Oil to drive Alberta to top province for economic growth

Oil to drive Alberta to top province for economic growth:3.8% forecast for next two years

CALGARY — Alberta will lead the country in economic growth this year and next year, according to a report released Wednesday by Scotia Economics.

The report says real GDP growth in the province will be 4.2 per cent this year, the highest in the nation, followed by 3.3 per cent growth in 2012, which will tie Saskatchewan as the highest in the country.

Scotia Economics is forecasting Canadian economic growth of 2.7 per cent this year and 2.5 per cent in 2012.

“Alberta will once again lead Western Canada’s outperformance, with growth averaging nearly 3.8 per cent in 2011-12,” says the report. “Heavy oil output is being ramped up, with further investment and construction activity underpinning a multi-year period of solid growth.

“The manufacturing and service sectors will experience a positive spillover as physical and human capital are added to support the expansion. However, rising construction and labour expenses will also weigh on business costs, and may pressure capacity towards the end of the forecast period.”

The report says the oil sector will continue to be Alberta’s growth engine with significant investment and output gains contributing to the increased momentum. Total crude oil output is projected to expand by nearly 30 per cent from current levels by 2012, bringing total production to 50 per cent above 1999 levels, it said.

“Alberta is expected to lead the country in job creation over the 2011-2012 period. The province lagged the national pickup in hiring earlier this year, but has been gaining momentum ever since. Alberta has one of the tightest labour markets in Canada, which is expected to put increasing pressure on wages,” says Scotia Economics.

Employment growth of 2.7 per cent this year and 1.8 per cent in 2012 is forecast for the province.

mtoneguzzi@calgaryherald.com

Calgary MLS sales soar in June

Transactions up over 30% from a year ago

CALGARY — Calgary’s residential real estate market experienced a significant upswing in sales in June compared with a year ago.

Single-family MLS sales during the month were 1,398, up 32.01 per cent from June 2010’s 1,059 transactions, according to data released by the Calgary Real Estate Board on Monday.

And for the first time since April 2010, condo sales were up year-over-year, increasing by 30.56 per cent in June to 581 transactions. In June 2010, there were 445 condo sales.

The average sale price for a single-family home in June dropped by 0.33 per cent year-over-year falling to $479,580 from $481,960.

But the condo average rose by 0.79 per cent to $296,501 from $292,182 a year ago.

June’s condo average condo price was the highest since May 2010.

According to CREB, June’s year-over-year increase in single-family home sales was the highest since January 2010’s 38.50 per cent while for the condo market it was the highest since March 2010’s 36.26 per cent.

On a year-to-date basis, single-family home sales for the first six months of this year are up 5.64 per cent from a year ago to 7,231 transactions while condo sales are down 4.91 per cent to 2,965 units.

“Strong monthly increases does not imply a housing boom, as it is important to put into perspective that sales activity remains below long-term averages,” said CREB in a statement.

Sano Stante, president of the Calgary Real Estate Board, said the housing market in Calgary has gradually improved throughout the year as anticipated.

“We had a late spring market this year,” he said. “It’s all starting to come together in June. And last year we had an exuberant market early on and it died in June. So to draw comparisons year-to-year for that month shows an exaggeration of the trend.”

After the first half of the year, it appears the recovery in the housing market is starting to find its footing, he added.

“This gradual levelling has been fuelled by growth in employment, and in particular growth in full-time jobs. Improved job prospects, combined with an increase in the number of people moving to Calgary, will give lift to our housing market for the remainder of this year and into the next.”

Stante said homes that are value-priced are selling and they’re moving relatively quickly. Homes that are over-priced are sitting on the market, he added.

Dan Sumner, economist with ATB Financial in Calgary, said a year-over-year comparison may be a little misleading as to the strength of the Calgary housing market in June specifically. June is often one of the busiest months for sales volumes but sales last June were abnormally slow, he explained.

“Fuelling sales is a stronger economy specifically in Alberta, which feeds through into consumer confidence and that’s making Albertans more comfortable with home purchases again. Very accommodative interest rates are also helping as well,” added Sumner.

He said prices have been stable for quite some time now, despite a fairly strong economy over the past year. Because housing prices have risen so much over the past 10 years in Alberta, they are about as high as they can be, he said.

“However, with the economy fairly strong in Alberta and rates increasing affordability, for the time being at least, that is preventing prices from moving any lower. What you end up with is resistance for prices to move in either direction, and flatness ensues,” said Sumner.

The key economic contributors to the current housing market include a strong energy sector and resource prices as well as an improving labour market and strong wage growth. Also interprovincial migration to Alberta has picked up, said Sumner.

