Commercial Market back on track

Canada’s commercial mortgage market has changed drastically over the last two years, with appetite for certain sectors completely drying up and lending guidelines drastically tightening. All that seems to be on the way out, however, as recent signs point to a recovery.

Even the Globe and Mail heralded on the front page of its business section “Commercial real estate bounces back,” saying an 18-month slump in Toronto is over and that other urban centres shouldn’t be far behind – all signs that Canada’s commercial market has “de-coupled from its troubled U.S. counterpart.”

In the U.S. talk is centred on the Commercial Mortgage Backed Securities program and how it threatens to eat up bank balance sheets and potentially reverse any economic progress the country has made.
Dale Bilton, a commercial broker with Mortgage Intelligence, said that Canada is “very blessed” in that it “didn’t experience what they did in the U.S.”

He recently partook in a commercial investment roundtable hosted by CMP’s sister magazine, Canadian Real Estate, in which the theme was more about ample opportunities rather than dealing with losses. “There has been a slow down in the past year,” said Bilton. “However, my lenders that I’m dealing with, which are institutional in most cases (i.e. charter and near-charter banks) are aggressive – they have funds to put out.”

The Globe also points to stats from industry tracker RealNet Canada Inc., which show that “investments in commercial property in the Greater Toronto Area increased by 46 per cent in the third quarter over the second quarter, to $1.31-billion, while the number of transactions increased by 20 per cent,” it said.
And while the numbers may not be near 2007’s, which was closer to $3 billion, CB Richard Ellis vice-chairman John O’Bryan told the paper that it’s still encouraging.

“Before things can get better, they have to stop getting worse and start to firm up – and this is what we are seeing,” he said.

Bank Of Canada Interest Rate Decision – October 20, 2009

Strong dollar holding back recovery

Key Central Bank Rates

By Kevin Carmichael
Ottawa — Globe and Mail Update Published on Tuesday, Oct. 20, 2009 9:08AM EDT Last updated on Tuesday, Oct. 20, 2009 10:36AM EDT

The Canadian dollar’s race toward parity risks “more than fully” offsetting the benefits from a surprisingly strong recovery from recession, the Bank of Canada said Tuesday.

Explaining their decision to leave the benchmark interest rate at a record low of 0.25 per cent, policy makers said the loonie’s ascent to levels around 97 cents (U.S.) in recent weeks is hurting Canadian exporters’ ability to participate in a global economic rebound that is stronger than they expected it would be in July.

So even though a “recovery in economic activity is also under way in Canada,” policy makers actually pushed back their outlook for when inflation will return to the central bank’s target of 2 per cent to the third quarter of 2011. The reason is the dollar, which is making Canadian goods more expensive in the U.S., the country’s largest trading partner, and in international markets that tend to price in U.S. dollars.

“Heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures,” the Bank of Canada said in a statement. “The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July.”

The central bank’s latest policy statement raises the likelihood that the central bank will stick to its pledge to leave its key overnight target at 0.25 per cent until June 2010, and could stoke speculation that Governor Mark Carney will opt to leaver interest rates near zero for even longer.

That’s because the pledge is conditional on the central bank’s outlook for inflation, which it is mandated by law to keep at an annual rate of about 2 per cent. The latest inflation figures show consumer prices are actually declining, meaning the central bank has to find a way to stimulate growth to put upward pressure on prices.

“The greater persistence of slack in the economy, and attendant downward pressure on inflation, provide more reason for the Bank of Canada to delay rather than advance any tightening in policy,” Paul Ferlely, Royal Bank of Canada’s assistant chief economist, said in a note to clients.

If not for the dollar’s ascent, Canada’s recovery would be much stronger.

The central bank said global and financial developments have been “somewhat more favourable than expected” since their last quarterly economic report in July.

At home, the economy is getting a lift from low interest rates and government stimulus spending, increased household wealth, improving financial conditions, higher commodity prices and strong business and consumer confidence, the Bank of Canada said.

The Bank of Canada began chopping its benchmark overnight lending rate last October as the recession took hold. After six cuts in a row, the key rate sits at 0.25 per cent, the lowest since the central bank was founded in the mid-1930s.

Nevertheless, the stronger currency is robbing Canada of wealth generated from exports, leaving the country’s economy to operate on one engine.

“The composition of aggregate demand will shift further toward final domestic demand and away from net exports,” the central bank said.

