Housing Market Outlook - CMHC Spring 2008

For your reference, please find attached the latest Housing Market Outlook data for the GTA (Spring 2008 release). Please feel free to forward to your respective Broker-clients for their review.

Here are some high-lights from the ten page Report:

For a full report from CMHC:
http://www.cmhc-schl.gc.ca/en/hoficlincl/homain/foan/index.cfm

1. New Home Market
i) Condominium apartment sales will dominate...
- Demand for new homes at the pre-construction stage of development in the GTA will remain strong, but trend lower through the end of 2009.
- High-rise sales will continue to account for more than half of total sales, with low-rise sales moving lower at a greater rate.
- Affordability underlies the increasing popularity of high-rise condominium apartments in the Toronto area.
- the luxury niche of the condominium apartment market will also remain popular.

ii) Strong new home starts...
- The number of homes that will start construction will increase in 2008 before edging lower again in 2009.
- Condominium apartment starts will be at the root of increased starts this year, as many projects at the pre-construction stage of development break ground.
- Low-rise home construction will take place almost exclusively in the GTA regions surrounding the City of Toronto.


2. Existing Home Market
i) More Balanced Market Conditions in 2008 and 2009...
- Following a record breaking year in the Greater Toronto Area (GTA) in 2007, existing home sales will edge lower in 2008 and 2009.

ii) Fewer first-time buyers...
- Following a resurgence in first-time buying activity in 2007, when an estimated 60 per cent of home buyers were moving from rental accommodation into home ownership, the number of households purchasing their first home will decline through the end of 2009.
- Strong youth employment growth, low borrowing costs and a greater diversity of mortgage products "pulled forward" some first-time buyer households last year who otherwise would have purchased in 2008 or 2009. The result will be a smaller first-time buyer pool this year and next.

iii) More choice in Resale Market...
- A widening gap between sales and listings will provide home buyers with more choice in the marketplace.
- The better-supplied existing home market will be associated with more moderate annual price growth.


3. Local Economy
i) Sustained job growth...
- Steady job creation and rising incomes in 2008 and 2009 will keep households confident in their ability to purchase and pay for a home over the long term in the GTA.
- Employment will continue to grow in 2008 and 2009, but at a more moderate pace than experienced last year.

ii) Population growing through migration...
- An increasing number of households will migrate into the GTA over the next two years - up to 65,800 and 68,000 in 2008 and 2009 respectively.
- Of paramount importance will be immigrant households.

iii) Mortgage Rates will remain relatively flat...
- Mortgage rates are expected to trend marginally lower throughout 2008, but will be within 25-50 basis points of their current levels.
- For 2009, posted mortgage rates will begin to drift up slightly as the year progresses.
- For 2008 and 2009, the one-year posted mortgage rate is forecast to be in the 6.50-7.50 per cent range, while three and five-year posted mortgage rates are forecast to be in the 6.75-7.50 per cent range.

Bond rates have increased 37 points in the month of May. Originators should prepare for higher interest rates.

RBC Capital Markets is now predicting no rate cut by the Bank of Canada on June 10, citing, higher commodity prices, higher currency, and rising inflation since the last rate cut on April 22. Rates have already started to increase in the Australian market, which typically trends ahead of the Canadian market.

TSX -111.45

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· Oil -4.41 to $126.62US per barrel

· Gold -23.30US to $881.70US

Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html

Canadian Bonds Fall Amid Speculation Banks to Stop Rate Cuts

By Haris Anwar

May 29 (Bloomberg) -- Canada's bonds declined, pushing the two-year's yield to the highest in more than three months, amid speculation the Bank of Canada and U.S. Federal Reserve will stop cutting borrowing costs.

Government securities fell for a fourth day as interest- rate futures suggested traders were reducing bets on rate cuts. Canada's central bank lowered the target lending rate by a half- percentage point to 3 percent on April 22 to shield the economy from a U.S. economic slowdown. Borrowing costs have been lowered four times since December from 4.5 percent.

``The Bank of Canada won't cut rates on June 10,'' said Mark Chandler, a senior fixed-income strategist in Toronto at RBC Capital Markets, a unit of Canada's largest bank. ``We can see a further upward pressure on short-term yields if that is the case. Higher commodity prices, a strong currency and rising inflation are going against the case for more rate cuts.''

The yield on the two-year Canadian government bond rose 2 basis points, or 0.02 percentage point, to 3.12 percent at 12:49 p.m. in Toronto. It reached 3.16 percent, the highest since Feb. 26. The yield has increased 37 basis points this month.

The price of the 3.75 percent security due in June 2010 fell 5 cents to C$101.23.

