Thursday, 20 April 2017

Burning down the house

After spending several years watching house prices in the Toronto region spiral ever higher, and facing a looming election in the spring of next year, Ontario's Liberal government is finally taking action.  Ahead of this morning's announcement by Premier Kathleen Wynne, officials had promised a "suite" of measures, and for once this was not an exaggeration.  There are sixteen new measures in all, although most of the attention will fall on just two of them: the imposition of a tax on non-resident foreign buyers, and the extension of rent controls to encompass the entire rental housing stock.

The 15 percent tax on non-resident buyers is not a new idea; it's a carbon copy of a similar tax imposed by the government in British Columbia last year to curb soaring house prices in and around Vancouver.  That tax is generally seen as a success, and Wynne will be hoping for a similar result here.  One small surprise is the extent of the area to which the tax will apply: the whole region designated as the "Greater Golden Horseshoe" is affected, which basically means anywhere within about 100 kilometres of the city of Toronto itself. This includes my own area in Niagara, which has seen a considerable influx of foreign money as well as buyers from the Toronto area in recent years, with prices rising sharply in response.

The devil may well be in the details here.  Obviously it is not the intention to tax new immigrants moving to Ontario; the focus is on speculative buyers looking to turn a quick profit.  However, deciding which is which may not be easy.  To take what appears to be a common example, rich Chinese sending their children to school in Ontario often buy condominiums for them to live in.  Will the taxman look primarily at the student,  who is at least temporarily resident,  or at the parents, who may never set eyes on the condo and very likely hope to profit by selling it when the student finishes school?  No doubt realtors and lawyers are already figuring out ways to structure deals so as to avoid the tax.

As for rent controls, the existing system, which applied only to properties built before 1991, was clearly past due for an overhaul.  The new plan extends controls to all rentals, limiting annual increases to the rate of inflation unless that rate rises above 2.5 percent.  Rental providers are predictably up in arms about this. Although other measures in the "suite" of sixteen are designed to increase the supply of new rental units, these will take time to work, assuming they work at all.  However, if the goal is to win next year's election -- and it is -- Premier Wynne is evidently prepared to let the future take care of itself.

The main opposition parties have accused the Premier of acting out of purely political motives, which is of course entirely true.  However, considering the rate at which prices have been rising in Toronto (33 percent in the year to March),  and considering that the one step that would definitely rein in the market --higher interest rates -- is not in the Province's control,  Wynne may well have felt that she had little choice.  No doubt those same opposition politicians would have been the first to criticize if the market had fallen victim to a sudden correction.  Better to try to deflate the bubble gently, though whether today's measures will be able to achieve that delicate task, time alone will tell.

Tuesday, 18 April 2017

May in June

It would be easy to be cynical about Theresa May's surprise decision to trigger a general election for the UK on June 8. It would also be correct.  Opinion polls show the Tories with a big lead over the opposition, and Jeremy Corbyn is widely regarded as the least electable Labour Party leader ever.

May's explanation for the election call, which she has always vowed not to do, is bizarre.  She claims that the country is uniting behind Brexit (really??) but Parliament is not, despite the fact that Corbyn has basically accepted the "will of the people" as expressed in last June's referendum.  A more plausible explanation, and a much more ominous one for the UK, is offered by Anthony Barnett here.  Barnett contends that May and her Brexit minsters are coming to realise that the UK will not cleanly exit the EU in March 2019; rather there will be a transitional period that may well be punishing for the UK.  This would make things difficult for the Tories at the supposedly fixed election date in 2020. Better to run now, before the formal negotiations ramp up.

It's nigh impossible to see May and her Tories losing in June, but it's even harder to see how the election will strengthen the UK's hand at the negotiating table.  The Tories will very likely be shut out in Scotland altogether; Plaid Cymru and Labour between them will win almost every seat in Wales; and nationalists and pro-EU moderates will likely increase their representation in Northern Ireland.

The Tories will then stand revealed as what they have increasingly become in recent years,  an English nationalist party.  Setting the stage for a messy breakup of the United Kingdom hardly seems the best way to prepare for the Brexit negotiations.    

