January 2011 Canadian Economic Fundamentals

[Ally]

Canada's housing market headed for 'soft landing'




Canada`s housing market appeared headed for a soft landing ` but not a crash ` after recording the worst month of the year in terms of starts in December.




Canada Mortgage and Housing Corp. reported Jan. 11 that housing starts fell to an annualized rate of 171,500 last month, well down from November`s rate of 198,200 units.




Most of the drop was attributed to fewer multiple-family dwelling units ` condos and apartment buildings ` mostly in Ontario, although single-family housing starts also fell.




Recent reports suggest that starts are on a downward track toward 170,000, a number that many believe is the sustainable level for new homes in Canada, down from an estimated 192,500 units in 2010.



Read the full article here.

 

[Ally]

World food crisis will hit the West








Some friends had a memorable Christmas. They spent it with family in Belfast, Northern Ireland, where water could only be obtained by melting the snowman. Providentially they and the children had made a large one and it kept them going for two days, until the water supply returned.




They were, of course, far better off than my relatives in flooded Brisbane, of whom I still anxiously await word.




Both cases, however, illustrate how easily the life we all take for granted can be turned upside down.




True, Queensland has suffered a deluge that in biblical times would have been seen as an expression of extreme displeasure from above. But it took nothing more than some unusually cold weather to reduce Belfast to misery. The carefully calibrated machine that is a modern city broke under the strain. The most basic prerequisite of life suddenly went missing.








Read the full article here.

 

[Ally]

What the Canadian oil and gas industry should be watching in 2011




CALGARY - Our calendars have flipped to 2011, but the market chatter hasn`t really changed: China`s insatiable appetite for commodities, European debt, a sputtering U.S. economy, environmental issues, peak oil and the North American gas glut. But plenty could change or start to change in this New Year.




Here are 11 big issues that stakeholders in the Canadian oil and gas industry should be watching in 2011:






China`s economy ` This is the elephant in the room when it comes to growth in oil demand. Over 40% of the world`s incremental oil consumption is coming from China, so slight changes in their economy will amplify into big oil price movements. China will be celebrating the Year of the Rabbit in 2011, leaving behind the Year of the Tiger. Let`s hope the change in animals is not symbolic to oil demand.




Read the full article here.

 

[Ally]

Caution sets in after BP-Rosneft deal






LONDON - Investors and analysts gave a cautious welcome to BP`s share swap and Arctic exploration deal with Russia`s Rosneft, saying that any return is likely a long way off.




Shares in BP traded up 0.5 per cent at 1448 GMT on Monday, outperforming a 0.1 per cent rise in the STOXX Europe 600 Oil and Gas index.




BP agreed on Friday to form a joint venture with state-controlled Rosneft to develop three of Rosneft`s offshore exploration blocks in northern Russia, which the companies said could hold as much oil and gas as the UK North Sea, implying a 60 billion barrel prize.




`It is deals like this that will have to secure the long- term growth of large oil companies,` Stephen Adams, head of UK equities at Aegon Asset Management, a top-20 investor in BP.








Read the full article here.

 

[Ally]

Bank of Canada outlook to shed light on rates






OTTAWA ` The Bank of Canada is likely to upgrade its U.S. outlook, and in turn prospects for Canada, when it releases its latest interest rate statement on Tuesday and a revised economic forecast Wednesday. What`s not clear, though, is how much of an upward revision is in store and whether that pushes up the central bank`s timetable for the next rate hike.




`Tuesday`s statement will show us how anxious the Bank of Canada is to move away from the sidelines,` said SÃbastien Lavoie, economist at Laurentian Bank Securities.




The market consensus is for the benchmark policy rate, at 1%, to stay as is. There`s no consensus, though, as to what`s ahead, with analysts signalling the next rate hike could emerge as early as March or no sooner than next year.




Read the full article here.

 

[Ally]

New mortgage rules could price some out of market





OTTAWA ` Tougher mortgage lending rules, as unveiled by Finance Minister Jim Flaherty on Monday, could add an estimated $100 a month in carrying costs for future homeowners ` pricing some people out of the real estate market ` and affect roughly 20,000 home sales in 2011, analysts say.




