Public Expecting Land Transfer Tax Repeal to Move Forward

Toronto realtors, and the public, continue to look forward to the fulfillment of the election commitment, of Mayor Rob Ford and numerous City Councillors, to repeal the Toronto Land Transfer Tax.

“It is clear that the public expects the Mayor and City Council to move forward with the commitment to repeal the Toronto Land Transfer Tax, and it is unlikely that they will forget about this. This is a significant tax: it costs the average Toronto home buyer almost $6,500, and when added to the Provincial Land Transfer Tax, average Toronto homebuyers face almost $14,000 in land transfer taxes. Realtors look forward to working with the Mayor and City Council on a reasonable approach to deliver on this promise,” said Toronto Real Estate Board President Bill Johnston.

TREB has consistently opposed the Toronto Land Transfer Tax as an unfair tax that hurts Toronto’s economy. TREB strongly believes that the commitment by Mayor Rob Ford, and numerous City Councillors, during and after the election campaign to repeal the Toronto Land Transfer Tax was, and is, sensible.
“Recently, the City’s Budget Chief has pointed out the budgetary challenges facing the City. Realtors believe that City Council is moving in the right direction by conducting a comprehensive review of City services; we also strongly believe that the commitment to repeal the Toronto Land Transfer Tax can, and should, move forward,” said Johnston.

A recent public opinion poll conducted by Ipsos Public Affairs found that 75 per cent of Torontonians support Toronto Mayor Rob Ford’s commitment to repeal the Toronto Land Transfer Tax.

In light of the City’s Budget Chief’s recent comments, the poll contained interesting results. In particular, even when asked to consider the City’s expected budget shortfall, the public’s support for the repeal of the Toronto Land Transfer Tax remains very strong, with 68 percent of Torontonians believing that the Mayor should follow-through on this commitment, despite the City’s budget challenges.

The poll also found that the public is paying attention to this issue: a large number of Torontonians, 61 percent, were previously aware that Mayor Ford has committed to repeal the Toronto Land Transfer Tax.

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April 2011 Housing Starts

The seasonally adjusted annual rate of housing starts was 179,000 units in April, according to Canada Mortgage and Housing Corporation (CMHC). This is down from 184,700 units in March 2011.

“Housing starts moved lower in April mostly because of decreases in multiple construction across the country and in rural starts,” said Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre. “The multiple segment market in Ontario and Quebec contributed the most to the overall decline in Canada.”

The seasonally adjusted annual rate of urban starts decreased by 1.9 per cent to 160,100 units in April. Urban multiple starts were down by 5.1 per cent in April to 96,000 units, while single urban starts increased by 3.4 per cent to 64,100 units.

April’s seasonally adjusted annual rate of urban starts decreased by 9.4 per cent in Quebec and by 8.0 per cent in Ontario. Urban starts increased by 5.3 per cent in the Prairie region, by 10.4 per cent in the Atlantic region and by 23.5 per cent in British Columbia.

Rural starts were estimated at a seasonally adjusted annual rate of 18,900 units in April.

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New index identifies provincial households most vulnerable to economic risks

British Columbia, Alberta, Ontario and Saskatchewan households were found to be at greatest risk to negative economic events such as a substantial correction in housing prices, a major disruption in incomes or an unexpected large increase in borrowing rates. Manitoba households are least vulnerable. The Atlantic region and Quebec fall in between. Detailed provincial assessments are included in Assessing the Financial Vulnerability of Households Across Canadian Regions.

The probability of one or more of these negative events occurring in the coming years is relatively low according to TD Economics. However, the Household Vulnerability Index does note that risks related to household finances have been rising broadly across all regions over the past few years, and with higher interest rates on the horizon set to boost the cost of servicing debt, this upward trend in vulnerability is almost certain to continue. “The focus nationally on household debt has raised questions about which regions face the most significant challenge,” according to Craig Alexander, TD’s Chief Economist and co-author of the report. “This new index does not predict events, but it does shed light on those provinces that are most susceptible to downside risks.”

