CHHMA - EYE ON OUR INDUSTRY
Volume 16, Issue 26, July 6, 2016
Inside This Issue:
• CHHMA Scholarship Program Application Deadline of July 15 Fast Approaching
• Is Your Company in Need of a New Proposal on Group Insurance/Employee Benefits?
• Loblaw Sends Letter to Major Suppliers, Asking to Lower Costs
• Amazon Gradually Eliminates List Prices from Site
• Amazon ‘Prime Day’ is Back this July 12
• Analysts Uncertain Over Empire Co.’s Recovery Plan
• Companies Expect Marginal Sales Growth Over the Next Year: Bank of Canada
• Canada’s Economy Bounces Back in April but Growth Spurt Unlikely to Last
• Get Ready for the Loonie to Slide Further Against the U.S. Dollar Later this Year: CIBC
• Mortgage Industry Says There’s No Housing Bubble in Canada
• North America is Not Immune to Brexit Effect, Despite Optimistic GDP Figures
• U.S. Spending is on the Rise for Kitchen and Bath Renovations
Association News
CHHMA Scholarship Program Application Deadline of July 15 Fast Approaching
The CHHMA is once again pleased to be able to offer the opportunity for children of employees of our member companies to apply for a scholarship to help offset the cost of post-secondary education. The Association recognizes the importance of education and therefore encourages children of our member companies to attend University or College. Successful candidates receive $1,000 CDN per year for the first two years of study leading to a diploma or degree from an accredited community college or university.
The scholarship program is available to the dependents of any current full-time employees of the CHHMA or member companies. The program is only offered to Canadian companies or divisions of companies based in Canada which are members of the CHHMA. The member company must remain a member in good standing in order for the student to qualify for the second year of the scholarship.The student's parent or guardian must be an active full-time employee with at least one year seniority with the CHHMA or member company as of July 15th in the year of application. Applicants must be preparing to enter an accredited community college or university in the fall term, and attain a minimum average of 75% in the last year of high school (or CEGEP).The decision of the Selection Committee and the CHHMA is final and not open to appeals.The CHHMA reserves the right to withdraw a scholarship should the student's parent(s) or guardian(s) voluntarily leave the employment of the CHHMA or member company, or if employment is terminated for just cause prior to the start of the school year, or if the company terminates its membership in the Association.
Complete details, application forms and information sheets (for bulletin board postings) in English and French can be found at http://www.chhma.ca/Public/Scholarship-Program. Please print off and post these notices in your lunch room or high traffic area.
The CHHMA must receive applications from potential candidates no later than July 15th.
Since 2001, the CHHMA has awarded $160,000 towards scholarships and some 80 young people have benefited from the scholarship program.
Is Your Company in Need of a New Proposal on Group Insurance/Employee Benefits?
As a member of the CHHMA, your company can take advantage of the CHHMA Group Insurance/Benefits Program and custom design a program for your employees’ needs while leveraging the pricing power from being part of an association group.
The broker for the CHHMA group insurance/benefits program is the Benefits Architect Group and Desjardins Insurance is the risk underwriter for the program.
The program offers very competitive rates which have decreased member benefit insurance costs by 10-20%, and as high as 38% while offering a faster, more efficient and custom program.
The program offers outstanding benefits not otherwise available to small groups.
The flexible plan design can be tailor made to your company’s needs, providing the exact coverage and benefits required.
• Flexible plan design
• Ease of administration
• Long term price stability at renewal
• Outstanding benefits not otherwise available to small groups
• Prompt, courteous, dedicated service - Toll free line support
• Clear communication in both languages
• Cost savings through volume discounts
Enhance your existing employee benefits plan or save money on a comparable program today!
For more information or to receive a free, no-obligation quote, please contact:
Michael Jorgenson at CHHMA (416) 282-0022 ext. 34, mjorgenson@chhma.ca or contact our insurance broker:
Nigel Ottley, Benefits Consultant at Benefits Architect Group, (416) 934-1660, nigel@benefitsarchitect.ca, website: http://www.benefitsarchitect.ca
Industry News
Loblaw Sends Letter to Major Suppliers, Asking to Lower Costs
Loblaw president Galen Weston, who observed in May that consumers were getting fed up with rising food prices, now wants his company’s largest suppliers to shoulder a bigger part of the inflationary burden.
In a strongly worded letter to its large suppliers this week, Loblaw is asking the group to cut costs by 1.45% for shipments received by the country’s largest grocery chain on or after Sept. 4.
The move comes after Loblaw told its suppliers last October that it intended to reform and simplify its pricing practices in order to smooth out friction between the two parties and provide greater cost clarity.
