Monday, November 16, 2009

Large loonie hard to hurdle

Strong dollar will be a drag on recovery, Carney says
By JULIAN BELTRAME The Canadian Press

OTTAWA — The stubbornly strong loonie is the major impediment to the Canadian economy rebounding more strongly from the recent deep recession, says Bank of Canada governor Mark Carney.

In a new warning about the currency that is approaching parity with the U.S. greenback, Carney says Canada would experience noticeably stronger recovery next year and in 2011 if the loonie had stayed at the 87-cent level the bank envisaged in the summer.

Carney said Thursday that’s why the bank made it clear this week that barring an unforeseen spike in inflation, it will keep interest rates at the historic low of 0.25 per cent until at least next July.

Carney said the central bank has several tools at its disposal, including intervention in the currency market, but didn’t specify which would be put to use.
"Intervention is always an option," he said.

"Markets should take seriously our determination to set policy to achieve the inflation target. Markets sometimes lose their focus. We don’t lose our focus."
The loonie closed 0.16 of a cent lower at 95.44 cents US on Thursday, but many expect it to hit parity in the next few months, mainly because of weakness in the

American dollar, which has dropped against most of the world’s major currencies.
A high loonie makes it cheaper to take U.S. vacations and buy imported goods. But it also harms the Canadian manufacturing sector because it makes exports of everything from minerals and metals to newsprint, machinery and lumber more expensive for buyers in the United States, Canada’s main export market.

Carney called the loonie’s persistent rise since July "the major downside risk" to the economy, noting that although the loonie was higher two years ago, the difference now is that it comes during a period of severe economic weakness.

His comments came after the central bank issued a comprehensive 28-page quarterly review of the global economy, showing a sharp rebound is underway, fuelled by government stimulus and the need to restock depleted inventories.

But in Canada, the strong burst in activity will last at most a few months more before giving way to the slow and difficult climb back from the deep hole that the recession dug over the past year, the review adds.

The bank is more optimistic about the second half of this year than it was three months ago, noting modest employment gains in August and September.

In a supporting report, Statistics Canada announced that retail sales jumped 0.8 per cent in August to $34.5 billion, largely as a result of strong activity at new car dealerships and at gas stations.

"When the labour market fares well, good things tend to happen to the rest of the Canadian economy," said CIBC economist Krishen Rangasamy.

The domestic economy is now expected to record a two-per-cent gain in the third quarter — the July-September period — and 3.3 per cent during the last three months of this year. The Bank of Canada’s July forecast called for growth of 1.3 per cent and three per cent, in the third and fourth quarters respectively.

A number of things have broken right for Canada to make this happen. Commodity prices, particularly oil, have firmed up, financial markets have stabilized faster than expected, and the global economy, particularly in China, has rebounded quicker and stronger than expected.

And consumers have bounced back strongly, although the manufacturing export sector continues to struggle. There are also concerns about how future government restraint might erode growth as Ontario, Alberta and the federal government warn of spending curbs to cope with large deficits.

That will be more a problem after 2011 when many temporary stimulus measures reach sunset and governments try to work off massive deficits, said TD Bank economist Pascal Gauthier. But he believes governments will play it by ear when they start withdrawing stimulus, or enact deep spending cuts.

"I don’t think the governments themselves could cause a recession because by that time we will have some clarity on whether the private-sector recovery has some legs in it," he said.

For the next two years, however, it will be the loonie that cuts away at economic growth, the bank’s outlook argues.
Even if the dollar averages 96 cents US, and does not go above parity as some expect, the impact on the export side of the economy will severe enough to restrict growth to 3.0 per cent in 2010 and 3.3 per cent in 2011, a smaller bounce than normally follows deep recessions.

"Over the balance of the projection period, growth is slightly lower, reflecting the effect of the higher value of the Canadian dollar," the bank said, noting that a high dollar will make life difficult for manufacturers to sell in foreign markets.
On Tuesday, the bank issued a similar warning when it reaffirmed, in strong words, that it intends to keep interest rates at the historic low of 0.25 per cent at least until next summer.

The language had the desired impact of driving the loonie down nearly two cents Tuesday.

Still, no economist believes Carney strong warnings will be sufficient to keep the
loonie grounded for long. In the final, analysis, the bank believes it has already set back by three months the recovery period.

It won’t be until late 2011 — two full years from now — that Canada’s economy will again be hitting on all cylinders, the bank says.

Thursday, October 29, 2009

With mortgage rates dropping, it's strategy time

September 15, 2009

It was a little less than a year ago that the global financial crisis began to hit home, which is to say that mortgage rates spiked higher.

Now, the cost of mortgages is coming down. If you're buying a home or renewing a mortgage, it's time to review your options.

Fixed-rate mortgages declined a little last week, but the most dramatic changes can be seen in variable-rate mortgages. For the first time in almost a year, it's possible to get a variable-rate mortgage at the prime rate used by most major financial institutions, which is currently 2.25 per cent.

Pre-crisis, variable-rate mortgages came with discounts that ranged from 0.75 percentage points to as much as 0.9 points off prime. By late last fall, crisis conditions prompted lenders to start charging prime plus a full percentage point or more. Now, some lenders are starting to unwind their crisis-rate premiums.

"Variable-rate mortgages are all over the map right now," said Gary Siegle, regional manager with the mortgage brokerage firm Invis Inc. in Calgary. "We're seeing them right in the area of prime with some lenders."

An example of a variable-rate mortgage at prime: ResMor Trust, a small player that deals through mortgage brokers, is offering four-year variable-rate mortgages at prime in all provinces except Quebec. The catch: You have to have your mortgage approved by Sept. 30 and close the purchase within 45 days.

Can variable-rate mortgages fall back to their pre-crisis lows any time soon?
"Definitely, 100 per cent, no," said Robert McLister, a mortgage broker and author of the Canadian Mortgage Trends blog ( "Could they get a little below prime? Definitely."

Okay, it's strategy time. With prime at 2.25 per cent and fully discounted five-year fixed-rate mortgages going for something in the area of 3.9 to 4.1 per cent, you're got some thinking to do if you're buying a home or renewing a mortgage.

The variable rate looks tempting. Sure, the prime is going to rise in the medium term, but it's expected to stay put until next spring at least. Even when prime does move higher, it will have to increase by roughly 1.75 percentage points to get to where today's five-year mortgages are.

"The risk is obviously that rates go up a lot more," Mr. McLister warned. "Rates went down four percentage points from December, 2007, through April, 2009. They could easily go up four - why not?"

Variable-rate mortgages allow you to lock into a fixed-rate mortgage, so there's no reason why you have to ride interest rates all the way up. Still, you have to recognize that fixed-rate mortgages could be significantly more expensive by the time you decide to lock in.

An academic study of rates between 1950 and 2007 found variable-rate mortgages were the money-saving choice over five-year fixed-rate mortgages 89 per cent of the time. If you're willing to ride rates higher for a while in hopes of longer-term savings on interest costs, then consider a possible approach suggested by Mr. McLister.

Instead of arranging a variable-rate mortgage now, go for a one-year fixed-rate mortgage. Then, when you're renewing in one year's time, you'll move into a variable-rate mortgage that will ideally have a rate that is discounted below prime.

Fully discounted one-year closed mortgages today go for about 2.55 per cent, so you're not paying much of a penalty at all compared with what variable-rate mortgages are pegged at right now.

Another suggestion from Mr. McLister is to consider a three-year mortgage, which offers an attractive blend of low rates and security against interest rate surges. Three-year mortgage typically go for around 3.39 per cent on a fully discounted basis, but he knew of one small lender offering 2.9 per cent through the mortgage broker channel.

The case for going with a five-year fixed rate is that rates are very cheap by historical standards. Rates were a little bit lower last spring, but they're not as high as they were a month or two ago thanks to a pullback in bond yields that has trickled down to fixed-rate mortgages.

Mr. Siegle said over half of his firm's clients are locking into a fixed-rate mortgage right now. "You can't ever time the bottom of the market, but are these good rates that you can be comfortable with? A lot of people are saying, 'yeah, they are.' "

UBS predicts a 'V-shaped' recovery in Canada

Eric Lam, Financial Post

While most economists generally agree Canada will experience some kind of economic recovery in 2010, UBS on Tuesday took the bold step of predicting a sharp and bullish "V-shaped" recovery, one of the first to do so.

George Vasic, strategist with UBS Securities Canada Inc., said the new prediction raises its outlook for economic growth next year to a healthy 2.9% from 2.4%, already above consensus of 1.8%. UBS had previously forecasted a more tepid "U-shaped" recovery.

"A few months ago people generally were saying it'd be very difficult to have any sort of recovery because credit market conditions would not recover quickly, there would only be a gradual thawing. But what we've seen since then is they've actually turned around quite remarkably," he said. "Sure it's a step from where we were and maybe two steps from where the consensus is, but we think effectively this is what's going to happen."

One of the main factors in Mr. Vasic's outlook is rising government and corporate bond yield curves, which have traditionally been a sign of improving fortunes for GDP growth.

"They're quite compelling. If you look at their correlations to GDP, they're about four quarters ahead," he said. "This isn't about the next quarter or the next month, it says when these things swing around it does assure you of some strong growth over the next year."

Sharp drops in GDP have also historically been followed by strong rebounds over the next year, he said.

Sheryl King, chief economist and strategist with Merrill Lynch Canada, was arguably the first bull out of the gate in July when she forecast a "burst" of 10% growth in the fourth quarter of 2009 and 7.5% in the first quarter of 2010. However, she stopped short of calling for a "V-shaped" recovery.

Other economists are not quite so bullish.
Benjamin Tal, economist with CIBC World Markets, expects only 2% annual growth from Canada. It's enough to outperform the other G7 countries, but not enough to justify a "V-shaped" forecast.

