Canada's Housing Bubble

Jul 07, 2010 Michael Babad Globe and Mail

What the HST will mean

Last week's introduction of the harmonized sales tax in British Columbia and Ontario won't have a marked near-term impact on the economy, but it could change buying habits and will lead to a boost in consumer prices of 0.9 of a percentage point permanently in the two provinces, Toronto-Dominion Bank says.

"There may be a short-lived adjustment period as households have been bringing forward purchases to avoid paying the additional 7 per cent or 8 per cent and as they shift some of their purchases to goods not subject to a tax change," TD economists Derek Burleton and Diana Petramala said in a report. "The strong positive benefits on business investment and the export sector will virtually offset the negative near-term adjustments that are likely to occur in consumer spending and in the housing market."

Impact of HST on national consumer prices

The two economists said overall prices in the two provinces are expected to rise by 1.5 percentage points immediately after harmonization, which has resulted in an HST of 13 per cent in Ontario and 12 per cent in B.C. But within the first three years, about half of that is expected to be offset by businesses passing on savings from input tax credits, leading to a permanent increase of 0.9 of a percentage point, TD said. That would also mean 0.4 of a percentage point on a national price level as the two provinces represent half the economic activity in the country.

Housing will be hit, they said, though they noted that many homebuyers rushed to beat the July 1 introduction.

Canadian housing starts

Over time, they added, consumers can soften the blow by opting for "relatively cheaper goods and services." In B.C., they said, restaurant food will be subject to an additional 7 per cent, but that won't apply to basic groceries.

"Households may choose to purchase more food at the grocery store and eat in more often," they said. "Or, when out at a restaurant, they may choose either restaurants with lower cost menus, or continue going to their favourite restaurant but choose lower cost items, mitigating the negative impact of the rise in the effective tax rate."

Related

• Two provinces, two sets of HST rules
• What you need to know about the HST

Signs of slowdown
Chief economist David Rosenberg of Gluskin Sheff + Associates today cites 15 signs that the U.S. economy has hit a speed bump and seven reasons why Canadian indicators aren't looking "Blue-Jay-ish" either. His reasons for U.S. troubles include everything from sinking consumer confidence and lower retail sales to a slowdown in manufacturing orders and a plunge in housing starts and new-home sales. His seven deadly sins for Canada include:

• Building permits fell 7.3 per cent in April.

• Housing starts sank 6.3 per cent in May to a five-month low.

• GDP was stagnant in April and industrial production dipped 0.1 per cent for the first decline since last August.

• Real manufacturing shipments slipped 0.1 per cent in April for the first fall in eight months.

• Exports fell 0.4 per cent in March and 1 per cent in April for the first back-to-back declines in a year.

• Retail sales dropped 2 per cent in April after four consecutive months of gains, marking the sharpest decline since December, 2008.

• Auto sales fell 4.7 per cent in April to a five-month low.

What the yield curve shows
While not one of the more highly publicized measures, the yield curve, which plots bond yields against their corresponding maturities, suggests a 12.4-per-cent chance of a double-dip recession by next June, according to research from the Federal Reserve Bank of Cleveland. That's up from 9.9 per cent in May and 7.1 per cent in April.

Recession probability from yield curve

Joseph Haubrich and Kent Cherny wrote in a report that the difference between long and short rates, illustrated by the slope of the yield curve, has "achieved some notoriety as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year, and yield curve inversions have preceded each of the last seven recessions ... In particular, the yield curve inverted in August, 2006, a bit more than a year before the current recession started in December, 2007. There have been two notable false positives: an inversion in late 1966 and a very flat curve in late 1998." Read the report

U.S. service sector growth dips
The Institute for Supply Management's non-manufacturing index, a measure of the U.S. service sector, dipped in June to 53.8 from 55.4. The 50 marks separates contraction from expansion, so the sector is still growing. "The slowdown appears to reflect deterioration in global economic conditions rather than a weakening in domestic sales," said Paul Ashworth of Capital Economics. "... In general, the survey supports our long-held view that GDP growth will slow in the second half of the year." Read the story

Rogoff sees China property 'collapse'
Harvard University professor Kenneth Rogoff is warning of a collapse in China's property market that will spread to its banks. China has moved recently to cool the overheated market, and, the former chief economist of the International Monetary Fund told Bloomberg Television, there are going to be "bumps" as China's economy develops.