“Since 2014, our suppliers have implemented more than $1 billion in cost increases,” says the letter to suppliers, obtained by the Financial Post. The letter is signed by Grant Froese, Loblaw’s chief operating officer, and Mike Motz, president of Shoppers Drug Mart.
“Even more concerning, despite our expectations and efforts to offer value to Canadian consumers, we have continued to receive unjustified cost-increase requests since our October communication — hundreds of millions of dollars by our calculation.
“Despite our efforts to absorb the costs, our low margins have forced us to pass many of these increases on to consumers on your behalf.” Food margins for grocery retailers are usually in the 5% range; for food processors and manufacturers, they average about 20%, according to industry data.
Loblaw’s missive comes as the price war escalates between Canada’s biggest grocery retailers and as consumers increasingly seek out discount food options after two years of rising food prices. A lower loonie helped to fuel the inflationary trend, particularly in categories such as fruit and vegetables, for which 81% of the produce consumed in Canada is imported. In such an environment, people’s food budgets don’t go as far.
Kevin Groh, Loblaw spokesman, said in an email the letter to suppliers is not meant to be adversarial.
“We have been simplifying our relationship with suppliers and this is just the latest in that dialogue,” he said. “It’s a reminder of the important role suppliers play in our ability to offer customers great prices in our many stores.”
Groh said the initiative is part of the retailer’s move to ramp up its “fight on food inflation, supported by economic conditions and the price expectations of customers. This meets the demand for value, combats years of inflation and cost increases, and should benefit all involved — first and foremost our customers.”
Weston revealed in May that food sales at Loblaw were “slightly disappointing” in the first quarter, with same-store sales rising just 2.6%.
In recent quarters, the Loblaw president told analysts that the retailer had been able to pass on some of the inflationary food price increases to customers, but was operating cautiously due to consumer price sensitivities, particularly in certain regions of the country and in food categories such as produce.
He also spoke of Loblaw’s need to ensure that the price gap did not get too wide between its discount and conventional store formats.
Prices of fruits, vegetables and nuts rose nine to 10% in 2015, and meat prices were up 5%, according to the University of Guelph’s Food Institute, which predicts overall food inflation rates will rise 2% to 4% this year in Canada.
In the May conference call, Weston also noted the industry outlook was improving, with inflation appearing to be heading down. Statistics Canada reported that overall food price inflation was 1.8% in May compared with a year earlier.
Loblaw told the suppliers that it will reject any cost-increase request from them that is not related to higher input costs — costs related to external factors such as foreign exchange, higher fuel costs or commodity increases.
“We understand that there have been economic challenges justifying some cost increases,” the letter says. “That is no comfort to Canadian consumers who have paid the price of sustained inflation. We think that the burden of inflation needs to shift. We want to work with our suppliers to put money back in the pockets of Canadian consumers.”
The letter goes on to say that the retailer has consistently invested its own money when lowering the price of suppliers’ products in its stores, and now needs suppliers’ “assistance and investment to introduce new value and drop more prices …If you continue to ship after September 4 we will assume we have your support.”
Retailers have been fine-tuning their pricing moves in recent months as competition has increased among the major players.
Walmart Canada has made strategic price cuts on certain popular brand-name packaged goods in order to boost its price perception among consumers, and Sobeys, too, reduced prices by 5% to 7% last month on 8,500 items at its IGA stores in Quebec and will roll out the program to other areas of Canada in the coming months. Sobeys said last week that it has renegotiated the allowances it receives from its suppliers, allowing it to lower shelf prices and overall costs and improve consumer perception of the chain’s prices.
Source: Article by Hollie Shaw, The Financial Post
Amazon Gradually Eliminates List Prices from Site
In a major shift for online commerce, Amazon is quietly changing how it entices people to buy.
The retailer built a reputation and hit $100 billion (U.S.) in annual revenue by offering deals. The first thing a potential customer saw was a bargain: how much an item was reduced from its list price.
Now, in many cases, Amazon has dropped any mention of a list price. There is just one price. Take it or leave it.
The new approach comes as discounts both online and offline have become the subject of dozens of consumer lawsuits for being much less than they seem. It is also occurring while Amazon is in the middle of an ambitious multi-year shift from a store selling one product at a time to a full-fledged ecosystem. Amazon wants to be so deeply embedded in a customer’s life that buying happens as naturally as breathing, and nearly as often.
“When Amazon began 21 years ago, the strategy was to lose on every sale, but make it up on volume,” said Larry Compeau, a Clarkson University professor of consumer studies. “It was building for the future, and the future has arrived. Amazon doesn’t have to seduce customers with a deal, because they’re going to buy anyway.”
Or so Amazon hopes. Digital stores live by Alec Baldwin’s maxim in Glengarry Glen Ross: “Always be closing.” The retailer has been experimenting with another method of closing a sale. It tells the potential buyer what the price used to be on Amazon.
