Thursday, June 29, 2006

Interest Rates - Inflation and the Canadian Economy


Both Canadian inflation and retail sales surpass expectations
Odds of a further BoC hike increase, but outcome will hinge on future data
Even though the Stanley Cup will remain in the United States for another season, the spotlight on economic data swung back to Canada this week, revealing a few more pieces of the economic puzzle facing the Bank of Canada. Unfortunately, the picture has become increasingly murky as stronger-than-expected readings for both inflation and retail sales joined the spectacular May employment report released two weeks ago in stoking fears that the Bank would plow ahead with a further rate hike at their upcoming Fixed Announcement Date (FAD) on July 11th. This stands in stark contrast to the extremely dovish message conveyed in the May 24th communiqué which suggested that the tightening cycle was complete. This week presented an ideal opportunity for the Bank to express any change in this view during Governor Dodge’s speech and subsequent press conference on Wednesday. However, the Governor stuck to his guns and urged calm in the face of the recent volatility. He went on to say that the evolution of economic data since the last FAD has remained consistent with the overall outlook articulated in the latest Monetary Policy Report. Taking the Bank at their word, a case can be made to leave rates on hold once you dig into some of the details underlying the headline figures. However, the final decision will likely depend on the evolution of the data between now and the decision date.

Inflation risks far from clear

From the perspective of financial markets, the strongest piece of evidence supporting a further rate increase was the CPI report for the month of May. While energy prices continued to fuel total inflation, the real surprise was a sharp increase in the core rate of inflation, which hit a year-over-year growth rate of 2.0% – four tenths of a percentage point higher than the rate observed in April and the strongest yearly increase since December 2003. While much of this jump was due to a surge in the homeowners’ replacement costs, the effect of a regulated increase in Ontario electricity prices also played a role.

This highlights a quirk in the Bank of Canada’s definition of core inflation. Whereas traditional core simply excludes the effects of all food and energy prices, the Bank of Canada preferred measure excludes eight of the most volatile components, which removes most, but not all energy prices. The price of electricity falls into this category since it is typically regulated and, therefore, relatively devoid of monthly volatility. However, there has been a trend towards more deregulation in the electricity markets, which has translated to greater price volatility. To assess the impact, consider the traditional calculation of core inflation, which rose by 1.7% in May, matching the increase observed in the previous month. This suggests that the underlying momentum in May’s core prices may not be as strong as the Bank’s own definition would let on.

A second force exerting upward pressure on Canada’s inflation rate in May was price pressures in Alberta. This should come as little surprise, since the boom in commodity prices has propelled the Western provinces to the top of the heap of pretty much every piece of economic data, skewing the national average higher in the process. For example, core inflation in Alberta, as measured by total inflation excluding food and energy prices (Statistics Canada does not provide a provincial breakdown based on the Bank of Canada’s definition of core) was 3.6% in May, marking the eighth consecutive month that Alberta experienced the hottest inflation amongst the provinces. What is even more interesting is that all of the other provinces in Canada were below the national average. When faced with this degree of dispersion, it is important to remember that the Bank has only one policy tool at its disposal for all of Canada and will set monetary policy with the national picture in mind. While the regional variation will be a component of the analysis, policy will not react exclusively to any one province, unless it threatens to unhinge overall inflation expectations. And, this captures the Bank’s true dilemma. A red-hot Albertan economy may create upward pressures on national measures of economic activity and prices, but further modest interest rate hikes are unlikely to cool it down, while additional tightening in policy could hit other provinces quite hard.

Consumption continues to shine

The effect of higher prices was also visible in the Canadian retail sales report, which trounced market expectations as total nominal sales increased by 1.7%. However, higher gasoline prices played a significant role, accounting for over half of the total increase. When the effect of higher prices is stripped out of the calculation, retail sales increased by a more moderate 1.2%, still indicative of a strong consumer, but not as spectacular as the 1.7% headline. As noted in the “TD Consumer Pulse” released this week, the pace of consumption is expected to wane somewhat in the coming months, but will remain healthy.

