September 12, 2005

Blurb: Despite recent hiccups, the Canadian housing market appears to be set for a record year

Let the good times roll

By Peter Diekmeyer o Bankrate.com

The news on the housing front has been mixed during the past few weeks. While there have been rough patches, on balance most indicators remain positive, with home sales set to hit new heights this year.

First the good news. Existing home sales continue to show considerable strength. A total of 40,973 homes were sold through the Canadian Real Estate Association's Multiple Listing Service during July, the third highest seasonally adjusted level on record.

Even more importantly, the average price of residential homes sold via the MLS in July hit $250,567, an increase of 11.8 percent from the same period last year. Existing home sales have been so strong throughout the first seven months of 2005, that CREA officials predict that it will be the industry's best year on record.

Housing starts take a breather
Unfortunately strong existing home sales momentum did not carry over into new home construction. Housing starts fell 17.1 percent from 242,600 units in July, 2005 to 201,000 in August according to Canada Mortgage Housing Corporation data.

However according to the CMHC's chief economist Bob Dugan, much of the drop in housing starts came in the multiple-units category (typically condos and apartments), which tends to be more volatile than single homes starts. But according to one expert the weakness is unlikely to be permanent.

"We doubt that (the) sharp drop marks the beginning of a weakening trend for housing, especially with job gains still solid and borrowing costs still low," comments Sherry Cooper, vice-president of BMO Financial Group. "However high-Canadian-dollar induced softness in Ontario's factory employment and a somewhat higher interest rate environment are signaling a more modest pace next year."

The Canadian economy
The Canadian economy continues to chug ahead. Q2 GDP growth came in last week at 3.2 percent, well above the market's expectations. While high energy prices continue to exert a drag on many of the world's largest economies, particularly the U.S., Japan and China, Canada, a net energy exporter, generally comes out ahead in a bullish energy market.

Despite the strong economy, inflation pressures appear to be in check experts say. There are several reasons for this. For one, although recent GDP numbers were strong, activity tailed off somewhat in the June, the last month of the most recent quarter, leaving doubt as to whether the economy will hit the 3.0 percent growth level again in upcoming quarters. In addition, the purchasing power created by a strong Canadian dollar continues to make imports relatively cheap, and the recent Bank of Canada rate hike should help to cool exuberant spenders somewhat.

Hurricane's economic impact overblown
According to the Bank of Canada, the economic consequences of Hurricane Katrina, appear to be vastly overblown, even in the U.S., let alone in here, where its effect is likely to be negligible.

Indeed, due to the somewhat disingenuous way that economists calculate GDP, phenomena like hurricanes and natural disasters are actually positive for economic growth. That's because while the reconstruction efforts are counted as "economic activity," the tens of billions of dollars of destruction wrought by hurricanes are not included in GDP totals.

More rate hikes in the picture?
The big question for homeowners and real estate investors right now is where interest rates are headed. Last week, in a much anticipated move, the Bank of Canada raised its target rate to 2 3/4 percent, citing rising oil prices in international markets and a Canadian economy that is operating at close to peak capacity as motivating factors.

And according to Carlos Leitao, chief economist at Laurentian Bank Securities, that is likely to be the first of several rate hikes to come. Leitao predicts that the Bank will increase its key rate by another 25 basis points at both its October and December meetings and then once again in the first half of next year. This would bring its overnight rate target to 3.5 percent by mid-2006, though he cautions that the bond markets are not quite as convinced.

"The key is Fed's meeting on September 20th," Leitao said. "If as expected they (follow the Bank of Canada's lead and) issue a statement acknowledging the fact that Katrina's economic impact will be minimal, then people will be reassured and we can move forward."

Peter Diekmeyer (www.peterdiekmeyer.com) is the Montreal Gazette's management columnist.

Recent Bank of Canada action:
September 7th, 2005 + 1/4%, 2 3/4%
July 12, 2005 No change 2 1/2%
May 25th, 2005 No change 2 1/2%
April 12, 2005 No change 2 1/2%
March 1, 2005 No change 2 1/2%
January 25, 2005 No change 2 1/2%
December 7th, 2004 No change 2 1/2%
October 19, 2004 +1/4% 2 1/2%
September 8, 2004 +1/4% 2 1/4%
July 20, 2004 No change 2%
June 8, 2004 No change 2%
April 13, 2004 -1/4% 2%

The Bank of Canada's rate announcement schedule for the upcoming year.
Tuesday, 18 October 2005
Tuesday, 6 December 2005
Tuesday, 24 January 2006
Tuesday, 7 March 2006
Tuesday, 25 April 2006
Wednesday, 24 May 2006
Tuesday, 11 July 2006
Wednesday, 6 September 2006
Tuesday, 17 October 2006
Tuesday, 5 December 2006

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