"It's like putting an average student in a class of underachievers," he said.
For Mr. Tal, a "V-shaped" recovery needs to be symmetrical, and he does not see that happening. Rather, he expects the economy to form a "fat U" shape with 2010 as the transition year.

"I just don't buy it. We need to see the labour market stop bleeding, export growth, strengthening in manufacturing," he said. "I think it will be a full year before we get back to potential."

Francis Fong, an economist with TD Economics, dislikes the alphabet-style designations but would characterize the recovery as a cross between a "V" and a "W", driven by consumer and government stimulus spending. TD's growth number, expected this month, will be higher than 1.8% but not at the level of Mr. Vasic's 2.9%, Mr. Fong said.

He also said that Canada's recovery also depends on how the United States performs, and a big part of the recent turnaround in this country has been fuelled by its biggest trading partner's economic stimulus plans.

"The ‘cash-for-clunkers' program was very successful, so there was lots of growth in the quarter. Is that sustainable?" he asked.

He forecasts a "W-shape" for the United States, as stimulus funds get pulled back in 2010.

However, Mr. Vasic argues stimulus will continue for at least the next year as governments on both sides of the border will be loath to switch policy gears.
"Even in turning [stimulus] off it takes time, so you'll have a period of time of good growth. No government is going to pull back stimulus when the unemployment rate is at 9%," he said.

Douglas Porter, deputy chief economist with BMO Capital Markets, has pegged Canada for 2.6% growth and does see signs of a "V-shape" recovery, particularly in the housing sector.

"But that's a factor of how far down the left side went. It depends on how the right-hand side will look," he said. "Even getting back to zero carves out a ‘V-shape.' "

There are a lot variables in a variable rate

Garry Marr, Family Man, Financial Post

He has a landmark study on mortgages, but York University professor Moshe Milevsky says he never anticipated the credit markets of the last year.

The 2001 paper examined the previous 50 years to determine whether consumers benefitted from locking into a fixed-rate mortgage or going with a variable-rate product linked to prime. Consumers did better 88% of the time by going with the variable-rate option. The study has been used by banks to lure consumers into variable rate products. Currently, about 25% of mortgage holders have gone with floating rates.

"I've written seven books and 100 research articles and that's the one I'm known for," says Mr. Milevsky, with a laugh. "I just wish some of these banks would mention the author."

He says the study results still hold true. If you factor in the past nine years, the variable rate probably does better about 96% of the time.

But that doesn't mean if you are looking for a mortgage today you should float, he says. "There is another element of risk to analyze," says Mr. Milevsky.

He's refering to the volatility in the mortgage market for variable-rate products. The variable rate is still tied to prime, but the discounts and premiums being offered are moving up and down wildly.

A year ago, consumers were being offered discounts as much as 90 basis points below prime, meaning those people who took it are now borrowing at 1.35% based on the current prime rate of 2.25%. When credit markets tanked a year ago, variable products were being sold at 100 basis points above prime.

Credit markets have calmed since. Bank of Montreal announced a week ago that its variable rate was down to 2.25%, with no discount or premium.

The Bank of Canada may have pledged to not touch the rate until next June, but consumers getting into variable rate products are facing the risk that the discounts they negotiate today will look pretty ugly in a few months.

Worse yet, the variable products being sold by the banks are generally closed mortgages, so they cannot be paid off immediately without penalty.

An open mortgage can be paid off at any time, but you pay a higher rate for the privilege. At Bank of Montreal, for instance, an open three-year mortgage costs 3.05%, so you are paying an 80-basis point premium.

"It's important to understand what kind of flexibility features you have in your mortgage," says John Turner, director of mortgages with Bank of Montreal.

With such confusion in the marketplace, these days even Prof. Milevsky is leaning somewhat in favour of the five-year closed fixed-rate mortgage. On a discounted basis, some banks are offering rates as low 3.69%.

"At some point, people have to ask themselves if they can afford the fact that eventually these things are going to go up, whether it's in one year, two years or five years," he says.

Recovery 'picking up,' but Fed stays cautious

Paul Vieira, Financial Post

OTTAWA -- The U.S. Federal Reserve acknowledged Wednesday the economic recovery has "picked up" and financial markets have "improved," but suggested it is in no hurry to pare back stimulus measures.

Among the new details released in the Fed's fixed-date rate announcement was a decision to extend a program, by three months, under which it pledged to acquire up to US$1.45-trillion of mortgage-backed securities and debt.

The mortgage debt program was set to expire on Dec. 31, and to date the Fed had acquired US$810-billion, or just over half, of the amount targeted.

An extension would slow the pace of weekly purchases the Fed executes. Nevertheless, the move suggests the Fed, led by chairman Ben Bernanke, remains committed to the scheme to fuel activity in the battered housing sector, and get the U.S. economy back on its feet.

"It sends a powerful signal that the Fed is not about to withdraw from their support for the economy," said Carlos Leitao, chief economist and strategist at Montreal's Laurentian Bank Securities. "They are not even considering any sort of exit strategies."

The U.S. mortgage debt targeted is a combination of mortgage-backed securities and bonds issued by Fannie Mae and Freddie Mac. The purchases are intended to lower the cost of taking out a mortgage, and, hence, encourage people to enter the housing market. In its statement, the Fed said activity in the housing sector has increased in recent weeks.

"It shows the Fed is very committed to continuing significant purchases to keep mortgage rates as low as possible," Michael Gregory, senior economist at BMO Capital Markets, said.

In stark contrast stands the Bank of Canada, which announced plans to shut down or scale back programs intended to provide capital markets with emergency liquidity to deal with the financial crisis.

"Financial markets have improved to such an extent that the demand for our [liquidity] has been waning," David Longworth, deputy governor at the Bank of Canada, said in a speech Wednesday to a business group in Prince Edward Island.

The removal of trillions in stimuli is among the key tasks that central banks
worldwide face. Central banks must determine the precise moment when the economy can move forward without further stimuli. The risk is moving too early and pushing the economy back into a tailspin, or move too late and allow deadly inflation to be unleashed.

The Fed's efforts to avert a depression has resulted in a ballooning of its balance sheet – from a pre-crisis level of US$929-billion to over the US$2-trillion mark.

In the Fed's statement, released after a two-day meeting of its open market committee, suggested household spending seemed to be "stabilizing." But consumer spending, which is the major driver of the U.S. economy, remains "constrained," the Fed added, due to "ongoing job losses, sluggish income growth, lower housing wealth, and tight credit."

Given these economic conditions, the Fed said it needed to keep the Fed funds rate at virtually zero "for an extended period."

Other analysts, meanwhile, picked up on a slight change in Wednesday's Fed statement that indicates the central bank has started thinking about the post-crisis economy. Wednesday's statement indicated the Fed was prepared to use "a wide range of tools" to fuel growth, while the August statement suggested "all available tools" would be employed.

"To us, this is a signal by the Fed that it will continue to gradually reduce the dose of the medicine that it will use on the economy," Millan Mulraine, economics strategist at TD Securities, said of the change in language.

"However, in recognition that the recovery, at least at its initial stages, will be
tenuous at best, they continue to indicate their willingness to maintain their support for the economy, as they nurse it back to health -- though they will reduce the dosage."

Ottawa enjoying home resale boom

July, August numbers beat totals from a year ago

THE OTTAWA CITIZEN - Ottawa has one of the tightest resale home markets in the province and as a result is expected to see more new home starts later this year. Ottawa's resale home market stayed hot through August, and is expected to soon spur an increase in new home construction, analysts say.

The Ottawa Real Estate Board said a total of 1,216 homes sold in Ottawa last month, a three-per-cent rise over the 1,181 homes sold in August 2008.

That followed an extremely strong July in which more than 1,577 resale homes were sold in Ottawa, an 11.5-per-cent jump from July 2008.

The sales momentum is being buoyed by extremely low interest rates and a shortage of properties on the market.

"Listing inventory is still very low," Rick Snell, president of the Ottawa Real Estate Board, said Thursday. "The capital still remains in a seller's market."
Year to date, resale home sales are up 2.6 per cent compared to the same period last year.

The recent boom marks a big turnaround for the Ottawa housing market, which slumped through the first three months of 2009. At the end of March, 2,479 resale homes had been sold in Ottawa, an 8.7-per-cent drop from the first three months of 2008.

For all housing, the average price in August was $315,074, up 12.3 per cent from August 2008. The average residential home sold for $339,406, up 13 per cent, while the average condominium changed hands for $225,167, an increase of 5.1 per cent.

The trend is similar in Gatineau, where so far this year a total of 4,390 homes have been sold. By this time last year, only 4,025 resale homes had been sold in Gatineau. Canada Mortgage and Housing Corporation believes the average price of a home will increase to $192,800 in Gatineau by the end of 2009.

The average price of a resale home in Gatineau in 2008 was $186,212.

The strong market for resale homes in the capital appears to be foreshadowing a national trend. According to CMHC, while selling prices are still depressed through most of Canada, the volume of resale homes sold is picking up.

CMHC said existing home sales have "rebounded strongly since January" and will total 420,700 units in 2009 and 419,400 units next year.
Nationally, the average sales price is expected to be down for the entire year, to $301,400, before rising to $306,300 in 2010.

The strong national housing rebound in the second half of this year is expected to continue into 2010 and will likely push builders to ramp up the number of homes they will begin construction on in the fall.

Housing starts will reach 141,900 this year and increase to 150,300 for 2010, according to CMHC. Ottawa, Hamilton, Kitchener and Thunder Bay are the tightest resale home markets in the province and as a result are expected to see a boom in
new home starts later this year.

"Improving activity on the resale market and lower inventory levels in both the new and existing home markets are expected to prompt builders to increase residential construction," CMHC said.

Bob Dugan, CMHC's chief economist, said economic uncertainty and lower levels of employment tempered new housing construction in the first half of this year.
"In the second half of 2009 and in 2010, we expect housing markets across Canada to strengthen," he said.