For example, Amazon originally promoted the Rave Turbo Chute as being discounted by 36%. Then, all mention of a discount was dropped and the 60-foot water slide was simply listed at $1,573.58, with an explanation that it used to be $1,573.59 — one penny more. Then, it dropped the old/new price comparison. Then, it dropped the price to $1,532.01 and put the comparison back.
“They still need to showcase deals, but the question is how,” said Michael Kovarik, who runs a comparison-pricing startup called Rout.
That is why stores love big discounts: They work. In studies by Compeau and others, the perception of a deal is often what makes the purchase happen.
“We’ve been conditioned to buy only when things are on sale,” said Bonnie Patten, executive director of TruthInAdvertising.org, a consumer information site. “As a result, what many retailers have done is make sure everything is always on sale. Which means nothing is ever on sale.”
Amazon has both benefited from that conditioning as well as encouraged it, which is most likely why it is changing cautiously. It began eliminating list prices about two months ago, pricing specialists say, both on products it sold itself and those sold by other merchants on its site. The retailer did not return multiple requests for comment.
“Our data suggests that list prices are going away,” said Guru Hariharan, chief executive of Boomerang Commerce, a retail analytics firm. Last spring, Boomerang compiled a list for The New York Times of 100 pet food products that Amazon said it was selling at a discount to a list price. Only about half of them still say that.
“Amazon is a data-driven company with very few sacred cows,” Hariharan said. “At the very least, it is conducting a storewide test about whether it should change its pricing strategy.”
With a majority of Amazon products, the presentation of a bargain used to be front and centre. Take, for example, the Breville Infuser Espresso Machine. A few months ago, Amazon said this was an $800 machine that it was offering for $500, a discount of 38%.
Two articles in The Times earlier this year on the problems with online list prices drew on a randomly assembled list of 47 discounted housewares, leisure and other products on Amazon, including the Breville Infuser.
Over the Fourth of July weekend, the list price was gone for 39 of those products. The Infuser page, for instance, simply said what it would cost to buy at that moment, which was $483. Nineteen of the product pages tried to encourage a sale by pointing out that the price used to be higher on Amazon, although no time period was given.
“Amazon is showing it can fix the problem if it wants to,” Patten said.
The problem with list prices or, as they are sometimes called, manufacturers’ suggested retail prices, is that they are regularly more of a marketing concept than what anyone is actually charging. When Amazon was saying the list price of the Breville Infuser was $800, Breville itself was selling the machine for $500 — about the same as Amazon. Other retailers sell it for $500, too. Breville confirmed the price was $500.
Bargains online and offline that are not real bargains are breeding legal action, much of it using a tough California law against deceptive advertising. New cases have been filed in the last few months against Macy’s, J.Crew, Gymboree, Ann Taylor, Ralph Lauren and the website Wines ‘Til Sold Out, according to TruthInAdvertising.org. Twenty-four cases were filed in the first six months of 2016, nearly as many as the 25 in all of 2015.
There have been at least 10 settlements. In April, a Los Angeles judge gave preliminary approval to a $6-million offer by Kohl’s Department Stores. That deal came on the heels of a $50-million preliminary settlement by J.C. Penney.
Amazon itself was the target of a fake-discounts suit — an unexpected development, because all Amazon customers agree to go to arbitration instead of court. A judge dismissed the complaint, but the plaintiffs are now appealing, saying the arbitration clause is “unconscionable” and should be invalidated. Amazon declined to comment on the suit.
Amazon has always focused on driving revenue while disregarding profits. That had many implications: It was driven to try new things; it could undercut any competitor who focused on price; it could literally buy customer loyalty.
In Amazon’s third decade, with its complete domination of the e-commerce landscape, there are signs it is beginning to emphasize the value each customer brings.
“They are trying to figure out what product categories have customers who are so tied into the Amazon ecosystem that list prices are no longer necessary,” Compeau of Clarkson University said. In some categories, like groceries, Amazon seems to be using just one price, the buy-it-now price.
If Amazon brings the milk and music into your house, not to mention videos and ebooks and the devices to consume them, as well as a hot dinner and just about any other object you could want, that presents a pricing challenge of a different sort. Untangling what those deals are worth — as opposed to what they cost — is probably impossible.
“Twenty years ago, we were hesitant to trust online companies with our credit-card information,” Compeau observed. “Now we’re being asked to trust them completely.”
Source: The New York Times
Amazon ‘Prime Day’ is Back this July 12
Amazon is renewing its “Prime Day” July sales gimmick as Walmart also tries to go after online shoppers.