Those rough estimates emerged after the government announced changes that would see Ottawa no longer guarantee insured mortgages with terms exceeding 30 years (the previous maximum was 35 years).




Also, Mr. Flaherty lowered the maximum amount Canadians can borrow against the value of their homes, to 85% from 90%, on a refinancing; and removed federal government backing for home equity lines of credit, or so-called HELOCs, whose popularity soared in the past decade with growth double that of mortgage debt.








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[Ally]

Inflation is here, inflation is here! Or maybe not





A quick glance at the latest news from the high-growth outposts of the world shows that inflation is rapidly turning into a front-burner issue, as officials grapple with the fallout from rising food and energy costs, loose monetary policies and the flood of hot foreign capital that has driven up asset prices.






Last week, Thailand and South Korea boosted interest rates, and China`s central bank ordered commercial lenders to stash more cash in their vaults for the seventh time in the past year ` all in an effort to reduce the supply of cheap credit. The Brazilian government has promised budget cuts, but is reluctant to raise rates, which would boost the value of an already strong currency.




The inflation-is-nigh crowd argues that it`s only a matter of time before this inflation wave hits the shores of industrial countries, which are just as guilty of keeping expansive fiscal and other currency-debasing policies around much too long.





Read the full article here.

 

[Ally]

Debt worries trump home sales




Finance Minister Jim Flaherty is betting that Canada's cooling housing market is strong enough without the fringe buyers who have been propping it up.




Housing has been key to Canada`s economic recovery; prices are now higher than they were prior to the recession, and construction activity has been healthy. But home sales are now under pressure from the threat of higher interest rates, and Mr. Flaherty`s latest move to curb 35-year amortizations stands to eliminate a number of potential buyers from the market.




Mr. Flaherty, citing concerns that Canadians are taking on too much long-term debt, said Monday the government would no longer insure mortgages that take longer than 30 years to pay off. Ottawa will also tighten the rules for existing homeowners who want to refinance their homes, by lowering the maximum amount Canadians can borrow to 85 per cent of the property`s value, and will no longer provide insurance on personal credit lines secured by homes.




The impact on home prices is expected to show up quickly. BMO Nesbitt Burns deputy chief economist Douglas Porter said resale prices could drop as much as 7 per cent within the next 12 months because of the change to amortization lengths, as buyers who would have opted to spread the cost out over 35 years are forced instead to take out borrow less in order to keep their payments affordable.



Read the full article here.

 

[Ally]

Don't count on politicians for coherent energy policy: Experts





CALGARY - Politicians aren't going to give Canadians the energy policy they need and want, a panel of experts agreed Monday night, until the public rises up to demand it.




Participants from environmental, political and corporate perspectives disagreed on many of the specifics of a policy that would guide Canada as it adjusts to an energy-hungry and greenhouse-gas-fearing world but agreed that change must come from the grassroots.




"How do you get Canadians to hurry?" asked panellist Preston Manning, chief executive of the Manning Centre for Building Democracy. "You don't get it by lecturing them. They'll only change if they have to."




The roundtable, the third in a series of four organized by Corporate Knights, a magazine devoted to clean capitalism, and sponsored by Calgary-based Enbridge Inc., was asked to consider the question of how best to manage the transition from a carbon-based to a low-carbon economy.




Read the full article here.

 

[Ally]

Ottawa toughens mortgage rules





OTTAWA -- Finance Minister Jim Flaherty is cracking down on Canadians' ability to qualify for a mortgage, in the government's latest attempt to rein in consumer debt.







Flaherty announced Monday the government is reducing the maximum amortization period for government-backed mortgages to 30 years from 35 years. The change will affect mortgages with loan-to-value ratios over 80 per cent.







Canadians will only be able to borrow up to 85 per cent of the value of their homes, down from 90 per cent.




Read the full article here.

 

[Ally]

Canada among 12 Petro states that will boom when oil hits $100






Crude prices are above $90, and everyone from OPEC to Goldman expects them to hit $100 in the near future.





While that's a huge obstacle to growth for most countries, it represents a giant stimulus for the Petro States, including Russia, Brazil and Canada.



Read the full article here.