For the short term, gross domestic product will grow faster than the central bank expected. Policy makers said growth in the second half will be “slightly higher” in the second half than previously thought, although they didn’t provide a figure.

However, over the next couple of years, growth will be lower than predicted in July. Canada’s economy is expected to expand by 3 per cent in 2010, which is unchanged from three months ago, and 3.3 per cent in 2011, which is lower than the previous forecast of 3.5 per cent.

The loonie fell more than a cent after the Bank of Canada’s release, tumbling to about 96 cents (U.S.) from 97.15 at 4.30 p.m. (EDT) yesterday, which is when the central allocates a closing value.

The comments on the dollar were the strongest yet in a verbal campaign that dates back to early June, when the Bank of Canada first raised concern that the currency could impede the recovery.

Mr. Carney’s efforts to keep speculators guessing about whether the central bank will intervene is some way to make the Canadian dollar a less profitable trade have had some success at slowing the currency’s rise.

However, lately, the loonie had appeared to have come untethered. The currency has gained about 5 per cent since the central bank’s last economic report on July 23, most of that in the last couple of weeks, as global investors become more confident about the rebound and seek better yields than are on offer in the U.S.

The central bank’s downward revision of Canada’s longer term growth prospects suggests policy makers suspect the loonie’s increase as more to do with speculators than fundamental factors such as higher commodity prices, said Michael Gregory, a senior economist at BMO Nesbitt Burns in Toronto.

When the dollar is rising along with increases in the price of commodities, the net effect on the economy is less severe, if not a wash. A gain driven mostly by speculative pressures has a net negative impact on growth, according to the central back.

By pushing out its inflation forecast, traders may begin to bet that interest rates will stay low in Canada longer than they thought, making jurisdictions where central banks are raising interest rates, such as Australia, more attractive.

Before today’s announcement, some investors were betting the Bank of Canada would raise interest rates early in 2010, according to futures contracts whose yields are based on future interest rate expectations.

The changed inflation outlook “makes it incrementally easier for the Bank to stick to its commitment” to keep the benchmark lending rate at 0.25 per cent until June, Mr. Gregory said in a report to his clients.

One on one with BMO economist John Turner

Some economists are claiming the worst of the recession is behind us. BMO expert John Turner recently spoke with CMP’s sister publication, CRE, about what this could mean for the real estate market and interest rates going forward.

There have been whispers that we may be nearing the end of the recession. Can you comment on this?

John Turner: According to BMO’s Economics Department, the whispers are turning to shouts. Canadian consumer spending has turned upwards, while the housing market has seen an astonishingly fast recovery. Financial conditions are much improved and confidence is on the mend. BMO Economics estimates that Canada’s recession ended in the third quarter, following three consecutive quarterly contractions. Aggressive monetary stimulus and hefty fiscal spending appear to have turned the economy around a little sooner than previously thought.

Do you think the Bank of Canada, by making the announcement on July 23, 2009 that the recession is over, is preparing Canadians for a rate increase (even though it said it wouldn’t for 12 months)?

JT: BMO’s economists think not. They think the Bank truly believes it won’t need to raise rates until mid-2010. The recovery, at least initially, is expected to be soft due to weak U.S. demand. The unemployment rate is expected to climb moderately further, and inflation should remain below target for a couple of years until the slack is absorbed.

It was recently reported that home sales have jumped 40 per cent between January and May 2009. Aside from low interest rates, what other factors could have contributed to buyers getting off the fence and purchasing?

JT: There are a number of contributing factors, including pent-up demand accumulated during last year’s downturn, the federal government’s tax credit incentive for first-time home buyers, a growing sense that the worst of the global economic crisis is behind us and the government’s insured mortgage purchase program which kept the credit taps flowing.

Of course, with interest rates being relatively low, this means lower mortgage payments for both first-time homebuyers as well as others. In some areas, prices have been holding steady and/or decreasing with recent market compression; this has led to better access to homeownership, which is a great investment. Everyone needs a place to live, and buying a home not only fulfils that need but also acts as an important component of a wealth accumulation strategy.

How might the forecasted increase in housing starts affect the real estate market from a buyer’s perspective?

JT: BMO’s economists expect housing starts to trend higher as the economy recovers, but remain soft for a while as a result of some overbuilding during the previous boom. The rising starts will help to keep the market balanced, since it now risks shifting back to a sellers’ market if demand remains strong. The current four-month supply of resale listings is in line with, if somewhat below, historic norms.

