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January 2008

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Higher Housing Costs Reflect in CPI - January 25, 2008

Consumer prices increased 2.4% between December 2006 and December 2007, a slight deceleration from the 12-month change of 2.5% posted in November. According to the report issued by Statistics Canada, again this month, higher gasoline prices and mortgage interest costs were the main factors driving the increase.

A 4.4% increase in homeowners' replacement cost, which represents the cost of maintaining a housing structure, was also a contributing factor. This component has been decelerating since July 2007. December's increase was the slowest recorded since April 2002.

Over the last six months, the slowdown in homeowners' replacement cost has been especially pronounced in Alberta. In December 2007, this cost rose only 9.0% for Albertans, well below the record gain of 48.6% in September 2006.

On a provincial basis, consumer prices decelerated in Alberta, where the 12-month increase was 4.1% in December compared with 4.7% in November. This slowdown can largely be explained by a 12.5% decline in natural gas prices in December following a 3.2% drop in November.

In Saskatchewan, the increase in consumer prices was 3.7% in December compared with 4.0% in November. A slowdown in homeowners' replacement cost contributed to the deceleration in consumer prices in Saskatchewan. The 12-month increase in homeowners' replacement cost slowed to 41.9% in December, down from the 43.7% rise reported in November. This component exerted the strongest upward pressure.

The 12-month increase in consumer prices of 1.2% in British Columbia was the weakest observed since October 2006. Gasoline prices there rose only 6.3%, the slowest gain of any province.

The fastest accelerations in the CPI occurred in Manitoba, where prices in December were up 2.0% compared with 1.7% in November, and in Nova Scotia, where the growth rate rose from 2.8% to 3.1%. In both provinces, the main contributor was a substantial increase in gasoline prices, which rose 16.2% in Manitoba and 14.7% in Nova Scotia.

BC Housing Prices Expected to Moderate - January 24, 2008

Retaining its title as the least affordable province in Canada in which to purchase a home, British Columbia's housing affordability is expected to improve modestly in 2008, according to a new housing report issued today by RBC Economics.

"B.C.'s housing market moved into uncharted territory last year as affordability deteriorated to its worst levels since we started tracking conditions back in 1985," said Derek Holt, assistant chief economist, RBC. "We expect affordability rates to see some modest improvements in 2008 as the province's housing market reached a peak stress point late last year."

The RBC Affordability measure for British Columbia, which captures the proportion of pretax household income needed to service the costs of owning a home in the province, deteriorated across all housing segments as the detached bungalow moved to 67 per cent, the standard two-story home to 71 per cent, the standard townhouse to 50 per cent and the standard condo to 36 per cent. Slower demand, coupled with a downward trend in the sales-to-listing ratio, has helped ease some of the upward pressures on B.C. home prices. As a result, price gains have started to level off, dropping from 18 per cent in 2006 to 12 per cent last year. An even softer rate of eight per cent is expected for 2008.

In Vancouver, affordability deteriorated across all housing segments in 2007, but the pace slowed significantly mid-year. The combination of more modest house price growth and improved income growth helped restrain the affordability deterioration. The city's housing market remains robust, with annual price growth around 12 per cent and the sales-to-listing ratio skewed towards sellers. However, with an increased supply of homes on the market helping to moderate price gains, Vancouver should see some affordability relief later in the year.

The Housing Affordability measure, which RBC has compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condo. The higher the reading, the more costly it is to afford a home. For example, an Affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household's monthly pre-tax income.

The report also looked at mortgage carrying costs relative to incomes for a broader sampling of cities across the country, including Victoria. For these smaller cities, RBC has used a narrower measure of housing affordability that only takes mortgage payments relative to income into account. RBC's Affordability measures for a detached bungalow for Canada's largest cities are as follows: Vancouver, 72 per cent, Calgary, 46 per cent, Toronto, 46 per cent, Montreal, 37 per cent and Ottawa, 32 per cent.

Bank of Canada Lowers Interest Rate - January 22, 2008

As was widely expected by most economists, the Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 4 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 4 1/4 per cent.

In the second half of 2007, the Canadian economy grew broadly in line with the Bank's expectations in the October Monetary Policy Report (MPR). Despite some slowing in growth in the fourth quarter, the Canadian economy continues to operate above its production capacity. Both core and total CPI inflation have been lower than projected in the MPR, largely reflecting a price-level adjustment related to increased competitive pressures in the retail sector stemming from the level of the Canadian dollar.