“With economic conditions in Alberta strong and looking up, sales during the second half of 2011 should be higher than last year,” he said.

Richard Cho, senior market analyst for Calgary for Canada Mortgage and Housing Corp., said that although demand for housing has been gradually improving, resale activity this time last year was also moderating.

mtoneguzzi@calgaryherald.com

Real estate fees not headed for basement despite new rules

Canadians shouldn’t expect a sharp drop in real estate fees, with the country’s largest brokerages vowing to hold the line on the commissions despite rules that make it easier for discounters to muscle in on their businesses.

While a deal between the Competition Bureau and the Canadian Real Estate Association means agents will be able to break real estate services into small, individually priced chunks rather than charge a set commission for a complete sale, companies such as Royal LePage don’t plan to offer à la carte services.

39% 516 votes

Yes

61% 799 votes

No

That leaves the door open for a small group of discounters who have already set up shop across the country, offering those who want to sell their own homes to buy a listing on the real-estate funded Multiple Listing Service for as little as $109.

“That type of service may appeal to a certain segment of the market but I don’t think it appeals to those who would traditionally use a professional agent,” said Royal LePage president Phil Soper.

The national real estate association, which represents about 100,000 agents, was locked in a battle with the Competition Bureau over Commissioner Melanie Aitken’s charges that CREA made it impossible for individual agents to offer innovative services to consumers.

Instead, anyone who wanted an agent’s help to sell their home had to sign up for a full slate of services – including the posting of a Multiple Listing Service listing, the handling of negotiations and anything else involved with the sale. The average commission is 5 per cent in Canada, which meant the average national sale price of $324,928 in August would have landed agents a $16,246 commission.

CREA made changes earlier this year that were meant to appease the Competition Bureau, but they didn’t go far enough because there was some wiggle room that allowed it to keep members from offering low-cost services at any time. Thursday’s deal, which must still be ratified by CREA’s members, should end that battle.

“This battle has been about making sure a consumer isn’t forced to buy more service than they may need,” said Mr. Soper. “These changes may well have a profound effect on the lower end of the market, but I’m not sure this is the best time to be offering fewer services considering the market is cooling.”

But even without a settlement, this year has seen a slew of low-cost realty companies set up shop to help those who want to sell their houses on their own.

Joe William of Best Value Real Estate in Ottawa has been putting houses on the MLS for $109. Mayur Arora of OneFlatFee.ca will place a listing for $649. Other services can be purchased as needed – for example, he will negotiate a deal for an extra $500.

“We’re having our best year, business is up over 40 per cent,” said Mr. William. “It’s been a very popular service, we’re looking at going national”.

(Steve Ladurantaye Globe and Mail)

Things you think add value to your home - but really don't

Every homeowner must pay for routine home maintenance, such as replacing worn-out plumbing components or staining the deck, but some choose to make improvements with the intention of increasing the home's value.

Certain projects, such as adding a well thought-out family room - or other functional space - can be a wise investment, as they do add to the value of the home. Other projects, however, allow little opportunity to recover the costs when it's time to sell.

Even though the current homeowner may greatly appreciate the improvement, a buyer could be unimpressed and unwilling to factor the upgrade into the purchase price. Homeowners, therefore, need to be careful with how they choose to spend their money if they are expecting the investment to pay off. Here are six things you think add value to your home, but really don't.

Swimming Pools

Swimming pools are one of those things that may be nice to enjoy at your friend's or neighbour's house, but that can be a hassle to have at your own home. Many potential homebuyers view swimming pools as dangerous, expensive to maintain and a lawsuit waiting to happen.

Families with young children in particular may turn down an otherwise perfect house because of the pool (and the fear of a child going in the pool unsupervised). In fact, a would-be buyer's offer may be contingent on the home seller dismantling an above-ground pool or filling in an in-ground pool.

An in-ground pool costs anywhere from $10,000 to more than $100,000, and additional yearly maintenance expenses need to be considered. That's a significant amount of money that might never be recouped if and when the house is sold.

Overbuilding for the Neighbourhood

Homeowners may, in an attempt to increase the value of a home, make improvements to the property that unintentionally make the home fall outside of the norm for the neighbourhood. While a large, expensive remodel, such as adding a second story with two bedrooms and a full bath, might make the home more appealing, it will not add significantly to the resale value if the house is in the midst of a neighbourhood of small, one-storey homes.