Since 2007, the increasing vulnerability has reflected in large part by the rising trend of household debt relative to income across the country. This development is an indication of the strength in housing markets and real estate related borrowing. More recently, however, there has been growing evidence that many Canadians have been turning to credit as a way to finance consumption rather than invest in their homes.

Despite rising indebtedness, home price increases have supported the asset side of the personal balance sheet ledger. Even more importantly the falling cost of borrowing has been pulling down the share of income households have been shelling out to service obligations. Low interest rates have also helped to keep a lid on the share of vulnerable households in recent years. As such debt-service ratios have been falling and remain in a comfortable range.

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Canadians less optimistic about economy compared to a year ago

Canadians are less optimistic about the outlook for the national economy and their personal financial situation in 2011 than they were last year, according to the January 2011 RBC Canadian Consumer Outlook Index (RBC CCO). Less than half (43 percent) of Canadians feel the economy will improve over the next year, a marked decline from the 56 percent reported in last January’s RBC CCO. In addition, only 38 percent of Canadians now feel their personal financial situation will improve over the next 12 months, compared to 45 percent a year ago.

The prevailing mood was reflected in the tight rein many Canadians kept on their expenses over the past holiday season, with 67 percent responding that they managed not to overspend their holiday budgets. Of this majority, 28 percent reported they had kept track of their spending by making a budget and sticking to it; 26 percent stated they knew how much they had to spend and “once the money was gone, that was it”. By far, the largest number of respondents (46 percent) said that they stayed within their budget because they didn’t want to go into debt or increase their debt load.

“We know that managing debt is top of mind for Canadians. Having a budget in place that you can stick to is one of the best ways to keep your finances in balance and take care of any debts,” said Ashif Ratanshi, head, Branch Investments, Deposits and Direct Investing, RBC. “This also gives you a good base from which to do your financial planning for the year. Ideally you want to ensure you are saving money for your future as well as covering your expenses today. Good financial advice can help you do both.”

Despite the cautious economic outlook expressed by the majority of Canadian respondents, there are indications that Canada’s economy will continue to grow in 2011 and 2012.

“While the pace of the recovery will remain moderate, we are projecting growth of 3.2 percent this year and 3.1 percent in 2012, representing the fastest pace of growth over the past four years,” noted Craig Wright, senior vice-president and chief economist, RBC. “As the economy continues to expand, we expect interest rates to drift moderately higher through the coming year. This should limit pressure on household balance sheets in an environment of continued employment gains.”

Other highlights from the RBC CCO include:

RBC Canadian Consumer Outlook Index: Overall, the RBC CCO Index dropped from 106 points in January 2010 to 93 in January 2011.

National Economic Outlook: While only 43 percent of Canadians feel the economy will improve over the next year, Albertans are much more optimistic (61 percent) and Quebecers less optimistic (32 percent) than the national average. As for the current state of the economy, 60 per cent of Canadians describe it as “good”, with the Prairies (77 percent) and Alberta (75 percent) feeling the most positive.

Personal Financial Situation Outlook: The number of Canadians who generally feel that their personal financial situation will improve over the next year dropped to 38 percent from 45 percent in January 2010. Albertans are the most optimistic about their personal financial situation (48 percent), Quebecers and Ontarians are the least optimistic (35 percent and 36 percent respectively).

Job Anxiety Outlook: Nationally, job anxiety has eased compared to a year ago. This year, 20 percent of Canadians surveyed stated that they are – or someone in their household is – worried about losing their job or being laid off, a drop from 26 percent in January 2010. Job anxiety was highest in Ontario (23 percent) in January 2011 and lowest in the Prairies (15 percent).

Holiday Season Expenditures: Of the one-third (33 percent) of Canadians who overspent their holiday budgets, the over-expenditure averaged $430. Atlantic Canadians were the most likely to overspend (37 percent), and overspent by the largest amount ($521). Of the two-thirds (67 percent) of Canadians who stayed within their holiday budgets, those living in Quebec and B.C. were most likely not to overspend (72 percent and 70 percent respectively).

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U.S. Housing Starts and Building Permits

Starts Edge Up, But Activity is Still Very Depressed

Housing starts rose by 3.9% to 555K units in November, slightly stronger than the market expectation for 550K units. Despite November’s increase, on a three month average basis, starts fell to 563K from 583K.