Financial market conditions have deteriorated since October, leading to a tightening of credit conditions in industrial countries. Given this, and a deeper, more prolonged decline in the U.S. residential housing sector, the 2008 outlook for the U.S. economy is now significantly weaker than at the time of the October MPR.

For Canada, the effects of the weaker U.S. economic outlook will lead to additional downward pressure on export growth. However, despite tighter credit conditions, domestic demand in Canada is projected to remain strong. This strength is supported by continued income growth associated with the increase in commodity prices since October, which has led to further gains in our terms of trade.

Overall, the Bank now projects weaker growth in 2008 than was expected in October, with the economy moving into modest excess supply in the second quarter of this year. Somewhat stronger growth in 2009 brings the Canadian economy back into balance in early 2010. The inflation projection has also been revised down since October, especially for 2008, primarily reflecting the price-level adjustment noted above and the recent one-percentage-point cut in the GST. Both core and total CPI inflation should fall below 1 1/2 per cent by the middle of this year before returning to the 2 per cent target by the end of 2009. On the whole, the Bank judges that the risks to this inflation projection are roughly balanced.

In line with this outlook, the Bank has decided to lower the target for the overnight rate and further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to return inflation to target over the medium term.

Variable or Fixed Mortgages - Which is Better - January 22, 2008

The Bank of Canada's decision today to cut its key interest rate by a quarter point comes at a time when a lot of Canadians are wondering how current trends in the overall economy will impact their bottom line. For most of us, our home is our biggest investment and many are reading the headlines wondering what, if anything, they should do with their mortgage.

Gary Siegle, regional manager with Invis suggests some helpful approaches for those who own homes and those who are thinking of buying real estate soon. For homeowners who now have a variable-rate mortgage, Siegle advises sticking with this type of mortgage for the time being.

"For those with variable mortgages, falling rates mean more opportunity to pay down their mortgage," he says. "If your variable mortgage is the type with unchanging monthly payments, a rate reduction means more of your money is going towards paying down your debt. If your payments are reduced in tandem with rates, consider keeping your payment the same, to attack the mortgage principal faster." This advantage also applies to borrowers with lines of credit based on the prime rate.

For homeowners currently in a fixed-rate mortgage, it can pay to fine-tune how they make their payments. Switching from regular monthly payments to accelerated bi-weekly payments can offer a way to pay down debt more quickly and save significantly on interest costs over the life of the mortgage.

On a $200,000 fixed-rate mortgage at a now-competitive 5.99 percent, monthly payments would be $1,278.42. Over the 25 years of this mortgage the borrower would pay a total of $183,529 in interest. With the same mortgage but with accelerated bi-weekly payments, the borrower would pay $639.21 every second week, and save $33,923 in interest and pay off the mortgage in just over 21 years.

Siegle adds this advice: "Borrowers who have a fixed-rate mortgage that is coming up for renewal should talk with a mortgage broker, to make sure that they are being offered a competitive rate," he says.

For homebuyers looking at getting a variable-rate mortgage, Siegle asserts that this is a good approach in the current interest rate environment. Variable rate mortgages have historically offered greater interest savings over the long term but require homeowners to keep an eye on interest rate trends.

Not sure if you should "lock in" your monthly payment? A variable-rate mortgage will allow you to monitor rates while having the option to convert to a fixed-rate mortgage at a later date. For homebuyers wanting to go with a fixed rate, this is the mortgage strategy preferred by most borrowers (72 per cent according to a 2007 study by the Canadian Association of Accredited Mortgage Professionals), as it offers stability in a shifting interest rate environment.

Siegle notes that rates on fixed mortgages have been fairly steady in recent weeks, although he adds that mortgage shoppers can't go wrong with a mortgage pre-approval with a rate hold. "If rates drop, you'll benefit from the new, lower rate. If rates on fixed mortgages rise during the rate hold, you still have your original lower rate." A mortgage broker will often be able to obtain a rate hold for a 120 day period.

Non-Res Construction Investment Sets New Record - January 17, 2008

Investment in non-residential building construction set a seventh consecutive annual record in 2007, thanks largely to huge gains in the construction of office buildings in Alberta and British Columbia according to a report filed this morning by Statistics Canada. Investment in commercial, industrial and institutional projects hit $39.8 billion, up 10.8% from 2006.

Furthermore, the outlook for 2008 remains positive with more than 12,000 of major projects under construction for a value of $21.5 billion, an increase of 4.0% compared with the same period of 2006. In constant dollars, annual investment was up 1.5% from 2006 to a record high of $29.2 billion.

