Statistics Canada reported this morning that real GDP rose at an annualized rate of 3.7 percent in the first quarter of 2017. Analysts' expectations were unusually widely dispersed for this one, but the reported number is in the middle of the range. Real GDP for the final quarter of 2016 was also revised higher, to an annualized rate just shy of 3 percent. While not all of the relevant data are yet available, it seems that for the moment at least, Canada has the fastest-growing economy in the G-7.
The growth is broad-based. Household consumption expenditure rose 1.1 percent quarter-over-quarter, with vehicle sales remaining strong. This marks a clear contrast to the United States, where auto sales are lagging. Business fixed investment rose an impressive 2.9 percent, led by gains in housing construction and, more surprisingly, machinery and equipment purchases.
The gains in consumption and investment indicate that the Bank of Canada's rate policy is having the desired effect. The same can't be said, however, for its concomitant weak dollar policy. Exports slipped 0.1 percent in the quarter, propelled by weakness in services, while imports jumped more than 3 percent, reflecting the strength in domestic demand.
What happens next? In the near term, it looks like more of the same. StatsCan reported separately today that real GDP rose 0.5 percent in the month of March. The consensus had looked for a much lower number, creating a so-called "weak handoff" for Q2, but it appears that the economy retained good forward momentum entering the current quarter.
Looking further ahead, we have a combination of uncertainties and imponderables. It is still unclear what demands the Trump administration will bring to the table when the NAFTA renegotiation begins later in the year. The uncertainty over how this will play out makes the Q1 surge in business investment all the more surprising, though given the weakness is such investment over the past year, this may prove to be just a temporary blip.
Then there's household consumption. The strength here no doubt owes a lot to the sustained growth in employment seen over the past year, but it's also debt-driven. StatsCan notes that the household savings rate fell to a nugatory 4.3 percent in Q1, while the debt service/income ratio edged higher. As has been widely reported here and elsewhere, the household debt/income ratio is at an all-time record high of 167 percent, and shows no signs of reversing. Even a hint of higher interest rates could quickly push higher-debt households into distress, crimping consumer spending and thereby the entire economy.
A GDP growth rate of 3.7 percent is well above the Bank of Canada's estimate of the economy's trend growth rate, which is now not much above 1.5 percent. In more normal times this would suggest that tighter monetary policy could not be postponed for very long, but the Bank has given every indication that it is prepared to stay on its current course as long as CPI inflation remains contained. The Bank's July policy meeting also brings an updated economic outlook; given today's robust data, that should be interesting reading.
Wednesday, 31 May 2017
Tuesday, 30 May 2017
Wynne or bust
Ontario Premier Kathleen Wynne's desperate attempt to secure re-election next year is starting to get expensive for a whole lot of people.
In April the Premier announced a whizz-bang scheme to roll back electricity prices in the Province. These had been rising at a staggering rate for better than a decade, thanks to the Liberals' cack-handed attempts at "going green". This very angry blog provides some excellent analysis of just how the costs are mounting up. Opinion polls show the rising cost of power is the number one issue for Ontario voters. Wynne's plan gives everyone a 25 percent reduction in their bills, starting next month.
Of course, this comes at a cost, and analysis by the Province's auditor indicates that it's a very steep cost indeed. Wynne is achieving the roll-back by instructing the distribution utility, Hydro One, to refinance its obligations over a much longer term. The plan is designed to offer an aggregate reduction in electricity bills of over $20 billion in the next few years (i.e. well beyond the June 2018 election) -- but the added interest costs in the long term will be twice as great! Each time one of today's voters flips a light switch, a portion of the bill is going to land on their children and grandchildren -- but who cares about them when there are votes to be bought?