The age old debate of fixed vs. variable is alive now more than ever. What should buyers take into consideration when deciding?

JT: It all depends on what the buyer is comfortable with and what they’re looking for. Fixed rate mortgages are great for Canadians who are concerned about upward pressure on rates and who are looking for peace mind. With a fixed rate mortgage they get the peace of mind of knowing what their payments are going to be and how much of their mortgage they will have paid down at the end of their term.

On the other hand, variable rate mortgages – when taken over the long-term – have proven to be a winning strategy for Canadians over the last 25 years. Each buyer’s circumstances are different and we invite Canadians to speak to a BMO Bank of Montreal mortgage specialist for the best individual advice.

By CMP | Wednesday, 30 September 2009

ith mortgage rates dropping, it’s strategy time

It was a little less than a year ago that the global financial crisis began to hit home, which is to say that mortgage rates spiked higher. Now, the cost of mortgages is coming down. If you’re buying a home or renewing a mortgage, it’s time to review your options.

Fixed-rate mortgages declined a little last week, but the most dramatic changes can be seen in variable-rate mortgages. For the first time in almost a year, it’s possible to get a variable-rate mortgage at the prime rate used by most major financial institutions, which is currently 2.25 per cent.

Pre-crisis, variable-rate mortgages came with discounts that ranged from 0.75 percentage points to as much as 0.9 points off prime. By late last fall, crisis conditions prompted lenders to start charging prime plus a full percentage point or more. Now, some lenders are starting to unwind their crisis-rate premiums.

“Variable-rate mortgages are all over the map right now,” said Gary Siegle, regional manager with the mortgage brokerage firm Invis Inc. in Calgary. “We’re seeing them right in the area of prime with some lenders.”
An example of a variable-rate mortgage at prime: ResMor Trust, a small player that deals through mortgage brokers, is offering four-year variable-rate mortgages at prime in all provinces except Quebec. The catch: You have to have your mortgage approved by Sept. 30 and close the purchase within 45 days.

Can variable-rate mortgages fall back to their pre-crisis lows any time soon?
“Definitely, 100 per cent, no,” said Robert McLister, a mortgage broker and author of the Canadian Mortgage Trends blog (canadianmortgagetrends.com). “Could they get a little below prime? Definitely.” Okay, it’s strategy time. With prime at 2.25 per cent and fully discounted five-year fixed-rate mortgages going for something in the area of 3.9 to 4.1 per cent, you’re got some thinking to do if you’re buying a home or renewing a mortgage.

The variable rate looks tempting. Sure, the prime is going to rise in the medium term, but it’s expected to stay put until next spring at least. Even when prime does move higher, it will have to increase by roughly 1.75 percentage points to get to where today’s five-year mortgages are.

“The risk is obviously that rates go up a lot more,” Mr. McLister warned. “Rates went down four percentage points from December, 2007, through April, 2009. They could easily go up four – why not?” Variable-rate mortgages allow you to lock into a fixed-rate mortgage, so there’s no reason why you have to ride interest rates all the way up. Still, you have to recognize that fixed-rate mortgages could be significantly more expensive by the time you decide to lock in.

An academic study of rates between 1950 and 2007 found variable-rate mortgages were the money-saving choice over five-year fixed-rate mortgages 89 per cent of the time. If you’re willing to ride rates higher for a while in hopes of longer-term savings on interest costs, then consider a possible approach suggested by Mr. McLister.Instead of arranging a variable-rate mortgage now, go for a one-year fixed-rate mortgage. Then, when you’re renewing in one year’s time, you’ll move into a variable-rate mortgage that will ideally have a rate that is discounted below prime.

Fully discounted one-year closed mortgages today go for about 2.55 per cent, so you’re not paying much of a penalty at all compared with what variable-rate mortgages are pegged at right now. Another suggestion from Mr. McLister is to consider a three-year mortgage, which offers an attractive blend of low rates and security against interest rate surges. Three-year mortgage typically go for around 3.39 per cent on a fully discounted basis, but he knew of one small lender offering 2.9 per cent through the mortgage broker channel.