So where does all of this leave the Bank of Canada? As outlined above, there certainly have been some economic indicators that have surprised on the upside in recent weeks. However, the downside is not without representation. For example, the export side of the economy is struggling with the effect of the higher dollar and things are likely to get worse before they get better as an expected mid-cycle slowdown in the United States begins to take hold over the second half of the year. Furthermore, growth in the housing market (at least in Central Canada) has shown some signs of waning in recent months. Fortunately, the Bank does have some time to decide what to do with rates and it will receive a fair bit of data between now and then. One of the most important pieces will be next Thursday’s real GDP report, which will help reveal if the mere 0.1% growth observed in April may be a sign of things to come or just an isolated touch of weakness. Another important piece of the puzzle will be the release of June’s employment report on July 7th, which will determine if the gain seen in May was just a blip or whether the labour market really does have superhuman powers. At the end of the day, while the odds of a further rate increase have materially increased in light of the recent data, it will fall to the strength of the upcoming data to conclusively tip the balance. And, regardless of whether the Bank hikes or not in July, we believe that the end of the rate tightening cycle is close at hand

Reprinted with permission from TD Canada Trust

For more information please contact A. Mark Argentino

A. Mark Argentino Associate Broker, P.Eng.,
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc.
2691 Credit Valley Road, Suite 101, Mississauga, Ontario L5M 7A1

BUS 905-828-3434
FAX 905-828-2829

Friday, June 23, 2006

Sales of Luxury homes in residential Markets are surging across the country - says RE/MAX

Luxury homes sales surge in residential markets across the country, says RE/MAX
Affluent Canadians are fuelling unprecedented demand for luxury homes from Halifax to Vancouver this year, according to RE/MAX.

Million dollar home sales are climbing at a rate never before seen in major centres across the country. Clearly, the Canadian love affair with residential real estate is far from over – and if the market continues at this pace, existing sales records for all types of real estate, including upscale properties, will be shattered by year end.

The RE/MAX Upper End Report found that luxury home sales rose to new heights in 12 out of 13 markets in January to May 2006 compared to one year ago, with percentage increases ranging from eight per cent in Halifax/Dartmouth to as high as 177 per cent in Edmonton. Only Windsor, Ontario, where concerns over the future of the automotive industry are having an impact on real estate in general, reported a decline in sales.

The surge in upper end sales can be directly attributed to three factors. Existing homeowners cashing in on substantial equity gains to re-invest in the top end of the market; strong economic performance across the country; and solid consumer confidence levels. Limited inventory has further served to underscore the intensity of the marketplace.

Rising values and renovation have been major factors in the upper-end of the market, redefining price points and reclassifying residential neighbourhoods across Canada. Infill is occurring in virtually every older, established community located in close proximity to the downtown core – creating new upper end enclaves. Limited inventory levels in areas like Vancouver, Calgary, and Toronto are placing serious upward pressure on prices in ‘blue chip neighbourhoods,’ with many properties now selling in multiple offer situations.

Local buyers, including young professionals, corporate executives, and entrepreneurs are behind the push for upscale homes and condominiums. More and more Canadians are reaching millionaire status and that position is often reflected in their choice of a home.

 The highest-priced MLS sale in Canada this year -- $10,880,000 -- occurred in Greater Vancouver.
 The most expensive property listed for sale is a $45 million waterfront estate in Oakville, Ontario.
 Out-of-province and international purchasers are a factor in Vancouver, Victoria, Kelowna, Edmonton and St. John’s.
 Teardown and infill is occurring in Vancouver, Victoria, Calgary, Edmonton, Winnipeg, Hamilton/Burlington, Toronto, Ottawa, and St. John’s.
 Turnkey properties are most sought-after in Vancouver, Kelowna, Windsor, and Halifax-Dartmouth.
 Upper end condominiums are popular in Victoria, Kelowna, Edmonton, Winnipeg, Toronto, and Halifax-Dartmouth.


Luxury homes start at…

Sales 2005

Sales 2006

Percentage +/-


$1.5 million





$1 million





$1 million





$1 million



















London / St. Thomas





Hamilton / Burlington





Greater Toronto

$1.5 million









Halifax / Dartmouth





St. John's





** Based on local board MLS statistics (January – May), RE/MAX

RE/MAX is Canada’s leading real estate organization with over 16,060 sales associates situated throughout its more than 615 independently owned and operated offices across the country. The RE/MAX franchise network, now in its 33rd year of consecutive growth, is a global real estate system operating in over 64 countries. More than 6,375 independently owned offices engage 118,450 member sales associates who lead the industry in professional designations, experience and production while providing real estate services in residential, commercial, referral, relocation and asset management. For more information, visit:

For more information please contact Mark Argentino

A. Mark Argentino Associate Broker, P.Eng.,
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc.
2691 Credit Valley Road, Suite 101, Mississauga, Ontario L5M 7A1