The e-commerce powerhouse launched the discounting event last year to commemorate its 20th anniversary and to advertise its $99 annual Prime loyalty program, which offers free two-day shipping, during sleepy summer shopping months. It has said previously that Prime Day would be an annual event.
Now Walmart is also advertising online shopping discounts in July as well as a 30-day free trial of a two-day unlimited shipping service. Other retailers may try something similar.
It remains to be seen whether Amazon’s event will be a hit or a bust. There was online grumbling last year that the deals were unimpressive, that deal items ran out too fast and were only available for a limited time.
Amazon said it was a success, with 18% more orders placed that day than the prior year’s Black Friday, the shopping day after Thanksgiving that’s typically the busiest day in retail. The company also said it got hundreds of thousands of new Prime sign-ups.
(You have to have Prime to be eligible for deals. There’s a 30-day free trial.)
This year the Seattle retailer says it has stocked more of the deal items. Discounts will start at 3 a.m. ET on July 12th and new ones will be introduced every few minutes.
Amazon’s competitor, Walmart, announced its own discounting effort Wednesday to try to get ahead of Amazon. It will offer discounts throughout July on a host of products online. It is also offering a free 30-day trial on its two-day unlimited shipping service, and an extra month free for paying members.
Their efforts may prompt other retailers to launch deals. Prime Day last year spurred “Christmas in July”-type sales from Target, Macy’s and Best Buy as well as Walmart.
Amazon doesn’t release detailed numbers on Prime but says it has “tens of millions” of subscribers. Wedbush Securities analyst Michael Pachter estimates there are about 50 million. It’s a key platform for Amazon because Prime members buy more than others. To attract subscribers, the company has added grocery delivery, one-hour delivery in some cities, more video streaming and a smart speaker called the Echo that syncs with Prime music.
Source: The Associated Press
Analysts Uncertain Over Empire Co.’s Recovery Plan
Analysts are worried about the lack of a turnaround timeline for Sobeys’ parent company after the retailer posted disastrous fourth quarter results last week amid continued struggles to integrate its Safeway business in Western Canada.
Two quarters of impairment charges in a row at Empire Co., totalling $1.3 billion and $1.7 billion respectively and leading to steep fourth quarter losses, “amount to about half the purchase price of Canada Safeway,” analyst Peter Sklar at BMO Capital Markets said in a note to clients. “It is not clear to us how long it will take for investments in margin to reverse the negative traffic trends,” he added.
“We remain concerned that this initiative could be more costly than anticipated, and could push out the prospect for a reversal of financial trends.” He continues to rate Empire shares at market perform, and revised his target price on Sobeys shares to $22 from $24.
Kenric Tyghe at Raymond James, who rates the shares market perform, cut his target price to $21 from $24. While the quarter “further highlighted the enormity of the challenges, it did not in our opinion provide sufficient insight into the recovery roadmap, much less a timeline,” the analyst wrote in a note to clients.
And though a new program to slash prices on packaged goods at its Quebec IGA stores dubbed “Simplify, Buy and Sell” seems to have received a positive consumer response, Tyghe has doubts about its potential given the state of the market.
“We are mindful that not only is it still very early days, but also that key competitors in the market are as (agile), if not more agile, with a more granular view of the Quebec consumer, in our opinion.”
Two years of food inflation has cramped household budgets and consumers have been increasingly flocking to discount stores, such as No Frills and Walmart.
Empire only operates its discount chain FreshCo in one province, Ontario, and that could be a significant impediment in other areas where it is competing head to head with discounters.
“After more than a year of volatility, management believes that operations in the Safeway-Sobeys business have stabilized and execution will improve,” analyst Mark Petrie of CIBC wrote in a research note. “But a weaker economy and lack of a discount banner mean that over-investing in price today will likely not result in the kind of traffic improvement needed to offset the investment.”
And while the retailer’s Quebec price reduction program is going to be rolled out nationally, it is “most needed in the West, where lower produce and meat prices are in place but traffic remains materially negative,” the analyst added.
“In both markets, management could overreact and make promotional investments to boost traffic, but this is the old habit they are trying to break, and we expect a more patient and rational approach.”
Petrie, who rates the shares at sector performer, lowered his target price to $20 from $25.
Source: Article by Hollie Shaw, The Financial Post
Economic News
Companies Expect Marginal Sales Growth Over the Next Year: Bank of Canada
A new Bank of Canada poll suggests businesses are expecting only a marginal acceleration in sales growth over the next 12 months.
The central bank’s latest Business Outlook Survey released on Monday, but conducted before the UK’s shock vote to leave the European Union, found that sales prospects remain gloomy among companies hit by the oil-price slump.
But the poll also indicates firms outside the affected commodity industries and in the service sectors are more optimistic about the coming year.