The case for going with a five-year fixed rate is that rates are very cheap by historical standards. Rates were a little bit lower last spring, but they’re not as high as they were a month or two ago thanks to a pullback in bond yields that has trickled down to fixed-rate mortgages. Mr. Siegle said over half of his firm’s clients are locking into a fixed-rate mortgage right now. “You can’t ever time the bottom of the market, but are these good rates that you can be comfortable with? A lot of people are saying, ‘yeah, they are.’ “

ROB CARRICK

Harmonized Sales Tax – what is effected

The following was passed on to me by a business associate who is a prominent local realtor.  I like what was said so I thought I would pass it along.

There are 2 things that the BC Government is counting on:

1. As British Columbian’s, we will continue to be apathetic to the proposed HST and although we will bitch about it to our friends and neighbours, we will not do anything to stop the government from implementing this tax.
2. That we will be as stupid as the government considers the voting electorate to be and by the time the next election rolls around, we will have forgotten how the Liberals lied to us (HST was not part of their platform for the May election)

If you want this tax implemented in July of 2010….simply ignore the rest of this post

If you do not want this tax implemented in July of 2010…Please contact your MLA and the Premier’s office.

SIGNING ON-LINE PETITIONS IS NOT ENOUGH   They must hear from individuals!

The Premier and MLA’s will only take notice if they are inundated with email’s, phone calls, faxes, and letters.

Find and email your MLA:        Http://www.leg.BC.ca/MLA/3-1-1.htm
Premiere’s Office   – email -    premier@gov.BC.ca
phone:   250 387-1715
fax : 250 387-0087
address:  PO box 9041, Station Provincial Government, Victoria,  BC   V8W 9E1

Listed below are a few of the items that you will be paying more for if the Liberals get their way and the HST is passed:

1. Cable TV
2. Car and home insurance
3. Chiropractors, naturopath
4. Golf Fees
5. Gym Membership
6. Gas for your car
7. Hydro
8. Haircuts
9. Heating Fuel
10. Internet
11. Income Tax Prep.
12. Legal Fees:  for wills, P.Of A., advice, etc.
13. Hockey/Football/Baseball Game Tickets
14. Home purchases
15. Home heating oil
16. Magazine Subscription
17. Movie Tickets
18. Newspapers Subscription
19. Pizza Delivery
20. Restaurant Service
21. Telephone
22. Theatre Tickets
23. Used Car purchases
24. Vacation Travel:  airline ticket and hotels
25. Veterinarian
26. Vitamins
27. Tim Hortons Coffee

There are many, many more .
Aren’t you tired of handing over your hard earned paycheck?

Please email/write/fax this government and let them know that we will not be lied to anymore….and keep writing until they start to listen.

If you agree, please forward this to every B.C. Resident in your contacts list.

Recession may be over but growth will be limited next year: CIBC

Inflation and interest rates will remain low as economy recovers

TORONTO, Aug. 25 /CNW/ – CIBC (CM: TSX; NYSE) – The recession in Canada and the U.S. may be over, but the damage it left behind means Canadian growth and inflation will be muted next year, keeping Bank of Canada interest rate hikes on the sidelines until 2011, notes a new report from CIBC World Markets.

“While the 2009 recession may already be over, the slack it created is both large and likely to persist,” says CIBC’s Chief Economist Avery Shenfeld.  “Unlike the Bank of Canada, we don’t expect growth to average above the non-inflationary potential until 2011. But even under Governor Carney’s more optimistic trajectory, inflation will still be feeling the downward pressure of a sizeable output gap next year, one as large as we saw in the early 1980s and 1990s downturns.”

Mr. Shenfeld finds that while the core inflation rate did not decelerate as much as the Bank of Canada predicted earlier this year, there are reasons to expect a further easing in core inflation ahead. “A look at the underlying components for headline and core inflation helps identify what has, in our view temporarily, prevented core inflation from easing much thus far. And part of the answer lies in what economists call, the “income effect.”

He notes that by stripping out volatile items from the CPI, the Bank of Canada’s core measure now excludes most of the items that have been deflating, much more so than in the “old” core measure that simply left out all food and energy prices. With the “volatile” measures included, headline CPI is negative, largely driven by the dive in gasoline prices from a year ago. Lower gas prices have pulled down costs for intercity transportation fares as well, which the Bank of Canada also excludes from core inflation. Other non-core items such as natural gas, fuel oil and mortgage interest costs have also eased off.

