Canada's Housing Bubble

Jan 08, 2010 Canwest News Service

Ottawa – Housing and trade are two of the main issues Canadians can look to in the coming week for clues concerning the health of the Canadian economy.

On Monday, Canada Mortgage and Housing Corp. is due to report housing starts for December. The median forecast among economists is for an annual rate of 161, 800 units being built last month. That would be a slight increase over November's rate of 158,500 and be the highest level since December 2008.

If expectations are right, it would put 2009 housing starts overall at about 143,600, marking the first time in eight years the number has been less than 200,000.

Douglas Porter, deputy chief economist at BMO Capital Markets, said he's expecting a housing-start level of about 163,000 for December. He's anticipating gains in the coming months, putting 2010 housing starts in the neighbourhood of 170,000.

"Housing starts have lagged a bit behind the very pronounced upturn we've seen in building permits and the spectacular rise we've seen in (existing) home sales," Porter said. "I think it's just a matter of time before housing starts move even higher in the months ahead."

Like other economists, Porter feels the normal rate of population growth does not support a level of 200,000 or more homes being built each year. He added that despite various encouraging signs about the housing market and economy overall, builders remain cautious about creating inventory that has not been sold yet.

Speaking of building permits, Statistics Canada is due to report these figures for November, also on Monday.

Millan Mulraine, economics strategist for TD Securities, is calling for a housing-start rate of 160,000 in December, and added that it would have been more if not for colder weather than usual last month.

"Most of the gains are likely to be in single-family unit construction, while the more volatile multi-family segment is also expected to advance," Mulraine wrote in a research note.

On Tuesday, Canada's merchandise trade data for November is due. In recent months, the balance has stayed relatively close to even with a surplus of $428 million in October. That followed three straight months of deficits. Up until December 2008, Canada had not seen a monthly trade deficit in more than 30 years.

The median estimate among economists is that Canada's trade surplus grew to $700 million in November.

Porter expects Canada's trade surplus to have fallen to about $100 million. That, he said, should come as a result of imports rising more than exports, both gaining ground on improving domestic and international economic conditions.

He said Canada's export and import levels are likely to stay relatively close to each other for the next few years as factors such as improving economies around the globe and a rising Canadian dollar cancel each other out in terms of their effect on trade.

Mulraine is also below the consensus, calling for a trade surplus of $300 million in November.

"In the months ahead, with the strong Canadian dollar continuing to wreak havoc on the export-based Canadian economy, we expect net trade to be relatively unsupportive to overall economic activity," he said.

Some of the other key reports on the Canadian economy in the coming week will be the Bank of Canada's quarterly business-outlook survey on Monday, the new-housing price index on Tuesday and new motor-vehicle sales on Friday.

Turning to the United States, December inflation numbers are due on Friday. Economists expect annual inflation of 2.8 per cent. That's up from 1.8 per cent in November, which followed eight straight months of lower prices on a year-to- year comparison.

As is the case in Canada, U.S. policy-makers aim for annual inflation of about two per cent. Porter said the sudden surge in U.S. inflation numbers – assuming forecasts are correct – is not as worrisome as it might look.

"The big story here is just where gasoline prices were a year ago," he said, adding that he expects inflation numbers in both the U.S. and Canada to subside in the coming months as the gap between year-to-year fuel prices narrows.

Canada's December inflation numbers are scheduled for release the following week.