The increase in starts was driven by a 6.9% increase in single family, while the more volatile multi-family component fell by 9.1%.

Building permits, an indicator of future starts, fell by 4.0% to 530K – the lowest reading since April 2009.

Starts grew by 20.8% in the Northeast (following a 53.1% increase during October), and 8.6% in the Midwest. Meanwhile starts fell by 8.4% in the South and 11.4% in the West.

Key Implications

While starts rose in November, at 555K units, housing construction remains severely depressed. Further, this report showed no signs of a meaningful improvement as starts fell on a three-month average basis and permits show no indication of future strength.

Given the supply-demand balance in the housing market, it is not surprising that starts are stuck in the doldrums. At the current sales rate, ordinary listings can supply more than 10 months worth of activity. Adding to this pressure is the 11 months worth of supply sitting in foreclosure or more than 90 days past due.

In 2011 and 2012, stronger job and income growth coupled with ongoing thawing in mortgage lending will support an uptick in existing sales, which will support some modest growth in housing starts.

That being said, housing construction will remain well below its long-run trend of 1.5 million starts annually until at least 2013 – a reminder that the housing recovery will be measured in years, not months or quarters.

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Growing appeal of Canada to foreign central banks may be overheating the loonie

he growing appeal of Canada to foreign investors, including central banks, may be overheating the value of the loonie, further hurting an already battered Canadian manufacturing sector and making it difficult for the Bank of Canada to raise interest rates to slow growing household debt, finds a new report from CIBC World Markets Inc.

While Bank of Canada Governor Mark Carney recently warned of a “death grip” on the U.S. dollar, given that over 40 per cent of America’s trade is now with countries with managed exchange rates against the greenback and more than a dozen countries seeing double-digit growth in their reserves, the report notes the Canadian dollar may also be in a “death grip” of its own.

“Reasonable decisions by central banks to diversify their reserve holdings, including added weight in the Canadian dollars, may have been a key factor in driving our currency to parity vs. the U.S. unit, offsetting a large trade deficit,” says Avery Shenfeld, chief economist at CIBC. “Precise data on such flows aren’t available, and much of the foreign ownership of Canadian bonds is likely in private sector hands. But a significant share of the growth of late, and it’s been massive, appears to be linked to central bank reserves and other sovereign funds.”

The CIBC report found that foreign investors added more than $72 billion to their Canadian dollar bond holdings in the past 12 months, nearly enough to finance last year’s entire federal and provincial deficit. The majority of that has been in Government of Canada issues, the favoured vehicle for central bank reserves.

Canadian dollar central bank holdings are lumped into an “other” category in IMF data that would also include the Australian dollar and a few others, with most emerging economies not reporting on the composition of their holdings. Mr. Shenfeld believes these non-reporters are following a similar allocation. Using a reasonable estimate of Canada’s share of that “other” group, he estimates central banks might be accounting for a third-to-a-half of the net new foreign buying, which is also in line with anecdotal evidence from market participants.

“Those central banks are not, of course, trying to control their currency’s cross against the Canadian dollar, since the bilateral trade flows that would be affected would be modest,” adds Mr. Shenfeld. “Nor are they directly aiming at driving the loonie up against the U.S. unit. But that is still the outcome.”

The elevated value of the loonie has hamstrung the Bank of Canada in its efforts to stem the rapid growth in consumer debt through interest rates hikes. A CIBC Economics analysis in the report shows that Canada’s current debt load is not problematic, but if maintained, the present pace of borrowing could put a squeeze on household finances five years out.

The Bank can’t move to raise interest rates to deter additional borrowing for fear of sending the loonie even higher and putting further drag on exports. Already, the Canadian dollar’s appreciation has contributed to Canada losing more than a quarter of its 2001 share of the U.S. import market.

While many are now looking to the federal government to put the brakes on household borrowing, the report suggests Bank of Canada Governor Mark Carney has another option.

