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Economic News
 
Canadian Housing Starts Rebound in February Due to New Condo Construction            

Canadian housing starts climbed in February as multi-family construction rebounded in Ontario and Quebec, the Canada Mortgage and Housing Corporation (CMHC) said last Friday, although data nevertheless showed that the housing market is continuing to moderate.

The seasonally adjusted annual rate (SAAR) of housing starts rose to 180,719 units in February, up 13.7% from 158,998 in January. The January figure was revised down from a previously reported 160,577 units.

The main reason for the increase was an 18.4% rise in urban starts, led by a 27.7% increase in multiple-unit dwellings (typically condos). Single urban starts were up 6.1% to 62,609 units from 59,035 in January.

The actual number of housing starts last month was 10,965, down 10.5% year-over-year from 12,247 in February 2012.

The six-month trend in housing starts was 195,087, continuing a downward slope that began in the middle of 2012, when Canada’s red-hot housing market peaked.

“The trend in total housing starts continued to moderate in February. Moderation in economic fundamentals in the second half of 2012 has led to more modest housing demand and builders are adjusting accordingly,” said Mathieu Laberge, deputy chief economist at CMHC. “Monthly SAAR housing starts moved closer to the six month trend in February, up from January levels, due to a rebound in Ontario and Quebec multi-family starts.”

February’s seasonally adjusted annual rates of urban starts increased in Ontario (46.8%), Quebec (34.9%, British Columbia (2.1%) and in the Prairies (1.5%). Urban starts declined in Atlantic Canada (-31.7%).

Rural starts were estimated at a seasonally adjusted annual rate of 19,088 units in February.

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Canadian Building Permits Edge Up in January
 
The value of Canadian building permits edged up in January after posting the biggest two-month fall in 24 years, Statistics Canada reported last Thursday.

The agency said municipalities issued building permits worth $5.8 billion in January, up 1.7% from December. The increase in the residential sector more than offset a decrease in the non-residential sector. Despite the advance, the total value of building permits has been trending downwards since October 2012.

The increase was also less than the 5.3% expected by market analysts, and follows revised declines of 10.4% in December and 16.5% in November.

The increase in construction intentions came from every province except Alberta and Quebec. New Brunswick posted the largest advance followed closely by Saskatchewan and British Columbia.

In the residential sector, the value of permits increased 17.6% to $3.8 billion in January, following six consecutive months of decline. Ontario had the largest gain, with British Columbia a distant second followed closely by New Brunswick. These gains more than offset decreases in Quebec, Newfoundland and Labrador and Manitoba. However, residential construction intentions are continuing a downward trend that began in July 2012.

Construction intentions for multi-family dwellings rose 38.0% to $1.6 billion in January. It was the first increase in seven months. The advance was principally attributable to higher construction intentions in Ontario, British Columbia and New Brunswick.

Municipalities issued $2.3 billion worth of building permits for single-family dwellings in January, up 6.6% from December. This was the second increase in seven months. Higher construction intentions in Ontario more than offset decreases in four provinces, led by Quebec and Manitoba.

Municipalities approved the construction of 16,002 new dwellings in January, up 15.6% from December. The increase was largely the result of a 25.9% gain in multi-family units to 9,550. The number of permits issued for single-family dwellings rose 3.0% to 6,452 units.

Construction intentions in the non-residential sector fell 19.2% to $2.0 billion, following a 7.8% decrease the previous month. Ontario, Quebec and Alberta were responsible for most of the decline. Non-residential construction intentions rose in Saskatchewan, New Brunswick, Manitoba and Newfoundland and Labrador. The total value of non-residential permits has been on an upward trend since June 2012, following a relatively flat period that began in May 2011.

Construction intentions in the commercial component decreased 15.2% to $1.3 billion, a second consecutive monthly decrease and their lowest level since February 2012. Despite these declines, commercial intentions have been on a continuous upward trend since November 2011.

Construction intentions for commercial buildings were down in every province except Saskatchewan, Newfoundland and Labrador and Manitoba. Ontario and Quebec had the largest declines. The decrease in January came from a variety of buildings, including retail complexes, hotels and restaurants as well as warehouses in Ontario and office buildings in Quebec.

The value of institutional permits declined 26.7% to $366 million in January, falling to their lowest level since January 2012. This was the third decrease in a row. The decline was largely attributable to lower construction intentions for educational institutions in Ontario, Alberta and Quebec as well as medical facilities in Alberta. Institutional construction intentions have been trending slightly downwards for eight months.