The whole scheme is so egregiously wrong-headed that it seems unlikely to achieve the desired effect on the electorate. So today, Ms Wynne is at it again. She has announced a raft of changes in labour legislation, including better rights for "precarious" workers and a sharp increase in the minimum wage. This currently stands at C$ 11.40 an hour, but will rise to $14 on the first day of 2018 and $15 a year after that. Notice the timing here: most reputable studies suggest that the minimum wage increase will not damage the job market, but Ms Wynne is taking no chances. Delaying the supposedly desperately needed increase until the start of next year will ensure that it's still top-of-mind when polling day arrives in June 2018, but any potential negative effects probably won't have materialized by then.
The labour market reforms are a good thing in themselves. The question is this: can an unfathomably unpopular Premier, leading a government of staggering incompetence, win over voters by doing one good thing, albeit for the most cynical of reasons? And what other expensive boondoggle does she have up her sleeve if today's announcement fails to move the dial? Well, there's this.
In April the Premier announced a whizz-bang scheme to roll back electricity prices in the Province. These had been rising at a staggering rate for better than a decade, thanks to the Liberals' cack-handed attempts at "going green". This very angry blog provides some excellent analysis of just how the costs are mounting up. Opinion polls show the rising cost of power is the number one issue for Ontario voters. Wynne's plan gives everyone a 25 percent reduction in their bills, starting next month.
Of course, this comes at a cost, and analysis by the Province's auditor indicates that it's a very steep cost indeed. Wynne is achieving the roll-back by instructing the distribution utility, Hydro One, to refinance its obligations over a much longer term. The plan is designed to offer an aggregate reduction in electricity bills of over $20 billion in the next few years (i.e. well beyond the June 2018 election) -- but the added interest costs in the long term will be twice as great! Each time one of today's voters flips a light switch, a portion of the bill is going to land on their children and grandchildren -- but who cares about them when there are votes to be bought?
The whole scheme is so egregiously wrong-headed that it seems unlikely to achieve the desired effect on the electorate. So today, Ms Wynne is at it again. She has announced a raft of changes in labour legislation, including better rights for "precarious" workers and a sharp increase in the minimum wage. This currently stands at C$ 11.40 an hour, but will rise to $14 on the first day of 2018 and $15 a year after that. Notice the timing here: most reputable studies suggest that the minimum wage increase will not damage the job market, but Ms Wynne is taking no chances. Delaying the supposedly desperately needed increase until the start of next year will ensure that it's still top-of-mind when polling day arrives in June 2018, but any potential negative effects probably won't have materialized by then.
The labour market reforms are a good thing in themselves. The question is this: can an unfathomably unpopular Premier, leading a government of staggering incompetence, win over voters by doing one good thing, albeit for the most cynical of reasons? And what other expensive boondoggle does she have up her sleeve if today's announcement fails to move the dial? Well, there's this.
Wednesday, 24 May 2017
Bank of Canada: can't move, won't move
As expected, the Bank of Canada kept its interest rate target unchanged at 0.5 percent today. The press release (which, as one commentator has noted, is unusually short) depicts an economy still facing uncertainty from global developments, especially in the United States. Low interest rates are supporting steady growth in consumer spending and the housing sector, and there are some signs of an improvement in business investment. Inflation -- both headline CPI and the Bank's three core measures -- remains well-contained.
Given these facts, it's no surprise that the Bank's Governing Council "judges that the current degree of monetary stimulus is appropriate at present". And likely not just "at present": the timetable for any removal of stimulus continues to be pushed further into the future, even though this implies that the divergence between the Bank's policy stance and that of the Federal Reserve will continue to widen.
Meanwhile, back in the housing market....It's too soon to tell whether recent actions by the Ontario government will help to cool the buying frenzy in the Toronto area, though there are some early signs that the bidding wars have eased. However, the overhang of household debt continues to loom ominously. Manulife is the latest institution to weigh in, as reported here.
Much of this is familiar, but there's one startling statistic: 72 percent of mortgage holders could not absorb a 10 percent increase in their monthly mortgage costs without running into financial problems. Indeed, 38 percent would be in trouble with a 5 percent increase! Think about that. Rates have been so low for so long that most of those people are probably paying something near a 3 percent mortgage rate. That means that just one 25 basis point increase would be enough to push a sizable number of homeowners into financial distress.