“There is one weapon yet to be touched: fighting fire with fire,” says Mr. Shenfeld. “Canada could match foreign central bank intervention in favour of our currency with an offsetting intervention, selling an equivalent volume of loonies. That would simply move back to market determined exchange rates, and would loosen the death grip on the Canadian dollar.”

Mr. Shenfeld notes that while global policy makers have devoted a great deal of time and effort to developing financial sector reforms based on the lessons from the past economic crisis, Canadian policy makers may want to pay a little more attention to the impacts of an imbalance in trade tied to misaligned currencies, another key factor in the recent troubles that tripped up the global economy.

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Canadian Existing Home Market

November extends the climb in home sales to four months

Existing home sales increased for a fourth consecutive month in November, climbing by 4.8% M/M to nearly 38,000 units (seasonally-adjusted). As of these November figures, sales were roughly halfway between their peak of December 2009 and their trough of July 2010.

Sales activity increased in two-thirds of local markets. Within large core urban markets, the uptick in sales was led by Vancouver (+11%), Montréal (+8%), and Edmonton (+7%).

Stepping back to the national trough in sales of July, the 20% increase in sales since then has been led by British Columbia (+29%), Ontario (+24%), and Saskatchewan (+20%). Other regions/provinces have also seen an uptick in activity, but it has been more subdued in Alberta (+15%), Québec (+11%), and the Atlantic (+9%).

On the supply side of the national market, new listings were down 0.7% M/M. Combined with the sales figure, this resulted in a firmer market balance than in October. The sales-to new listings ratio rose to 0.55 (from 0.52 in October), while the months of inventory measure declined to 5.8 months (from 6.1 months in October).

The seasonally-adjusted average price rose by 1.8% M/M in November, while the actual (unadjusted) price gained 2.0% Y/Y. Monthly (seasonally-adjusted) average home values have been accelerating over past four months, reflecting the firmer market balance. Meanwhile, year-over-year changes, while still modest, have also been picking up over the last two months after near flat readings in August and September.

Key Implications

With the November figures in and assuming steady sales in December, Q4 would mark a 14% increase in sales. As such, and not coincidentally, it appears that Q3 was not only the low-water mark in economic growth, but also in resale housing activity.

We expect home sales to remain well supported over the next couple of quarters before increases in borrowing rates eventually begin to ease the pace of sales. Reading through the quarterly volatility, we expect the market to move mostly sideways over the next couple of years. The bottom line is that before long, eroding affordability and resale housing sector sluggishness will slightly dampen economic growth. Further analysis and forecasts are provided in “Canadian Housing Landing Safely” (Dec. 9) and the latest edition of our Canadian Quarterly Economic Forecast, to be released today.

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Domestic Strength to Propel Canada’s Economic Recovery into 2011

Canada’s economic recovery soldiered on in the third quarter, although the pace of growth slowed for the second straight quarter after losing traction in the spring amid softness in the U.S. economy, according to the latest Economic Outlook report from RBC Economics.

However, with financial market conditions improving and with monetary policy remaining very accommodative, the pace of quarterly growth is expected to quicken from the recent downshift. As a result, GDP is expected to come in at 3.2 per cent in 2011, slightly faster than 2010′s projected growth of 3.1 per cent. RBC notes that projected growth this year and next represents the fastest pace over the past four years and forecasts that GDP will rise by 3.1 per cent in 2012.

“The mid-year economic slowdown reflected a pullback in housing investment, which fell after five consecutive quarterly increases, and a mild downturn in exports. However, financial conditions remain supportive of domestic growth which will be the main engine of the expansion going forward,” said Craig Wright, senior vice-president and chief economist, RBC. “While the recovery is proving to be weaker than those previously experienced, economic growth in 2010 and 2011 is a substantial improvement from the contraction of 2.5 per cent experienced in 2009.”

While consumers have been a mainstay of the recovery to-date, the pace of consumer spending is likely to slow from 2010′s solid clip with the slack being taken up by business investment in capital goods. In fact, RBC expects that Canadian businesses will play a pivotal role in the economy’s growth momentum as the recovery matures and pressures persist on businesses to boost productivity.