BUS 905-828-3434
FAX 905-828-2829

Thursday, June 08, 2006

The Real Real Estate Market in Canada is Surging

Canada's Real Estate Market Surging

While eastern Canada's real estate market may be cooling off, the booming Western Provinces are more than making up for it. The Canadian Real Estate Association (CREA) reports that home prices were up 12.9 per cent in April compared to the same month last year. The average home sold in Canada through the MLS system cost $280,740 in April.
After prices increased by 10.2 per cent in 2005, CREA is predicting a further 6.1 per cent increase this year and another 4.7 per cent hike in 2007. Meanwhile, Canada Mortgage and Housing Corp. (CMHC) says prices will go up 11.2 this year, recording their strongest growth in 17 years. It says more balanced conditions next year will slow prices to an increase of 4.8 per cent.

RBC Economics, which has compiled a Housing Affordability Index since 1985, says rising interest rates and higher prices means the cost of home ownership rose at a faster pace than income for the last two quarters. British Columbia is the least affordable province. The home ownership costs of a detached bungalow in Vancouver was 64.4 per cent, which means that mortgage payments, utility costs and property taxes would take up 64.4 per cent of a typical household's monthly pre-tax income. In Toronto, the index was 41.7 per cent; in Montreal, 34.9 per cent; and in Calgary, 32.7 per cent.

CMHC recently published a study that used average hourly earnings data for different centres across Canada, and calculated the number of hours a person would need to work in order to bring the mortgage payment on an average house down to 30 per cent of monthly income. The 30 per cent benchmark is generally recommended to determine if you can afford to buy a house, but the CMHC study included only mortgage payments and not utilities or taxes.

It found that to own a house in Vancouver, with mortgage payments at 30 per cent of income, someone would have to work 331 hours a month. There are only 162.5 hours available in a typical work month.

Toronto required 257 hours, Calgary 186, Montreal 168, St. John's 125, and Saguenay, Quebec, 82.

The same study was conducted to see how many work hours would be required to pay rent. Toronto was the most, at 157 hours, followed by Vancouver at 153 and Halifax at 129. In Thunder Bay, Ont., fewer hours were required to own a house (97) than to rent (108).

With prices rising and affordability deteriorating, how is it that housing sales will set a new all-time record this year, according to CREA forecasts?

Even though the Bank of Canada has increased interest rates seven times since last September, mortgage interest rates are still near historically low levels.

Economist David Tulk at TD Economics says that although variable-rate mortgages are impacted by the prime lending rate, fixed-rate mortgages are tied more closely to the bond market, and they have not increased as much as the Bank of Canada rate. He says it's the level of the rate, which is still low, rather than recent changes that impacts the real estate market the most. Most economists believe the central bank's rate will not rise again for some months.

Personal income in Canada strengthened steadily throughout last year, says CMHC. The unemployment rate set a 32-year low in March and a record share of Canadians are employed, says the federal housing agency. That creates high levels of consumer confidence and strong demand for housing.

Immigration into the country is also set to exceed the target range for new permanent residents this year and in 2007, says CMHC. Newly arrived immigrants generally settle into rental housing at first, and then many move to home ownership.

More Canadians are also moving into less expensive housing as the boom in multi-unit buildings continues. "The apartment/condominium market is witnessing particularly explosive growth, having accounted for fully two-thirds of multi-family starts last year," says Adrienne Warren of Scotiabank Group. "The number of apartment starts in Canada has increased at a 15 per cent average annual rate since 1998 - three times the growth in the stock of single-detached homes, semi-detached homes or townhouses. Not since the early 1970s have we seen such an extended boom in apartment construction."

Warren says that "for many young renters contemplating home ownership, condominiums and other multi-unit developments represent an affordable entry point, and perhaps the only viable option."

Copyright © 2006 Realty Times. All rights reserved. 6/2/06
Used by permission.

For more information please contact Mark Argentino

A. Mark Argentino Associate Broker, P.Eng.,
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc.
2691 Credit Valley Road, Suite 101, Mississauga, Ontario L5M 7A1

BUS 905-828-3434
FAX 905-828-2829

Wednesday, June 07, 2006

TREB (Toronto Real Estate Board) reports May 2006 was a record month

These are the latest results from TREB (Toronto Real Estate Board) reporting that May 2006 was a record month

May breaks all-time record

TORONTO, June 5, 2006 -- More Toronto Area homes changed hands during the month of May than in any other previous single month, Toronto Real Estate Board President John Meehan announced today. The 9,434 transactions that took place during the month were two per cent higher than last May and nearly two per cent above the previous monthly record of 9,275 sales set in June 2004.