That certainly shows why the Bank of Canada will need to be cautious when it does start to tighten its policy settings. But it also begs the question: just why has the Bank allowed this situation to develop, and just how does it think it can get out of it without torpedoing the entire economy?
The Bank's next policy decision, due on July 12, will be accompanied by an updated Monetary Policy Report. This will doubtless provide a detailed review of the economic outlook, but it is very unlikely to provide any clear pathway for the Bank to extricate itself from the low-rate trap it has created for itself.
Given these facts, it's no surprise that the Bank's Governing Council "judges that the current degree of monetary stimulus is appropriate at present". And likely not just "at present": the timetable for any removal of stimulus continues to be pushed further into the future, even though this implies that the divergence between the Bank's policy stance and that of the Federal Reserve will continue to widen.
Meanwhile, back in the housing market....It's too soon to tell whether recent actions by the Ontario government will help to cool the buying frenzy in the Toronto area, though there are some early signs that the bidding wars have eased. However, the overhang of household debt continues to loom ominously. Manulife is the latest institution to weigh in, as reported here.
Much of this is familiar, but there's one startling statistic: 72 percent of mortgage holders could not absorb a 10 percent increase in their monthly mortgage costs without running into financial problems. Indeed, 38 percent would be in trouble with a 5 percent increase! Think about that. Rates have been so low for so long that most of those people are probably paying something near a 3 percent mortgage rate. That means that just one 25 basis point increase would be enough to push a sizable number of homeowners into financial distress.
That certainly shows why the Bank of Canada will need to be cautious when it does start to tighten its policy settings. But it also begs the question: just why has the Bank allowed this situation to develop, and just how does it think it can get out of it without torpedoing the entire economy?
The Bank's next policy decision, due on July 12, will be accompanied by an updated Monetary Policy Report. This will doubtless provide a detailed review of the economic outlook, but it is very unlikely to provide any clear pathway for the Bank to extricate itself from the low-rate trap it has created for itself.
Friday, 19 May 2017
Inappropriate
The snappy catchphrase of the month here in Canada is "cultural appropriation". In case you live in a less politically correct jurisdiction, this refers to a situation in which a member of the dominant culture (in Canada's case, white people) uses the culture of a minority in a way that can be considered disrespectful.
The specific point at issue here is an article in the Canadian Writers Union magazine's annual issue for indigenous authors*. The (white) editor of the magazine decided this was a fine opportunity to declare that he didn't actually believe in cultural appropriation, and half in jest suggested a prize should be awarded to the best appropriator. Cue uproar from indigenous writers and others from minority communities.
Over at the Toronto Star, they've been firing actual journalists (you know, the kind that go out and report on news stories) almost on a weekly basis, but they still keep a large number of columnists on staff. These people are always quick to upbraid all and sundry for racism, anti-semitism, homophobia and the like, and one or two of them duly started to weigh in on cultural appropriation. Then it seemed to occur to someone at the Star that having its columnists speak out for indigenous people about cultural appropriation might itself be considered a form of cultural appropriation, so actual indigenous voices were sought out to express their views.
This controversy, such as it is, may run for some time, but the best analysis I've seen appeared in today's issue of the Star -- this article, written by the definitely non-indigenous Rick Salutin. People who despise the concept of cultural appropriation, such as the increasingly unhinged Mark Steyn, tend to fall back on one argument: "the minute you have to state something so butt-numbingly obvious as that Shakespeare wasn't a Prince of Denmark or a Moor of Venice, you've lost". Alongside some other good points, Salutin has the perfect response to that.
* As it happens, one major Canadian novelist who has written from an indigenous perspective, Joseph Boyden, has recently had his claims to native heritage pretty effectively debunked. But that's another story.
