Briefing highlights
- GTA housing: When ‘stinky stuff hits the fan’
- Many other cities see sharp home price gains
- U.S. dollar weakens as Trump says it's too strong
- Loonie at about 75.5 cents
- JPMorgan Chase, Citi post higher profits
- Wells Fargo sees small profit dip
- Manufacturing sales slip 0.2 per cent
- Natale to take Rogers helm early
The bubble
Talk of an earlier-than-expected interest rate hike brings with it the threat of the “stinky stuff” hitting the fan in Toronto’s bubbly housing market.
To be sure, the Bank of Canada isn’t poised to raise its benchmark overnight rate from its current 0.5 per cent any time soon. And when it does, the cycle will be a gradual one.
But as The Globe and Mail’s Barrie McKenna reports, a stronger outlook from the central bank Wednesday has economists speculating that the first hike may come sooner than initially expected, some time earlier in 2018.
And as David Rosenberg puts it, that’s when trouble looms for inflated housing markets, in this case those in and around Toronto.
“No matter how you slice and dice it, there is a very high and widening gap between today’s home prices and where their intrinsic value is based on the underlying fundamentals,” said Mr. Rosenberg, chief economist at Gluskin Sheff + Associates.
“There can be no doubt that this differential is unsustainable, though, as is typically the case in real estate, the stinky stuff hits the fan when interest rates begin their up-cycle,” he added.
“That isn’t happening tomorrow, but is a clear and present danger in coming years.”
Nothing, Mr. Rosenberg said, is “more bubbly” than the Toronto market, where the average cost of a detached house is about equal to 13 years of median household income, compared with a decade just one year ago.
As The Globe and Mail’s Janet McFarland and Justin Giovannetti report, the latest reading of the Teranet-National Bank home price index showed another surge in March, a record 24.8 per cent in Toronto from a year earlier.
And it’s not just Toronto. This is rippling across Southern Ontario. And, for that matter, prices are rising at a fast pace in other areas, as well.
National Bank studied 26 markets, and found prices rising at a double-digit pace in almost 60 per cent of them, said senior economist Marc Pinsonneault.
“This record proportion is very similar to that observed in the United States in 2005 at the peak of the market,” he warned.
His colleague, National Bank chief economist Stéfane Marion, wondered in a research note if this might be Canada’s version of “irrational exuberance,” a reference to Alan Greenspan’s dot-com warning when he chaired the Federal Reserve.
“Even if Canada continues to enjoy some of the best demographics in the OECD, home price inflation appears to be running ahead of fundamentals,” Mr. Marion said.
Here’s National Bank’s breakdown of March price gains from a year earlier:
Oshawa, 29.4 per cent
Barrie, 27.2 per cent
St. Catharines-Niagara, 26.5 per cent
Toronto, 24.8 per cent
Hamilton, 21.5 per cent
Kitchener-Cambridge-Waterloo, 21.2 per cent
Peterborough, 19.1 per cent
Abbotsford-Mission, 19.1 per cent
Brantford, 18.1 per cent
Victoria, 18 per cent
Guelph, 15.8 per cent
Kelowna, 13.5 per cent
Windsor, 13.4 per cent
Vancouver, 12.2 per cent
London, 11.5 per cent
Sudbury, 6.5 per cent
Ottawa-Gatineau, 5.3 per cent
Halifax, 4.1 per cent
Montreal, 3.5 per cent
Thunder Bay, 2.4 per cent
Winnipeg, 2.2 per cent
Calgary, 1 per cent
Kingston, 0.9 per cent
Prices fell 2.8 per cent in each of Edmonton and Quebec City. And St. John’s registered a drop of 1.9 per cent, as of February rather than March.
The Bank of Canada has already warned of the sharp rise in high-ratio mortgages, particularly those where the loan-to-income ratio exceeds 450 per cent, in Toronto and some nearby communities.
It warned again Wednesday of rising debt burdens and home prices, in Toronto and elsewhere.
“The overall ratio of debt to disposable income is expected to edge higher,” the central bank said in its monetary policy report.
“Housing market activity has been very strong in some segments of the national market,” it added.
“In particular, resales and [housing] starts have increased significantly in the Greater Toronto Area (GTA) and in parts of the Golden Horseshoe region. Price growth in the GTA has accelerated and seems to have entered a phase in which speculation is playing a larger role.”
The Bank of Canada also suggested the federal government’s moves to hose down overheated markets will have some impact, at the same time citing a projected “gradual rise” in global long-term bond yields.
That would continue to push up Canadian yields to which mortgage rates are linked.
Dollar slumps
Dollar slumps
The U.S. dollar slumped in the wake of President Donald Trump talking it down.
The loonie, in turn, is at about 75.5 cents U.S. after the greenback slipped and the Bank of Canada painted a more upbeat picture of the economy Wednesday.
The U.S. dollar weakened after Mr. Trump said in an interview that it was too strong, something he has said before, that he likes low interest rates, and that he no longer plans to officially label China a manipulator of its currency.
“Typically, politicians’ currency comments have no lasting effects - the kneejerk reaction may be 50 to 100 points but it quickly fades,” said Elsa Lignos, Royal Bank of Canada’s head of foreign exchange strategy.
“The comments would have more lasting power if they drive Trump to openly look for a dove to replace Yellen, though her term is not up until October, 2018.”
As for the loonie, Ms. Lignos cited several reasons for the push higher: Stronger economic indicators, higher oil prices, and the Bank of Canada’s shift to a “neutral” stance.
U.S. bank earnings kick off
America’s big banks are kicking off their quarterly earnings season:
Factories suffer down month
Canada’s manufacturing sector ended a three-month string of wins with a down month in February.
Sales slipped 0.2 per cent, driven by auto plants and oil and coal, Statistics Canada said.
Inventory levels rose 1.6 per cent, as did the inventory-to-sales ratio, and unfilled orders rose.
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