Construction intentions in the industrial component fell 25.6% to $296 million in January. This was the third consecutive monthly decrease following a record high in October. Industrial construction intentions have been on a downward trend since June 2012. This follows a continuous year-long increase that began in June 2011.

The decrease in January was largely the result of lower construction intentions for mining and primary industry buildings in Ontario, manufacturing buildings in Alberta and utilities buildings in Ontario and Quebec. Industrial construction intentions decreased in seven provinces, led by Ontario, with Quebec a distant second.

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TD: Canadian House Prices to Average 2% Annual Growth Over Next 10 Years
 
After year’s of growth, economists from the TD Bank say the Canadian real estate boom is over and predict house prices to flatline over the next decade.
 
In a report entitled: ‘Long-Run Rate of Return for Canadian Home Prices’ released on Monday, TD Economics predicts a “string of lacklustre performances” over the next few years. The study says the annual rate of return for Canadian real estate will be about 2% over the next decade, meaning that prices will simply match the pace of inflation.

“There is some overvaluation in the housing market — home prices have moved away from their underlying economic fundamentals — and that overvaluation has to unwind,” said Sonya Gulati, senior economist at TD, and one of the report’s authors along with Derek Burleton, vice-president & deputy chief economist and Craig Alexander, senior vice-president & chief economist (Mr. Alexander is also once again the opening keynote speaker at this year’s CHHMA Spring Conference & AGM and we look forward to his insight that he will provide on the housing market and other key aspects of the Canadian, U.S. and Global economies.)

The adjustment, however, will be gradual, Ms. Gulati added. “With the U.S., it was a housing market bubble and all of a sudden, a pin came and pricked it. It completely burst. The way you want to think about the Canadian housing market is that there’s a balloon that’s been inflated but instead of a pin coming and pricking the balloon, the air is going to be slowly let out.”

The longer term trend is for home price gains to average about 2% over the next 10 years - flat once inflation is taken into account, said Mr. Alexander.

"I do not think we have a housing bubble in Canada," he said. "We have had abnormal strength in the market during a period of low interest rates and when rates go up over the next three years, you will get a cooling and weaker prices, but not a permanent shock and not a sharp correction."

The bank said tighter rules for borrowers and lenders are only part of the reason to expect prices to moderate. Other contributing factors include the aging population, modest growth in both the population and the economy and, eventually, higher interest rates.

The bank thinks the market could correct by as much as 8% over the next three years, but Alexander said it is possible that prices won't fall as much as that.

Some forecasters, including Capital Economists, have predicted a bigger correction is in the offing, arguing that houses in Canada may be overpriced by as much as 25%.

But Alexander says that exaggerates the problem, believing the overvaluation is closer to 10%.

The problem with the housing collapse scenario, says Alexander, is that typically a sharp price correction needs a trigger in terms of a steep increase in interest rates or unemployment, both of which appear unlikely at this point.

While sales, starts and building permits issued have come off the boil in the past half year, particularly since tighter mortgage rules went into effect in July, home prices in Canada have remained relatively resilient with the exception of perhaps the condo market in Vancouver and Toronto. The Canadian Real Estate Association calculation for January found the average home sold for $354,754, about 2% more than a year earlier.

Still, the report makes clear that the next decade for housing will be significantly weaker than the previous three.

Since 1980, home prices have climbed on average by 5.4% annually, including a spike of 7% a year in the last 10 years. By contrast, TD expects prices to fall in the next two or three years, rising to average annual increases of 3.5% after 2015 for an average annual gain of 2% overall in the upcoming decade.

In terms of return on investment, real estate will not reap the bonanza of the past decade, but remains relatively attractive because profits on a primary residence are tax free, the report points out. It estimates the annual pre-tax return to be about 4.4% over the next 20 years, which is higher than expected yields on bonds.

Somewhat surprisingly, the report predicts Vancouver and Toronto, along with Victoria, Edmonton and Calgary will continue to outpace the national average in terms of home prices over the next 10 years.

Vancouver and Toronto are regarded as the cities with the most inflated prices - despite recent corrections - but TD argues that the two cities will realize the biggest influx of immigrants, so demand will remain higher. The Alberta cities will do well because of both population growth and higher than average income growth.

Alexander says the two biggest factors in trend home prices are population growth and housing formation, which both favour Toronto and Vancouver.

To find a copy of the full report, go to: http://www.td.com/economics/analysis/economics-index.jsp

Source: TD Economics, Canadian Press

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Canadian Economy Adds 51,000 Jobs in February, Far Exceeding Expectations
 
The Canadian economy created 50,700 jobs last month, six times more than expected, and the country’s unemployment rate stayed at a four year low of 7% as more people looked for work, Statistics Canada said last Friday.