10-Year Yield

The 10-year government bond's yield increased 3 basis points to 3.72 percent. The price of the 4 percent security due June 2017 fell 23 cents to C$102.16. The yield is up 13 basis points this month.

Fed Bank of Dallas President Richard Fisher said the central bank will raise the benchmark interest rate if inflation expectations increase. Canada ships about 80 percent of its exports to the U.S.

Bankers' acceptances futures contracts for September rose to 2.99 percent, from 2.64 percent on May 20. The futures have settled at a three-month lending rate averaging 16 basis points above the central bank's target since Bloomberg started tracking the data.

``The Bank of Canada can still afford to cut rates, but the magnitude of the cutting is likely to be scaled back,'' said Eric Lascelles, chief economist and rates strategist at TD Securities Inc. in Toronto, a unit of Canada's second-largest bank. ``The bank may signal a pause after a 25-basis-point cut on June 10. Unattractive yields and capital losses'' are making the government bond market an unfriendly place. ``The recent sell-off may be difficult to fight.''

Futures Contracts

Futures contracts on the Chicago Board of Trade show 98 percent odds the Fed will keep borrowing costs at 2 percent during its next meeting on June 25. The odds were 94 percent yesterday.

The 10-year bond yielded 60 basis points more than the two- year security, down from 109 basis points on March 17.

Canada's two-year bond yield will touch 2.90 percent by the end of this year, with the 10-year yield reaching 3.82 percent, according to the median forecast in a Bloomberg survey.

Canadian government bonds have returned 2.7 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries during the same period returned 1.5 percent.

Canada's dollar rose 0.2 percent to 98.82 cents per U.S. dollar, from 99.01 cents yesterday. One Canadian dollar buys $1.0120. Canada's dollar has strengthened 2 percent so far this month, making it the best performer against the 16 most-active currencies.

U.S. Economy

The U.S. economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record. The 0.9 percent gain in gross domestic product compares with an advance estimate of 0.6 percent, the Commerce Department said today in Washington. Fourth-quarter growth was 0.6 percent.

``As the market becomes less concerned about the downside risk in the U.S., that would also suggest less downside for the Canadian side,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``That bodes well for the Canadian dollar.''

Bank of America predicts Canada's currency will peak at 98 cents per U.S. dollar in the second quarter and decline to C$1.03 in the first quarter of 2009.

The loonie, as the currency is known because of the image of the bird on the one-dollar coin, has traded near parity with its U.S. counterpart this year after climbing 17 percent in 2007. It touched a 2008 low of C$1.0379 on Jan. 22, and a high of 97.12 cents per U.S. dollar on Feb. 28.

The currency reached 98.20 cents per U.S. dollar on May 21, the strongest since March 14.

Canada's dollar will decline to C$1.08 by the first quarter of 2009, according to the median forecast of 38 analysts in a Bloomberg survey.

Long Term vs ARM? What to advise our clients.

Benjamin Tal updates brokers on interest rates and stresses the importance of staying current on rapidly changing events.

Variable rate mortgages currently make up only about 20% of the Canadian market. We’ve seen a significant shift towards fixed in the past year or so, but now consumers are going back to variable because Prime is falling. I suspect this move to variable will continue for the next few months, but it will be short-lived.

If the Bank of Canada rate is going to fall by another 50 bp, it will happen within the next few months. But that doesn’t mean the 5 year rate will also fall by that much.

Remember, the bond market is already expecting this much of a cut in Prime and is discounting the 5 year rate based on that expectation. So while Prime may drop in the next few months, the 5 year rate will likely be relatively stable or slightly lower.

At some point—and it’s getting closer—we’ll see a situation in which going variable may no longer be the best approach. By cutting rates very aggressively now, the Bank of Canada is planting the seeds for inflation down the road. By the end of the year, it’s possible that we’ll see a significant correction in the bond market as the economy improves and inflation rises. If this happens, spreads will go back to normal and the 5 year rate will actually rise.

Paying close attention to developments at this point is much more critical than at any time in recent history. A few years ago we could predict that short term rates were falling, so taking a variable rate mortgage was the right thing to do. Now, we know that inflation may start rising and therefore the 5 year rate will start rising at some point. But that can happen even earlier than we expect.

Clients need to be aware that while the 5 year rate is currently attractive, it can change quickly. Rates could rise by as much as 75-100 bp in 2009. It’s very difficult to predict. But clients need to understand this risk.

Speculation the loonie may fly higher

May 24, 2008 Julian Beltrame The Canadian Press

Is the Canadian loonie preparing to take flight again?