“The moderation in future sales expectations was concentrated among firms in the Prairies, which see few signs of a recovery from the oil price shock,” the survey report stated. “In other regions, steady, albeit modest, domestic momentum is providing support to firms’ sales outlooks. In a number of cases, however, expectations of acceleration merely reflect the view that domestic sales growth will not deteriorate further or will modestly increase over the next 12 months.”
The bank’s quarterly survey says rising demand from the United States and the past depreciation of the Canadian dollar remain key sources of stronger sales expectations.
The study suggests that overall, firms generally expect to add jobs over the coming year but finds that hiring intentions remain below post-recession levels and diverge considerably by sector.
The bank says plans to reduce staff were found to be particularly prominent in goods-producing sectors such as construction and manufacturing firms that are part of the energy supply chain.
Employment growth is more likely to be expected in service industries such as consumer and business services and real estate.
National Bank of Canada senior economist Krishen Rangasamy said the quarterly survey results show the ongoing headwinds in the economy are unlikely to abate soon.
“Intentions to hire and invest remain weak, which does not bode well for economic growth in the second half of the year,” he said in a written commentary. “And it’s worth noting that the surveys were carried out before Brexit, meaning that actual investment and hiring may end up being softer than the already weak intentions communicated in the surveys.”
In all regions except British Columbia, the survey found businesses reported less intense labour shortages, on balance, than a year ago.
The overall balance of opinion on investment in machinery and equipment pointed to modest increases in the next 12 months, said the survey. Firms tied to the energy sector and affected regions planned to curtail investment spending, while even exporters unaffected by low oil prices were looking forward to only modest increases in investment.
The survey found that business expectations for inflation over the next two years are largely unchanged.
As for inflation, a majority of respondents, at 67%, said they expect total consumer price index inflation to fall within 1 to 2% over the next two years. That is in the lower half of the 1- to 3% inflation control range used by the Bank of Canada to guide its interest rate decisions.
Businesses said credit conditions eased over the past three months, with firms citing improved market receptiveness to new debt or equity issuance.
A separate survey of senior loan officers also found that overall business lending conditions tightened slightly in the second quarter.
The reports of tighter conditions were concentrated among firms with energy sector exposure.
The survey compiles the views of senior managers from about 100 firms selected to represent the GDP of Canada’s business sector.
Source: The Bank of Canada, The Canadian Press, The Globe and Mail
Canada’s Economy Bounces Back in April but Growth Spurt Unlikely to Last
Canada’s economy bounced back to modest growth in April on gains in consumer and government spending, manufacturing and conventional oil and gas extraction that were offset by a big drop in heavy oil activity, Statistics Canada reported last Thursday.
The agency said real (adjusted for inflation) GDP rose 0.1% in April after a 0.2% drop in March and a 0.1% decline the previous month. The April result matched market expectations.
The April figure was in line with economists’ forecasts.
“It’s a welcome bounce from a soft end to the first quarter, but it will only be temporary relief as the impact of the Alberta wildfires loom,” CIBC economist Nick Exarhos said in a report.
Now Brexit is also threatening more tugs on the economy in the months ahead.
“We do think the U.K. economy is going to struggle over the next six months,” said Bank of Montreal chief economist Douglas Porter. “We may be in a holding pattern for a while until we get a bit more clarity in terms of who the U.K. prime minister will be.”
That uncertainty is expected to keep the Bank of Canada’s key interest rate on hold at 0.5% far into 2017.
Economists expect real GDP fell by as much as 1% in May due to wildfires in the Fort McMurray region that forced evacuations and the shut down of several oil sands operations.
The wildfire impact, however, will be short lived and could give way to more robust GDP growth on a return to near normal production levels in the third quarter, said Bank of Montreal chief economist Doug Porter.
Statscan said oil and gas extraction dropped 2.4% in April as non-conventional oil extraction, which includes bitumen from Alberta’s oil sands, fell 7.3% due to maintenance shutdowns at upgrader facilities.
Conventional oil and gas activity, however, rose 1.7% while the benchmark global crude price ticked above $45 (U.S.) per barrel.
TD Economics in a report said the country’s conventional oil and gas sector has “largely stabilized,” but the overall oil and gas outlook remains depressed since support activities are at near historic lows.
Statistics Canada said output of goods-producing industries edged down 0.1% in April, mainly as a result of a decrease in mining, quarrying, and oil and gas extraction. Manufacturing and utilities posted increases, while the agriculture and forestry sector fell.
The struggling manufacturing sector provided a surprisingly upbeat reading for April, with manufacturing output rising 0.4% during the month on higher non-durable goods production while service-producing industries gained 0.2% after being almost unchanged in March. Manufacturing was down 0.5% in March and 0.6% in February.