Monday, 17 April 2017

Call some place Paradise....

Our little town of Niagara-on-the Lake (NOTL) is just 25 miles from Toronto as the crow flies, but for all the attention we get in the Toronto media, apart from a couple of theatre reviews each summer, we might as well be on the moon.  Big surprise, then, to pick up the Toronto Star from my doorstep this morning and find this article dominating the front page.

The story, which concerns a Toronto-area property developer who recently set up his daughters as proprietors of a winery on the edge of the old town of NOTL, has been well covered in the two local newspapers.  There are growing suspicions that the developer,  Benny Marotta, has set his sights on corralling portions of the local "Green Belt" for housing development.  He has already built a very large subdivision in one of the outlying villages here, but his recent actions suggest he wants to do something much closer to the (increasingly fragile) historic centre of town.

It's impossible to be certain about what Marotta intends to do, although his actions as described in the linked article certainly make one suspicious.  He has made a lot of enemies in the town, including some local politicians, in remarkably short order.  However, he's just one of the developers and investors trying to change the face of the town for their own profit, so let's try to look at the bigger picture.

Both Marotta and some of the other folk quoted by the Star suggest that NOTL is hostile to developers.  This is absurd.  First, as noted above, Marotta himself has developed a subdivision of well over 200 homes in the past couple of years.  Second, the population of the town has grown by about 13 percent in the past five years alone, to stand at 17,500 currently.  In other words, we have added something close to 2,000 residents in just half a decade, and all of those people have found homes.  The truth is that developers have been extremely busy here, in the heritage area itself and,  even moreso,  in the four other villages that go to make up the town.

Housing development, however, is just one of the pressures on the town, and arguably not the biggest one.  As the article notes, the town receives about three million tourist visits per year, the bulk of those in the fair weather months from April to October.  Let's put that into perspective.

With a population of just 17,500, NOTL welcomes 171 tourists per resident each year.  Now take a look at London, England, one of the world's biggest tourist destinations.  It has a population of 8.63 million.  If it were to receive as many tourists per resident as NOTL does, it would have to accommodate 1.48 BILLION visitors per year, which is almost exactly 20 percent of the entire population of the earth! London can certainly seem overrun with visitors at times, but the actual number of tourists travelling there was just 31 million in 2015.

This swarm of visitors is putting the old town of NOTL under enormous pressure.  The main streets are lined with hotels, restaurants and tourist-oriented stores. Aside from the liquor store and a tiny supermarket, there's almost nothing for the locals, who have to go elsewhere for their shopping.  Needless to say, when the tourists beat a hasty retreat at the onset of cold weather, the place can resemble a ghost town, and those businesses that stay open struggle to make ends meet.  It's an  unbalanced and unhealthy situation.

Given these facts, it's no surprise that out-of-town developers like Benny Marotta encounter strong pushback from the locals, especially when they seem willing to try an end-run around the local planning bylaws. Now, it's true that the NIMBY spirit is alive and well in NOTL: you can find people whose families have lived here for generations and who are quite open about their preference that newcomers from Toronto (like me) should hightail it back whence we came.

That makes no sense: without newcomers and their money, NOTL would long ago have sunk into a slightly more genteel version of the stagnation and poverty that afflicts most of the Niagara region. However, the town has reached and maybe even passed a tipping point: the press of numbers, whether new residents or tourists, is destroying the attractions that bring people here in the first place.

Benny Marotta says he sees Niagara as a Paradise, and he just wants to make it better.  I don't know if Benny is a fan of the Eagles, but he might want to ponder these lines from their great lament for the fate of their home state of California, "The last resort":

"They called it Paradise.
I don't know why.
You call some place Paradise --
Kiss it goodbye".