 

[Ally]

Chinese companies eye areas beyond resources for investment





B.C. and Canada are expected to benefit from plans by China's private small-and medium-sized enterprises to ramp up investment in industries beyond the resources sector, according to a report released Monday.





"Don't just focus on natural resources," said Kenny Zhang, senior research analyst with the Asia Pacific Foundation of Canada.




"There's other parts of the puzzle we need to take advantage of. It could be manufacturing, hotels, restaurants or retail.




"We've overemphasized [investment stories] of the oil-sands, natural resources, by the big, giant companies."




Zhang is the author of the China Goes Global 2010 report, which was released during a workshop on Chinese investment in Canada at Simon Fraser University's Segal Graduate School of Business.




Read the full article here.

 

[Ally]

Why Mark Carney has the 'luxury of time' on interest rate hikes





Bank of Canada Governor Mark Carney held his benchmark interest rate at 1 per cent today even as he slightly upgraded the central bank's economic forecasts for this year and next.



The Bank of Canada warned in its accompanying statement that uncertainty overseas, the strong Canadian dollar and the poor productivity performance among companies will hold back exports, Globe and Mail economics writer Jeremy Torobin reports.




The economy will grow 2.4 per cent this year and 2.8 per cent in 2012, the Bank of Canada said, up slightly from earlier forecasts.




When all is said and done, interest rates are expected to hold where they are for some time yet, though markets will increasingly speculate on the timing of the next rate hike. Here the views of some economists today:

• 
  "Even while slightly upgrading its economic outlook, the BoC appears to have gone to lengths not to sound hawkish ` to avoid igniting another surge in a Canadian dollar already above parity with the U.S. currency ... The BoC`s next fixed announcement date is only six weeks away (March 1) and today`s communiquà did not signal a hike at this next meeting. Nonetheless, intrigue as to the specific timing of the next hike will still build in the months ahead." Pascal Gauthier, senior economist, Toronto-Dominion Bank
  

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[Ally]

Bank of Canada says strong loonie to stall growth






OTTAWA ` An elevated Canadian dollar and the country's poor productivity performance are set to hold back economic growth even as U.S. private-sector demand revs up, the Bank of Canada said Tuesday as it announced no change to its benchmark policy rate of one per cent.







Those two factors also threaten to widen the country's current account deficit even further from a 20-year high, analysts indicated.







Despite such concerns, the central bank said it nudged upward its outlook for GDP growth this year and next, as monetary and fiscal stimulus drives near-term U.S. growth, and Europe performs better than expected sovereign debt woes notwithstanding. The central bank now expects the economy to expand 2.4 per cent this year and 2.8 per cent in 2012, up modestly from its October forecast of 2.3 per cent and 2.6 per cent, respectively.







A strong rebound in business investment ` as indicated in last week's business outlook survey from the central bank ` is expected to offset a slowdown in consumer spending as households wrestle with record debt levels, and the gradual withdrawal of government stimulus. Furthermore, net exports are now set to contribute more to real GDP growth than anticipated.








Read the full article here.

 

[Ally]

First time home buyers hit again





It`s the first-time home buyer who has once again felt the pinch of new mortgage rules which will restrict the amount consumers can borrow to buy a home.




`It`s a big thing reducing that amortization from 35 to 30,` said Calgary mortgage broker Mark Herman of Mortgage Alliance about the new rules introduced by Ottawa which will go into effect in 60 days.




Amortization lengths were as long as 40 years in 2008 before the government first cracked down. They had been at 25 years for decades before this housing boom.




Mr. Herman, who says about 85% of his clients use the 35-year amortization, calculates that based on a five-year fixed rate of 3.99% someone making $50,000 a year with a $1,200 annual property tax bill and $100 monthly heating bill will soon just qualify for a $238,620 mortgage compared to the $257,451 they would qualify for now.




Read the full article here.

 

[Ally]

HELOCs will survive government action






New federal government rules around popular consumer loans offered by banks known as home equity lines of credit (HELOCs) are unlikely to significantly dampen demand for such products, experts said.




Customers who qualify for HELOCs generally have much higher credit scores than typical borrowers and banks usually don`t seek to insure such loans, said Craig Alexander, chief economist at TD Financial Group.