The specific point at issue here is an article in the Canadian Writers Union magazine's annual issue for indigenous authors*. The (white) editor of the magazine decided this was a fine opportunity to declare that he didn't actually believe in cultural appropriation, and half in jest suggested a prize should be awarded to the best appropriator. Cue uproar from indigenous writers and others from minority communities.
Over at the Toronto Star, they've been firing actual journalists (you know, the kind that go out and report on news stories) almost on a weekly basis, but they still keep a large number of columnists on staff. These people are always quick to upbraid all and sundry for racism, anti-semitism, homophobia and the like, and one or two of them duly started to weigh in on cultural appropriation. Then it seemed to occur to someone at the Star that having its columnists speak out for indigenous people about cultural appropriation might itself be considered a form of cultural appropriation, so actual indigenous voices were sought out to express their views.
This controversy, such as it is, may run for some time, but the best analysis I've seen appeared in today's issue of the Star -- this article, written by the definitely non-indigenous Rick Salutin. People who despise the concept of cultural appropriation, such as the increasingly unhinged Mark Steyn, tend to fall back on one argument: "the minute you have to state something so butt-numbingly obvious as that Shakespeare wasn't a Prince of Denmark or a Moor of Venice, you've lost". Alongside some other good points, Salutin has the perfect response to that.
* As it happens, one major Canadian novelist who has written from an indigenous perspective, Joseph Boyden, has recently had his claims to native heritage pretty effectively debunked. But that's another story.
Thursday, 18 May 2017
Better late than never
The best that can be said for the Bank of Canada's low interest rate/low dollar policy is that without it, things might have been worse over the past decade. It's not as though the Bank's stance has produced strong growth in investment or exports, but at least the economy has for the most part stayed out of recession.
The worst that can be said about that same policy is that it has driven a boom in consumer debt and house prices that cannot be sustained indefinitely. The Canadian household debt/income ratio stands at an all-time high of 167%, which is higher than the peak reached by the (not exactly comparable) US ratio just before the financial crisis. The well-publicized problems now being experienced by the higher-risk mortgage lender Home Capital may be an early indication that the bubble may be about to pop.
A few people, including your humble correspondent, have been saying for years that the Bank of Canada needed to start signalling, and then start implementing, a change of course. Now we read in the Financial Post that "some economists fret about a rapid rise in domestic house prices after eight years of rock bottom borrowing costs".
One of the quoted economists, David Rosenberg, used to work at Royal Bank of Canada, while the other, Krishen Rangasamy, is with National Bank, Canada's sixth-largest lender. This definitely counts as progress. Even as the Toronto housing market has blasted off into the stratosphere, bank economists have tended to focus on speculation, foreign buying, lack of supply and so on as the causes of the boom, downplaying the obvious impact of Bank of Canada policy.
Most galling of all, many economists have tried to argue that the growth in household debt burdens is not a problem because household assets (i.e. the value of the homes themselves) have also been rising, as if the two sides of the balance sheet -- the ultra-cheap debt and the soaring house prices -- were completely unrelated. This is nonsensical. House prices will inevitably stall out and reverse at some point, but that won't reduce the debt burden; a lot of homeowners will quickly find themselves "upside down", as our American friends refer to it when the mortgage is worth more than the house.
But even if house prices don't correct, the debt burden poses an enormous risk to the economy. Even without any policy signals from the Bank of Canada, mortgage rates have been creeping up as domestic banks find their funding costs rising, in response to developments south of the border. Survey after survey shows that the proportion of Canadian households that would be in immediate trouble if the missed even one paycheck is rising inexorably.
Raising rates is not a risk-free strategy for the Bank of Canada, not least because it would immediately start to push some of the most-indebted households over the edge. However, continuing to do nothing is surely even riskier, because in the absence of some sort of shot across the bows, many households will continue to pile up debt, making the correction all the more painful when it finally comes. The chances that the Bank will pay attention to David Rosenberg et al are still very slight, but I hope that won't discourage them from continuing to speak out.
