Canada: Boom in progress

Canada has experienced a housing boom, not unlike many other English-speaking countries globally. According to the Globe and Mail, housing prices have doubled there nationally in the last 10 years. So, what are the prospects for Canadian housing and for the Canadian economy going forward?

The prospects for Canada certainly are better than in the US; after all, Canada has a commodity-rich business environment, which bodes well as commodity prices remain at elevated levels. However, Canada will not be able to fully de-couple from the US, its main trading partner. Canada’s economy will suffer along with the downturn in the US. And, above all else, don’t expect a repeat of the last ten years on the housing front.

Just at the end of last month, Statistics Canada released a surprising GDP report for the Canadian economy. GDP actually contracted in Q1 2008. This had the Canadian Finance Minister Jim Flaherty defending the government and predicting that Canada will avoid recession. The Globe and Mail reported broad weakness in the economy.

Data released by Statistics Canada showed a widespread softening, with the declines clustered in the goods-producing side of the economy.

Major cutbacks in manufacturing activity, especially in the auto sector, were behind much of the poor performance, Statistics Canada said, but bad weather was also to blame.

For the month of March, economic output also contracted, falling 0.2 per cent from a month earlier, similar to the revised 0.3 per cent decline seen in February.

Canada’s economy has lost steam sharply over the past year. In the first quarter of 2007, the economy was expanding at a robust 4.1 per cent pace, declining to 2.3 per cent by the middle of last year, and 0.8 per cent in the fourth quarter.
Globe and Mail, 30 May 2008

As a result, consumer confidence has really suffered. The Conference Board of Canada recently reported that consumer confidence was at its lowest level in seven years, with eastern and central Canada most pessimistic. With consumer confidence at a low ebb, the export market to the U.S. hurting and statistics confirming an actual contraction in Canadian GDP, it’s unlikely that Canada will not have a fairly major slowdown. If Canada does escape with a mild slowdown, the booming oil and gas and commodities sectors will be the country’s saving grace.

Housing Bubble
As for housing, Canada has been one of the more bubblicious housing markets in the global economy. But, Canada’s housing market has yet to fall, supported by a hot economy in the western provinces. Signs of a slowdown in the housing sector are beginning to accumulate. According to the National Post, house price growth is slowing, even in Alberta.

Canadian new housing prices rose at a slower pace in March than in February as a slowing market in Alberta was only partially offset by a real estate boom in other western provinces, Statistics Canada said on Monday.

The price of new homes edged up 0.2% in the month compared with a 0.3% rise in February, in line with market expectations. Year-over-year price growth slowed to 6.1% from 6.2% in February.

“This deceleration continues a downward trend that started in September 2006 due mainly to the softening market in Alberta,” the state-run agency said.
National Post, 12 May 2008

Inflation and Monetary Policy
So, with the economy and the housing sector slowing, inflation and monetary policy are particularly important. Petroleum and coal product increases are pushing up raw materials costs and cutting profit margins. Inflation is becoming a concern and could prevent the Bank of Canada from reducing interest rates as the economy slows. Previously, the Canadian central bank cut interest rates down to 3% on April 22nd, it’s third cut already in 2008.

Final thoughts
Ultimately, Canada is looking a lot better than some other Anglo-Saxon economies. As with Australia, a commodity-rich export culture has helped the local currency and bolstered the economy. Yet, imbalances remain and the housing sector is looking stretched, especially in overbuilt Toronto. I am certainly watching to see how things develop in Canada. But, things there certainly look a whole lot better than in Ireland, the U.S. or the UK indeed.

Housing’s 10-year boom saw prices double, Globe and Mail, 3 Jun 2008
Consumer confidence plunges, Globe and Mail, 2 Jun 2008
Toronto’s Condo Kings: Is their boom sustainable?, National Post, 2 Jun 2008
From boom to gloom?, National Post, 30 May 2008
Flaherty rejects recession fears as economy shrinks in quarter, Globe and Mail, 30 May 2008
Manufactured goods, raw materials prices hit record highs in April, Globe and Mail, 30 May 2008
Alberta cools Canada’s house price growth, National Post, 12 May 2008
Canada’s housing market cools in April, National Post, 8 May 2008
Canada’s housing boom is ‘officially over’, National Post, 17 Apr 2008

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