No guarantee rates will stay low, Carney warns

Paul Vieira, Financial Post

OTTAWA -- Governments will be required to undertake "concerted" and "sharp" efforts to restore fiscal sustainability once a market-led recovery is assured, Bank of Canada governor Mark Carney said Monday.

This will particularly apply to countries with ageing populations and "unsustainable entitlement programs," he said in a speech to the Victoria Chamber of Commerce.

While Mr. Carney was speaking about the need of governments to get their fiscal houses in order in the post-crisis landscape, the central banker also went to some lengths to reiterate that the central bank's pledge to keep interest rates at 0.25% until the end of June 2010 is "conditional" on meeting inflation targets. He told reporters afterward it would be unwise to assume current rates are "normal."

"It is an expectation, not a promise," Mr. Carney said in his remarks.

In recent weeks, analysts have debated whether the bank may move before that June 2010 deadline to raise rates given the strength in the economic rebound; or whether it may extend its pledge to keep a lid on growth in the Canadian currency, which it identifies as a risk to growth.

His speech touched on familiar ground, such as the risk of the rising loonie, but also attempted to set the landscape for the "hand off" from government-led growth to the private-sector-led expansion. His remarks suggested that stimuli - whether through government spending or low interest rates - should be kept in place "until the recovery is assured."

When that recovery is assured, certain countries have much work to do to clean up their public finances, Mr. Carney indicated. He did not cite specific countries in his remarks, but jurisdictions that fall under this category could include the United States and western Europe.

"Once the recovery is assured, concerted efforts will be necessary in most economies to restore fiscal sustainability," he said, adding it would be "particularly sharp" for some countries. "The fiscal cost of arresting the downfall will need to be first
contained and then repaid over many years."

In Canada, the federal government has set out a framework under which it would remain in a deficit position until at least the 2014-15 fiscal year. But, the Conservative government said it would be able to reduce the amount of red ink in the coming years through cost controls and better growth.

More difficult decisions await legislators in Washington, which is recording shortfalls in the trillion-dollar range. Analysts warn of the need for U.S. legislators to cut spending and raise taxes, which could further keep U.S. consumers timid and undermine global growth.

Without aggressive efforts to keep the U.S. debt in check, bond investors will demand fatter yields that, in turn, could drive up inflation and weaken the U.S. currency.

But some governments are indicating they are prepared to take the steps Mr. Carney is calling for. Alistair Darling, Britain's finance minister, said Monday the country will make annual budget deficit reduction a legal commitment in order to bind future governments to getting the national debt down.

"Policy makers will have to act deftly to maintain stimulus long enough for private demand to take up the burden of growth, but not too long to undermine confidence in and the sustainability of that growth," Mr. Carney said. "The aftermath of the crisis will make considerable demands on structural policies in all countries, including Canada."

Among the structural changes in Canada would be the need for businesses to rely more on emerging markets as a source of demand as open access to the U.S. market becomes "less valuable," Mr. Carney said.

Afterward, he told reporters the U.S. economy would not be as "dominant" because that economy is going through a multiyear adjustment.

Housing market, led by west, shows better-than-expected performance

Financial Post Published: Friday, August 28, 2009

Canada's housing market will perform better than expected in 2009, the Canadian Real Estate Association (CREA) said yesterday. The realtor group revised its previous forecast that sales would fall 14.7%. It now says resale market activity will total 432,600 units, a decline of only 0.4%, compared with 2008. It cited stronger-than-expected second-quarter sales for its revised outlook. The group also raised its outlook for prices, saying that average home prices in 2009 will rise 1.5% to $309,500, compared with its previous forecast of a 0.3% decline. B. C., which experienced a 33% decline in sales in 2008, will recover to post a 5.2% gain-- to 72,500 units -- in 2009, CREA forecast. The Alberta market, which fell 21% in 2008, will now post sales this year of 55,000 units, a decline of only 2.5%. CREA however reduced its sales outlook for 2010 to a gain of 5.3%, or 455,400 units.

CMHC expects housing market to rebound strongly this year and next

Financial Post Published: Friday, September 04, 2009

Canada's housing market will rebound strongly in the second half of this year and into 2010, the federal housing agency said yesterday. Housing starts will reach 141,900 this year and increase to 150,300 for 2010, said Canada Mortgage and Housing Corp. "Improving activity on the resale market and lower inventory levels in both the new and existing home markets are expected to prompt builders to increase residential construction," CMHC said. Bob Dugan, CMHC's chief economist, said, "Economic uncertainty and lower levels of employment tempered new housing construction in the first half of this year. In the second half of 2009 and in 2010, we expect housing markets across Canada to strengthen."

Canada a tale of two economies: as export sector staggers, domestic activity booms


Two reports Thursday reinforced recent trends that show a strong domestic Canadian economy propped up by floor-low interest rates and a recovering housing market, and a weak manufacturing sector hammered by the sky-high dollar and a squeeze on exports.

“What it’s telling us is that low interest rates are working in Canada,” said CIBC chief economist Avery Shenfeld. “We’ve had a number of disappointments on the export front. Where Canada is showing vigour, it’s on the domestic front in response to low interest rates.”

The most recent evidence is the outsized growth in house sales during the third quarter — given the still-weak overall economy.

The Canadian Real Estate Association reported that in real terms, sales of existing homes in the country have never been stronger than in the just-completed third quarter. The association said more than 135,000 units were sold in the July-to-September period — 18 per cent higher than the corresponding period last year before the recession hit.

Meanwhile, Statistics Canada figures released early Thursday showed factory shipments fell 2.1 per cent in August as the activity from the U.S. cash-for-clunkers program, which had artificially spurred auto sales in the United States, subsided.

As well, there are few signs of recovery ahead for the battered manufacturing sector as new orders have practically stagnated and unfilled orders fell 4.2 per cent.

“The fact remains that Canada’s manufacturing sector remains under duress,” said TD Bank economist Grant Bishop, noting the new challenge of a dollar that many expect to regain parity with the U.S. greenback by year’s end.

A perhaps even bigger barrier to a recovery in Canada’s export sector, which accounts for about one-third of the economy, is that consumer demand in the U.S. for what Canada has to sell — cars, parts, lumber and consumer items — isn’t about to pick up any time soon.

A new Conference Board of Canada forecast of the U.S. economy estimated that consumer spending will remain in the dumps throughout 2010, rising only about one per cent from already abysmal levels.

The problem faced by the Bank of Canada is that hinting it may raise rates sooner than next summer, when its conditional pledge to keep the policy rate at 0.25 per cent runs out, will only add fuel to the loonie’s flight and further harm exports and manufacturers. Suggesting that rates will remain as low as they are for a long time feeds into a housing asset bubble and risks inflation.

“The decisive rebound (in home sales) puts the Bank of Canada in a quandary — while the hot housing market cries out for rate hikes, the runaway loonie screams ‘No!’ ” is the way Doug Porter, deputy chief economist with BMO Capital Markets, puts it.

The big banks recently raised mortgage rates by up to a third of a point on many loans, a move that could slow down demand in some markets. However, mortgage rates are still extremely low by historic standards. The Canadian Press

BoC focus on consumers worries analysts

Paul Vieira, Financial Post
OTTAWA -- Mark Carney, the governor of the Bank of Canada, said Thursday consumers would be at the "heart" of an economic recovery that continues to pick up steam, leaving analysts worrying a new wave of spending will only drive consumers deeper into debt.

Improved financial conditions and consumer confidence, coupled with indications that labour market conditions "may have" ceased deteriorating, has led the Bank of Canada to believe consumer spending will account for a larger share of total economic growth in the years ahead, according the central bank's quarterly economic outlook, released Thursday.

Consumer spending will offset some of the losses in the export-oriented sector, which is expected to contract 1% next year due to the strength of the Canadian dollar.

"The conundrum for the central bank is the longer they keep interest rates low, the more likely it is that it will create [a debt] problem," said Andrew Pyle, wealth advisor and markets commentator with ScotiaMcLeod.

The central bank upgraded growth projections for the second half of 2009, seeing expansion of 2% for the third quarter and 3.3% for the fourth quarter.

The bank previously expectated 1.3% and 3% in the third and fourth quarters, respectively. Then, the economy is set to expand 3% next year and 3.3% in 2011.
In 2010, consumer spending is set to contribute half of the growth in final domestic demand, which includes consumer purchases, housing, public spending and business investment. By 2011 it will climb to three-quarters.

This reliance on consumers has analysts wondering whether Canadians might find themselves caught in a debt trap, especially given the current low cost of borrowing -- as led by the Bank of Canada's record-low 0.25% policy rate.

Laurentian Bank Securities has noted that household credit as a share of GDP (currently at 90%) and the household debt-to-GDP ratio (at 140%) are "quite elevated" and kept creeping up during the recession.

At a media conference, Mr. Carney said the bank believes, all told, savers will outstrip borrowers, as incomes begin to grow on better job market conditions. He told reporters households should plan their financial affairs "prudently" on the anticipation that interest rates will eventually return to a more normal level.

That might be easier said than done, said Stewart Hall, an economist at HSBC Securities Canada. He said history and markets demonstrate consumers respond to cheap prices, whether it is for gas or for financing.

"The Bank of Canada [seems] to have removed themselves from the dynamic of cheap money ... and instead fallen back on the view that, at best, we are simply seeing pent-up demand and at worst ... that lenders and borrowers will self regulate and act in a prudent way," Mr. Hall said. "The heart wants what the heart wants and many a purchase, houses included, prove emotional rather than prudent."

Mr. Carney said the housing market dynamic has "raised some concerns" at the central bank, although it anticipates housing growth to slow down in early 2010 as pent-up demand for real estate is met, affordability declines and the federal home-renovation tax credit expires.