The new jobs were spread between full-time and part-time positions, with most of the new hires being age 55 and over – continuing a trend from January.

Overall, most of the job increases were in the private sector (+29,200) and mostly on the services side of the economy. The public sector added 9,400 positions.

On average, economists had forecast up to 8,000 new jobs being created in February, with the unemployment rate edging back up to 7.1%, so the latest labour data has again confounded analysts.

In January, the Canadian economy had lost 21,900 positions, while in December and November, 31,200 and 56,300 jobs were added respectively.

Year-over year, employment in Canada is now up 336,000 jobs or 1.9%, predominantly in full-time work. Over the same period, the total number of hours worked also increased by 1.9%.

Provincially, employment increased during the month in Ontario, British Columbia, Nova Scotia, New Brunswick and Prince Edward Island, while Manitoba saw a small decline. Saskatchewan’s jobless rate of just 3.8% is the lowest in the country, and is at its lowest level since November 2008.

In February, there were more people working as employees (+39,000), while the number of self-employed was little changed.

Compared with 12 months earlier, the number of private sector employees rose by 236,000 or 2.1%, and public sector employment increased by 72,000 or 2.0%. Self-employment was little changed over the same period.

In February, employment in professional, scientific and technical services rose by 26,000, returning to a level similar to that of 12 months earlier.

Employment in accommodation and food services increased by 21,000 in February, bringing year-over-year employment growth in this industry to 3.0%.

Public administration employment rose for the second consecutive month, up 16,000. Compared with 12 months earlier, employment in this industry increased by 2.7%.

In agriculture, employment increased by 7,300 in February and was up 5.6% compared with February 2012.

Construction gained 15,800 jobs during the month.

Meanwhile, the number of workers in manufacturing declined by 26,000 in February. Employment growth in the spring of 2012 was offset by a slight downward trend since the summer, leaving employment in this industry little changed compared with 12 months earlier.

There were 12,100 fewer workers in educational service in February.

Among people aged 55 and over, employment increased for the second consecutive month, up 32,000 in February and mostly among men. Compared with 12 months earlier, employment among people in this age group rose by 171,000 (+5.4%), partly a result of population aging.

While employment among people aged 25 to 54 was little changed in February, it was up by 116,000 (+1.0%) on a year-over-year basis.

Among youths aged 15 to 24, employment was little changed in February and the unemployment rate was 13.6%. Employment among youths has been on a slight upward trend since August 2012.

“This is very solid Canadian job numbers on the headline and details,” said Scotia Economics economist Derek Holt. “If there is a fly in the ointment, it lies in the fact that a big job gain nonetheless coincided with no growth in paycheques for all workers combined during the month evidenced by flat wages and flat hours worked.”

“Up until today, economic indicators had suggested that the Canadian economy was sputtering,” noted Sonya Gulati, senior economist at TD Securities. “Today’s employment numbers put some of these concerns to bed.”

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Economists Cut Canadian Growth Forecasts: Flaherty
 
Private sector economists have cut their growth forecasts for the Canadian economy in 2013 due to volatile market conditions in the United States and Europe, Finance Minister Jim Flaherty said last Friday.

Flaherty, speaking to reporters after meeting the economists, did not give precise figures. Ottawa's budget, expected later this month, is based on projections from around a dozen private sector economists.

Last October, the economists forecast real GDP growth of 2.0% and nominal GDP growth of 4.0% in 2013. 

Economists surveyed in a Reuters January poll forecast real GDP growth of just 1.8% in 2013.

Economists who spoke after the meeting noted that while growth projections for 2013 have been revised downward, growth will pick up in 2014.

“We need the rest of the world to be growing faster to push business investment spending in areas like resources,” said Avery Shenfeld, chief economist for CIBC World Markets. “So far this budget, a modest dose of further restraint still seems to be appropriate,” he said. “If [economic growth] picks up as many of us expect it to, then I think Canada will in fact be able to continue on that path to a balanced budget.”

"The consensus coming out of the meeting is that Canada will continue to see modest gross domestic product growth in 2013. Yet, the private sector forecasts have been revised downward due to external pressures outside of the government's control," the government said in a statement.

"Canada is in the midst of a very volatile and risk-filled global environment due to unstable economic environments in Europe and the United States."

Flaherty said that although government revenues would take "a significant hit" from lower-than-expected growth in nominal GDP, Ottawa would balance the budget in the 2015/2016 fiscal year.

"We will manage it. They key is looking forward to the next two years and making sure that we stay on track to balance the budget in 2015/16. There are a number of measures we can take to do that, and you'll see them in the budget," he said.