"You’re starting to see that collapse in property and it’s going to hit the banking system,” Mr. Rogoff said. “They have a lot of tools and some very competent management, but it’s not easy.”

Scotia Capital noted today that Mr. Rogoff's comments had a muted impact on financial markets.

AgBank to mark biggest IPO
Agricultural Bank of China today raised about $22-billion (U.S.). AgBank, the last of the major government-owned banks in China to go public, sold 24 billion shares in Hong Kong at about the midpoint of its original price range and 22.24 billion in Shanghai at the top of its range, reports said. The results of the IPO are seen as a proxy for how investors view China's economic growth prospects.

U.S. politician slams Keystone XL
U.S. Congressman Henry Waxman, chairman of the House of Representatives Committee on Energy and Commerce, today slammed the proposal by TransCanada Corp. (TRP-T36.900.491.35%) for its Keystone XL pipeline. In a letter to Secretary of State Hilary Clinton, who must decide on whether Keystone gets a presidential permit, Mr. Waxman said Keystone XL is a "multibillion-dollar investment to expand our reliance on the dirtiest source of transportation fuel currently available.”

Keystone XL is part of TransCanada’s $12-billion Keystone project, which is designed to bring 1.1-million barrels - and, with upgrades, up to 1.5-million barrels - per day of crude from the oil sands to refineries in the U.S. Midwest and Gulf coast. Read the story

Vancouver, Calgary home sales slow
Home sales in Vancouver and Calgary, among the first to report numbers, slowed in June, evidence that the real estate market is beginning to cool after its sharp post-recession runup. Observers have been projecting a slower market, though not one that will come crashing down, in the face of higher mortgage rates and tighter mortgage rules.

The Real Estate Board of Greater Vancouver reported yesterday that home sales fell 30.2 per cent in June from the inflated levels of a year earlier, and 5.8 per cent from May. New property listings rose 1.2 per cent from May and 32 per cent from a year earlier.

The Calgary Real Estate Board reported earlier that sales of single family homes fell 16 per cent in June from May and 42 per cent from June of 2009, while condo sales fell 14 per cent from a month earlier and 40 per cent from a year earlier. Notable is that sales of high-end properties worth $1-million or more are rising, the group said.

“We are seeing continued moderation in Calgary’s home sales in the face of higher mortgage rates, increased inventory levels and a decreasing number of fist-time home buyers entering the market,” the group’s president, Diane Scott, said. Read the story

Building permits fall
Building permits in May also show a slowing in the construction sector, according to Statistics Canada data released today. The number of permits issued by municipalities across the country fell far more than expected, by 10.8 per cent to $6-billion. Both residential and non-residential permits dipped, residential by 5.3 per cent. Institutional permits declined 21.6 per cent and those in commercial construction 35.2 per cent. The permit numbers are traditionally volatile. Read the story

Jean Coutu warns of potential hit
Jean Coutu (PJC) Inc. (PJC.A-T8.32-0.07-0.83%) warned today that its results could be hit if Quebec goes through with adopting reforms to drug prices similar those implemented in Ontario. The changes in Ontario, the pharmacy chain said as it reported first-quarter results, will have little impact given the amount of business it does there.

“As for the reduction in the price of generic drugs announced by the minister of health and social services of Quebec, we will make representations for the company and the pharmacist owners affiliated with the PJC Jean Coutu network through the associations involved," said chief executive officer Francois Coutu. "We strongly believe that the government of Quebec must recognize that a reduction in the price of generic drugs must be adopted concurrently with measures in order to assist market participants with the transition to lower generic drug prices."

Coutu also reported strong quarter results, as profit jumped to $43.2-million or 18 cents a share from $10.3-million or 4 cents a year earlier, and revenue rose to $642.9-million from $619.3-million. Read the story

BP shares rise
Even as the damage from the oil spill in the Gulf of Mexico spreads to new shores, shares of BP PLC (BP-N32.740.832.59%) are rising after the energy giant quashed speculation of a share issue and talk of an investment by sovereign wealth funds heightened. It has now been more than 75 days since the disaster began with the explosion on the Deepwater Horizon drilling rig, and BP shares have lost billions of dollars in value. Today, Reuters reports said BP executives have talked with several sovereign wealth funds in Abu Dhabi, Kuwait, Qatar and Singapore.

"Today’s report that BP won’t be issuing any more shares has calmed any nerves that its value would be diluted and kept the bargain hunters happy," said IG Index chief market strategist David Jones.