The worst that can be said about that same policy is that it has driven a boom in consumer debt and house prices that cannot be sustained indefinitely. The Canadian household debt/income ratio stands at an all-time high of 167%, which is higher than the peak reached by the (not exactly comparable) US ratio just before the financial crisis. The well-publicized problems now being experienced by the higher-risk mortgage lender Home Capital may be an early indication that the bubble may be about to pop.
A few people, including your humble correspondent, have been saying for years that the Bank of Canada needed to start signalling, and then start implementing, a change of course. Now we read in the Financial Post that "some economists fret about a rapid rise in domestic house prices after eight years of rock bottom borrowing costs".
One of the quoted economists, David Rosenberg, used to work at Royal Bank of Canada, while the other, Krishen Rangasamy, is with National Bank, Canada's sixth-largest lender. This definitely counts as progress. Even as the Toronto housing market has blasted off into the stratosphere, bank economists have tended to focus on speculation, foreign buying, lack of supply and so on as the causes of the boom, downplaying the obvious impact of Bank of Canada policy.
Most galling of all, many economists have tried to argue that the growth in household debt burdens is not a problem because household assets (i.e. the value of the homes themselves) have also been rising, as if the two sides of the balance sheet -- the ultra-cheap debt and the soaring house prices -- were completely unrelated. This is nonsensical. House prices will inevitably stall out and reverse at some point, but that won't reduce the debt burden; a lot of homeowners will quickly find themselves "upside down", as our American friends refer to it when the mortgage is worth more than the house.
But even if house prices don't correct, the debt burden poses an enormous risk to the economy. Even without any policy signals from the Bank of Canada, mortgage rates have been creeping up as domestic banks find their funding costs rising, in response to developments south of the border. Survey after survey shows that the proportion of Canadian households that would be in immediate trouble if the missed even one paycheck is rising inexorably.
Raising rates is not a risk-free strategy for the Bank of Canada, not least because it would immediately start to push some of the most-indebted households over the edge. However, continuing to do nothing is surely even riskier, because in the absence of some sort of shot across the bows, many households will continue to pile up debt, making the correction all the more painful when it finally comes. The chances that the Bank will pay attention to David Rosenberg et al are still very slight, but I hope that won't discourage them from continuing to speak out.
Wednesday, 10 May 2017
Short story
I haven't written about the short-selling of stocks here for a long time -- probably since the financial crisis was at its peak. Now it seems that the short sellers are back to their nefarious business in Canada again, looking to bring down Home Capital, a higher-risk mortgage lender.
The elevated level of risk in the Canadian housing market, particularly in areas around Toronto and Vancouver where an out-and-out bubble has developed, has become an international story. Bubbles almost always end badly. There are grave doubts as to whether the steps taken to cool the market by the BC provincial government (last year) or the Ontario government (last month) can be effective, given that the Bank of Canada seems set on maintaining its ultra-low interest rate policy.
If the bubble is indeed going to burst, the first sign of danger will always be a problems at a higher-risk lender. This was the case in the UK a decade ago, with Northern Rock, and it was the case also in the United States with Countrywide and others. Home Capital is one of the larger higher-risk mortgage lenders in Canada, and in the last few months it has made a number of unfortunate mis-steps. In essence, the company realized some months ago that some of the mortgage brokers feeding its business had not been fully disclosing the financial situation of the borrowers they were introducing.
Since then, as this article by Terence Corcoran in the National Post explains, it's been all downhill for Home. The Ontario Securities Commission has become involved, there has been a management and board shake-up, and depositors have started to get cold feet and withdraw their funds, creating a liquidity problem. Most ominous of all, short-sellers have become actively involved, although as Corcoran notes, it's all but impossible to discover just how big the short positions are.
Matters seem to be coming to a head. Last week Home arranged a large line of credit at a very fancy interest rate -- 22 percent! -- with a consortium of non-bank lenders. This week it has announced a deal for an unnamed buyer to take over a portion of its mortgage book, and also announced its intention to re-orient its entire business model. To reduce funding pressures, it will focus on sourcing mortgages that can be packaged for sale rather than kept on the company's own books.