Source: Reuters
 

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U.S. Retail Sales Increase at Fastest Pace in Five Months
 
U.S. retail sales expanded at their fastest clip in five months in February, the latest sign of momentum for an economy facing headwinds from higher taxes and pricier gasoline.

The solid sales last month comes on the heels of strong gains in employment and manufacturing. But the improvement in the economic picture is likely insufficient to shift the Federal Reserve from its very accommodative monetary policy stance.
 
U.S. retail sales increased 1.1%, the largest rise since September, after a revised 0.2% gain in January. That was well above economists’ forecasts for a 0.5% advance.

So-called core sales, which strip out automobiles, gasoline and building materials and correspond most closely with the consumer spending component of GDP rose 0.4% after increasing 0.3% in January.

The healthy gains in retail sales came despite the end of a 2% payroll tax cut and an increase in tax rates for wealthy Americans on Jan. 1.

Spending is being supported by the stock market rally, rising home prices and sustained job gains which are starting to push wages higher.

The gains in core sales in the first two months of the year offered hope that consumer spending, which accounts for about 70% of the U.S. economy, would probably not slow much this quarter after growing at a 2.1% annual rate in the fourth quarter.

Despite paying 35 cents more for gasoline at the pump, consumers also bought automobiles last month.

Receipts at auto dealerships rose 1.1% after falling 0.3% in January. Excluding autos, retail sales increased 1.0%, also the largest increase in five months. That followed a 0.4% advance in January.

Last month, the high gas prices helped to lift sales at gasoline stations by 5.0%, the largest increase since August. They had risen 0.7% in January. Excluding gasoline, sales rose 0.6%.

Sales at building materials and garden equipment suppliers increased 1.1%, reflecting gains in home building as the housing market recovery gains momentum. Receipts at clothing stores rose 0.2%.

Delays in tax refunds probably hurt sales at restaurants and bars, which fell 0.7%, while receipts at sporting goods, hobby, book and music stores declined 0.9%.

Sales of electronics and appliances slipped 0.2%, while receipts at furniture stores dropped 1.6%, the largest decline since April 2011.

Source: Reuters

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U.S. Unemployment Rate Drops to Lowest Level in Four Years
 
U.S. employers stepped up hiring in February, pushing the unemployment rate to a four year-low and suggesting the economy has enough momentum to withstand the blow from higher taxes and deep government spending cuts.

Nonfarm payrolls surged 236,000 jobs last month, the Labor Department said last Friday, handily beating economists’ expectations for a gain of 160,000.

The jobless rate fell to 7.7% from 7.9% in January, the lowest since December 2008. The decline reflected gains in employment as well as people leaving the labor force.

Although December and January’s employment data was revised to show fewer jobs added than previously reported, details of the report were solid, with construction adding the most jobs since March 2007 and increased hours for all workers.

It was another sign of the U.S. economy’s fundamental health, which has already propelled the Dow Jones industrial average to record highs. The sturdy gains in February also offered hope the economy would be able to absorb the fiscal austerity.

A 2% payroll tax cut ended and tax rates went up for wealthy Americans on Jan. 1. In addition, $85 billion in federal budget cuts that could slice as much as 0.6 percentage points from growth this year started on March 1.

But the pace of gains is still below the roughly 250,000 jobs per month over a sustained period that economists say is needed to significantly reduce unemployment. The Federal Reserve will likely maintain its very accommodative monetary policy.

The U.S. central bank is buying $85 billion in bonds per month and has said it would keep up asset purchases until it sees a substantial improvement in the labor market outlook, a message that Fed Chairman Ben Bernanke drove home in congressional testimony two weeks ago.

February’s employment report showed broad-based gains, with construction the star. The sector added 48,000 jobs and in January construction payrolls increased 25,000.

A decisive turnaround in the housing market and rebuilding on the East Coast after the destruction wrought by Superstorm Sandy in late October is boosting jobs at construction sites.

Manufacturers stepped up hiring in February, although the pace was still well below early last year because of lackluster domestic demand and cooling growth overseas. Factory jobs increased 14,000 last month after rising 12,000 in January.

Retail employment increased 23,700 jobs, rising for an eighth straight month, and defying a recent slowdown in sales.

Healthcare and social assistance saw another month of solid job gains. The same was the case for leisure and hospitality.

Government continued to shed jobs, with payrolls dropping 10,000 last month after falling 21,000 in January.

The sustained steady job gains are lending some stability to wages. Average hourly earnings rose four cents last month.

The length of the average workweek increased to 34.5 hours from 34.4 hours in January.

Source: Reuters
  

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