The strengthening dollar, the bank said, is driven in large part by the weakness in the U.S. currency. This, however, may be one of the consequences of unwinding global imbalances, as Americans will need to increase its exports and savings to generate wealth.

A hot real estate market getting hotter

Garry Marr, Financial Post

The statistics may not say it yet but Toronto real estate sales representative Kate Watson can already feel the ground shifting.

A new set of data from the Ottawa-based Canadian Real Estate Association (CREA) shows the market tighter than ever with the lack of supply in new listings conspiring to make a hot market even hotter.

CREA said Thursday the average sale price of a house in Canada reached $331,602 last month, a 13.6% increase from a year ago. There just isn't enough new product coming to market to meet demand. Last month, there was 80,816 new listings across the country, compared to 97,657 a year ago.

The supply problem is happening in almost every major Canadian city. Toronto new listings were down 25.3% last month from a year ago. Calgary was off 26.1%.

The number of months of inventory in the market -- which is based on the number of months it would take to sell current inventories based on current sales activity -- was 4.9 months in September. That figure was down slightly from August and way off the peak of 12.8 months reached in January.

CREA expects the situation to ease in the coming months as sellers realize the type of prices they can get if they list. Ms. Watson, who works for Wright Real Estate Brokers Ltd., says the situation is already resolving itself.

"It was bit of as logjam but it is already starting to clear," she says. "You had a lot people waiting to list until after Thanksgiving because nobody wants to put their property for sale before a holiday."

The Canadian market has had a remarkable turnaround from a winter that was the worst Ms. Watson can remember in her six years on the job which have mostly witnessed a rising market. September sales across the country were up 1.5% from August. The latest bump in sales puts the market 63% above January low.

The same things continue to drive the housing market. "Low interest rates, rebounding consumer confidence and improving overall sense of economic security continue to draw homebuyers," said Dale Ripplinger, president of CREA.

CREA's chief economist Gregory Klump said the 1.5% increase in sales while impressive shows the market is beginning to cool to some degree. "Monthly sales activity remained on a strong upward trajectory throughout the third quarter in British Columbia while showing signs it may be topping out in other provinces. On balance, this suggest the sales activity may be starting to plateau after having climbed rapidly earlier this year," he said.

The total dollar figure for all sales in the third quarter reached $41-billion, the highest level on record for the period. British Columbia and Ontario reached new
highs for dollar volume. Canada's largest cities are driving the housing market.

Vancouver sales in the third quarter were up 34% from second. Toronto sales rose 11% during same period while Calgary climbed 19%.

Nationally, average national sales price in the third quarter was $327,736, an 11% increase from a year ago. Sellers sitting on the sidelines are expected to move in the coming months.

"Headline average price increases over the rest of the year are expected to prompt sellers to return to the market," said Mr. Klump. "An increase in new listings will help keep a lid on price increases."

Scotiabank economist Adrienne Warren says she's not too concerned about any sort of bubble building in the housing market. "I don't think so. This is just the strength of demand and a lack of listings," she said. "As the economy stabilizes, people will feel more confident to list their homes."

Thursday, September 3, 2009

Economic signals turning green as consumer confidence, home sales rise

By Julian Beltrame, The Canadian Press

OTTAWA - Canadians are starting to believe that better times are just around the corner, and that's good news for the economy, analysts say.

The August consumer confidence survey from the Conference Board of Canada shows optimism returning to Canadian households, with the index rising for the sixth consecutive month to the highest level since April 2008, when the economy was firing on all cylinders.

And in a separate report, the Canadian Real Estate Association reported that sales of existing houses rebounded so strongly during the spring and into July that the housing group was dramatically revising upwards its forecast for the year.

"The difference in the resale market now, compared to the beginning of the year, is night and day," said president Dale Ripplinger, in increasing CREA's projection for sales this year to 2008 levels, from a previously thought 14.7-per-cent decline.

As well, the real estate body forecasts the general prices of homes across Canada will rise 1.5 per cent this year, a stark contrast to the situation south of the border, where both prices and sales have collapsed.

Both indicators were below levels that existed in 2007 when the economy was booming and the horizon contained few warnings of forthcoming turbulence, but they do support the general view that the sharp economic slide of the winter and spring has stopped.

They also coincide with the recent slowdown in job losses and steady growth in the retail sector, including June's surprise one per cent increase in sales.
Since October, 414,000 jobs have vanished in Canada, but the majority of the losses occurred in December, January and February.

Economists don't often get excited about consumer confidence surveys, mostly because they often reflect the economic news rather than predict future behaviour.

Douglas Porter of BMO Capital Markets said the latest survey is worth noting, however, because of its timeliness, and its track record in accurately predicting last winter's consumer spending slump.

"Given that the consumer confidence survey is the first piece of data we have from August, it's at least a hint that maybe some of the other indications we're going to see later on - spending, perhaps even employment - are going to be better than expected," he said.

The survey, conducted between Aug. 6 and 16, raised the consumer confidence index by 5.5 points from July to 88.4, the highest reading in almost a year and a half. Confidence has risen 18.2 points since the beginning of the year.

Another good sign was that all components of the survey showed gains: more respondents were upbeat about their near-future financial prospects, fewer were pessimistic about job prospects, and a plurality said it was a good time to make big purchases, such as a car or home.

On the critical jobs question, 25.6 per cent of respondents said there will be fewer jobs available in the next six months, a huge improvement from the 54.5 per cent who felt gloomy about jobs prospects six months ago. Twenty-one per cent felt there would be more jobs six months from now, an increase of over six percentage points from July.

"In general we see this as good news," said Todd Crawford of the Conference Board. "In terms of going forward, as people become more optimistic and they go out and spend more money, that is good news for the economy." -

The perils of writing off the mortgage

Jamie Golombek, Financial Post

It has been nearly six months since the Lipson decision, in which the Supreme Court of Canada effectively blessed the debt-swap strategy known as the "Singleton shuffle." But a new court decision reminds us how critical it is when rearranging your debt to do so legally.

After all, in Canada, it's nearly impossible to write off your mortgage interest without some advance planning.

The Singleton shuffle, named after Vancouver lawyer John Singleton's 2001 Supreme Court victory, stands for the notion that you can rearrange your financial affairs to make the interest on investment loans tax-deductible. How you do that is by replacing non-deductible debt with tax-deductible debt.

The case decided last month involved Nina Sherle, who owned a rental property (Property A) with a mortgage on it upon which the interest was deductible. She also owned a personal residence (Property B) free and clear.

She wanted to switch properties. In other words, she wanted to live in Property A as her personal residence and rent out Property B. She stated she didn't want to change her financing strategy, which was to live in her personal residence (soon to be Property A) mortgage-free.

To accomplish this, she mortgaged Property B to pay off the loan on property A. As a result, she was now making interest payments on the new mortgage secured by Property B. She deducted this interest on her tax returns but was reassessed by the Canada Revenue Agency.

The CRA argued that for interest to be deductible, one must look to "the actual, direct use of the borrowed funds" and whether such use was for the purpose of earning income.

Since the mortgage proceeds were used to pay off the loan on Property A, which was to be a personal residence, not an income-producing property, the interest was not taxdeductible.

The judge in the case agreed. He wrote: "Why funds are borrowed is irrelevant.... It is the use of the funds that governs [the decision]. In the present case, the required link between the use of the proceeds and the income-producing property is just not there."

In a twist, the judge went on to describe what Ms. Sherle could have done to permit the interest to be deductible. While somewhat complex, it essentially involves Ms. Sherle selling Property B to a friend in return for a promissory note.

The next day, Ms. Sherle could have borrowed money from the bank to pay off the mortgage on Property A. She then could buy back Property B from her friend, financing that purchase through a mortgage on Property B.

Her friend would take the proceeds from the sale of Property B and use them to repay the promissory note. Finally, Ms. Sherle would use the proceeds from the promissory note to pay off the bank loan.

Confused yet? The end result is that only the mortgage on Property B would be outstanding. The interest should be taxdeductible since the direct use of the mortgage proceeds was to buy the rental property. - Jamie Golombek, CA, CPA, CFP, CLU, TEP is the managing director of tax and estate planning with CIBC Private Wealth Management in Toronto

Thursday, August 27, 2009

BoC may have to break interest rate promise

Alia McMullen, Financial Post Published: Thursday, July 23, 2009

TORONTO -- The Canadian dollar hit a 10-month high Monday amid growing risk appetite and rising expectations that inflation will ultimately force the Bank of Canada to break its promise to keep interest rates on hold until mid-2010.

"The time for tightening is not yet at hand, but June 2010 seems too late," said Yanick Desnoyers, the assistant chief economist at National Bank Financial. "The day when the condition for the Bank's low-rate commitment is no longer met will probably come before then."

Mr. Desnoyers said the benchmark interest rate had been lowered to a record low of 0.25% to limit the damage of the recession and financial crisis. However, he said the rate was too low relative to core inflation, which stood at 1.9% in June, just one basis point below the bank's target rate.

The outlook for higher interest rates, whether they come sooner or after June next year, has helped support the Canadian dollar, which has increased by about 8% since the beginning of the month.

The loonie inched up US0.16¢ to US$92.50 Monday after reaching its highest level since October in intraday trade. The rise was boosted by an improvement in investor sentiment after new U.S. home sales surged by 11% in June and the three-month Libor rate, the benchmark borrowing rate banks generally charge each other, fell to a record low 0.496%.

The decline in Libor, which peaked at 4.82% in October, is a sign that credit pressures continue to ease. Commodity prices were also marginally higher amid expectations of an uptick in demand.

Aron Gampel, vice president and deputy chief economist at Scotia Capital, said the Canadian dollar has also strengthened against the greenback because many were concerned U.S. stimulus efforts would leave behind a problematic debt hangover. He said the loonie was likely on its way back to parity with the U.S. dollar.