It remains to be seen whether this will be enough. It may at least permit an orderly wind-down of the business, rather than a sudden collapse that could put the entire financial system under strain. In the meantime, it's appropriate to ask again just what value short sellers bring to the market in these (or any other) circumstances. When even a right-winger and ardent free-marketeer like Terence Corcoran is all but accusing the shorts of pushing Home into bankruptcy with no regard for the wider consequences, maybe the regulatory authorities need to take a fresh look at the whole pernicious practice.
The elevated level of risk in the Canadian housing market, particularly in areas around Toronto and Vancouver where an out-and-out bubble has developed, has become an international story. Bubbles almost always end badly. There are grave doubts as to whether the steps taken to cool the market by the BC provincial government (last year) or the Ontario government (last month) can be effective, given that the Bank of Canada seems set on maintaining its ultra-low interest rate policy.
If the bubble is indeed going to burst, the first sign of danger will always be a problems at a higher-risk lender. This was the case in the UK a decade ago, with Northern Rock, and it was the case also in the United States with Countrywide and others. Home Capital is one of the larger higher-risk mortgage lenders in Canada, and in the last few months it has made a number of unfortunate mis-steps. In essence, the company realized some months ago that some of the mortgage brokers feeding its business had not been fully disclosing the financial situation of the borrowers they were introducing.
Since then, as this article by Terence Corcoran in the National Post explains, it's been all downhill for Home. The Ontario Securities Commission has become involved, there has been a management and board shake-up, and depositors have started to get cold feet and withdraw their funds, creating a liquidity problem. Most ominous of all, short-sellers have become actively involved, although as Corcoran notes, it's all but impossible to discover just how big the short positions are.
Matters seem to be coming to a head. Last week Home arranged a large line of credit at a very fancy interest rate -- 22 percent! -- with a consortium of non-bank lenders. This week it has announced a deal for an unnamed buyer to take over a portion of its mortgage book, and also announced its intention to re-orient its entire business model. To reduce funding pressures, it will focus on sourcing mortgages that can be packaged for sale rather than kept on the company's own books.
It remains to be seen whether this will be enough. It may at least permit an orderly wind-down of the business, rather than a sudden collapse that could put the entire financial system under strain. In the meantime, it's appropriate to ask again just what value short sellers bring to the market in these (or any other) circumstances. When even a right-winger and ardent free-marketeer like Terence Corcoran is all but accusing the shorts of pushing Home into bankruptcy with no regard for the wider consequences, maybe the regulatory authorities need to take a fresh look at the whole pernicious practice.
Friday, 5 May 2017
Canada employment data: jobs -- OK; wages -- not OK
While the US labour force survey for April showed a smart bounceback in job creation, the Canadian data were more mixed. Although the unemployment rate ticked down to a nine-year low of 6.5 percent, that improvement was entirely due to a fall in labour force participation, with younger people in particular seemingly giving up on the search for jobs. The economy added only 3200 jobs in the month, well inside the survey's margin of error.
Still, as StatsCan noted in its commentary, the economy has added 276,000 jobs over the past year, a 1.5 percent increase. Not bad at all, but.....first, the vast majority of the new jobs have been part-time in nature, so that total hours worked in the economy have only grown by 1.1 percent in the last twelve months. Second, and potentially more significant, wage growth is lagging badly. Hourly earnings rose less than 0.7 percent in the year to April, the lowest recorded increase in the series since at least 1998.
This is an extraordinarily low figure for this stage of the business cycle. It may in part explain why the household debt/income ratio has been rising steadily -- the problem may be less with the numerator than with the denominator. More importantly, with inflation (CPI) currently at 1.6 percent, real household incomes are under downward pressure, which militates strongly against steady growth in household consumption.