`While there has been a change in government policy, home equity lines of credit will remain an extraordinarily attractive way to borrow,` he said. `The key point is that this is not a game changer.`




On Monday Jim Flaherty, the Finance Minister, announced that non-amortizing home equity lines of credit secured by real estate will no longer be covered by government insurance. The new rule was part of a series of government measures aimed putting a lid on rising consumer debt levels.




Read the full article here.

 

[Ally]

Mortgage changes will bite





OTTAWA ` The federal government`s move Monday to toughen mortgage rules should further cool housing demand and slow down red-hot renovation activity, while alleviating pressure on the Bank of Canada to raise rates, analysts say.




The measures unveiled by Finance Minister Jim Flaherty are judged to be modest, economists said. Still, they could affect 20,000 home sales this year, according to Toronto-Dominion Bank estimates, as they add roughly $100 per month for future homeowners, driving out potential buyers on the fringe out of the market.




`From a cash flow perspective, the amount of income you have to allocate to buy a home is going up and that will no doubt put a damper on housing demand,` said Michael Gregory, senior economist at BMO Capital Markets.




Mr. Flaherty, amid concerns over record levels of household debt, said Ottawa would no longer guarantee insured mortgages with terms exceeding 30 years, compared to the present 35-year limit. On its own, this move is akin to a roughly 50-basis-point rate increase from the Bank of Canada, Mr. Gregory added. Roughly 30% of new mortgages issued last year were for terms of 35 years.



Read the full article here.

 

[Ally]

The banker's dilemma





The macroprudential brigade down at the International Monetary Fund and the Bank of Canada have been harrumphing about Canadian household debt for some time. Hence Finance Minister Jim Flaherty's further tightening of government-backed mortgage insurance hardly comes as a surprise. But it does suggest that previous rules were too lax, and may have overinflated the Canadian housing market. His move also raises further questions about what the government is doing in the mortgage insurance business at all.




In December, the TD's Ed Clark was prominent among bankers calling for such tightening. He seemed to be pleading, "Stop us before we lend again," but his message was really that when government insures mortgages, bankers can't afford not to extend them. Government policy creates a classic "prisoners' dilemma," where bankers are led to make decisions that are individually rational but systemically suboptimal, even downright dangerous.




Under revised rules announced Monday for new mortgages insured by the Canada Mortgage and Housing Corporation, Ottawa will reduce the maximum amortization period from 35 to 30 years (Mr. Clark had recommended 25 years). The government's press release declared that this will reduce total interest payments. Of course it will, but it will also accelerate principal repayments, so monthly costs will rise, with a dampening effect on house prices. Maximum insured refinancing has also been cut, from 90% to 85% of property values. Meanwhile, government insurance on home lines of credit is also now to be curtailed. This last measure could have significant ramifications.



Read the full article here.

 

[Ally]

U.S. accuses Canada of violating softwood lumber pact





OTTAWA`Canada is being brought before an international court by the United States, which alleges British Columbia is breaking the 2006 softwood lumber agreement by selling the province`s timber at artificially low prices.




The U.S. trade representative has asked the London Court of International Arbitration to rule on the complaint that, insiders say, could result in a fine of up to $500 million.




Under the rules, a decision from the London court is final. The process can take up to two years to reach a verdict.




The complaint accuses the B.C. government of `dramatically` increasing the amount of timber it is selling that has been infested by the mountain pine beetle at the cut-rate price of 25 cents a cubic metre.



Read the full article here.

 

[Ally]

Canadian mortgages linked to strong economy





CALGARY - Residential mortgage credit has expanded very rapidly in Canada during the past decade, at an average of about 10 per cent per year, raising fears about the level of risk in the mortgage market and possible consequences for the broader economy, says a new report.




The report - Revisiting the Canadian Mortgage Market-The Risk is Minimal - says the United States experience has provided a "sobering illustration of the possible repercussions of mortgage risk run amok."




But the rapid growth in Canadian mortgage debt is related to a very strong economy.




And the report says the vast majority of borrowers holding highest risk mortgages have considerable room to absorb interest rate increases.




Read the full article here.