A rise in transportation equipment manufacturing helped offset declines in machinery and wood products.
Activity in the construction sector, another area that has struggled, was basically flat in April after only a marginal increase a month earlier that followed two previous downturns.
An increase in engineering construction was offset by a decrease in residential building construction, which declined in April after four consecutive gains.
The output of real estate agents and brokers increased for the seventh consecutive month, up 3.3% in April. Home resale activity was higher across most markets in Canada.
After rising 0.4% in March, the finance and insurance sector grew 0.3% in April on higher output from financial investment services. Banking services were unchanged, while insurance services edged down.
Both wholesale and retail sales were up 0.2% while public administration rose 0.5%.
A lack of Canadian teams in the NHL playoffs triggered a hefty 3.9% drop in the arts, entertainment and recreation sector on dips in spectator sports and related industries.
Source: Statistics Canada, The Toronto Star, The Financial Post
Get Ready for the Loonie to Slide Further Against the U.S. Dollar Later this Year: CIBC
Rising oil prices have pushed up the loonie against the U.S. dollar in recent months, but CIBC Capital Markets says that will likely change later this year.
CIBC analysts said in a new report that a Fed hike in December will push the loonie down to 74 cents U.S., from its current level of about 77 cents U.S.
“With oil prices expected to languish around current levels, look for the loonie to reach the 1.35 (74 cents U.S.) level by the end of the year,” write analysts at CIBC World Markets. “That’s a less dramatic move than we earlier thought, since we eliminated a September hike from our Fed outlook.”
The loonie could fall from current levels later this summer, when StatsCan releases economic data for the second quarter. CIBC expects those numbers will be worse than the market is pricing in. Still, analysts say it likely won’t be enough to do real damage to the currency.
The real action will happen in the fourth quarter, when CIBC says the Fed will move rates from the current range of 0.25% to 0.50% up to 0.50% to 0.75%.
“A December rate hike from the Fed will see negative front-end spreads drive the Canadian dollar weaker against its U.S. counterpart,” CIBC analysts write.
The forecast calls for the loonie to bottom out in Q4, before gradually beginning a recovery in 2017. CIBC sees oil prices averaging US$60 a barrel next year, which should boost the currency to a trading band of 75 cents U.S. abd 77.5 cents U.S.
“With both the central bank south of the border taking an extremely gradual approach to rate hikes and the Canadian economy chewing through the slack that opened up over the past couple of years, the loonie won’t be feeling as much pressure in 2017,” write CIBC analysts.
Source: Financial Post
Mortgage Industry Says There’s No Housing Bubble in Canada
A Canadian mortgage industry group says there is no bubble in any Canadian housing markets and is warning the government against any changes in lending conditions that might derail the market.
Will Dunning, the chief economist for Mortgage Professionals Canada, which represents more than 11,000 members across the country, says everybody is waiting for the bubble to burst, but maintains there isn’t enough evidence to say it exists.
“There is a risk that changes in policies of lenders or mortgage insurers that reduce access to mortgages could cause an unnecessary drop in housing demand and housing prices, and bring consequent economic damage,” Dunning said, in a release last week that accompanied the group’s 38-page report on the state of the mortgage industry.
His comments come as federal finance minister Bill Morneau has called for a “deep dive” into the state of the housing market, including the impact of foreign ownership. Two weeks ago, Morneau announced a working group will be formed of federal officials, provincial representatives from Ontario and British Columbia and municipal counterparts in Toronto and Vancouver.
Morneau’s comments came after a torrid month for real estate in May for both Toronto and Vancouver. The composite index for all homes in Metro Vancouver rose almost 30% last month from a year ago while average prices in the Toronto region were up almost 16% during the same period from a year ago.
“At this time, we are hearing calls for more changes to macro-prudential regulation. The proponents want to make mortgage finance more difficult to obtain. That will result in reduced housing activity and, thereby, slow the growth rate for mortgage indebtedness,” writes Dunning, in his report.
He cautions about the importance to the housing sector and warns that some of the economic drivers out west are no longer present to propel those markets. In Calgary, the benchmark price for a home was down almost 4% in May from a year ago, while prices in Saskatoon were off 2.3% during the same period.
“Given the importance of housing activity to the national economy (especially since investment in energy projects is no longer a driver of growth), we are hopeful that any changes will be based on a careful consideration of the trade-off between caution in the mortgage market versus overall economic growth,” Dunning writes.
Dunning says it is low mortgage rates — now as low as 2.15% for a five-year fixed rate product, according to ratepsy.com — that have caused the resale market to surge.
On the foreign buyer issue, he notes there is a gap between average prices produced by the Canadian Real Estate Association statistics and data on price increases from the Teranet/National Bank House Price Index. Dunning says a larger gap indicates sale of higher end homes, something he says is present in Toronto and Vancouver, but not in nine other markets.
