Thursday, 14 December 2017

All housing, all the time

It's forecasting season in Canada, and the housing industry is front and centre.  Following on from yesterday's rosy forecast for house prices from Royal LePage, today brings several more tasty morsels.

  • Here is a much less bullish outlook from another huge realtor, ReMax, forecasting that Toronto-area housing prices will fall sharply in early 2018 as a result of new mortgage stress tests (see yesterday's post), before bouncing back later in the year to end up basically unchanged from current levels.
  • Here we have the Canadian Real Estate Association (CREA) predicting that those same mortgage rules will lead to a more than 5 percent fall in home sales in 2018, with prices nationwide edging lower. 
  • Here is a report, originally from Bloomberg, suggesting that borrowers facing problems as a result of the new mortgage rules are increasingly turning to unregulated mortgage lenders, paying fancy prices for the privilege and increasing systemic risk.
  • And if that's not scary enough, here is a report on new data from Statistics Canada showing that Canadian household debt has reached yet another record high, at 171.1 percent of disposable income. 

You've got to love the last sentence in that final story, a quote from a gent at the Credit Counselling Society: "Canadians need to gain control of their finances and use a budget/spending plan to effectively manage their expenses".  Good luck with that one, sunshine -- you're going to be a busy boy in 2018. At least, that's my forecast.

Wednesday, 13 December 2017

Guess who's forecasting higher house prices!

Today brings us a new forecast that house prices in the Toronto region will rise 6.8 percent in 2018, the fastest rate for any major Canadian conurbation.  Here's a link, but before you open it, try and guess what kind of person or company is making the forecast. 

Got it in one, I'm guessing.  The rosy forecast is from Royal LePage, one of Canada's largest realtors.  Now there are good reasons to think that the long-term direction of house prices in Toronto is upward.  The region's population growth is steady, thanks in part to the fact that it is the preferred destination for new immigrants.  As a result, demand for new housing units can be expected to increase.  At the same time, new construction, particularly for detached family homes, remains sluggish.  Developers blame this on zoning and planning restrictions, but it seems more likely that slapping up condo towers hither and yon is more lucrative.

All of that may be true, but there are headwinds that the market is certain to face next year.  One is the introduction of new stress tests for borrowers.  Studies suggest that 20 percent even of existing borrowers would fail to meet these tests, so it seems likely that the percentage of would-be new buyers who fail to meet the new criteria may be even higher.  The Royal Le Page forecast acknowledges this, but expects it to have an impact only at the start of the year.

Then there's the economic environment.  Royal LePage thinks that strong job creation and income growth will support housing demand.  Indeed it would, but most forecasts call for the slowing in growth that was already evident in Q3 GDP figures to persist into next year.  If that doesn't happen, the Bank of Canada will certainly continue its policy of gradual monetary tightening.  Either slower growth or rising borrowing costs could easily invalidate Royal LePage's rosy scenario -- and we could well be looking at both.

But who takes house price forecasts from realtors seriously anyway?*  I believe it was the philosopher Bertrand Russell who used the term "arguing against interest", best defined through an example:  if I tell you there is no God, you can safely ignore me, but if the Pope starts telling you there is no God, that's a different matter altogether.  If realtors predicted a softer housing market once in a while, it would be easier to take them seriously. 

* Aside from me, I guess.

Tuesday, 12 December 2017

The one about Nazis

Spoiler alert for viewers of The Crown who have not made it to Episode 6!

We are devouring the second series of The Crown at a two-episodes-per-night pace.  It amazes me that, with the Queen and Prince Philip still very much alive, the producers are so willing to air the Royal Family's dirty laundry.  One episode in this series was entirely about Philip's long-rumoured philandering; Princess Margaret seems like a high-class tart; and the Queen Mother is portrayed as an insufferable and humourless snob.

Last night we watched episode 6, in which the Duke and Duchess of Windsor were depicted as not merely insufferable snobs, but also as Nazi fellow-travellers.  The producers have been very careful to keep everything about the show in its proper time period, from the cars to the twinsets that the Queen often favours.  So I was a bit surprised to find a major error in protocol as it applies at the Foreign Office.

Early in the episode, incriminating documents about the Windsors are translated by a Foreign Office linguist. He barges into his boss's office, to be greeted with a bark of "Don't you know how to knock?"  The two of them then go to a senior diplomat's office, carefully knocking on the door before entering.  Here's the thing: almost the first thing I was told when I started work at the Foreign Office many years ago was: never knock on a door. Even if you suspected that the Permanent Under Secretary was in flagrante with his secretary at that very moment, you just walked in unannounced.  I never encountered that practice anywhere else and I'm surprised that nobody mentioned it to the people making The Crown.

It's probably not a spoiler if I reveal to you that the Duke of Windsor seems to have been a conniving sack of sewage.

Wednesday, 6 December 2017

Bank of Canada: no change

The strong employment data released last week led some market participants to think that the Bank of Canada might tighten policy further at its Governing Council meeting this week.  However, the consensus expectation was for no change, and today the Bank confirmed that it will be keeping its overnight rate target at 1 percent.

The press release notes that developments in the economy since the Bank's previous meeting in October have been broadly in line with expectations.  Growth has begun to moderate from the rapid pace seen in the first half of the year.  However, it is striking to note how much of the release is devoted to developments that could lead the Bank to tighten policy again before too much longer: strong employment gains, rising wages and an upward creep in inflation, both headline CPI and the Bank's favoured "core" measures.