“This result is very positive for a number of reasons,” Mr. Meehan said. “We are seeing strong sales totals, yet the pace is very steady and controlled which is a good sign. This speaks to the overall health of the GTA housing market.”

The Scarborough waterfront was one of the most active areas during the month as Guildwood and Scarborough Village saw 33 per cent more transactions than during May of last year. A strong increase in sales of condominiums and townhomes helped fuel the increase, though the majority of transactions were detached homes.

Willowdale, in North Toronto, saw 25 per cent more homes change hands than during May 2005, with condominiums showing the largest increase of any housing type.

Immediately north of Willowdale just outside Toronto city limits, Thornhill showed a 34 per cent increase in overall sales compared to last May.

Ted Tsiakopoulos, regional economist for the CMHC, noted that the larger economic picture shows the Toronto real estate market is a very healthy market to be in.

“Record resale volumes in May suggest that consumer confidence remains strong. A steady pace in home price appreciation, modest rate hikes and rising incomes have kept housing demand healthy across the GTA," Mr. Tsiakopoulos said.

Mr. Meehan agreed that confidence is high. “A big reason there is so much confidence in this market is the consistency it has shown month after month. Consumers are understanding that this is a market with a strong foundation, and that there is a lot of choice out there for established homeowners and first-time buyers alike.”

Toronto REALTORS® are passionate about their work. They adhere to a strict code of ethics and share a state-of-the-art Multiple Listing Service. Its 26,220 listings resulted in May’s 9,434 sales. Serving over 23,000 Members in the Greater Toronto Area, the Toronto Real Estate Board is Canada’s largest real estate board.

For more information please contact Mark Argentino

A. Mark Argentino Associate Broker, P.Eng.,
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc.
2691 Credit Valley Road, Suite 101, Mississauga, Ontario L5M 7A1

BUS 905-828-3434
FAX 905-828-2829

Perspective: Why the latest Bank of Canada interest rate increase is insignificant

This article talks about Why the latest Bank of Canada interest rate increase is small potatoes

Just released on May 29, 2006

Since February 2005, TD Economics has forecast that a rebalancing in monetary policy would see the Bank of Canada raise its benchmark overnight rate to a peak of 4.00% in mid-2006. We stuck to this call for 15 months. However, the communiqué accompanying the April rate hike - which lifted short-term rates to our 4.00% target -suggested that the Bank was still leaning toward pulling the trigger one more time, and it delivered with a quarter point increase last week. If we had been conducting policy, rates would have been left on hold. But, like most sore losers, we’ll now argue that the last hike is no big deal.

The central bank’s latest decision has sparked a considerable amount of criticism, most of which is a bit unfair. The focus has been on the fact that rates have been increased seven times in a row, that the increase in borrowing costs has eroded housing affordability, and that rate increases have contributed to the strength in the Canadian dollar. A more sober assessment reveals two important observations: First, it is the level - not the change - in interest rates that is of critical importance to the economy. Second, the interest rates actually faced by consumers have not moved to the same degree as the Bank’s overnight rate. When these two observations are taken into consideration, it is evident that there is nothing especially damaging about the current conduct of monetary policy and while we would have stopped at 4.00%, the extra 25 basis points won’t break the economy.

It’s all about the level

The Bank of Canada’s decision to raise rates one further time is largely innocuous because the level of interest rates across the yield curve is very low by historical standards. Despite the removal of 175 basis points of stimulus, the overnight lending rate sits at a very modest 4.25%. Using the Bank Rate as a guide, the policy rate has fallen over this cycle to a level not seen since the late 1950s. You would also have to go back that far to find the last time that longer maturity yields displayed the levels seen recently. After removing the effect of inflation, the real interest rate based on 3-month Treasury yields has fallen during this cycle to levels last seen during the late 1970s.

The Bank has been able to keep their lending rate so low because they have been very successful in their mandate of low and stable inflation, and in the process, have grounded inflation expectations. While increased transparency and enhanced credibility of the Bank has played a role in keeping inflation subdued, the emergence of China and India has also contributed to falling prices for many manufactured goods and textiles. The sharp appreciation of the dollar, motivated in large part by surging commodity prices, has also put downward pressure on imported goods and has allowed the Bank to temper the pace of tightening.