“This is consistent with increased buying by affluent foreign investors, although it is not conclusive proof,” he writes. “Given the available data, it may be impossible to measure buying by foreign investors with any reasonable accuracy, and it would be even more difficult to measure the consequences.”
As for the bubble talk, the economist says it has been going on since 2008 without any real evidence.
“Those comments have generally assumed that rapid growth in house prices (or a rising ratio of house prices versus incomes or of house prices versus rents) is sufficient evidence of a bubble,” writes Dunning. “To the contrary, these supposedly strong indicators are not definitive proof. They may actually represent healthy outcomes within existing conditions.”
In order to prove a bubble exists, he says there must be “expectations of price growth that are self-fulfilling” and that the expectations lead to increased and excessive activity in the housing market. He also says prices must diverge significantly from what should be expected based on economic fundamentals. As far as Dunning is concerned, the current market does not meet these conditions.
Source: Financial Post
North America is Not Immune to Brexit Effect, Despite Optimistic GDP Figures
First, the good news: The U.S. economy performed a lot better in the first quarter of 2016 than previously forecast, and Canadian GDP edged up in April for the first time in three months — setting an initial optimistic tone for the second quarter.
Now, the bad news: With the impact of the Brexit vote to leave the European Union setting in — accompanied by dire projections of a U.K. recession — all bets could be off for near-term growth in North America. It also shelves plans by the U.S. Federal Reserve to push ahead with its already-detailed plan for interest rate hikes, and likely leaves the Bank of Canada firmly on hold for a lot longer than planned only a few weeks ago.
With details and timing of the U.K. break from the EU still unclear, there is “a heightened degree of economic uncertainty that is likely to slow economic growth in the U.K. and in continental Europe,” HSBC Global Research said in a report last week.
“Brexit, by dampening the outlook for U.S. exports, lessens the chances of a sustained rebound in orders for capital equipment and for a pickup in business investment spending later this year,” HSBC said. “This lessens the need for the Federal Reserve to lift the nominal funds rate.”
HSBC now expects the U.S. Fed to delay raising its key lending level until December — one year after the central bank’s initial relaunch of rate increases after a seven-year lull. The Fed rate is now at a range of 0.25 to 0.5%.
The U.S. economy rose 1.1% on a revised annualized basis between January and March, the Commerce Department reported last Tuesday, which beat forecasts of 1% growth. Many forecasters have predicted GDP of 2.5% in the second quarter — but those forecasts were made pre-Brexit.
In Canada, growth came in at an annualized pace of 2.4% in the first quarter and GDP was up 0.1% in April. But following the optimist outlook for that month, the devastation of the wildfires in Alberta is expected to push second quarter GDP down by an annualized 1.5%, before rebounding in the third quarter.
Uncertain outlooks domestically and globally will likely keep the Bank of Canada’s key interest rate on hold at 0.5% well into 2017.
Emanuella Enenajor, senior economist at Bank of America/Merrill Lynch Global Research in New York, is forecasting overall U.S. growth of 1.8% both this year and 2017, while Canada’s economy is estimated to grow 1.4% in 2016 and 1.7% next year.
“There is so much uncertainty with Brexit. Clearly, the world has become a much more uncertain place. And it seems that there have been a number of global shocks. Typically, during a recovery, you can brush these shocks off,” Enenajor said.
“But this time around, it does appear that shocks are having much more of an impact because the world is more interconnected and growth is so much slower. And so these little shocks do matter,” she added. “But we don’t exactly know, with any certainty, what the economy may look like six to 12 months from now. So, we’re really shooting in the dark here.”
Source: Article by Gordon Isfeld, The Financial Post
U.S. Spending is on the Rise for Kitchen and Bath Renovations
U.S. homeowners are investing larger budgets into their kitchen and bathroom renovation projects, according to the fifth annual Houzz & Home Survey of more than 120,000 respondents released last month.
The average spent on kitchen and master bath remodelling projects in 2015 increased by 12% year over year. Consistent with the last five years, kitchens remain the most popular interior remodelling project (31%), followed by master/non-master bathrooms (22% and 26%, respectively) and living/family rooms (23%). Renovating homeowners also tackled a more diverse set of projects in 2015 than in 2014, with a greater emphasis on upgrades to interior spaces (72% versus 69%) and exterior features like windows and roofing (56% versus 53%).
When it comes to the motivations behind renovations, finally having the time was the top trigger for home renovation projects in 2015 (38%), ahead of finally having the financial means (37%), the top trigger for 2014 projects. Homeowners are renovating instead of buying a “perfect” home largely due to their desire to stay in their current home or lot (49%) or remain in their current neighbourhood (31%). Financial considerations such as renovation being a more affordable option or providing a better return on investment (28% each) trail behind.