Wednesday, 12 April 2017

Bank of Canada: not just yet

As expected, the Bank of Canada left its target rate unchanged at 0.5 percent at today's Monetary Policy Committee meeting.  The statement presented by Deputy Governor Carolyn Wilkins is instructive: while the Bank acknowledges that economic data have been strong in recent months, it is not confident that the strength will last.  Specifically, it forecasts that after growing at a 3.8 percent rate in the first quarter of 2017, GDP will slow to about a 2 percent pace in the second half of the year and persist at that rate through 2018 and 2019.  This is only marginally above what the Bank now sees as the economy's underlying rate of growth (about 1.5 percent) and implies that any increase in the target rate is unlikely until well into next year.

The Bank acknowledges that consumption and housing activity has been stronger than expected -- near-free money at work -- and that the energy sector has rebounded.  However, it is concerned that export growth is sluggish, despite the favourable exchange rate, and that business investment is slack, despite strong corporate balance sheets and low borrowing costs.  It is the lack of momentum in those two key sectors that has convinced the Bank that the recent burst of GDP growth may not be sustained.

Speaking to reporters, both Ms Wilkins and Governor Stephen Poloz expressed concern over price trends in the Toronto housing market.  Poloz said it was perhaps time to remind people that "house prices can go down as well as up".  The latest data show that house prices in the Toronto area rose a startling 33 percent in the year to March.  Lack of supply, in the form of both sluggish new home construction and dwindling listings of existing properties, receives some of the blame for this. So does the rapid growth in the population of the Toronto region, running at upwards of 100,000 people per year. There is also concern over speculative buying, much of it possibly fuelled by foreign money.  The Ontario budget later this month is expected to include measures to slow the market, a prospect that fills the heart with foreboding.

Low supply, rising migration and speculation may all be in play, but it's undeniable that the Bank of Canada's ultra-low interest rate policy is the key driver.  Nobody knows how the market will react when the Bank does start raising rates, but given the indebtedness of Canadian households, it's unlikely to be pretty.  Based on today's statement, however, we are going to wait for many more months to find out.    

Friday, 7 April 2017

Canadian jobs data: go figure

The monthly labour market data from Statistics Canada never fail to leave us scratching our heads.  Just take a look at the March data, released this morning.  The headline: the economy added 19,400 jobs in the month, way above the market consensus and continuing the strong trend seen since the turn of the year.  Almost all of the new jobs were reported to be full-time positions, and more than 21,00 jobs were added in the manufacturing sector, the best report in well over a decade.

And also appears that almost all of the new jobs were in the "self employed" category.  This seems unlikely in itself, and even if it is literally true, leaves open the question of how stable these new positions are.  Then there's the unemployment rate, which ticked up to 6.7 percent despite the strong job creation.  It appears that the number of people looking for work increased in March, which is usually taken as a positive sign.

So what's the bottom line?  It looks as though the economy retains good forward momentum, even though the details of today's report demand caution.  Weaker external trade data reported earlier this week (goods trade unexpectedly slipped back into deficit in February) may well be just a one-off.  All-in-all, nothing to trigger any kind of policy change by the Bank of Canada in the near term; and for the longer term, much still depends on how the NAFTA renegotiations pan out.

Tuesday, 4 April 2017

Time for rent controls?

You would be hard pressed to find many people who would disagree with the proposition that the Greater Toronto Area (GTA) has a housing affordability problem.  Single family detached homes in the region now change hands for well north of C$1 million on average.  Prices are rising at a 25 percent annual rate, driven to some extent by speculative buying, some of it from outside Canada. Meanwhile, despite the fact that a significant proportion of the fast-growing condo supply gets put on the rental market, the availability of long-term rentals may actually be shrinking as owners turn to short-term rentals, using services like Airbnb.

Meantime Ontario Premier Kathleen Wynne is in big trouble with the voters -- her approval rating stands at 12 percent -- and seems to be considering yanking her Liberal Party sharply to the left ahead of next year's Provincial election.  Among the things that may be on the table: expansion of rent controls.  The Province's existing control regime has been in place since 1991, and basically leads to controlled rents for properties that existed prior to that year, and no control on anything more recent.  Given the explosive growth in the GTA's population over the past quarter-century, this means that the proportion of the rental property stock that is subject to controls has shrunk drastically.  