While betting on the up and down movements of a currency is risky, some economists are beginning to move off their bearish outlook for the Canadian dollar and contemplating that the loonie may be readying a move to higher ground, well above parity.

"One could make the case that the loonie is undervalued at today's oil prices,'' says Bank of Montreal deputy chief economist Douglas Porter. "Partly, this likely reflects the fact that the foreign exchange market, for one, simply doesn't believe today's oil prices will last.

"Another factor may have also been that the Bank of Canada may cut (interest rates) further, but the U.S. Federal Reserve looks done,'' he added.

For several years, the Canadian dollar has generally moved in tandem with prices of commodities Canada has in abundance, particularly oil.

But the Canadian dollar hasn't gathered much strength during the surge from $95 US oil at the end of 2007, Porter noted. It only moved past parity with the U.S. currency when oil cracked the $130 level this week.

A good sign for the loonie's prospects was Scotiabank's commodities report Thursday that forecast crude oil prices in the $135 to $140 range for the rest of the decade, based on a shortage of new non-OPEC production and rising demand from emerging economies in Asia.

Scotiabank currency analyst Stephen Malyon said the bank is forecasting the loonie to finish the year at $1.01 US and 2009 at $1.06, but said it will likely revise the forecast upward next week on the growing perception that high oil and high commodity prices are here to stay.

"I think the Canadian dollar has a lot of things going for it, from a structurally sound economy, and the fact we're a commodity exporter amid a cyclical bull market in commodities,'' he said.

Of course, there are other factors that have come into play in the relative pricing of the loonie.

The Canadian dollar is directly impacted by the interest rate spread between Canada and United States and was lifted last fall when the Fed moved aggressively to cut rates in expectation of a serious economic slowdown.

As important is recent language coming from both central banks which suggests the Fed is heading for the sidelines, while the Canadian bank remains on an easing trend.

There is also the relative purchasing power of both currencies, which suggests that the loonie remains the weaker sister.

Better deals ahead expected for Canadian home buyers

New listings at record high

Alia McMullen, Financial Post Published: Saturday, May 24, 2008

Canada's housing market might still be expensive, but sellers are going to lose some of their negotiating power over the course of the year as housing supply floods onto the market.

The number of homes for sale in April was double that of the number that were sold as new listings reached a record high, the Canadian Real Estate Association's monthly Multiple Listing Service figures showed.

Residential listings for April jumped 2.8% from the previous month to a seasonally adjusted 77,248 units, while home sales rose 1.2% to 36,614 units. It was the first time monthly sales had increased this year.

The rise in supply, which comes on the back of years of under supply, caused house price growth to continue to moderate from recent highs. The national average house price was up 4% from a year earlier to $317,619-- the smallest annual gain in six years.

"Price increases are now maintaining at levels that are historically more consistent with the Canadian real estate market," Calvin Lindber, president of CREA said.

British Columbia remained the most expensive province, with the average house price up 10.7% over the year to $478,004, followed by Alberta, which fell 0.5% to $353,515. Prices rose 4.8% in Ontario to $314,041 and 4.3% in Quebec to $217,683. Prince Edward Island was the cheapest province, following a 9.8% annual decline to an average $121,807.

Amy Goldbloom, economist at RBC Financial Group said the latest results reflected the mid-point of a balanced housing market that was likely to soften gradually this year.

"As we see more supply coming to market, sellers are going to certainly lose some of their negotiating power, so the bidding wars that we've seen over the last couple of years, particularly in markets like the core area of Toronto, they're going to certainly slow," Ms. Goldbloom said.

She said there would be better opportunities for buyers as supply increases amid cheaper finance as a result of recent interest rate cuts. However, the market generally remained expensive and sales would likely continue to slow.

"The hit to affordability has certainly taken a toll on sales. People have simply been priced out of the market and that's become very evident in overheated markets in Calgary and Edmonton," Ms. Goldbloom said.

Although new listings in Calgary and Edmonton declined in April after posting record levels in March.

Derek Holt, economist at Scotia Capital said the ratio of listings to sales in Calgary and Edmonton had declined rapidly since last fall, dropping from about 90% to 40%.

"That speed of adjustment abruptly turned it away from a deep sellers market towards a marginal buyers market, so that's why they've seen prices come off their peak and why we think that they face a further housing correction in Alberta," he said.

Mr. Holt said while supply was expected to continue to enter the market, Canada would not experience the inventory overhang plaguing the U. S. housing sector.

He said Canada has not experienced the same factors that have driven the excess in U. S. supply, including the flood of foreclosed properties that have entered the market.