In general, homebuyers do not want to pay $250,000 for a house that sits in a neighbourhood with an average sales price of $150,000; the house will seem overpriced even if it is more desirable than the surrounding properties. The buyer will instead look to spend the $250,000 in a $250,000 neighbourhood. The house might be beautiful, but any money spent on overbuilding might be difficult to recover unless the other homes in the neighborhood follow suit.

Extensive Landscaping

Homebuyers may appreciate well-maintained or mature landscaping, but don't expect the home's value to increase because of it. A beautiful yard may encourage potential buyers to take a closer look at the property, but will probably not add to the selling price. If a buyer is unable or unwilling to put in the effort to maintain a garden, it will quickly become an eyesore, or the new homeowner might need to pay a qualified gardener to take charge. Either way, many buyers view elaborate landscaping as a burden (even though it might be attractive) and, as a result, are not likely to consider it when placing value on the home.

High-End Upgrades

Putting stainless steel appliances in your kitchen or imported tiles in your entryway may do little to increase the value of your home if the bathrooms are still vinyl-floored and the shag carpeting in the bedrooms is leftover from the '60s. Upgrades should be consistent to maintain a similar style and quality throughout the home.

A home that has a beautifully remodeled and modern kitchen can be viewed as a work in project if the bathrooms remain functionally obsolete. The remodel, therefore, might not fetch as high a return as if the rest of the home were brought up to the same level. High-quality upgrades generally increase the value of high-end homes, but not necessarily mid-range houses where the upgrade may be inconsistent with the rest of the home.

In addition, specific high-end features such as media rooms with specialized audio, visual or gaming equipment may be appealing to a few prospective buyers, but many potential homebuyers would not consider paying more for the home simply because of this additional feature. Chances are that the room would be re-tasked to a more generic living space.

Wall-to-Wall Carpeting

While real estate listings may still boast "new carpeting throughout" as a selling point, potential homebuyers today may cringe at the idea of having wall-to-wall carpeting. Carpeting is expensive to purchase and install. In addition, there is growing concern over the healthfulness of carpeting due to the amount of chemicals used in its processing and the potential for allergens (a serious concern for families with children). Add to that the probability that the carpet style and colour that you thought was absolutely perfect might not be what someone else had in mind.

Because of these hurdles, wall-to-wall carpet is something on which it's difficult to recoup the costs. Removing carpeting and restoring wood floors is usually a more profitable investment.

Invisible Improvements

Invisible improvements are those costly projects that you know make your house a better place to live in, but that nobody else would notice - or likely care about. A new plumbing system or HVAC unit (heating, venting and air conditioning) might be necessary, but don't expect it to recover these costs when it comes time to sell.

Many homebuyers simply expect these systems to be in good working order and will not pay extra just because you recently installed a new heater. It may be better to think of these improvements in terms of regular maintenance, and not an investment in your home's value.

The Bottom Line

It is difficult to imagine spending thousands of dollars on a home-improvement project that will not be reflected in the home's value when it comes time to sell. There is no simple equation for determining which projects will garner the highest return, or the most bang for your buck.

Some of this depends on the local market and even the age and style of the house. Homeowners frequently must choose between an improvement that they would really love to have (the in-ground swimming pool) and one that would prove to be a better investment. A bit of research, or the advice of a qualified real estate professional, can help homeowners avoid costly projects that don't really add value to a home.

(Jean Folger, Investopedia.com)

Canadian mortgage debt rises to over $1 trillion on high prices, low interest

Low interest rates and a hot housing market helped push Canada’s total residential mortgage debt to a record $1 trillion this year, but a cooling real-estate market is expected to slow further accumulation, says the chief economist of Canada’s mortgage industry association.

The value of outstanding mortgages is now 7.6 per cent higher than it was last year, the Canadian Association of Accredited Mortgage Professionals said in its annual report released Monday.

“We’re still seeing a lot of movement into home ownership and that’s what’s driving the growth of debt,” said Will Dunning, CAAMP’s chief economist.

“The growth will gradually decelerate but we’re still looking at rates of six and a half per cent or so, so still fairly rapid,” Dunning said.

This year’s growth was higher than the average annual increase is around 7.1 per cent. However, it is still much lower than it was in the early 2000s, when debt growth hovered closer to 10 per cent year over year.

Higher home prices drove many Canadians to borrow heavily to finance-purchases, while a low interest rate environment encouraged others to refinance loans and consolidate debt, the CAAMP report said.

The low interest rate environment has enabled some consumers to take on bigger mortgages than they might otherwise have been able to carry, while it has encouraged others to borrow against their homes.

Recent housing market data points to a massive downshift in housing market activity.

Less activity in Canada’s resale home market and moderating housing starts will mean fewer people taking on new mortgages, Dunning said.