The employment data come in the wake of an earlier StatsCan report that real GDP was unchanged in February after three straight monthly gains. The immediate analyst take on this was that the economy was due for a "breather", even though nobody had actually seen it coming. International trade data for March were remarkably strong, with exports rising to an all-time record; this should underpin some recovery in the monthly GDP data for the month and ensure a positive result for the first quarter as a whole.
Even so, if wages and household incomes remain stagnant or worse, it is difficult to see how the overall economy can remain on a stable growth path. Today's US employment data put a Fed rate hike in June firmly on the agenda; the Bank of Canada will not be following suit for many months yet.
Still, as StatsCan noted in its commentary, the economy has added 276,000 jobs over the past year, a 1.5 percent increase. Not bad at all, but.....first, the vast majority of the new jobs have been part-time in nature, so that total hours worked in the economy have only grown by 1.1 percent in the last twelve months. Second, and potentially more significant, wage growth is lagging badly. Hourly earnings rose less than 0.7 percent in the year to April, the lowest recorded increase in the series since at least 1998.
This is an extraordinarily low figure for this stage of the business cycle. It may in part explain why the household debt/income ratio has been rising steadily -- the problem may be less with the numerator than with the denominator. More importantly, with inflation (CPI) currently at 1.6 percent, real household incomes are under downward pressure, which militates strongly against steady growth in household consumption.
The employment data come in the wake of an earlier StatsCan report that real GDP was unchanged in February after three straight monthly gains. The immediate analyst take on this was that the economy was due for a "breather", even though nobody had actually seen it coming. International trade data for March were remarkably strong, with exports rising to an all-time record; this should underpin some recovery in the monthly GDP data for the month and ensure a positive result for the first quarter as a whole.
Even so, if wages and household incomes remain stagnant or worse, it is difficult to see how the overall economy can remain on a stable growth path. Today's US employment data put a Fed rate hike in June firmly on the agenda; the Bank of Canada will not be following suit for many months yet.
Wednesday, 3 May 2017
Aussie rules
Why are house prices in Toronto continuing to soar? They were up 31 percent in the year to April. Some point the finger at foreign buyers, shifting their attention from Vancouver after the BC Provincial government imposed a special tax to cool the market there. Some blame domestic speculators. Some blame a lack of supply of new homes, which is in turn attributed to zoning regulations. And underlying all of these is the rock-bottom interest rate policy still adhered to by the Bank of Canada, almost a decade on from the financial crisis.
There's another culprit that doesn't get much mention, but maybe should: the machinations and sheer venality of realtors. Time was, a seller would hire an agent and put the house up for sale at a price that was realistic or maybe slightly ambitious. The realtor would put the home on the Multiple Listing Service (MLS) so that other realtors could have a crack at selling it for a portion of the commission. Then a buyer would come along with an offer at or maybe below the asking price, there'd be a bit of to-and-fro'ing, and a deal would be struck.
That's still how it goes in much of the country, but in Toronto the system has been turned on its head. Homes are now routinely listed at a price well below what the seller and realtor hope to achieve. A fixed date is set for bids to be tabled. On the specified date, the realtor and seller review the bids and strike a deal with the highest bidder. Here's the thing: none of the bidders knows what anyone else is prepared to pay. It's quite possible to outbid the next best buyer by tens of thousands of dollars, and hence end up paying far more than the seller would in fact have been prepared to settle for.
It's self-evidently a wildly unfair approach, but is there a better alternative? Today's Toronto Star suggests one: the open auction system used in Australia, as explained by a former Australian realtor now living in Canada. The system basically sees a short marketing period for the house that's being sold, after which interested buyers assemble, customarily at the house itself, and bid openly against each other until a winner emerges. It's all transparent and sensible. It would not necessarily prevent house price bubbles, especially in an ultra low rate environment, but it would ensure that buyer and seller in each transaction entered into the deal with full information to hand.