With the Bank of Canada having declared that the recession is likely over, interest is beginning to turn to when interest rates will begin to rise. Some, such as Mr. Desnoyers, believe the Canadian recovery, bolstered by government stimulus, will push inflation up faster than expected, forcing the Bank of Canada to use its "get out of jail free card" and raise the benchmark policy rate before June 2010.

The central bank said it would keep interest rates on hold until June 2010 "conditional on the outlook for inflation".

Bond yields have risen in recent weeks and now reflect a 90% chance of an interest rate rise withing nine months.

Others, such as Mr. Gampel, believe the central bank will keep interest rates on hold until mid next year, but embark on an aggressive tightening thereafter. However, he said the economy was at a turning point and the Bank of Canada's ultimate decision would depend on the speed of economic recovery.

"They could be looking at having to push interest rates up at a faster rate, and sooner, if the recovery takes on a greater scope going forward," Mr. Gampel said.
He said the recovery could well be on track to outpace expectations as businesses rebuild inventories, consumer spending picks up and fiscal stimulus kicks in.

However, he said evidence to date does not suggest the central bank will need to hike rates before June, particularly with a large amount of excess capacity in product and labour markets.

Central banks signal low rates here to stay

Paul Vieira, Financial Post, with files from Reuters Published: Monday, August 24, 2009

OTTAWA -- Despite growing confidence that economic growth is in the offing, monetary policy around the world is likely to remain "ultra-accommodative," perhaps until 2011, as doubt remains as to whether or not the growth expected this quarter is sustainable, analysts say.

That is the view emerging following the weekend gathering of the world's leading central bankers in Jackson Hole, Wyo., highlighted by remarks from Ben Bernanke, U.S. Federal Reserve chairman, who warned of the uncertainties ahead, and Jean-Claude Trichet, president of the European Central Bank, who suggested he is in no rush to reverse emergency stimulus measures.

"The key message from Jackson Hole was ... that monetary policy is likely to remain ultra-accommodative for the foreseeable future - at least for the next several years," said Julian Jessop, chief international economist at Capital Economics of London.

"It seems more likely that there will be no increases in interest rates in any of the major economies over the next 12 to 18 months."

Strategists at RBC Capital Markets concurred, adding in a note released Monday: "We continue to believe the economic backdrop will warrant a significant additional period of low rates. Indeed, even at the Jackson Hole conference, there was not even a suggestion that we should be braced for anything other than that outcome."

This outlook applies to Canada as well. Banc of America Securities-Merrill Lynch, as part of global report on monetary policy, said it does not expect the Bank of Canada to begin raising rates until 2011 - well past its pledge to keep the key policy rate, at 0.25%, until June 2010.

Canada has a significant output gap - the difference between potential and real gross domestic product - and the rate at which money is deployed in the economy, or money velocity, has shrunk 15% since late last year even though the central bank has taken its target rate to its lowest possible level, the BofA-Merrill Lynch analysis indicates.

"To compensate, we think the Bank of Canada will probably need to keep rates lower ... to ensure that money creation remains in the double-digit [growth] territory needed to reinflate the economy and close the output gap," the report says.
This outlook is similar to what economists at Laurentian Bank Securities suggested last week. They said a lack of pricing power for firms, a sizeable amount of excess supply and virtually non-existent upward pressure from labour costs means the bulk of policy tightening would not materialize until 2011.

The Bank of Canada signalled in its last economic outlook that it expected economic growth to resume this quarter, marking, technically, the end of a deep but relatively short recession.

It expects growth this quarter of 1.3%, 3% in the final three months of 2009, and the latter again in 2010. Further boosting the recovery story was data from Japan, Germany and France that indicated economic growth in the second quarter.

But there are growing concerns about the sustainability of this emerging recovery.

In a note published last week, Olivier Blanchard, chief economist of the International Monetary Fund, warned of a difficult recovery that would take years to unfold as elements of the financial system remain dysfunctional.

Of particular concern in his outlook was the source of demand once governments phased out fiscal stimuli. The worry is that U.S. business investment and household spending would remain weak, and Asian economies would fail to pick up the slack.
Still, some leading central bankers warn about leaving interest rates too low too long.

Masaaki Shirakawa, governor at Bank of Japan, told his peers at Jackson Hole that policymakers must avoid economic bubbles fostered by expectations that interest rates will remain low.

"Shirakawa's point about the need to prevent future bubbles is weighing more on minds of central bankers, so maybe they do have to be a little more careful," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

Flaherty calls economic signs encouraging, tentative

Not aware of other big Chinese forays into Canada
Reuters Published: Wednesday, August 12, 2009

BEIJING -- Canadian Finance Minister Jim Flaherty on Wednesday described recent positive economic signs as encouraging but tentative.

Speaking to reporters after three days of meetings in Beijing, Flaherty said he welcomed Chinese direct investment in Canada but had not been made aware that China Investment Corp. was considering other big forays into Canada.

CIC, China's $300-billion sovereign wealth fund, agreed last month to acquire a 17.2% equity stake in Canadian miner Teck Resources for $1.74-billion.

Flaherty, who last week raised the possibility of policy makers' intervening in the currency market if the Canadian dollar's sharp rise put the country's fragile economic recovery at risk, said he has always expressed concerns about rapid fluctuations in the Canadian dollar.
© Thomson Reuters 2009

Housing resales rocket in July

Record 18.2% jump
Alia McMullen And Garry Marr, Financial Post Published: Saturday, August 15, 2009

Canada's housing market boomed in July as low interest rates and improving economic confidence sent sales of existing homes to a record for the month, despite generally weak economic conditions.

The remarkable turnaround from an almost frozen market at the start of the year has economists stunned, and while they predict activity will level out soon, the risk is continued low interest rates begin to stoke a house price bubble.

"We can't rule it out," Douglas Porter, the deputy chief economist at BMO Capital Markets, said of the possibility of a bubble. But he said the scenario was hard to fathom given the underlying weakness in the economy.

Even so, that weakness to date has not prevented a strong rebound in the existing housing market, which declined steadily throughout 2008 and hit a decade low in January.

Home resales increased by 18.2% in July compared with a year earlier, to reach 50,270 units -- the highest July sales result on record, Canadian Real Estate Association figures showed yesterday. At this pace, the housing market is on track to be even hotter than it was in 2007, which was a record year. Seasonally adjusted sales have risen for six straight months to be up 61.2% since January and are now just 1.4% below the peak in May 2007.

But despite the spectacular gain, the level of activity in the first seven months of this year remains 6% lower than in 2008 when activity had already begun to decline. Mr. Porter said some of the rise in the month was a result of sales that had been held back from the start of the year because of the weak market conditions.
But homebuyers have swarmed back into the market because of low interest rates and more affordable house prices.

"Homebuyers recognize that interest rates and prices have bottomed out, and are taking advantage of excellent affordability before prices and interest rates move higher," said Dale Ripplinger, the president of CREA.

A five-year fixed-rate mortgage, the most popular product among consumers, is still available for under 4% at some financial institutions. Variable-rate mortgages, tied to prime, remain in the 3% range and are not expected to rise until June. The Bank of Canada has promised to keep the benchmark interest rate at a record low 0.25% until mid-2010, provided inflation does not begin to rise.

The strength in the market has been felt right across the country. Vancouver sales last were up 90% from a year ago, while sales climbed 28% in Toronto and 28% in Edmonton. The strong demand in the country's highest-priced markets has to some degree skewed the average price higher. The average price of a home sold on the Multiple Listing Service last month rose 7.6% from a year earlier to $326,832.

The strength in the resales market has not been echoed in the price of new homes, which fell 3.3% in June compared with a year earlier, Statistics Canada figures showed Wednesday.

Part of the pressure on prices has come from a decline in supply, which has fallen for seven straight months. New listings in July were down 13% from a year earlier to 73,444.

Economists are skeptical the housing market will be able to continue to post such strong growth.

"After improving markedly, affordability will deteriorate in coming quarters, and unemployment will continue to rise," said Pascal Gauthier, an economist at TD Bank Financial Group. "New listings might well start rising again too. Combined, a larger supply and a softening in demand should cool prices in a delayed fashion."

Housing Starts Increase in June

OTTAWA, July 9, 2009 — The seasonally adjusted annual rate1 of housing starts increased to 140,700 units in June from 130,300 units in May, according to Canada Mortgage and Housing Corporation (CMHC).

“The increase in housing starts in June is broadly based, encompassing both the singles and multiples segments,” said Bob Dugan, Chief Economist at CMHC. “In addition, Western Canada experienced an increase this month.”

Housing starts are expected to improve throughout 2009 and over the next several years to gradually become more closely aligned to demographic demand, which is currently estimated at about 175,000 units per year.

The seasonally adjusted annual rate of urban starts increased 9.5 per cent to 120,100 units in June. Urban multiple starts increased 11.3 per cent to 67,000 units, while urban single starts also moved up by 7.3 per cent to 53,100 units in June.

June’s seasonally adjusted annual rate of urban starts increased 59.4 per cent in the Prairies, 25 per cent in British Columbia, and 3.1 per cent in Ontario. Urban starts declined 6.3 per cent in Quebec, and 3.9 per cent in Atlantic Canada.

Rural starts were estimated at a seasonally adjusted annual rate of 20,600 units in June2.

As Canada’s national housing agency, CMHC draws on more than 60 years of experience to help Canadians access a variety of quality, environmentally sustainable, and affordable homes — homes that will continue to create vibrant and healthy communities and cities across the country.

Friday, July 24, 2009

The recession is over. Cue the painful recovery

The recession is over, but not the pain.

Canada's central bank predicted Thursday that the economy would expand this quarter, suggesting the economic contraction lasted for about nine months, considerably shorter than the previous two recessions in the early 1990s and the early 1980s.

The Bank of Canada’s reassessment of the state of the economy is perhaps the clearest signal yet that the worst of the recession is over.