Two components contributed to the gain in 2007. Commercial investment rose 18.3% from 2006 to a record $23.8 billion, while institutional investment was up 3.9% to $10.4 billion, also a record. Industrial investment declined 3.4% to $5.6 billion.

Western Canada's dynamic economy continued to spark the non-residential sector. Alberta and British Columbia alone accounted for more than 80% of the total increase in non-residential investment nationally in 2007. In both provinces, commercial projects dominated investment.

Among other contributing factors were low vacancy rates for office buildings in large urban centres, strong consumer demand for durable goods and high corporate profits, in particular for banks and the oil and gas industry.

On a quarterly basis, investment hit $10.4 billion in the last three months of 2007, up 2.4% from the third quarter and the 19th consecutive quarterly increase. This gain was mainly the result of sustained commercial investment in Alberta and Central Canada. All three components contributed to the increase.

Overall, six provinces recorded fourth-quarter gains, but the biggest increases, in dollars, occurred in Ontario, Alberta and Quebec. In all three provinces, total investment reached record highs and was due mostly to the construction of major office buildings already underway. Of the 34 census metropolitan areas (CMAs), 21 showed gains in the fourth quarter, with Toronto and Calgary showing the largest increases (in dollars). Both set a record high.

In contrast, Ottawa posted the biggest decline as a result of a decrease in all three components.

Commercial component: Heavy investment in Western and Central Canada

Commercial investment increased for the 20th consecutive quarter, reaching $6.3 billion during the last three months of 2007, a 2.9% increase from the third quarter. That sent commercial investment to a record level for the year as a whole, thanks to huge spending on new offices, and retail and wholesale buildings in Alberta, British Columbia and Central Canada.

At the provincial level, the biggest fourth-quarter gains in dollars occurred in Alberta, Ontario and Quebec. All three provinces set record highs. In contrast, Manitoba experienced a decrease for a third consecutive quarter, dropping by 18.7% to $101 million.

Among the CMAs, 20 of 34 registered increases in the last three months of 2007. Calgary experienced the greatest gains, followed closely by Toronto. Winnipeg showed the largest drop (-21.7%), which was a third consecutive quarterly decline. This was the result of lower spending on major commercial projects reaching completion at the end of 2007.

Several economic factors were consistent with a fertile environment for the commercial sector, including vigorous growth in retail and wholesale sectors, and low vacancy rates for office buildings in major urban centres.

Record fourth-quarter investment in institutional buildings

Investment in institutional building construction reached a record $2.7 billion in the fourth quarter, up 0.7% from the previous three months. Fourth-quarter investment increases were shared by five provinces and two territories. Quebec recorded the largest gain in dollars, a fourth consecutive quarterly gain, as a result of significant spending on the construction of educational and health care buildings.

In contrast, British Columbia posted the largest reduction in dollars. This decrease was the result of institutional construction projects started at the end of 2005 and early 2006 and now mostly completed.

Of the 34 CMAs, 17 posted increases. Toronto and Montréal posted the highest fourth-quarter gains, the result of higher spending on projects for educational and health facilities. After 10 consecutive quarterly gains, Calgary posted the largest decline in dollars. Despite this decrease, the annual total was 72.4% higher than the level recorded in 2006.

Industrial component: Increases in the last three quarters

Industrial investment reached $1.5 billion in the fourth quarter, up 3.5% from third quarter, and a third consecutive quarterly increase. This increase was due to strong spending on the construction of maintenance and primary buildings in seven provinces. Despite the fourth-quarter gain, total industrial investment for the year fell 3.4% because of a drop in spending in six provinces.

At the provincial level, the largest contribution to the quarterly increase (in dollars) occurred in Ontario. This reflected a higher number of major projects for manufacturing plants, utilities and maintenance buildings that began in 2006 and 2007.

Following two quarterly gains, Quebec posted the largest decline (in dollars), as investment in manufacturing and utilities buildings categories dropped. This decline was the result of several industrial projects, which started in 2005 and 2006 and are now mostly completed.

Manufacturers continued to face increased production costs, stronger global competition and the appreciation of the Canadian dollar in the fourth quarter. Even so, they were optimistic about the outlook for production, according to Statistics Canada's Business Conditions Survey for October 2007.

Of the 34 CMAs, 20 posted increases. Toronto posted the highest fourth-quarter gains, as a result of higher spending on the construction in manufacturing, maintenance and utilities buildings.

For the second consecutive quarter, Calgary registered the most significant decline in dollars, in the wake of a drop in the majority of industrial construction building categories.