The market is currently pricing in no more that a one-in-three probability of a rate hike at the Bank's next policy meeting, set for January 17.  If the economic data, particularly regarding employment and wages, remain as strong as they have been recently, a rate move at that meeting or at least by the end of Q1 seems much more likely than not.

That said, there are at least two wild cards that the Bank will have to take into account.  First:  new mortgage "stress tests" will be introduced in the new year, applicable to non-insured mortgages. Studies suggest that as many as one in five mortgagees could fall short of the new tests, a number that would only be increased by further monetary tightening.  Second: NAFTA.  The "drop dead" date for the talks has been pushed back to March from the end of this year, but there are plenty of indications that the negotiations are not going well.  The negative impact on Canada of a US withdrawal from NAFTA is debatable, but the Bank of Canada would surely want to avoid making a bad situation worse with an ill-timed rate move. These wild cards are likely the main reason that the market is not more confident about a rate hike in January.

Friday, 1 December 2017

It's all over for Bitcoin!

I don't pretend to understand Bitcoin and I certainly don't understand why investors and hedge funds are falling over themselves to invest in something so essentially ephemeral.  I know a bubble when I see one, and this can't end well.

But we now have a clear sign that the party will soon be over:  the Bank of Canada has published a research paper suggesting that it may start to look at setting up a cryptocurrency of its own.  If the regulators are showing up at the door, it's surely a sign for the speculators to move on to the next shindig.

UPDATE, December 4: And it's not just Canada that wants in. Now Venezuela is talking of setting up a cryptocurrency.

More extraordinary job gains in Canada

StatsCan reported this morning that Canada added 80,000 jobs in November, fully eight times as many as the analysts' consensus had predicted.  This pushed the jobless rate down by a remarkable 0.4 percentage points, to 5.9 percent.  This is the lowest jobless rate since February 2008, at the inception of the financial crisis.

Details of the report are, for the most part, as encouraging as the headline. Although more than 50,000 of November's new jobs were classified as part-time, the addition of 30,000 full-time jobs was in and itself way stronger than the analysts' consensus.  Moreover, the month saw 30,000 new jobs in manufacturing and 16,000 in construction, meaning that the focus of job gains is firmly in the productive sector -- indeed, 72,000 of the new jobs were in the private sector, with little change in either public sector employment or self-employment.

In the past 12 months full-time employment has grown by 441,000, or 3 percent, with part-time employment falling slightly.  Somewhat perplexingly, total hours worked in the economy rose only 1 percent in the year.  One possible explanation for this is that companies are more confident about using new employees to boost production, rather than relying on overtime work by the existing workforce.

The strength in employment seems to suggest that the much-anticipated slowdown in GDP growth may not be as pronounced as some have forecast, though it needs to be kept in mind that employment is generally seen as a lagging indicator.  (StatsCan reported separately today that real GDP rose at a 1.7 percent annualized rate in Q3, in line with expectations but significantly slower than in the first half of the year).  With the Bank of Canada already signalling that it sees the economy operating close to full capacity, it seems likely that a further rate hike will be forthcoming during the winter months. All such bets will, however, be off in the event that the ongoing NAFTA renegotiations collapse.

Tuesday, 28 November 2017

Bank of Canada: the risks are still the risks

The Bank of Canada released its semi-annual Financial System Review this morning.  Introducing the Report to the media, Governor Stephen Poloz noted that the key risks identified by the Bank are the same as they were six months ago, and indeed the same as they have been for several years now: high and rising household indebtedness, and imbalances (read: overvaluation) in the housing market.

Gov. Poloz pointed out that household indebtedness continues to rise faster than household incomes. As the OECD noted earlier this month, Canada's households are now the most indebted in the developed world.  The increase in debt has seemingly not yet been affected by the Bank's increasingly urgent warnings, or its steps toward tighter policy.

Poloz noted that steps by the Government to regulate high-ratio mortgages (less than 20 percent down-payment) more tightly have reduced the issuance of such mortgages.  However, the Bank is concerned over a possible deterioration in the quality of non-high ratio mortgages, with amortizations stretching beyond 25 years and more such loans being taken out by highly-indebted households. New regulations will be forthcoming in the new year to regulate these mortgages more closely and ensure that the borrowers can withstand a rise in interest rates.  The Bank welcomes this prospect, though one wonders whether Poloz ever asks himself why the lenders need the Government to impose such prudence on them, rather than adopting it themselves.

As regards the housing market, Poloz notes that the froth seems to have come off the Toronto area market in response to steps announced by the Ontario Provincial Government back in April.  However, the Bank is waiting to see whether Toronto house prices follow the pattern set in Vancouver, where the effect of earlier government measures seems to have faded, with prices starting to rise again.  Poloz also notes that the fundamentals of the market are strong, with demand driven by rising population and employment.

The Bank's conclusion is that Canada's financial system remains "resilient".  That message is likely to be reinforced over the course of this week by the release of  financial results for the major banks.  The first of these, Scotiabank, today announced an 11 percent year-on-year rise in profits, a remarkable result considering nominal GDP is rising at less than a 6 percent pace.  So far there has been little evidence of any impairment in the banks' credit quality, despite the surge in household debt. Some commentators are suggesting that Gov. Poloz sounded a little complacent today, but for now, he seems to be on solid ground.