Buoyed by the prospect of better days ahead, investors rushed to buy Canadian stocks, adding new life to an near five-month rally that economists said has played a big role in reversing Canada's fortunes.

The Standard & Poor’s /TSX Composite Index rose 243.33 points to 10,675.68, the highest in six weeks. Canada's dollar jumped about 1 per cent to 92.04 U.S. cents, the strongest in almost two months.

Yet Bank of Canada Governor Mark Carney stopped short of celebration, saying it will take more than a year to replace the wealth destroyed by the financial crisis.

A graphic example of the hole out of which Canada's economy has to climb is the “output gap,” which measures the difference between current economic activity and the level of production policy makers reckon the economy can sustain without causing rapid inflation.

The Bank of Canada's conventional measure of output gap was -4.3 per cent in the second quarter, the widest deficit on record dating back to 1985.

“We are on track for the recovery both in Canada and globally,” Mr. Carney said at a news conference. “But it's early days. It's a long road.”

Canadian policy makers attributed their brighter outlook to improved confidence around the globe, reflected in the Dow Jones Industrial Average’s 2-per-cent jump yesterday, sending the New York-based index above 9,000 for the first time since January.

The Bank of Canada, which employs more than 300 economists and runs 21 models, predicted in April that gross domestic product would contract 1 per cent in the current quarter and that growth wouldn't return until the final three months of 2009.

As it turns out, policy makers underestimated Canadian consumers' ability to weather the deepest global recession since the Second World War and the central bank's own ability to erect a bulwark against the storm.

Mr. Carney and his senior deputies remain surprised that household credit continued to expand through the recession, providing a measure of support for domestic spending that kept the collapse in exports and rising unemployment rates from taking a greater toll.

The fact that family borrowing continued to increase at its historic pace of about 8 per cent a quarter reflects an increase in home buying – purchases that were encouraged by mortgage rates that fell to record lows as the Bank of Canada dropped its benchmark lending rate to an unprecedented 0.25 per cent and set up emergency cash auctions to ensure banks had access to enough money to continue lending.

“We've seen some remarkable policy response to the economic issues, not just on a regional basis, but on a global basis,” said Daniel Bain, president and chief investment officer at Toronto-based Thornmark Asset Management Inc., which oversees investments worth about $460-million. “It's almost unimaginable where we would be if there had not been some intervention.”

It will be months before Statistics Canada officially dates the latest economic downturn.

Bank of Canada July 21 rate announcement: Analyst reaction

Posted: July 21, 2009, 9:43 AM by Vieira
Bank of Canada

Here is a roundup of analysts’ reaction to the Bank of Canada's rate decision Tuesday, in which it left its benchmark mark unchanged, at 0.25%, and revised upward its economic outlook:

It now sees some expansion in many countries, though the recovery is still "nascent" in the bank's words. Last meeting it talked of an improvement in financial conditions and commodity prices, which it repeated this statement, but added the observed improvement to Canadian business and consumer confidence. It still sees a higher Canadian dollar and corporate restructuring as being a drag on growth. One interesting reference in the statement is that the bank believes that early signs of strength in Canadian domestic demand “represents the bringing forward of household expenditures.” I would assume this is directed more to the latest housing figures we've seen, in addition to anecdotal evidence of a pick up in some auto sales because of incentives. In other words, the bank is not betting the farm on a quick snap back in demand and maybe a cooling off this summer. Stronger stock markets though and the recent slide in gasoline prices might just offer a lift.
Andrew Pyle, wealth advisor, ScotiaMcLeod

The economic and inflation assessments were changed a bit, and the bank now expects a little bit of a stronger performance on both fronts. The follow through for the output gap and inflation is that the bank now expects it to close a quarter sooner than the original forecast of [the third quarter of] 2011. But the overall risks to the inflation project are still “tilted slightly to the downside.” The hot issue for this meeting was how the bank would address the currency issues, as the Canadian dollar has firmed recently, though the spate of appreciation has not been as significant, nor as rapid as the intermeeting period [prior] to the June [announcement]. The bank did mention the Canadian dollar as a variable that “is significantly moderating the pace of overall growth.” The tone of this specific statement is not that dissimilar to the one in June, though the bank did not specify the drivers of the currency this time around. … It seems that the bank is now a little less dour on the outlook. That said, the currency remains a potential obstacle, and will continue to be watched very closely.
Charmaine Buskas, senior economics strategist, TD Securities

I don’t think there were any huge surprises here. But I think at the margin they come across as being a little bit more bullish on the growth outlook. That’s not a big shock. But just the tone of the remarks sounds a little bit more upbeat then I might have expected. They still signal the high dollar is weighing on growth but overall its got slightly more upbeat tone then I would have anticipated. I don’t see the changes to the forecast as being that surprising. There is no real surprise on the view for 2009 that’s basically consensus, the decline of 2.3% for GDP. But the call for the 3% growth in 2010 is an upgrade from where they were before and it’s well above consensus. The bank is now significantly more optimistic then most forecasters for next year.
Douglas Porter, deputy chief economist, BMO Capital Markets

We’re looking at a little stronger growth environment and a little less worrying inflation outlook ... or disinflation or deflation outlook perhaps. It’s a small step toward an eventual increase in interest rates but a small step, nothing significant.
Craig Wright, chief economist, Royal Bank of Canada

Our central bank said the recovery has started. We agree. The outlook for inflation and the economy still necessitates the firmly expansionary monetary policy to stay in place, which makes sense to us. However, [we think] the Bank of Canada is somewhat optimistic about the strength of the recovery, based on robust growth in household expenditures. We will learn more on Thursday in the monetary policy report.
S├ębastien Lavoie, economist, Laurentian Bank Securities

Tuesday's policy announcement didn’t change anything that [the Bank of Canada] is doing, but the central bank is clearly less worried about the downside risks to growth. That degree of optimism, however, may understate the structural challenges to brisk growth abroad, and the risks to Canada from an overvalued exchange rate. ... The good news is that if the central bank has been too optimistic on 2010, it won’t really matter much for what the bank actually does. It will have plenty of time to observe actual growth and inflation conditions before making a decision to begin a tightening cycle.
Avery Shenfeld, chief economist, CIBC World Markets

Paul Vieira, with files from Reuters

End of Recession is Near

Kevin Carmichael
Ottawa — Globe and Mail Update Last updated on Wednesday, Jul. 22, 2009

The U.S. and Canadian central banks are promising to keep borrowing rates at record lows well into next year as they seek to foster a recovery that both institutions say won't hit its stride until 2011.

Both the U.S. Federal Reserve Board and the Bank of Canada signalled yesterday the recessions in their countries are all but over, echoing their counterparts at the Bank of Japan and Reserve Bank of Australia, which published similar assessments.

But just as they agree the worst is over, Fed chairman Ben Bernanke and Bank of Canada Governor Mark Carney are united in their nervousness over the fragility of a rebound that is being fuelled almost entirely by benchmark interest rates that are near zero and hundreds of billions of dollars in short-term government spending.

North America's climb out of the deepest global recession since the Great Depression is being slowed by rising unemployment that is a threat to consumer confidence and an impediment to domestic spending.

The two central banks said those concerns are offsetting what would otherwise be stronger gains from better financial conditions and increasing signs that economic activity is expanding in other parts of the world.

“I want to be clear: We have a very long haul here,” Mr. Bernanke said during three hours of testimony to the U.S. House financial services committee . “It's not going to feel like a very strong economy.”

Mr. Bernanke, who returns to Capitol Hill today to complete his semi-annual report to the U.S. Congress by submitting to questions from senators, reaffirmed that he intends to leave the federal funds rate at “exceptionally low levels for an extended period of time.”

The benchmark U.S. lending rate is currently in a range of zero to 0.25 per cent, while Canada's key overnight target is 0.25 per cent, the lowest it can go without roiling short-term money markets.

Mr. Carney, through the Bank of Canada's latest policy statement, recommitted to keep the overnight target at 0.25 per cent until June, 2010, conditional on an unexpected burst of inflation.

Economic conditions in Canada have improved enough to warrant a brighter outlook from the central bank.

Policy makers used yesterday's statement to adjust their forecast for 2009 to a contraction of 2.3 per cent, compared with an April prediction that gross domestic product would collapse 3 per cent. GDP will expand 3 per cent next year, compared with a previous estimate for growth of 2.5 per cent, the Bank of Canada said.

The revisions reflect what the central bank said are “increasing signs that economic activity has begun to expand in many countries” as a result of unprecedented monetary and fiscal stimulus.

“The recovery is nascent,” the Bank of Canada said.

“Effective and resolute policy implementation remains critical to sustained global growth.”

At home, domestic demand also is getting a boost from improved financial conditions, firmer commodity prices and a rebound in business and consumer confidence, the Bank of Canada said. Growth is being significantly offset by a higher dollar that is crimping exports and restructuring in the auto and forestry industries.

The central bank's revised outlook, which it will explain when it releases its latest quarterly economic report tomorrow, puts it in line with the 2009 forecasts of Canada's biggest banks and leaves it more optimistic about 2010.

Inflation remains tame and is unlikely to pose a threat for some time. Canadian policy makers don't expect the economy to return to a level at which it risks sparking rapid inflation until mid-2011.

Consumer debt rises sharply

90 days overdue; Delinquencies up as jobless households rise
Alia McMullen, Financial Post Published: Saturday, July 04, 2009

A growing number of Canadians have fallen behind on their credit and mortgage payments as unemployment rises, prompting a surge in consumer bankruptcies. It is a situation that is expected to get worse as unemployment continues to grow.

Canada's average delinquency rate for all types of consumer credit, excluding mortgages, reached 1.52% in May, up 19% from a year earlier, data compiled by Equifax Canada Consulting Solutions showed yesterday. The pace of growth accelerated from 13% in April. The delinquency rate is based on payments more than 90 days overdue.