Does the overnight rate matter…

The Bank of Canada’s overnight rate is just one of a myriad of interest rates and one that Canadians will never directly face. Meanwhile, the rates that consumers typically borrow at have increased much more modestly than the overnight rate. This becomes increasingly apparent for interest rates at longer maturities, leaving the overall yield curve extremely flat. Since the Bank started tightening in September of 2005, 5 year Government of Canada yields have increased by 84 basis points, while the 10 year and the long-term benchmark have increased by just 72 and 23 basis points, respectively. Meanwhile, the five-year conventional mortgage rate has risen by 95 basis points.

Typically, changes in the overnight rate are reflected in prime rates charged by Canadian chartered banks, which then feed through to variable rate mortgages and other consumer loans before moving out over the remainder of the yield curve. Historically, the overnight rate has played a large role in the overall shape of the yield curve, as market participants assessed the future path of interest rates.

However, more recently, other factors such as high pension demand for longer maturity bonds and a glut of global savings have leaned on the long-end, depressing rates below what would normally occur. This was former-Fed chairman Greenspan’s famous “conundrum” characterization. Furthermore, the diametrically opposite fiscal performance in Canada and the United States has also exerted downward pressure on domestic yields at longer maturities, adding to the low long end of the yield curve.

… for housing affordability?

The housing market is a case in point of where there is a disconnect between the rates that borrowers face and those set by the Bank of Canada. While variable rate mortgages move in lockstep with the prime lending rate, which itself is tied to changes in the overnight rate, fixed rate mortgages generally track developments in the bond market. For example, 5-year fixed rate mortgages will follow 5-year government bonds. As noted above, even though the Bank has raised their policy rate by 1.75% since the fall of 2005, longer maturity yields, including mortgages, have not shown the same rate of increase.

The criticism raised against the Bank for causing a deterioration in affordability, while partially correct in spirit, has come a bit late. If anything, the modest rise in mortgage rates will help keep affordability in check. The true cause of declining affordability is the rapid growth rate in home prices, a trend set in motion by the massive dose of monetary stimulus administered by the Bank during the economic slowdown of 2001.

… for the Canadian dollar?

And what of the criticism that the Bank of Canada’s tightening cycle has pushed the dollar higher? While there is little doubt that the speed at which the Canadian dollar has appreciated is worrisome, especially for the manufacturing sector, the role that the Bank has played in fuelling the rise in the loonie is minor. The rise of the dollar is mostly due to a combination of soaring commodity prices and the continued weakness displayed by the U.S. currency. In fact, the spread between Canadian and U.S. interest rate continues to favour the United States as the pace of the tightening cycle in Canada has been eclipsed by that of the United States. So if anything, the interaction between monetary policy in Canada and the United States has placed downward pressure on the value of the dollar. However, it is important to recognize that empirical studies have noted that the channel between domestic interest rates and the value of the dollar is fairly small.

Global Insight estimates that a permanent 100 basis point increase in the Canada-U.S. interest rate differential results in a 2.8% appreciation in the Canadian dollar by the end of two years. Applying this relationship to the last two years suggests that in order to have kept the Canadian dollar around the U.S. 85 cent level that prevailed in September 2005, the Bank would have had to freeze their key policy rate at the rock bottom level of 2.5% while the corresponding U.S. rate rose to 5.0%. This is clearly one case where “everything else would not have been equal”. In the environment of robust Canadian economic growth, inflation pressures would have risen enormously with the greatest impact likely in housing markets, resulting in an even greater deterioration in affordability than has actually occurred.


The main message is that it is the level and not the change in interest rates that is important for economic activity. Despite the seven rate increases by the Bank of Canada, the level of the overnight rate remains fairly low. And, it is not just the level of the Bank’s benchmark overnight rate that matters, but the level of market interest rates across the entire yield curve that determines the borrowing cost for consumers and businesses. On this front, interest rates across the yield curve are not significantly restrictive. The big news is that it appears the Bank is set to pause, and despite the fact that they are set to do so at a rate that is 25 basis points higher than what we had predicted, we firmly believe that it is the prudent decision at this juncture.
Used with permission: Paul Chadwick from TD-CT

For more information please contact Mark Argentino

A. Mark Argentino Associate Broker, P.Eng.,
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc.
2691 Credit Valley Road, Suite 101, Mississauga, Ontario L5M 7A1

BUS 905-828-3434
FAX 905-828-2829