BC Economy Expected to Maintain Modest Growth - January 11, 2008

British Columbia's economic growth is on track and expected to come in at 2.5 per cent in 2008 and three per cent in 2009, but continues to face long-term pressures on future economic growth, according to a provincial economic outlook released today by RBC.

"Several of British Columbia's key cyclical growth drivers are at turning points, capital spending will likely peak over the next few years, vulnerable exports are being hit, and the pine beetle threat still looms," said Craig Wright, senior vice-president and chief economist, RBC. "Growth will slow as the balance of risks to the province's economy over the long term has swung more towards the pessimist's camp."

According to the report, public capital spending is expected to have peaked in 2007 at $5.5 billion. However, it will remain at around $5 billion in 2008 but this is not expected to have as positive a growth impact as it has had over the past five years. This softening will also amplify the effects of a slowdown in other critical sectors like forestry and energy. Relative to a $200-billion economy, there is a record high $135 billion earmarked for capital projects, good news for BCdex members. However with half the projects already under construction, the remaining proposed projects will represent only modest stimulus for the economy over the next decade. Construction and landscaping companies who have started during the last decade have experienced only the boom and should make every effort to solidify their name and reputation at this time in preparation for leaner times to come.

Exports remain under pressure and were down about six per cent for most of last year, primarily due to the U.S. housing slowdown and soft lumber and natural gas prices. Pulp producers, however, are the noticeable exception to this bleak export picture. A bullish pricing environment and strong global demand will help pulp producers, but excess global capacity coming on stream may dampen prices later in the year.

Across Canada, Alberta leads all provinces with above-average economic growth, followed by Saskatchewan and Nova Scotia. On the opposite end of the scale, and showing a complete turnabout with its mega-projects now in maturation, Newfoundland and Labrador is posting the slowest economic growth rate of 0.5 per cent, and on its heels is P.E.I., as well as Quebec and Ontario with its manufacturing woes. However, a more bullish outlook is in store by the end of this decade for Newfoundland and Labrador, New Brunswick, Nova Scotia and, in particular, Saskatchewan, where there is a possibility for a triple play of diamond mining, rich uranium deposits and a massive oil strike in the southeastern part of the province.

The RBC Economics Provincial Outlook assesses the provinces according to economic growth, employment growth, unemployment rates, personal income growth, retail sales, housing starts and the Consumer Price Index.

BC Building Intentions Drop Significantly - January 10, 2008

The value of building permits across the country fell in November but still remained slightly above the $6-billion mark for a seventh consecutive month however the drop off in building intentions was much more pronounced in British Columbia.

Municipalities issued building permits worth $6.0 billion, down 9.9% from October. Fewer construction intentions for both residential and non-residential buildings contributed to the decline in November according to a report issued this morning by Statistics Canada.

On a year-to-date basis, the total value of building permits issued by municipalities from January to November hit $68.1 billion, up 12.4% from the total for the first 11 months of 2006. This total was also 2.8% higher than the previous annual record of $66.3 billion set in 2006. The strong results came from gains in both residential and non-residential sectors.

In the non-residential sector, intentions fell 17.5% to $2.2 billion in November. A rise in industrial construction intentions was insufficient to offset strong decreases in the commercial and institutional components.

The residential sector followed suit with a 5.0% decline to $3.9 billion. A slight gain in single housing could not make up for a dive in the multi-family component. Municipalities approved 19,659 new units, down 4.3%.

November's decline in the total value of permits was spread across the country as every province, except for Newfoundland and Labrador and Manitoba, recorded decreases.

Housing sector: Decline in demand for multi-family units

The value of permits for multi-family dwellings fell by 15.2% in November to $1.4 billion, an amount close to the 2007 monthly average. The number of multiple-family units approved decreased 7.9% to 9,914. Single-family permits increased by 1.8% to $2.5 billion. The number of new single units authorized remained virtually unchanged (-0.2%).

Strength in employment, growth in disposable income, tight apartment vacancy rates in certain centres and attractive financing options continued to affect positively the housing sector. However, the deterioration of housing affordability due to the growth in prices for new housing and the recent increases in mortgage rates could erode demand.

Provincially, the largest decrease (in dollars) occurred in British Columbia, where the value of housing permits fell 28.5% to $611 million. The drop originated from a 49.7% decrease in the value of multi-family permits. Quebec followed with a drop of 8.8% to $735 million, as a result of decreases in both the single and multi-family components.

In contrast, Alberta experienced the largest gain among the province with an increase of 13.3% in residential intentions. This gain originated from both single and multi-family housing.