Though the recovery is expected to continue, the pace will remain moderate, implying only limited progress in lowering the unemployment rate which is expected to close out 2010 under eight per cent and decline only to 7.4 per cent by the fourth quarter of 2011. Beyond next year, RBC forecasts that the unemployment rate will continue to moderate slowly, reaching 7.0 per cent by the end of 2012.

RBC notes that inflation has been volatile in recent months reflecting the pass-through from the harmonization of sales taxes in Ontario and B.C. and movements in energy prices. As of October, the core rate, which excludes these factors, stood at 1.8 per cent and the all-items inflation rate rose to 2.4 per cent. The excess capacity that was generated during the economic downturn is slowly being whittled away and RBC expects that the output gap will be eliminated mid-year 2012.

According to the report, the persistent strengthening in the Canadian dollar from its early 2009 low aligns closely with the decline in import prices which have fallen by eight per cent as the Canadian dollar gained 19.4 per cent against the US dollar. As a result, import growth has solidly outpaced exports resulting in the trade sector acting as a weight on the overall level of GDP output for most of 2010. RBC forecasts that the Canadian dollar will continue to be well supported relative to the US dollar remaining close to parity through the forecast.

RBC forecasts U.S. GDP of 2.7 per cent in 2010 and 3.3 per cent in 2011 as the downdraft in U.S. growth in the middle of the year appears to have come to an end with the number of upside surprises in the economic data solidly outpacing the downside recently. Support to near term growth is also expected from recent rounds of increased monetary and fiscal stimulus, sending growth in 2012 up to 3.6 per cent.

At the provincial level, RBC expects Saskatchewan to take over the top spot in the provincial-growth rankings from Newfoundland & Labrador in 2011 after trailing behind it in 2010. Alberta is also expected to move ahead of Newfoundland & Labrador in 2011. Ontario is expected to slip to fifth position in 2011 from fourth in 2010. Manitoba is expected to move up in the rankings in 2011 to fourth spot after a modest recovery in 2010. Nova Scotia, New Brunswick and Prince Edward Island are projected to remain at the lower end of the scale in 2010 and 2011. The forecast for growth in British Columbia is fairly similar to the national average, and the forecast in Quebec is lagging slightly below the national average both this year and next.

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National Rental Vacancy Rate Edges Lower

The average rental apartment vacancy rate in Canada’s 35 major centres decreased slightly to 2.6 per cent in October 2010, from 2.8 per cent in October 2009, according to the fall Rental Market Survey released today by Canada Mortgage and Housing Corporation (CMHC).

“The economic recovery that has taken place over the past year has boosted demand for both rental and ownership housing,” said Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre. “High levels of immigration have supported demand for rental housing, thus pushing the vacancy rate lower. In addition, improving economic conditions have likely boosted household formation which, in turn, has added to the demand for rental housing. These two factors combined, have put downward pressure on the vacancy rate.“

The results of CMHC’s fall survey reveal that, in October 2010, the major centres with the lowest vacancy rates were in Winnipeg (0.8 percent), Regina, Kingston and Québec (1.0 percent each). At a provincial level, Manitoba and Newfoundland and Labrador posted the lowest vacancy rates at 0.9 percent and 1.0 percent, respectively.

The survey reveals that the major centres with the highest vacancy rates were Windsor (10.9 percent), Abbotsford (6.5 percent), Saint John (5.1 percent), and London (5.0 per cent). On a provincial basis, the highest vacancy rates were in Alberta (4.6 per cent) and New Brunswick (4.5 per cent).

The Canadian average two-bedroom rent was up from $836 in 2009 to $860 in 2010. The highest average monthly rents were in Vancouver ($1,195), Toronto ($1,123), Calgary ($1,069), Ottawa-Gatineau (Ontario part, $1,048), Victoria ($1,024), and Edmonton ($1,015). Of all the major centres, only these six had average rents at or above $1,000. The lowest average monthly rents for two-bedroom apartments in new and existing structures were in Trois-Rivières ($533), Saguenay ($535), and Sherbrooke ($566).