Recent Home Buyers – A Key Driver of Renovation Activity
Over a quarter of U.S. renovations are driven by recent home purchases (26%), and more than one in ten renovators purchased a home in 2015 (12%). Renovators of a recently purchased home invest more in their projects than other homeowners ($66,600 versus $59,800). They also embark on larger scope projects, and are nearly three times as likely to renovate all of their interior spaces than the average renovator (14% versus 5%). When considering priorities, kitchen projects top the list for these homeowners (41% versus 31% for the average renovating homeowner) along with other major projects to improve the comfort of their home such as home automation (33% versus 19%). People tend to buy a home with the intention of renovating versus seeking an already “perfect” home, with the goals of creating a personalized space (34%), capitalizing on the affordability of renovating versus buying a home (32%), or maximizing their return on investment (32%).
Those preparing to sell their home (13% of renovators) are also investing in renovations, focusing on exterior projects that enhance curb appeal. Popular projects include upgrades to exterior paint, roofing, exterior doors and decks (27, 20, 19, and 17%, respectively). Homeowners preparing their home for sale spend just over half the amount that recent home buyers invest in their projects ($36,300 versus $66,600), prioritizing immediate return on investment and rapid sale.
“2015 was another strong year for the home renovation market [in the U.S.], with homeowners continuing to increase investment in their homes," said Nino Sitchinava, principal economist at Houzz. “While the majority of renovations are spurred by homeowners’ desire to upgrade a home they have lived in for some time, recent home purchases are also an important driver of home renovation activity. Recent home buyers tend to do more, spend more, and are more likely to hire professionals to help with their renovation projects than other homeowners. As the churn in the housing market picks up in the near future, the home renovation market should see meaningful growth.”
Personal Finances Fund Most Renovations
When it comes to financing, the majority of homeowners continue to use personal savings/finances to fund their renovations (82%), followed by credit cards (21%). Millennials are most likely to pay for their renovations with a credit card (32%), and Baby Boomers are least likely (17%). While home equity lines of credit are the biggest form of debt financing, fewer than one in ten renovating homeowners leverage this option to fund their projects (8%).
Budget? What Budget?
Nearly one-third of U.S. homeowners take on a remodelling project without setting a budget, and the same share exceed their established budget (31% each). Homeowners who exceed their budgets spend considerably more on their projects ($83,400 average spend) than those who stayed on budget ($52,300). Surprisingly, those who did not set an initial budget spent less, on average, than those who stayed on budget ($44,100). Renovators of a recently purchased home are significantly less likely to embark on a project without a budget (24%), yet are much more likely to exceed an established budget (40%). The decision to opt for more upscale products and materials was the top budget buster (45%), ahead of products/services being more costly than expected (40%) and the decision to change the project scope/design (33%), further signalling a high level of consumer confidence.
Motivated Millennials
Millennial homeowners continue to be just as active as other age groups when it comes to remodelling their homes (61% for Millennials and other age groups alike), and an even greater percentage are decorating (77% versus 65% across age groups). However, Baby Boomers and others over the age of 55 spend three times more on renovations than Millennials ($73,300 versus $24,500, respectively). While one in five renovating homeowners upgrades or installs a home automation system (19%), Millennial homeowners (26%) and recent home buyers (33%) are even more avid about home technology.
A Helping Hand
More than four in five U.S. homeowners renovated their homes with professional help in 2015 (85%), a percentage consistent with 2014 findings. Baby Boomers and recent home buyers are more likely than any other groups to hire professional help (88% and 91% respectively). Among those homeowners who hire a professional for their renovations, nearly half hire a professional remodeler, such as general contractor, builder, kitchen or bath remodeler or a design-build company (46%). One-fifth hire a design professional such as an architect, interior designer or kitchen or bath designer. Recent home buyers are particularly keen on hiring these professionals.
The annual Houzz & Home Survey is the largest survey of residential remodelling, building and decorating activity published. The survey covers a wide range of renovation projects in 2015, from interior remodels and additions to home systems, exterior upgrades and outdoor projects. Data gathered includes historical and planned spends, professional involvement, motivations and challenges behind building, renovation and decorating projects, as well as planned activities for 2016. The 2016 study includes more than 120,000 respondents in the U.S. alone, providing insights into the home improvement activity of the more than 40 million monthly unique users of the Houzz site and mobile apps.
Headquartered in Palo Alto, Calif., Houzz also has international offices in London, Berlin, Sydney, Moscow and Tokyo.
The full report is available at http://info.houzz.com/HH2016.html.
Source: Houzz Inc.
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