The bad news is that US fourth quarter GDP was revised downward to show a dazzling 6.2% decline (annual rate). This was the sharpest decline since the 1982 recession. The good news is that this quarter is behind us. The main contributors to the revision were lower investment in inventories, lower exports, and weaker consumer spending on non-durable goods. From the data we have to date regarding the current quarter, it appears that real US GDP will fall by an additional 5% (annual rate). So this is as bad as it gets. In fact, we can make the point that while the US economy will remain in negative territory for the next 4-5 months, the rate at which it is declining is slowing. The 10-year US Treasury yield is just under 3%, up about a full percentage point from its December low. Back then, the 10-year yield plunged following the Fed’s announcement that it was exploring the idea of purchasing longer-term treasury securities. The recent increase in long-term rates was largely due to increased supply and a daunting federal budget deficit which will clearly be dealt with by the Fed. Rising treasury yields are complicating matters for the Federal Reserves; since higher long-term rates restrict growth. At this stage of the game, the Fed will probably look into buying these securities in order to lock-in the improvement in long-term
mortgage rates.
The issue of a de facto nationalism of American banks is clearly impacting markets. Following two injections of capital, the US Treasury will convert up to $27.5 billion of preferred Citigroup shares into common stock issued under the Capital Purchase Program. This is on top of the $45 billion allocated to Citigroup in 2008 to shore it up. The move increases the bank’s tangible common equity from $29.7 billion to $81 billion and is intended to strengthen its capital structure. This means that the government has increased its ownership of close to 36% of Citigroup’s outstanding common stock. And this is before the stress test the government will conduct on banks with over $100 billion in assets. So potentially the government can control even a larger portion of the bank.
The main point made by the White House, Treasury and the Fed regarding this issue has been that nationalization is not the issue since the government will still be a minority shareholder. With the financial system still impaired, policymakers have few choices. In Canada, the market is currently discounting only a 25 basis points rate cut by the Bank of Canada next week. The thinking here is that with the Bank being so optimistic about a robust growth in 2010 (3.8%) and given the lagged impact of monetary policy, why cut by more? But given the weakness in the US and the clear deterioration in the Canadian labour and housing markets, we might see the Bank cutting by 50 basis points. The first quarter results from Canadian banks were generally better than expected, reflecting the strength of this sector in comparison to virtually any other financial sectors worldwide. This does not mean that Canadian banks will not face challenges in the coming six months. Retail banking activity is slowing, reflecting a significant softening in demand for credit as well as rising delinquency rates. The mortgage market will probably remain flat in the coming twelve months following a 14% increase last year. And the cumulative number of personal bankruptcies will probably rise by 20% or so in the coming twelve months.
Benjamin Tal
Senior Economist
Global economic uncertainty weighed heavily on residential real estate activity in most major Canadian centres during the latter half of 2008. Although the forecast for 2009 promises more of the same, most markets are expected to
weather the storm, says RE/MAX. The RE/MAX Housing Market Outlook for 2009 examined residential real estate trends in 22 markets across the country and found that average price held up remarkably well in 2008, despite 13 centres reporting double‐digit declines in home sales. Solid gains earlier in the year likely served to prop‐up housing values at year‐end. The prognosis for housing activity in the first six to nine months of 2009 is somewhat static, given continued volatility in financial markets and the threat of recession, but as stability returns to the financial sector, housing markets are
expected to recover. Nationally, 440,000 homes are expected to change hands in 2008, down 15 per cent from record
2007 levels. Canadian housing values are expected to hover at $300,000, a nominal three percent decline from last year’s historic peak. By year‐end 2009, unit sales should match 2008 levels, while average price is forecast to fall another two per cent to $293,000. “Housing market performance will clearly be contingent on economic performance at a local, provincial, and national level in 2009,” says Michael Polzler, Executive Vice President and Regional Director, RE/MAX Ontario‐Atlantic Canada. “Issues affecting the overall economy are impacting housing markets across the country and the situation is not expected to be remedied until consumer confidence is restored. That said, we could see a bounce back as early as spring
– if inventory levels remain stable, pent‐up demand kicks into gear, and lower interest rates stimulate home‐buying activity.”