"While we have seen delinquencies increase steadily since the beginning of the year, the rate of increase in the past three months has been significantly higher," said Nadim Abdo, vice-president of Equifax Canada.

He said the sharpest increase in the past year was in credit card and sales finance purchases, which increased by 38% and 58%, respectively.

"Such transactions typically represent the purchase of durable goods, such as furniture or electronics, and consumers appear to be willing to fall behind on them first before they miss payments on their bank loans and lines of credit."

Michael Gregory, a senior economist at BMO Capital Markets, said it was likely more than 150,000 households in Canada were experiencing some degree of stress in meeting consumer debt repayments.

"Canadian households were in relatively good shape with high debt levels, but still manageable. But the risk was always that if people started losing their jobs that it would be a lot harder to make ends meet because of debt payments," he said.

The unemployment rate reached an 11-year high of 8.4% in May. Mr. Gregory said the unemployment rate would likely rise to 9.3% by the first quarter of next year, causing a further increase in credit delinquencies.

Mortgage delinquencies have also risen. Figures released by the Canadian Bankers Association in April showed 15,628, or 0.4%, of all mortgages were in arrears, up from 0.26% in April 2008.

But the percentage of mortgage arrears remained below the 0.65% level hit during the 1990s recession when interest rates surged to about 14% and unemployment hit 12%.
Despite this, Derek Holt, chief economist at Scotia Capital, said consumer bankruptcies have hit record levels.

Consumer bankruptcies rose 31% to 14,455 in the year ended April, figures from the Office of the Superintendent of Bankruptcy show.

"As bad as the recession was in the early 1990s, today's bankruptcy picture is shaping up to be worse, even when properly adjusted for population growth over the years," Mr. Holt said.

Housing sales soar in Ontario’s biggest cities

Garry Marr, Financial Post Published: Monday, July 06, 2009

TORONTO - Despite all the talk of a housing downturn and economic crisis in Ontario, the province's two biggest cities both saw record housing resales last month for the month of June.

The Toronto Real Estate Board said Monday there were 10,955 sales in the Greater Toronto Area in June, a 27% increase from the 8,600 homes sold a year ago. It was the best June for sales since the board started tracking the numbers in the mid 196s.

In Ottawa, housing sales jumped 12.5% in June to 1,895, also a new record for the month.

The average sale price in the GTA last month $403,972, up 2% from a year earlier. In Ottawa, the average sale price rose 3% annually to $306,925.

"I think the next stage" might be price pressure, said Doug Porter, deputy chief economist at BMO Capital Markets. "The moderation we have seen in prices may not last long if this kind of sales and listing balance remains in place."

Porter said the mad scramble to buy a house is playing out across the country, as consumers wade back into the market tempted by interest rates the lowest they've been in 50 years. Five-year fixed rate mortgages were as low as 3.75% last month, though they've nudged back up to about 4.5% since.

"Vancouver sales were up about 76% from a year ago, the second best June ever for them. Calgary sales were up 27%, and Edmonton sales were up 38%," said the economist. "A lot of people emerged from their foxholes over the winter and have been brought in by low mortgage rates or a belief the economy is going to improve.

"There was some pent-up demand, things almost froze over solid over the winter."

With files from Ottawa Citizen

Retail sales rise more than expected in May

Financial Post

OTTAWA -- Canadian retail sales rose much more than expected in May after a surprise drop the previous month, Statistics Canada said Wednesday.

Sales increased 1.2% during the month to $34-billion, with gains in seven of eight sectors, led by a 2.4% increase in automotive products, the federal agency said.

"Retail sales have been generally rising since the beginning of 2009," it said.
Most economists has expected sales to rise by just 0.5% cent in May after a 0.6% decline in April.

"This sturdy report marks a nice reversal from April's sour note. It also drums home the point that Canadian consumers are not nearly as stressed as their U.S. counterparts, a point made amply clear by recent home sales data," said Douglas Porter, deputy chief economist at BMO Capital Markets.

Statistics Canada said the jump in auto sector sales was driven by a 3.4% increase in purchases at new car dealers. Sales of used and recreational motor vehicle, as well as auto parts, were up 1.8%, following declines in the previous six months, the agency said.

Sales at gasoline stations rose 0.9% in May after dropping 4.7\% over the previous two months, it said. Building and outdoor home supply stores saw sales rise 1%, double April's rate.

Retail sales were higher in nine provinces in May, with the biggest jump coming in New Brunswick, up 2.5%. Prince Edward Island was the only province to post a decline, down 0.7%.

Charmaine Buskas, senior economics strategist at TD Securities, said Wednesday's report "does not necessarily suggest a turnaround in retail sales."

"The backdrop for the Canadian economy remains soft, and consumers are sure to adjust their spending behaviour accordingly in the coming months," she said.

Canada's economy shrank 5.4% in the first quarter of this year, its fastest pace of contraction since 1991. That followed a 3.7% decline in the fourth quarter of 2008.

On Tuesday, the Bank of Canada revised its outlook for the economy, saying it will contract 2.3% this year, which is less than the 3% drop it forecast in April. The economy is then expected to grow 3% in 2010, up from its previous 2.5% projection.

In 2011, the bank forecast growth of 3.5%, which is down from its earlier call for an increase of 4.7%.

Last week, marketing and research group TNS Canadian Facts said Thursday its consumer confidence index edge up to 93.4 in July after slipping to 92 in June.

However, its buy index, which monitors views on whether now is a good time to make major purchases, eased this month to 103.2 from 104.5.

"While spending here is no ball of fire, it is gradually climbing back from the lows at the start of the year, with consumers poised to moderately contribute to the recovery," Mr. Porter said. "As the bank noted yesterday, domestic spending is on the road to recovery -- the issue is exports, both because of the strong loonie and still-soft U.S. demand."

CanwestNews Service

Royal Lepage boosts housing outlook

Financial Post Published: Wednesday, July 08, 2009

One of Canada's best-known real-estate firms has upgraded its housing-market outlook for the remainder of this year after second-quarter activity showed a thaw from the deep freeze in activity during the winter. Royal LePage said it expects an average price for home sales of $297,000 by year-end, which would be a 2% drop from last year. It forecasts unit sales of 430,000, down 1% from 2008. Its previous forecast called for housing sales to fall 3.5% this year to 416,000 transactions, and the average price to decline 3% to $295,000. Now, house prices are actually anticipated to appreciate somewhat in much of Central and Eastern Canada, while markets in the West -- such as Vancouver, Calgary and Edmonton -- see lower prices as an adjustment to above-average gains in previous years. "With our industry's busiest quarter behind us, we feel comfortable revising our 2009 forecast to the positive," said Phil Soper, chief executive of Royal LePage Real Estate Services.

Unemployment rises, but not as much as feared

Canada's economy lost 7,400 jobs in June, far less than expected, even as the country continued to struggle through an economic downturn.

The unemployment rate rose to an 11-year high of 8.6%, up from 8.4% in May, Statistics Canada said Friday.

"Full-time employment continued its downward trend in June, offsetting gains in part-time," the federal agency said. "Employment was little changed in June, leaving total net losses during the last three months at 13,000, much smaller than the 273,000 decline in the first three months of the year."

Most economists had expected 35,000 job losses in June, with the unemployment rate rising to 8.7%.

On Thursday, however, Finance Minister Jim Flaherty warned that job losses are likely to continue for the months ahead.

Most analysts forecast the jobless rate will peak at the mid-9% range some time next year.

"In the months ahead, given the very weak backdrop for the Canadian economy, we expect the negative labour market dynamics to continue and the pace of job losses to remain fairly brisk," Millan Mulraine, economics strategist at TD Economics, said ahead of Friday's report.

Canada's economy shrank 5.4% in the first quarter of this year, its fastest pace of contraction since 1991. That followed a 3.7% decline in the fourth quarter of 2008. The Bank of Canada expects the economy to contract a further 3.5% in the second quarter of 2009.

On Wednesday, the International Monetary Fund revised its outlook for the Canadian economy, saying GDP is now expected to contract by 2.3% this year, compared to its earlier forecast of a 2.5% decline. The IMF, which monitors the global economy, and provides financial and technical assistance to its 186 member nations, also raised its forecast for 2010 growth to 1.6% from the 1.2% it had predicted in April.

Canwest News Service

Worst may be over for the housing market

Garry Marr, Financial Post

New home construction rose for a second straight month in June, in what analysts say is another sign that the worst may be over for the Canadian housing market.

Canada Mortgage and Housing Corp. said Thursday there were 140,700 new homes constructed in June on a seasonally adjusted annualized basis. Construction was up almost 8% from the 130,300 May figure.

"There are some pretty good signs that we are starting to see in the housing market," said Bob Dugan, chief economist with CMHC. "We've seen it for quite a few months on the existing homes side."

Existing home sales rose 42% from January to May across the country and the early indications are that June was strongest month this year. Sales in Vancouver were up 76% last month compared with a year earlier and Calgary and Toronto both recorded 27% increases during the same period.

Existing home inventories have begun to shrink across the country, convincing builders to ramp up construction. CMHC said urban single family homes -- considered the best barometer of the new home market -- climbed 7.3% in May from a month earlier.

"It's well into seller's market territory again with the May and April numbers," said Mr. Dugan.

The optimism about the Canadian market comes despite the fact new construction at 140,000 units is way off the 200,000-plus figure the market in Canada has seen for the past seven years.

"I can only speculate, but maybe a lot of people are relieved we are not seeing the decreases we have seen in the U.S.," said Mr. Dugan. "Peak-to-trough, the decline in the U.S. was something like 80%. In Canada, that would mean we'd have to have 55,000 starts. Some people may have thought that's where the Canadian market was going."

The consensus among economist is construction won't return to pre-recession levels but will gradually improve in the coming months.

