polite to the Canadians.

The Bank of Canada is universally expected to hold its interest rates steady at 4.5% tomorrow.

Although the unemployment rate is at a 33-year-low of 6.0%, wages are rising at a 3.7% annual clip, the economy expanded 3.4% in the second quarter and core inflation has been above its 2% target for an entire year, the sludge dripping from North American debt markets is expected to persuade the bank to stay its hand for now.

It will take time to see whether this sludge will contaminate broader lending, mingle with the U.S. housing slump and cause the United States and Canadian economies to slow. Canada also has some sludge of its own to absorb from the asset-backed commercial paper blow-up here.

It is ironic that as the bank holds rates in response to the slump in U.S. housing, it may further stoke a Canadian housing market still on a tear and vulnerable to risks of its own — like the rising labour and materials costs the bank was previously trying to restrain.

While U.S. building and sales have cratered and prices have dipped 3.2% on the year, Canadian resales rose nearly 10% in July to a new record and average prices jumped 12.6% to a record $311,495.

Toronto high-rise sales, meanwhile, are in their second year of 24% increases year-to-date. The luxury hotel-condo — usually commanding the top floors of some architectural jewel and bearing a marquee name like Ritz or Four Seasons — is the latest boom’s must-have.

“It is now common to see 2,000-to 2,500-square-foot condos selling for $2-million or more with property taxes and condo fees to match,” Sherry Cooper, chief economist at BMO Capital Markets, said in a recent note. “Per square foot, condo prices are now higher than single-family home prices of similar quality and location.”

At the Four Seasons hotel-condo in Yorkville for example, a 2,500-square foot condo sells for more than $4-million; a 3,900-square-foot penthouse has a $7.4-million price tag.

Although the prices may not be quite so lofty, they are racing across the country, too, with Saskatoon joining Calgary as the latest hot spot.

Analysts are at pains to point out how the Canadian market is in much better health than the United States.

“The current subprime default rate in Canada is less than 3% compared with 13% and growing for the United States,” Warren Lovely, economist at CIBC World Markets said in recent note. And there isn’t much subprime debt in Canada anyway. It accounted for barely 5% of mortgage originations during 2005-06, well below the 20%-plus share in the United States, Mr. Lovely said.

As well, Canadians have taken out fewer mortgages with teaser or adjustable rates and they have traditionally relied less on home lines of credit to fuel consumption.

Builders and lenders in Toronto, burnt by the 1990 real estate bust, are smarter too.

“There’s a healthy amount of discipline that has been inserted into the Canadian system that was a direct result of the problems of ‘89, ‘90, ‘91,” said George Carras, vice-president at RealNet Canada Inc. Typically a project is 60% to 70% sold before a shovel breaks ground. Deposits are also quite significant and required at various milestones over the course of construction.

At the Four Seasons for example, the buyer must put down a $50,000 deposit, followed by additional deposits equal to 25% down at the end of the first year after signing — with still more than two years to go before occupancy, Ms. Cooper notes.

“There is an incredible rigour around the interim financing, which is typically done after a minimum pre-sales target has been met and enough due diligence is in place — there is enough money to get their loan back on the completed building,” Mr. Carras said.

Yet trouble can come rumbling out of nowhere, as the Canadian ABCP market storm has shown.

Instead of buyers walking away from deposits as prices slid in the United States, Canadian developers might run into trouble grappling with runaway costs, especially if borrowing costs become stickier north of the boarder.

Canada is at, or very near full employment in the construction industry, and competition for labour has become fierce, Mr. Lovely said. Material costs have also soared.

Under a supply-side crunch, a developer might go bust before he can bring his project to completion, leaving buyers hanging.

Mr. Carras agrees the biggest risk for the Toronto market now appears to be execution risk, especially with some 60 of the 160 or so developers building new homes in the Greater Toronto Area having operated for five years or less.

“The things to watch are in the execution risk–being able to deliver the units that are sold, within budget to people that will be closing when they are supposed to be closing,” Mr. Carras said. “That’s the risk profile of this marketplace because there are a number of people in this space that have not been in this space before.”

So far though, the market appears to be functioning smoothly and the condos are flying off the shelves.

But as the U.S. market shows, sentiment can sometimes turn on a dime — all the more reason for the Bank of Canada to hope this subprime mess sorts itself out and it can get back to raising rates.