Enter stage right Benjamin Tal, economist with CIBC, arguing that tighter rent controls are the exact opposite of what the GTA needs right now.  He certainly has some good points to make.  As in other cities (New York is an obvious example), rent controls reduce tenant mobility.  They also tend to lead to inadequate maintenance of older properties, which can sink into disrepair as landlords lack the incentive to keep the homes in good shape: they can't afford it because the rents are too low, and the tenants aren't going to move out anyway.

All true enough, but keeping the current controls untouched doesn't seem to be working, and there would be zero appetite among politicians for doing away with controls altogether.  The problem in the rental market seems to be one of supply as much as anything. None of the apartment towers springing up in all corners of the GTA is aimed primarily at the rental market: they're all condominiums. Builders favour those because the payback period is so much shorter than for a rental building.

There's another issue on the supply side that gets less attention: community housing.  The Toronto Community Housing Association (TCHA), which runs the city's social housing stock, is a mess.  It has a multi-million dollar backlog of maintenance that it never manages to catch up of because of lack of funding.  Horror stories about cockroaches or fire hazards or smashed-up elevators that crop up regularly on local news bulletins are almost always about TCHA buildings rather than privately-owned ones.  And needless to say, with no money even for maintenance of its existing stock, TCHA is not doing anything about acquiring new buildings, despite the rapid growth in segments of the population that traditionally rely on social housing, including immigrants.

Ontario budget day is set for April 27, and that's when any announcement about changes to rent control is likely to come.  Benjamin Tal is probably correct to say that tighter rent controls may do more harm than good, but unless a way is found to increase the rental stock -- including the social segment run by TCHA -- Toronto's rental affordability crisis is set to persist well into the future.

Friday, 31 March 2017

Canada GDP -- more good news

Statistics Canada reported today that GDP grew 0.6 percent in January, well above the consensus expectation of a 0.3 percent gain*.  The good news on overall economic activity follows recent positive data on external trade, retail sales and employment,  Many economists are rushing to upgrade their expectations for the whole of Q1, with an annualized growth rate above 3 percent now almost inevitable.

Manufacturing posted the strongest growth, with a 1.9 percent monthly increase, but strength was evident in most parts of the economy.  The economy has now grown in each month bar one (October) since last June.  Although expansion in the third quarter of last year was largely attributable to the bounce-back from the Fort McMurray wildfire disaster, it appears that the economy has now developed a broader-based momentum of a kind not seen not seen for several years.

This is Canada, so we have to ask: what can go wrong?  The first and most obvious risk is the situation south of the border.  The Trump administration is starting to set out its stall for the promised renegotiation of the NAFTA agreement, and has also announced its intention to investigate the "trade practices" of Canada and a number of other countries.  Even before any of this leads to actual policy changes, there is a risk that fear of trade restrictions might cast a chill on business sentiment in Canada.

Closer to home, the biggest risk remains the housing market.  Prices in the Toronto area rose 27 percent in 2016 and a similar increase is foreseen for this year, barring some steps by the authorities to cool the market.  There is no possibility that the Bank of Canada will be raising rates any time soon, but Provincial and municipal politicians are making noises about taking steps to slow things down. British Columbia had reasonable success last year with its tax on foreign purchasers, and the Ontario budget (likely on April 27) may well try something similar. Given the customary ineptitude of both Ontario and Toronto politicians, there's a clear risk that they could get this wrong, with potentially damaging consequences either immediately (if they do too much) or later (if they don't do enough).

Neither of these risks seems unduly severe in the near term.  This being the last day of March, higher-than-expected growth for Q1 is already baked in, and the momentum is likely to persist at least through mid-year.  Good news for policymakers, and vindication for Federal Finance Minister Bill Morneau's relatively cautious fiscal stance in his budget earlier this month.

* I can't pass over an obvious bit of economic illiteracy in the linked article.  I don't think you'd need a PhD to figure that if the economy grew 0.6 percent in January, then the annualized growth rate has to be north of 7 percent -- and yet the reporter states it was 2.3 percent. Knowing the difference between "annualized" and "year over year" is apparently not a pre-requisite for an economics reporter at Canada's national broadcaster.