Financial Update For Oct. 16, 2009

A hot real estate market getting hotter

average sale price of a house in Canada increased 13.6% from a year ago.

• TSX -28.27 to 11,504(Reuters) on lower gold prices and disappointing U.S. earnings news

• DOW +144.80 to 10,062

• Dollar -.81c to 96.67

• Oil +$2.40 to $77.58US per barrel. Hits another 2009 high

• Gold -$14.100 to $1,049.80USD per ounce

• Canadian 5 yr bond yields +.03bps to • http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us

Canada's annual inflation rate edged down one-tenth of a point in September, staying well below zero at minus-0.9 per cent

Canada a tale of two economies: as export sector staggers, domestic activity booms

By Julian Beltrame OTTAWA — Two reports Thursday reinforced recent trends that show a strong domestic Canadian economy propped up by floor-low interest rates and a recovering housing market, and a weak manufacturing sector hammered by the sky-high dollar and a squeeze on exports.

“What it’s telling us is that low interest rates are working in Canada,” said CIBC chief economist Avery Shenfeld. “We’ve had a number of disappointments on the export front. Where Canada is showing vigour, it’s on the domestic front in response to low interest rates.”

The most recent evidence is the outsized growth in house sales during the third quarter — given the still-weak overall economy.

The Canadian Real Estate Association reported that in real terms, sales of existing homes in the country have never been stronger than in the just-completed third quarter. The association said more than 135,000 units were sold in the July-to-September period — 18 per cent higher than the corresponding period last year before the recession hit.

Meanwhile, Statistics Canada figures released early Thursday showed factory shipments fell 2.1 per cent in August as the activity from the U.S. cash-for-clunkers program, which had artificially spurred auto sales in the United States, subsided.

As well, there are few signs of recovery ahead for the battered manufacturing sector as new orders have practically stagnated and unfilled orders fell 4.2 per cent.

“The fact remains that Canada’s manufacturing sector remains under duress,” said TD Bank economist Grant Bishop, noting the new challenge of a dollar that many expect to regain parity with the U.S. greenback by year’s end.

A perhaps even bigger barrier to a recovery in Canada’s export sector, which accounts for about one-third of the economy, is that consumer demand in the U.S. for what Canada has to sell — cars, parts, lumber and consumer items — isn’t about to pick up any time soon.

A new Conference Board of Canada forecast of the U.S. economy estimated that consumer spending will remain in the dumps throughout 2010, rising only about one per cent from already abysmal levels.

The problem faced by the Bank of Canada is that hinting it may raise rates sooner than next summer, when its conditional pledge to keep the policy rate at 0.25 per cent runs out, will only add fuel to the loonie’s flight and further harm exports and manufacturers. Suggesting that rates will remain as low as they are for a long time feeds into a housing asset bubble and risks inflation.

“The decisive rebound (in home sales) puts the Bank of Canada in a quandary — while the hot housing market cries out for rate hikes, the runaway loonie screams ‘No!’ ” is the way Doug Porter, deputy chief economist with BMO Capital Markets, puts it.

The big banks recently raised mortgage rates by up to a third of a point on many loans, a move that could slow down demand in some markets. However, mortgage rates are still extremely low by historic standards. The Canadian Press

A hot real estate market getting hotter

Garry Marr, Financial Post The statistics may not say it yet but Toronto real estate sales representative Kate Watson can already feel the ground shifting.

A new set of data from the Ottawa-based Canadian Real Estate Association (CREA) shows the market tighter than ever with the lack of supply in new listings conspiring to make a hot market even hotter.

CREA said Thursday the average sale price of a house in Canada reached $331,602 last month, a 13.6% increase from a year ago. There just isn't enough new product coming to market to meet demand. Last month, there was 80,816 new listings across the country, compared to 97,657 a year ago.

The supply problem is happening in almost every major Canadian city. Toronto new listings were down 25.3% last month from a year ago. Calgary was off 26.1%.

The number of months of inventory in the market -- which is based on the number of months it would take to sell current inventories based on current sales activity -- was 4.9 months in September. That figure was down slightly from August and way off the peak of 12.8 months reached in January.

CREA expects the situation to ease in the coming months as sellers realize the type of prices they can get if they list. Ms. Watson, who works for Wright Real Estate Brokers Ltd., says the situation is already resolving itself.

"It was bit of as logjam but it is already starting to clear," she says. "You had a lot people waiting to list until after Thanksgiving because nobody wants to put their property for sale before a holiday."

The Canadian market has had a remarkable turnaround from a winter that was the worst Ms. Watson can remember in her six years on the job which have mostly witnessed a rising market. September sales across the country were up 1.5% from August. The latest bump in sales puts the market 63% above January low.

The same things continue to drive the housing market. "Low interest rates, rebounding consumer confidence and improving overall sense of economic security continue to draw homebuyers," said Dale Ripplinger, president of CREA.

CREA's chief economist Gregory Klump said the 1.5% increase in sales while impressive shows the market is beginning to cool to some degree. "Monthly sales activity remained on a strong upward trajectory throughout the third quarter in British Columbia while showing signs it may be topping out in other provinces. On balance, this suggest the sales activity may be starting to plateau after having climbed rapidly earlier this year," he said.

The total dollar figure for all sales in the third quarter reached $41-billion, the highest level on record for the period. British Columbia and Ontario reached new highs for dollar volume. Canada's largest cities are driving the housing market. Vancouver sales in the third quarter were up 34% from second. Toronto sales rose 11% during same period while Calgary climbed 19%.

Nationally, average national sales price in the third quarter was $327,736, an 11% increase from a year ago. Sellers sitting on the sidelines are expected to move in the coming months.

"Headline average price increases over the rest of the year are expected to prompt sellers to return to the market," said Mr. Klump. "An increase in new listings will help keep a lid on price increases."

Scotiabank economist Adrienne Warren says she's not too concerned about any sort of bubble building in the housing market. "I don't think so. This is just the strength of demand and a lack of listings," she said. "As the economy stabilizes, people will feel more confident to list their homes."