“That (slowdown) now and in the near future going to result in less mortgage takeout as those sales get closed,” he said.

Canada’s housing market has been on a tear for much of the past year after the Bank of Canada sent its trend-setting policy rate to an emergency low of 0.25 per cent to stimulate borrowing and consumer spending.

Buyers, spurred by easy access to relatively cheap borrowing, rushed into the market and competed aggressively for homes, which drove prices to record highs.

The market has been cooling in recent months as many sales were pushed ahead to the beginning of the year in advance of tighter mortgage qualification rules, a new tax regime in B.C. and Ontario and higher interest rates.

Meanwhile, the Bank of Canada’s policy rate has been hiked three times to one per cent, still historically low. The central bank is expected to take a pause on rate hikes until the middle of next year, giving mortgage holders more time to refinance at low rates.

Most Canadians have heeded warnings from economists — including the Bank of Canada — about growing debt levels and took advantage of low interest rates to refinance and pay off other debts, CAAMP said.

The report found 18 per cent of mortgage holders have taken equity out of their homes to free up extra cash. Almost half of mortgage holders who borrowed against their homes cited a need for “debt consolidation or repayment” and the average amount borrowed against home equity was $46,000.

The association said that most mortgage holders appear to be comfortable with their debt levels and that the vast majority — about 84 per cent — said they could afford at least a $300 or 30 per cent increase in their monthly mortgage payment, Dunning said.

The association asked approximately 2,000 Canadians surveyed how much of an interest rate hike they could withstand. The average Canadian monthly mortgage payment is about $1,025 and the average homeowner has room for $1,056 per month on top of current costs, the report found.

However, about 350,000 out of 5.65 million, or about six per cent of Canadian mortgage holders, would be challenged by rate rises of less than one per cent, CAAMP said.

“Most of the people who have low tolerances for increased payments have fixed-rate mortgages,” the reports said. (So) by the time their mortgages are due for renewal, their financial capacity will have expanded and their mortgage principal will have been reduced.”

Canadians continue to favour fixed-rate mortgages and a five-year fixed-rate mortgage remains the most popular option despite the fact that variable rates have become much less expensive than fixed rates, the report found.

Mortgage loophole helps first-timers

There is a small loophole in the new federal mortgage rules that could make it easier for the banks to lend out money to first-time buyers.

The federal government announced last month new requirements for anyone borrowing money for a house and needing mortgage insurance. If you have less than a 20% down payment and are borrowing from a financial institution covered by the Bank Act, you have to take out mortgage default insurance, which ensures the banks are covered for any losses resulting from payment defaults.

For principal residences, the new rules force consumers to qualify for a loan based on being able to make payments on a five-year fixed-rate mortgage, which has a much higher interest rate than variable mortgages, now as low 1.85%.

Clearly, Ottawa’s view was toward rising rates. And this week, two of the major banks raised their posted rate on five-year fixed mortgages to 5.85%.

But one lingering question is how the five-year rate would be calculated in terms of qualifying a customer. In other words, it would obviously be a lot tougher to qualify for a mortgage under the new rules when using the posted rate of 5.85%. But if using the actual rate consumers get -- these days as low as 3.75% -- that’s a lot less income you’ll need to buy your first home.

Officials in Ottawa have been mum on what numbers should be used.

But an internal document distributed by Canada Mortgage and Housing Corp. to mortgage brokers, obtained by the Financial Post, shows consumers will be able to use their actual rate to qualify for a mortgage if they go for a term five years or longer.

If buyers want a variable-rate mortgage, they will have to qualify based on “the benchmark rate,” which is essentially the posted rate.

So, if you want to go short, you had better be able to make payments based on an interest rate as high as 5.85%, which is where the benchmark rate will likely sit by next week.

“Probably 10% of the overall mortgage population is going to be affected by this rule in the sense they are no longer going to be able to qualify for a variable-rate mortgage or a one- to four-year term,” says Robert McLister, editor of Canadian Mortgage Trends. “The qualifying rate is going to affect the debt ratios of those people.”

The end result may see more people forced to lock in their rate, which is hardly fair given variable-rate mortgages have been a better deal than fixed-rate rate mortgages about 88% of the time over the past 50 years, before the recent credit crisis.

“This will help people become accustomed to making payments based on where mortgage payments are likely to be going,” said Peter Vukanovich, chief executive of Genworth Financial Canada, the mortgage insurer.

He doesn’t think the changes are a major deal, given that most of the major banks have been qualifying consumers based on their four- and five-year rates. His company was already only insuring products based on rates as high as 4%.