"This month's increase is an important confirmation that the Canadian housing sector is past the worst and in recovery mode," said Marco Lettieri, an economist with National Bank. "The recovery seems to be broad based with gains observed in both multiple [which includes condominium construction] and single units."

Robert Kavcic, an economist with Bank of Montreal, said there could be some room for modest growth in starts in the coming months.

"Higher affordability and improved consumer confidence brought buyers off the sidelines this spring," said Mr. Kavcic.

A report this week from RBC Economics said declining prices and lower interest rates led to one of the biggest quarterly improvements in affordability in history. The bank said monthly payments on a typical detached bungalow in Canada had decreased by almost 17% from a year earlier.

Royal LePage Real Estate Services was also forced this week to upgrade its forecast for 2009 because of the improved market conditions. It now expects 430,000 sales this year, an improvement from its previous call of 416,000, but still down 1% from a year ago.

"I think 2009 will go down as a moderate correction as opposed to the deep and sustained recession that we had first feared," said Phil Soper, chief executive of the real estate company.

Royal LePage expects prices this year will still fall but not by as much as previously feared. It expects the average sale price in 2009 to be $297,000, a 2% drop from last year. It had previously forecast a 3.5% decline.

Monday, July 6, 2009

Weak rebound seen for Canada's housing market

Ka Yan Ng, Reuters Published: Thursday, July 02, 2009

TORONTO -- The worst of Canada's housing market woes appear to be past but the sector's rebound will be tenuous as a rise in mortgage rates and high unemployment limit the recovery in prices and sales.

Property experts say first-time buyers and Bank of Canada rate cuts have helped restore stability to a market that slumped from late 2008 to early this year, when the worst leg of the global financial crisis battered consumer confidence.

"We should be less fearful than we were six months ago, but I don't think we should be exuberant yet. The resale markets in Canada are very strong. May numbers were pretty good, and June numbers will be even better," said Will Dunning, an economic consultant who specializes in the housing market.

"But by July and into the fall there will be an offset of considerably slower activity. I don't think it's likely to go off a cliff. It'll depend on what happens in employment and the broader economy, and how that affects confidence."

Recent data suggests Canada's residential property market, which weathered the financial crisis much better than its hard-hit U.S. counterpart, has been thawing for several months.

The latest Canadian Real Estate Association data shows May resale home prices rose 0.4% to $319,757, topping the previous record set a year earlier. It was the first year-over-year increase since May last year. And sales activity climbed for a fourth straight month.

The industry group, which represents more than 97,000 real estate brokers and agents, also cut its forecast for a drop in home prices this year and said it expected sales activity to trend higher.

Meanwhile, Canada Mortgage and Housing Corp., the national housing agency, forecast in its second-quarter outlook that new home construction is expected to decline to 141,900 units in 2009 but rebound next year.

Still, no one predicts the residential property market is headed back to the heady times seen between 2002 and 2007, when prices surged and outpaced income growth. In some cities, such as Vancouver, British Columbia, and Calgary, Alberta, home prices doubled and are now going through a sharp correction.

A "stable but unremarkable" period for the real estate market is expected this year, said Philip Soper, chief executive officer of Brookfield Real Estate Services, an arm of Canadian property giant Brookfield Properties Corp. that holds real estate broker brand Royal LePage.

"Stability is something you can't overemphasize in terms of its importance for the housing market right now."

Unless the global financial system succumbs to another crisis, analysts expect the Canadian home market is likely to stabilize further.

Activity from first-time buyers appears to be providing support because of stimulative measures by the federal government that allow these buyers to defray closing costs and withdraw more from retirement funds.

The Bank of Canada has also pledged to keep interest rates near zero until mid-2010, which could underpin confidence.

But the economy is still on shaky ground, contracting for the ninth straight month in April. And the unemployment rate spiked to an 11-year high in May, boosted by massive layoffs in the factories of Ontario.

Experts warn that further job losses in pockets of Canada's export-oriented economy could slow the momentum that has been gathering in the housing sector.

"We don't expect the recession to end until the fall. It's clear that the spring fling in housing markets, this remarkable surge in resales and prices, has been driven by record low mortgage rates," said Sal Guatieri, senior economist at BMO Capital Markets.

These record low rates, whether variable or fixed, had increased affordability for many buyers. But weakness in the bond market, caused in part by reduced investor demand for safe-haven assets, has pushed mortgage rates higher.

The posted rate on a five-year mortgage at Royal Bank of Canada, the country's largest lender, has risen to 5.85% from 5.25% in April.

Brookfield's Mr. Soper has been telling his management team to prepare for softness in the housing market in the second half.

"The advice I have been giving ... is to accept the recovery this spring with humility, to continue to plan for a difficult second half of the year although the comparables are going to be positive simply because the second half of 2008 was so poor," he said in an interview.

"But at least we have a stable market and stable prices, which is something that you need to encourage consumers to trade."
© Thomson Reuters 2009

More Canadians miss payments

Half-million consumers fall more than 90 days behind on credit bills


More than half a million Canadians have fallen behind on their various credit payments, fuelling a 19 per cent rise in the average national delinquency rate in the one-year period ending May 31, says a new report from Equifax Canada.

The credit bureau called the double-digit jump "alarming," noting the average delinquency rate for Canada hit 1.52 per cent at the end of May.

Much of the trouble stemmed from missed payments on credit card bills and for sales finance purchases of items such as furniture and electronics.

Equifax defines delinquent bills as those that are at least 90 days overdue.

Its latest snapshot on delinquencies comes just days after a Senate committee released a report urging the federal government to take more aggressive action to shield consumers and small businesses from rising interest rates and fees in the credit and debit card markets.

Finance Minister Jim Flaherty continues to review all input on credit cards and will announce his final intentions once that process is complete, a spokesperson said.

While his office gave no timeline, Pierrette Ringuette, the Liberal senator who spearheaded the study, appeared to up the ante yesterday by vowing to introduce legislation in September if the government fails to act before then.

Legislation, except money bills, can be introduced in the Senate, although most originates in the House of Commons. It was unclear what kind of support such a bill would garner in a minority Parliament.

The Senate report, released Tuesday, recommended the government create an "oversight board" and also take steps to clamp down on the rates and fees paid by consumers and merchants for the use of Visa, MasterCard and other card brands.

If Flaherty takes no action by the fall, "I'm going to be very, very disappointed," Ringuette said in a phone interview. "The small and medium businesses of this country are not asking for a bailout."

"They're only asking for fairness -- just like consumers are only asking for fairness. I think it's high time that government paid attention to them."

The Equifax report, meanwhile, was the latest study to suggest that increasing numbers of Canadians are struggling to pay their bills.

Nadim Abdo, an Equifax vice-president, stressed that the "sharpest increase" in delinquencies resulted from credit card and sales finance purchases, which have risen by 38 per cent and 58 per cent, respectively, since May 2008.

Rising delinquencies in those areas are troubling because consumers tend to miss payments on those unsecured credit products before they fail to pay back collateral-backed loans such as mortgages, bank loans and lines of credit, Abdo said.

While that's likely to spell higher loan losses for banks, consumers who skip payments will also suffer longer-term consequences because of tarnished credit scores.

"When economic conditions get better, whenever that is, if they want to go get a mortgage or get a line of credit -- with a negative rating on their credit file, that's not going to help them," Abdo said.

The Equifax data follows a Bank of Canada report last month that suggested climbing debt levels have put households under increased financial strain amid the recession.

The Financial System Review also said that households are increasingly vulnerable to "adverse shocks" such as higher unemployment.

Don’t believe the housing hype

There are plenty of signs that the Canadian housing market is still on some very shaky ground

Judging by the latest real estate data, the Canadian housing market could scarcely be better. Average home prices are up more than 16 per cent this year, and in May they hit an all-time monthly high, according to the Canadian Real Estate Association. By those numbers, Canada didn’t just sidestep the housing market crash that continues to plague the United States, it sailed right through it virtually unscathed. And yet, there are plenty of signs that the Canadian housing market is still sitting on some very shaky ground—and even the potential that Canada’s big housing crash is yet to come.

There is one particular statistic that suggests trouble could be brewing. Unlike in the U.S., Britain and most European countries, household debt in Canada is, incredibly, still growing. That rising debt is being driven largely by record-low interest rates. Canadians have been buying homes not so much because they can afford them, but because many believe there’s never been a better time to buy, with lending rates so low. “There is no doubt that record-low mortgage rates have juiced Canada’s housing market,” wrote BMO economist Sal Guatieri, in a recent newsletter. Houses are barely more affordable now than they were during the market peak. And as people keep buying, houses may only become less and less affordable.

Not everyone agrees with the CRE figures that suggest the market has managed such a quick and painless turnaround, either. According to the Teranet-National Bank housing price index, Canada’s housing market is not recovering yet. Home prices have been falling for the past eight months, according to its latest statistics. Vancouver, Calgary and Toronto have each experienced significant price drops compared to last year. This would seem more in line with what one would expect after an unprecedented six-year housing boom in which home prices shot up 80 per cent.

It is, of course, possible that the correction will, ultimately, be modest. Guatieri expects that interest rates will remain low and income growth will remain subdued this year, before picking up next year. That will keep housing prices down, but would likely mean the worst of the correction is behind us.

But if mortgage rates go up sharply then “affordability will get crunched again,” says Guatieri, in an interview. Things could get much, much worse. And that’s not an unthinkable scenario. Some banks have already boosted interest rates twice this year. Then there is the possibility that job losses continue and the economy doesn’t recover quickly, putting further strains on household finances. The low interest rates and continued debt problems mean that Canadians could find them themselves badly over-exposed.

Guatieri isn’t forecasting a housing market crash. But, as he wrote last week, “it’s worth remembering that the further house prices go up and the longer household finances get stretched, the greater the risk of a painful correction. Anyone who doubts that should talk to an American or British homeowner.”