Year-over-year comparisons of average rents can be slightly misleading because rents in newly built structures tend to be higher than in existing buildings. By excluding new structures and focussing on structures existing in both the October 2009 and October 2010 surveys, this provides a better indication of actual rent increases paid by tenants. Overall, the average rent for two-bedroom apartments in existing structures across Canada’s 35 major centres increased 2.4 percent between October 2009 and October 2010, a similar pace of rent increase to what was observed between October 2008 and October 2009 (2.3 percent).

CMHC’s fall Rental Market Survey also found that the rental apartment availability rate in Canada’s 35 major centres was 3.8 percent in October 2010, down from 4.1 per cent in October 2009. A rental unit is considered available if the unit is vacant (physically unoccupied and ready for immediate rental), or if the existing tenant has given or received notice to move and a new tenant has not signed a lease. Availability rates were highest in Windsor (12.5 percent), Abbottsford (7.7 percent), London (7.4 percent) and Hamilton (6.8 percent). The lowest availability rates were in Québec (1.2 percent), Winnipeg and St. John’s (1.4 percent), and Regina (1.5 percent).

As Canada’s national housing agency, CMHC draws on more than 60 years of experience to help Canadians access a variety of high quality, environmentally sustainable and affordable homes. CMHC also provides reliable, impartial and up-to-date housing market reports, analysis and knowledge to support and assist consumers and the housing industry in making informed decisions.

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Travel Will Be Second Biggest Expense for Canadians Over the Holiday Season

While Canada may be synonymous with snow and shovels this time of year, the majority of Canadians plan to trade their boots and snowsuits for swim suits and suntans, according to BMO’s recent Holiday Spending Survey. These findings are in marked contrast to BMO’s Summer Spending Survey released in August in which Canadians indicated they were more than twice as likely to part with cash for a vacation close to home (43 percent) than a trip abroad (17 percent).

More than half (55 percent) of Canadians who said they plan to take a winter vacation over the next three months will opt to follow the sun and head to a warmer destination such as Florida, California, Mexico. Only six percent of those polled said they’ll choose a ‘staycation’ or a vacation close to home. The report showed that travel would represent the second biggest holiday expense for Canadians.

Douglas Porter, Deputy Chief Economist, BMO Capital Markets, said the shift away from ‘staycations’ to out-of-country travel may indicate that Canadians are developing a more confident outlook about their personal financial situation after a lengthy battle through the recent economic downturn.

“Consumer confidence is up since the summer lull and significantly higher than levels seen during the recession,” said Mr. Porter. “While we haven’t yet returned to pre-recession levels, the latest trend is nonetheless encouraging.”

Prepaid Travel Cards Growing in Popularity

Another growing travel-related trend is a preference to use prepaid travel cards in lieu of cash and/or travellers cheques for out-of-country spending. Prepaid travel cards offer the convenience of cash and travellers cheques without the risks associated with loss or theft. BMO’s own Prepaid Travel MasterCard has quickly gained popularity as an easier alternative, gaining double digit growth, year over year, since it was introduced in 2007.

“Prepaid travel cards take a lot of the worry out of travel because you don’t have to carry a lot of cash in your pocket and this can help with sticking to a travel budget.” said David Heatherly, Vice President, Payment Products, BMO Bank of Montreal. “But not all cards are created equal. Most prepaid travel cards offer convenience but can be costly to load funds; they can only be loaded once; and they may not offer extensive security features.”

Mr. Heatherly offered some timely advice for Canadians who plan to travel abroad this holiday season:

Have a travel budget – Plan your itinerary and anticipate your expenses. Set a realistic budget and then stick to it. It’s also a good idea to have a small amount of the local currency on hand to tip service providers or make other incidental purchases.

But don’t carry more cash than you need – Don’t carry more cash than you need. A pre-paid travel card provides all the convenience of a credit card without the interest costs and is an effective tool for managing to a travel budget. Choose a card that comes with security features that protect your purchases and give you peace of mind.

Advise your bank before boarding – Bank fraud-prevention measures might automatically block unusual transaction activity such as out-of-country purchases unless you tell your bank in advance.

Carry a converter – Buy a currency converter, available at many retailers, to help you determine how much you’re spending before you buy.

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