“It’s a good rule change when you are situation right now where we are increasing interest rates,” says Jim Smith, vice-president of Scotia Mortgage Authority. “Most lenders, ourselves included, have qualified based on at least the three-year posted rate.”

The discrepancy is, the three-year posted rate at most banks is actually higher than the five-year discounted rate.

And that means it is actually going to get easier to get a mortgage -- as long as you do what the government tells you to do and lock in your rate.

(By Garry Marr, Financial Post)

Interest rate hike this summer?

Don't count on it. For the Bank of Canada to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast.

Canadian market watchers will get some good news this week. The predictions for a "blowout" reading on fourth-quarter GDP are already out there and it is likely to be an abnormally strong number. But for anyone who thinks a big number is likely to help lock in a rate hike this summer, I would suggest that is not going to happen. In fact, my view is that the Bank of Canada will not be raising rates until mid-2011 - at the earliest.

This is critical to the outlook for Canadian money market and bond yields since futures have priced in nearly 100 per cent odds of a 25 basis point rate hike this June, and another 25 basis points by September. (A basis point is 1/100th of a percentage point.) The central bank has already told us that its base case is for 2.9 per cent real GDP growth this year and 3.5 per cent next year, with the starting point on the "output gap" being 3.7 per cent ("output gap" is the gap between the actual level of real GDP and where real GDP would be if the economy were at full capacity). Remember that an output gap that big in any given quarter classifies as a 1-in-20 event. Moreover, baselining these expected growth rates against the latest estimates of potential growth puts the output gap at a smaller level of 1.55 per cent this year, narrowing further to 0.25 per cent in 2011.

The history of the Bank of Canada is such that - outside of when it had to defend the Canadian dollar - it typically does not embark on its tightening phase until the output gap is close to closing. Even during the aggressive John Crow era, the bank's modus operandi was to time the first rate hike just as spare capacity was being eliminated, and not much before. On average, the first central bank rate hike following a recession takes place one quarter before the output gap closes (there is still a gap, but it is small at 20 basis points). If such a strategy is replicated this time around - and the cause for being on pause longer in the context of a historic deleveraging cycle is certainly quite strong - then the very earliest the bank will move is the second quarter of 2011.

Under this scenario, based on some back-of-the envelope calculations I just did, the unemployment rate at no time declines below 7.5 per cent through to the end of 2011. The peak in the jobless rate was 8.7 per cent in August, 2009. Going back to prior recessions, the central bank does not begin to tighten rates until the jobless rate is down an average of 150 basis points with a range of 130 basis points to 170 basis points.

Unless the bank wants to be pre-emptive - highly unlikely when it acknowledges in its economic outlook last week that "the recovery continues to depend on exceptional monetary and fiscal stimulus" and that "the overall risks to its inflation projection are tilted slightly to the downside" - then to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast. More to the point, while bored Bay Street economists analyze every word to see if the bank is more or less "hawkish" than in its previous outlook, what is important for investors is to assess the bank forecast and decide what it means for the degree of excess capacity in the economy and what that implies for the future inflation rate.

The bottom line is that even with the fragile recovery, the bank sees more downside than upside risk to its inflation projection, and, to reiterate, for it to start tightening policy until the jobless rate falls below 7.5 per cent would be a break from past post-recession actions.

And whatever future "policy tightening" is needed could also come via the overextended loonie, limiting any need for an interest rate adjustment in the time horizon that the markets have discounted. This is a source of debate on Bay Street, but the bank is still sensitive to the growth-dampening impact of an exchange rate too firm for its own good. To wit: "The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity in Canada," the bank says.

In a nutshell, the Canadian market is already braced for 50 basis points of tightening from the Bank of Canada by September. With that in mind, it is difficult to believe that there is any significant rate risk here; if anything, the surprise will be that the bank is on hold for longer. If that proves to be true, then there is actually more downside than upside potential to Canadian bond yields, particularly at the front end of the coupon curve.

The reason the markets think the bank may pull the trigger is because of this one sentence that shows up in every press statement: "Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."

So the central bank has really only given a pledge to keep rates where they are until mid-year. But June is only five months away and so one would have to think that at one of the next three meetings, the Bank is going to have to update this particular sentence or cut it entirely and leave the market without a de facto time commitment. Either way, the moment the bank changes this sentence is the moment the market will put on hold its expectations of a new rate-hiking cycle coming our way.

Until then, homeowners opting for variable rate mortgage financing will likely not have to face the interest rate music.

(By David Rosenberg, chief strategist for Gluskin Sheff & Associates Inc. and a guest columnist for Report on Business).