Major markets are evenly split in terms of housing performance in 2009, with 11 centres forecast to match or exceed 2008 home sales and 11 expected to slide from 2008 levels. The highest percentage increase in unit sales is anticipated in Saskatoon, where the number of homes sold is forecast to climb three per cent in 2009. Housing values are expected to hold the line in 2009, with St. John’s, Montreal, Kingston, London, Winnipeg, Saskatoon, and Regina posting modest gains in average price in 2009.
“Canada’s real estate environment is considerably more complex than it has been in recent years,” says Elton Ash, Regional Executive Vice President, RE/MAX of Western Canada. “The landscape is definitely changing ‐‐ with most markets shifting into either balanced or buyer’s territory. The shut out is over. Sellers no longer rule the roost. Opportunities exist for
purchasers like never before, including lower interest rates, greater inventory levels, the luxury of time to make decisions, and the upper‐hand at the negotiating table. Motivated vendors will need to take note of the new mindset and set their prices accordingly.” Canadian sellers are slowly adjusting to new realities. For most markets, 2008 started in balanced territory and moved into buyer’s market conditions during the latter half of 2008. The year ahead will prove challenging, especially for vendors. “While the economy will dictate real estate performance next year, it’s important to remember
that demand still exists in the marketplace,” says Sylvain Dansereau, Executive Vice President, RE/MAX Quebec. “In the midst of stock market turmoil, sold signs continue to appear on lawns across the country. With affordable lending rates and increased selection, first‐time and move up buyers with good credit may choose to play their investment strategy safe and purchase a home. The comfort of a tangible investment like real estate goes a long way in tough times.” RE/MAX is Canada’s leading real estate organization with over 18,000 sales associates situated throughout its more than 670 independently owned and operated offices across the country. The RE/MAX franchise network, now in its 35th year, is a global real estate system operating in close to 70 countries. More than 7,000 independently owned offices engage more than 100,000
member sales associates who lead the industry in professional designations, experience and production while providing real estate services in residential, commercial, referral and asset management. For more information, visit: www.remax.ca.
Eric Beauchesne, Canwest News Service Published: Thursday, September 11, 2008
OTTAWA — Canadians have been flooding into the depressed U.S. housing market, purchasing a record number of homes south of the border, and twice as many as a year earlier. Armed with what until recently was a strong currency, most were also paying cash, according to the 2008 National Association of Realtors annual profile of international home buying activity in the United States. Canadians have replaced Mexicans as the top foreign buyers of U.S. properties, the survey revealed. The surge in purchases of U.S. properties by Canadians is due to the combination of the stronger dollar, a drop in U.S. house prices, and last winter’s record snowfall, John Clinkard, a consulting economist with Reed Construction Data, said in an analysis of the report Wednesday.
The annual report, based on a survey of U.S. realtors, found that in the 12 months ended last May, nearly a quarter of foreign buyers of U.S. properties were from Canada, double the proportion of a year earlier, reflecting both a surge in Canadian buyers to a record high and a drop in purchases by other foreigners.
“Condominiums were most popular among those foreign buyers from Canada,” it said, noting that nearly half of all properties purchased by Canadian buyers were condominium apartments.
Florida and Arizona were the most popular states for Canadian buyers, accounting for more than 60% of their purchases. The amounts Canadians paid for their properties were relatively modest compared with other foreign purchasers. The median price — with half higher and half lower — of properties purchased by Canadians was US$277,800, well below the US$450,000 by buyers from China, and less than the US$297,000 paid by all foreign buyers. Among the six top nationalities of foreign buyers of U.S. properties, only Mexicans paid a lower median price than Canadians.
Only 5.1% of Canadian buyers paid more than US$1-million. Foreign buyers, especially Canadians, were also much more likely than Americans to pay cash for their homes. “In fact, buyers from Canada were more than twice as likely to purchase a U.S. home with cash than via any other method,” it said, noting that 69% did so. That foreign buyers were more likely to pay cash for their homes may be because they tend to be relatively well off, or like Canadians, are not entitled to deduct mortgage interest payments, which makes it less attractive to take out a mortgage than it is for Americans.
Mr. Clinkard, meanwhile, predicted the shopping spree will likely cool as a result of the recent retreat in the value of the Canadian dollar, slowing income growth in Canada, and a firming of U.S. housing prices. “However, over the longer term, an increasing number of retiring Baby Boomers seeking relief from the winter chill will ensure that Canadians continue to be major foreign buyers of U.S. residential property for the foreseeable future,” he added.