The Star reporter asks the Aussie realtor an obvious question: why hasn't Canada moved to a more open auction system? The reply in part: "It's a bit of a head-scratcher for people here. It's agents that don't get it as much as anything". Oh, the agents get it all right, and the key thing that they get is revealed in response to an earlier question: "The seller pays the agent a percentage -- usually 0.5 percent to 1 percent -- of the anticipated value of the home to market and stage the property and hold open houses".
"0.5 percent to 1 percent"! Real estate commissions in Toronto are customarily in the area of 5 percent -- which, considering how little effort is needed to sell a home in the city these days, is money for nothing. It's no wonder the number of real estate agents in Toronto has been expanding rapidly in recent years, and it's no wonder that the industry strenuously defends the flawed system that's in place.
When I returned to Canada a few years ago, I met a local realtor at a social function and got talking about the recent sale of our home in the UK. The realtors there had compiled and published a colour brochure on the property in less than a day and sold the property, after two competing offers, in three days flat. And for this we were charged a fee of 1.25 percent. I thought the Canadian realtor was going to stuff a canape down my throat to make sure nobody else heard that. Low fee realtors exist in Canada, but they never make much inroads against the established big boys of the industry. Aussie rules would be a good idea, but is a change a'gonna come? I highly doubt it.
There's another culprit that doesn't get much mention, but maybe should: the machinations and sheer venality of realtors. Time was, a seller would hire an agent and put the house up for sale at a price that was realistic or maybe slightly ambitious. The realtor would put the home on the Multiple Listing Service (MLS) so that other realtors could have a crack at selling it for a portion of the commission. Then a buyer would come along with an offer at or maybe below the asking price, there'd be a bit of to-and-fro'ing, and a deal would be struck.
That's still how it goes in much of the country, but in Toronto the system has been turned on its head. Homes are now routinely listed at a price well below what the seller and realtor hope to achieve. A fixed date is set for bids to be tabled. On the specified date, the realtor and seller review the bids and strike a deal with the highest bidder. Here's the thing: none of the bidders knows what anyone else is prepared to pay. It's quite possible to outbid the next best buyer by tens of thousands of dollars, and hence end up paying far more than the seller would in fact have been prepared to settle for.
It's self-evidently a wildly unfair approach, but is there a better alternative? Today's Toronto Star suggests one: the open auction system used in Australia, as explained by a former Australian realtor now living in Canada. The system basically sees a short marketing period for the house that's being sold, after which interested buyers assemble, customarily at the house itself, and bid openly against each other until a winner emerges. It's all transparent and sensible. It would not necessarily prevent house price bubbles, especially in an ultra low rate environment, but it would ensure that buyer and seller in each transaction entered into the deal with full information to hand.
The Star reporter asks the Aussie realtor an obvious question: why hasn't Canada moved to a more open auction system? The reply in part: "It's a bit of a head-scratcher for people here. It's agents that don't get it as much as anything". Oh, the agents get it all right, and the key thing that they get is revealed in response to an earlier question: "The seller pays the agent a percentage -- usually 0.5 percent to 1 percent -- of the anticipated value of the home to market and stage the property and hold open houses".
"0.5 percent to 1 percent"! Real estate commissions in Toronto are customarily in the area of 5 percent -- which, considering how little effort is needed to sell a home in the city these days, is money for nothing. It's no wonder the number of real estate agents in Toronto has been expanding rapidly in recent years, and it's no wonder that the industry strenuously defends the flawed system that's in place.
When I returned to Canada a few years ago, I met a local realtor at a social function and got talking about the recent sale of our home in the UK. The realtors there had compiled and published a colour brochure on the property in less than a day and sold the property, after two competing offers, in three days flat. And for this we were charged a fee of 1.25 percent. I thought the Canadian realtor was going to stuff a canape down my throat to make sure nobody else heard that. Low fee realtors exist in Canada, but they never make much inroads against the established big boys of the industry. Aussie rules would be a good idea, but is a change a'gonna come? I highly doubt it.
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