“The deep dive in non-core items, has left those Canadians still working with some spending power,” adds Mr. Shenfeld. “While nominal wages have begun to decelerate in a slack labour market, a negative year-on-year inflation rate has meant that in real terms, the buying power of the average wage has escalated. So after filling their gas tank and paying their new, lower, mortgage bills, Canadians simply have more money in their pockets when they go shopping for other items, keeping those prices aloft.”

Mr. Shenfeld notes that economic slack usually takes time in exerting its disinflationary force. Given that wages get adjusted only as contracts come up and that some prices are fixed ahead of time (as is the case for catalogues), he believes the upward pressure on prices will ease in the coming months.

“Headline inflation rates won’t be as benign as they have been,” says Mr. Shenfeld. “If crude oil hugs the $60-70 range, energy will revert from a huge negative contributor to CPI to a modest positive in early 2010, with spillovers into related products like airline fares. But by reversing the “income effects” noted above, that implies diminished buying power for other goods, contributing to a cooling in core CPI. With a lag, a strong Canadian dollar will also provide a dampening impact on retail prices for imported goods and services.

“All told, Governor Carney will not fret about the stickiness of core inflation because, given time, core prices will come down. Look for headline and core prices to cross paths in the second quarter of 2010, at a level well under the Bank of Canada’s two per cent target. As a result, Canada’s inflation rate will be no threat to the Bank easily fulfilling its pledge to keep interest rates at a slim quarter point through mid-2010. In fact, market expectations for rate hikes in the first half of 2010 could be a full year too premature.”

Unlike the central bank’s outlook, the CIBC report does not see the Canadian economy gaining much benefit from a forecast U.S. recovery. It notes that the nature of the budding recovery will be very different than what we have seen in the past, with U.S. consumer spending taking a back seat to government stimulus.

CIBC’s analysis finds that protectionist trade barriers and a tilt in U.S. stimulus spending towards industries that have less-than-average propensities to import from Canada, will dampen the benefits that this country typically sees from economic growth south of the border.

The In-Harmonious Tax (HST)

The proposed tax harmonization, planned for July 1, 2010, has caused more headache than harmony. Nearly 20 GVHBA builders and renovators attended an HST roundtable meeting last Tuesday. Topics of discussion included thresholds, rebates, indexation, transition and the expected multiplier impact on the already burgeoning underground economy.

Last Wednesday a meeting was convened at CHBA-BC to determine the provincial association’s position. Attending from GVHBA were CHBA National President Gary Friend, CHBA Canadian Renovators’ Council Chair John Friswell and yours truly. At noon today we are meeting with Finance Minister Colin Hansen to express industry concerns with the proposed harmonized sales tax. Instead of meeting independently as a local association representing a major-market residential construction industry, as invited by Minister Hansen, GVHBA will join the CHBA-BC delegation, comprised of First-Vice President Bob Deeks from Whistler and CEO MJ Whitemarsh. GVHBA leaders wish to support the CHBA-BC delegation and position as well as personally verbalize the impacts of HST on our members locally.

As you know, I have been responding to a steady stream of media questions since this bomb was dropped on July 23, expressing concerns with the HST proposal as presented and cautioning that whatever rolls out on July 1 must be tax neutral, so that home buyers and homeowners contemplating renovation will not pay any more tax under HST than they do now.

The tax burden on home buyers is growing. After calculating taxes, fees and levies imposed by the federal, provincial, regional and local governments, a new single-detached home selling for $564,933 (municipality identity withheld) was determined to have a tax component of $75,481. That’s onerous enough, but on July 1, 2010, the tax whack will be $82,974 – an increase of $7,493 or 9.9%, increasing the selling price to $572,486.

The buyer of that home (firefighter, nurse, police officer, teacher) will more than likely be lumping the lion’s share of that tax burden on a mortgage amortized over 25 years. Perhaps the builder should advertise his home as available for $489,500 – plus applicable taxes, fees, charges, levies, etc. – like the auto dealers do.

The extent of the anti-HST firestorm was likely underestimated by the provincial government. The B.C. reaction is far greater – and much more vitriolic – than the pushback when HST was announced in Ontario earlier this year. GVHBA, CHBA-BC, UDI, the Ministry of Finance Tax Policy Branch and others will meet to discuss HST technicalities, including a crucial element requiring clarification – transition rules. Interactive consultation workshops are being considered. This thorny issue has cast a dark cloud on a sunny summer.

