Some Good News
By Dr. Peter Andersen
The stock market is one
of the best leading indicators for the economy and it is also closely related
to new home building and residential renovation. It provides down-payment
help for home buyers and helps to finance renovation projects. Stock market
performance is therefore an important determinant of both the ability and
willingness to buy homes and commit to renovation projects.
The good news is that the S&P/TSX is at an all-time high and about six
per cent above its year-end close. Mergers and takeovers - the product of
the liquidity boom - are partly responsible. News that American consumers
have not been held back by either the sub-prime mortgage meltdown or the bounce
in oil prices has also helped. The S&P/TSX has benefited from the revival
in commodity prices and widespread indications that the growth surge in the
world economy seems immune to the U.S. slowdown.
The
global economy
Emerging economies are now the dominant force in the global economy. They
account for more than half of the world's GDP and are growing at more than
twice the rate of the older industrial countries. Developing countries have
gone through profound structural changes this decade. They have adopted market
capitalism, integrated their economies into the global trading system, used
information technology to become part of the world's supply-chain, and effectively
expanded the world's labour force. In addition, they are generating a global
demand shock as their purchasing power increases.
Perhaps the most important economic news over the past month is the release
of the International Monetary Fund's semi-annual World Economic Outlook Report.
Its estimate for world real GDP growth in 2006 was raised to 5.4 per cent.
In addition, growth in 2007 and 2008 is now forecast to be much higher than
expected six months ago: 4.9 per cent in both years. We have not seen a growth
run this strong since the 1960s.
Canada's economic outlook
The Bank of Canada's Business Outlook Survey covers senior management of about
100 firms, selected in accordance with the composition of Canada's economy.
It is carried out on a quarterly basis. It shows a clear-cut improvement in
a number of business activity indicators (future sales, expected employment
and investment intentions). Hiring intentions declined in manufacturing, but
overall are strong across Canada.
The U.S. economy
Our view is that the U.S. economy is stronger than generally perceived. The
main risk is that the sub-prime delinquency problem might spread and produce
a credit crunch for lower-income American consumers. A large number of sub-prime
mortgage loans were originated in 2005 and 2006, and they will see rates reset
this year and next. Mortgage lending standards in the U.S. are also being
tightened now.
One reason the mortgage problem in the U.S. is unlikely to spread is the government's
response. Mass foreclosures are not welcome, especially with the approach
of the 2008 elections. Testifying to the House of Representatives Financial
Services Committee, Fannie Mae and Freddy Mac, the two largest sources of
financing for U.S. residential mortgages, pledged to help sub-prime borrowers
refinance into more affordable mortgages and avoid foreclosure.
No
sub-prime mortgage problem in Canada
The question of whether Canada faces a sub-prime mortgage problem has surfaced
because of what is happening in the United States. Fortunately, Canada's non-traditional
mortgage market is much smaller than that of the United States. It accounted
for only about five per cent of total originations in 2006, compared to over
20 per cent in the United States. Canada has not experienced the aggressive
lending practices seen in the U.S. and default rates in Canada are currently
at a low level.
The resale housing
market
Another way of comparing Canada's housing outlook with the U.S. is to look
at what is happening in the resale market. In the U.S., existing home sales
in the latest month are down by 3.6 per cent from the same month a year ago.
Average U.S. resale house prices are down by 1.3 per cent year-over-year.
Resale activity in Canada is still very strong. Seasonally adjusted transactions
in the first quarter were at an all-time high. Nationally, average resale
house prices are up by almost 10 per cent. This positive news from Canada's
resale market bodes well for the new housing market. The resale market typically
sets the tone for new home sales.
Warning signs for builders
There are some warning signs for Canada's new home builders. The inventory
of newly completed but unoccupied single and semi-detached homes has increased
to its highest level in more than five years. This suggests that supply is
beginning to outpace demand.
Housing starts are also trending lower now. They were down by more than 10
per cent year-over-year in urban areas in the first quarter. The decline is
particularly pronounced in the single-detached category. They were down by
16 per cent, while multiple-unit starts were down by only five per cent. These
latest developments are in line with our forecast, which calls for a 10 per
cent decline in total housing starts in Canada this year to 205,000 units
from 227,395 in 2006. HB