For the first 11 months of 2007, the value of housing permits totalled $41.5 billion, up 10.5% from the same period in 2006. The gain was fuelled by growth in both the single-family (+8.6%) and multi-family components (+14.2%).

Non-residential sector: Construction intentions at their lowest level in seven months

The value of non-residential permits plunged in November to its lowest level since April. This drop came after the value of non-residential permits surged 19.8% in October, thanks to large commercial projects in Calgary.

Commercial intentions tumbled 32.5% to $1.1 billion in November, the lowest level since February. The drop was largely fuelled by a decline in permits for office buildings and by smaller decreases in retail trade buildings and warehouses.

Following a 30.6% gain in October, the value of institutional permits decreased 14.1% to $581 million. The decline was spread across various types of institutional buildings (schools, nursing homes, administrative buildings, churches).

In contrast, the industrial component climbed 47.9% in November as the value totalled $495 million, halting three consecutive monthly declines. Construction projects for manufacturing buildings fuelled the increase in November.

Following peaks in May and June, the value of non-residential permits has been on a downward trend because of lower levels in commercial permits. In contrast, the value of industrial and institutional permits has been on an upward trend over recent months.

Provincially, the largest decline in non-residential construction intentions (in dollars) occurred in Alberta (-36.7% to $480 million), after an exceptional month in October, as important gains in institutional and industrial permits were offset by the drop in the commercial component. Ontario followed with a sizeable 16.1% decline.

In November, gains in the non-residential sector were recorded only in Newfoundland and Labrador, Saskatchewan, British Columbia and Northwest Territories.

For the January-to-November period, the total value of non-residential permits reached $26.6 billion, up 15.5% from the same period in 2006. The total has already surpassed the annual record of $25.2 billion reached in 2006.

The three non-residential components posted marked gains in their cumulative numbers. The value of commercial permits increased 19.2% to $15.6 billion; the gain was largely fuelled by the strong demand for new office space. The value of institutional permits gained 7.0% to $6.3 billion, thanks to projects for hospitals and nursing homes. Industrial permits increased 16.0% to $4.7 billion due mostly to projects for plants.

Among the provinces, Ontario (+26.1%) showed the largest cumulative increase in non-residential construction, followed by Alberta (+19.7%) and Quebec (+15.3%). The levels in Ontario and Alberta already surpassed their annual records reached respectively in 2005 and 2006.

Low office vacancy rates in major centres, the increasing demand for health and nursing facilities and the vigorous retail and wholesale sectors contributed to generate an increase in non-residential construction projects.

Two Decade High in Housing Starts in 2007 - January 9, 2008

Housing starts in 2007 are estimated at 229,600, surpassing 2006 starts, and reaching their second highest level in nearly two decades. However, the seasonally adjusted annual rate of housing starts in December decreased to 187,500 units from November's 233,300 units, according to Canada Mortgage and Housing Corporation (CMHC).

“Growth in 2007 housing starts was driven by low mortgage rates, solid employment, income growth and a high level of consumer confidence," said Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre. “Even with the weakness in residential construction in December, new home starts are estimated at 229,600 units in 2007, surpassing 2006 levels.”

After two strong months in October and November, the volatile multiples segment and single-detached starts fell in December mainly due to harsh winter weather. Also, the seasonally adjusted annual rate of urban starts decreased 23.2 per cent to 151,600 units in December, compared to November. Urban singles were down 12.6 per cent to 85,600 units in December, while multiple starts decreased 33.7 per cent to 66,000 units.

In December, the seasonally adjusted annual rate of urban starts increased in two of Canada’s five regions. Urban starts registered an increase of 3.4 per cent in Quebec and 1.2 per cent in the Atlantic region. British Columbia, Ontario and the Prairies all recorded a decline in activity for December (-36.7 per cent, -33.1 per cent, and -17.1 per cent respectively). Urban single starts were down in all regions except the Atlantic and British Columbia, while only Quebec saw an increase in urban multiple starts.

Rural starts were estimated at a seasonally adjusted annual rate of 35,900 units in December.

For the year 2007, actual starts, in rural and urban areas combined, increased by an estimated 1.0 per cent compared to 2006. In urban areas, actual total starts in 2007 decreased by an estimated 0.6 per cent. Actual urban single starts for 2007 were down 3.5 per cent compared to 2006, while multiple starts grew an estimated 2.1 per cent in 2007 compared to 2006.

Housing starts are expected to remain strong in 2008, but are forecast to decrease to 214,300 units.

 

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