Central banks signal low rates here to stay

OTTAWA — Despite growing confidence that economic growth is in the offing, monetary policy around the world is likely to remain “ultra-accommodative,” perhaps until 2011, as doubt remains as to whether or not the growth expected this quarter is sustainable, analysts say.

That is the view emerging following the weekend gathering of the world’s leading central bankers in Jackson Hole, Wyo., highlighted by remarks from Ben Bernanke, U.S. Federal Reserve chairman, who warned of the uncertainties ahead, and Jean-Claude Trichet, president of the European Central Bank, who suggested he is in no rush to reverse emergency stimulus measures.

“The key message from Jackson Hole was … that monetary policy is likely to remain ultra-accommodative for the foreseeable future – at least for the next several years,” said Julian Jessop, chief international economist at Capital Economics of London.

“It seems more likely that there will be no increases in interest rates in any of the major economies over the next 12 to 18 months.”

Strategists at RBC Capital Markets concurred, adding in a note released Monday: “We continue to believe the economic backdrop will warrant a significant additional period of low rates. Indeed, even at the Jackson Hole conference, there was not even a suggestion that we should be braced for anything other than that outcome.”

This outlook applies to Canada as well. Banc of America Securities-Merrill Lynch, as part of global report on monetary policy, said it does not expect the Bank of Canada to begin raising rates until 2011 – well past its pledge to keep the key policy rate, at 0.25%, until June 2010.

Canada has a significant output gap – the difference between potential and real gross domestic product – and the rate at which money is deployed in the economy, or money velocity, has shrunk 15% since late last year even though the central bank has taken its target rate to its lowest possible level, the BofA-Merrill Lynch analysis indicates.

“To compensate, we think the Bank of Canada will probably need to keep rates lower … to ensure that money creation remains in the double-digit [growth] territory needed to reinflate the economy and close the output gap,” the report says.

This outlook is similar to what economists at Laurentian Bank Securities suggested last week. They said a lack of pricing power for firms, a sizeable amount of excess supply and virtually non-existent upward pressure from labour costs means the bulk of policy tightening would not materialize until 2011.

The Bank of Canada signalled in its last economic outlook that it expected economic growth to resume this quarter, marking, technically, the end of a deep but relatively short recession.

It expects growth this quarter of 1.3%, 3% in the final three months of 2009, and the latter again in 2010. Further boosting the recovery story was data from Japan, Germany and France that indicated economic growth in the second quarter.

But there are growing concerns about the sustainability of this emerging recovery.

In a note published last week, Olivier Blanchard, chief economist of the International Monetary Fund, warned of a difficult recovery that would take years to unfold as elements of the financial system remain dysfunctional.

Of particular concern in his outlook was the source of demand once governments phased out fiscal stimuli. The worry is that U.S. business investment and household spending would remain weak, and Asian economies would fail to pick up the slack.

Still, some leading central bankers warn about leaving interest rates too low too long.

Masaaki Shirakawa, governor at Bank of Japan, told his peers at Jackson Hole that policymakers must avoid economic bubbles fostered by expectations that interest rates will remain low.

“Shirakawa’s point about the need to prevent future bubbles is weighing more on minds of central bankers, so maybe they do have to be a little more careful,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

Paul Vieira, Financial Post, with files from Reuters  Published: Monday, August 24, 2009

Recession may be over but growth will be limited next year: CIBC

TORONTO, Aug. 25 /CNW/ – CIBC (CM: TSX; NYSE) – The recession in Canada and the U.S. may be over, but the damage it left behind means Canadian growth and inflation will be muted next year, keeping Bank of Canada interest rate hikes on the sidelines until 2011, notes a new report from CIBC World Markets.

“While the 2009 recession may already be over, the slack it created is both large and likely to persist,” says CIBC’s Chief Economist Avery Shenfeld.  ”Unlike the Bank of Canada, we don’t expect growth to average above the non-inflationary potential until 2011. But even under Governor Carney’s more optimistic trajectory, inflation will still be feeling the downward pressure of a sizeable output gap next year, one as large as we saw in the early 1980s and 1990s downturns.”

Mr. Shenfeld finds that while the core inflation rate did not decelerate as much as the Bank of Canada predicted earlier this year, there are reasons to expect a further easing in core inflation ahead. “A look at the underlying components for headline and core inflation helps identify what has, in our view temporarily, prevented core inflation from easing much thus far. And part of the answer lies in what economists call, the “income effect.”

He notes that by stripping out volatile items from the CPI, the Bank of Canada’s core measure now excludes most of the items that have been deflating, much more so than in the “old” core measure that simply left out all food and energy prices. With the “volatile” measures included, headline CPI is negative, largely driven by the dive in gasoline prices from a year ago. Lower gas prices have pulled down costs for intercity transportation fares as well, which the Bank of Canada also excludes from core inflation. Other non-core items such as natural gas, fuel oil and mortgage interest costs have also eased off.

“The deep dive in non-core items, has left those Canadians still working with some spending power,” adds Mr. Shenfeld. “While nominal wages have begun to decelerate in a slack labour market, a negative year-on-year inflation rate has meant that in real terms, the buying power of the average wage has escalated. So after filling their gas tank and paying their new, lower, mortgage bills, Canadians simply have more money in their pockets when they go shopping for other items, keeping those prices aloft.”

Mr. Shenfeld notes that economic slack usually takes time in exerting its disinflationary force. Given that wages get adjusted only as contracts come up and that some prices are fixed ahead of time (as is the case for catalogues), he believes the upward pressure on prices will ease in the coming months.

“Headline inflation rates won’t be as benign as they have been,” says Mr. Shenfeld. “If crude oil hugs the $60-70 range, energy will revert from a huge negative contributor to CPI to a modest positive in early 2010, with spillovers into related products like airline fares. But by reversing the “income effects” noted above, that implies diminished buying power for other goods, contributing to a cooling in core CPI. With a lag, a strong Canadian dollar will also provide a dampening impact on retail prices for imported goods and services.

“All told, Governor Carney will not fret about the stickiness of core inflation because, given time, core prices will come down. Look for headline and core prices to cross paths in the second quarter of 2010, at a level well under the Bank of Canada’s two per cent target. As a result, Canada’s inflation rate will be no threat to the Bank easily fulfilling its pledge to keep interest rates at a slim quarter point through mid-2010. In fact, market expectations for rate hikes in the first half of 2010 could be a full year too premature.”

Unlike the central bank’s outlook, the CIBC report does not see the Canadian economy gaining much benefit from a forecast U.S. recovery. It notes that the nature of the budding recovery will be very different than what we have seen in the past, with U.S. consumer spending taking a back seat to government stimulus.

CIBC’s analysis finds that protectionist trade barriers and a tilt in U.S. stimulus spending towards industries that have less-than-average propensities to import from Canada, will dampen the benefits that this country typically sees from economic growth south of the border.

Canada’s resale sales through the roof

Sales of exisiting home sales in Canada jumped 31.5%

Sales of existing homes in Canada jumped 31.5% in the second quarter from the previous one – their first year-over-year quarterly increase since before the peak of the financial crisis, the Canadian Real Estate Association said this week.

The industry group said actual home sales totaled 147,351 units in the second quarter of 2009, up 1.4% from the same quarter of 2008.

Home sales rose 8.7% in June from May on a seasonally adjusted basis. They were up 17.9% from June 2008, using non-seasonally adjusted figures.

“This is on par with the record for the month of June, set in 2007, and is the fourth highest ever for activity in any month on record,” CREA said in a report.

A total of 41,304 homes changed hands in the month.

The report is the latest piece of evidence showing that consumers are venturing back into the home market, encouraged by low mortgage rates and signs that the worst of the recession is over.

“The recovery in the Canadian housing market continued in earnest in June …,” said Millan Mulraine, economics strategist at TD Securities.

“With prices remaining quite favorable and low borrowing rates enhancing affordability, it is likely that this uptick in sale activity may continue for some time as the recovery in the housing sector takes hold,” he said.

The average home price rose 3.6% year-over-year to a record high $326,613 in June.

On a quarterly basis, the average price was up 0.5% from a year earlier to $318,696.

But CREA said strong sales activity in a handful of very expensive markets was distorting the national average to make prices look unusually high.

Sales growth in Vancouver, Toronto, Montreal, Calgary and Edmonton contributed most to the national increase.

The inventory of unsold resale homes – measured as the number of months it would take to sell the stock of houses at the current sales rate – fell to its lowest level since August 2007 at 4.2 months.

Reuteurs – National Post