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Housing affordability worst in a generation in ‘high-risk’ Toronto

Theglobeandmail.com
March 31, 2017
By Michael Babad

Briefing highlights

Affordability stressed

Affording a home in Toronto is the toughest it has been in more than 25 years, Royal Bank of Canada warns.

Which takes us back to 1990, and we don’t want to go there.

Not only that, the “squeeze” is spreading in Southern Ontario, with evidence suggesting the Toronto area is now a “high-risk” zone that calls for government intervention, said RBC chief economist Craig Wright and senior economist Robert Hogue.

Their housing affordability measure - the proportion of median pretax income needed to juggle mortgage payments, property taxes and utility bills - puts Toronto at its most stressed since 1990.

Indeed, the level of 64.6 per cent in the fourth quarter is the worst since the mid-1980s, according to this measure, which is based on a down payment of 25 per cent and a 25-year, five-year fixed-rate mortgage.

“The severe strain afflicting Toronto-area buyers primarily reflects elevated and still rapidly escalating single-detached home prices (resulting from a shortage of supply relative to strong demand); however, increasing condo apartment values also contributed,” Mr. Wright and Mr. Hogue said in Thursday’s report.

“RBC’s affordability data strongly indicate that the Toronto-area market is in a high-risk zone.”

And it’s spreading, the study said, citing nearby areas such as Hamilton and St. Catharines.

Last year’s federal mortgage and tax measures have done little to cool Toronto down, the RBC economists said, and more action may be needed.

“The last time affordability was in such a state (in 1990), Toronto’s housing market subsequently fell into a deep and prolonged slump,” Mr. Wright and Mr. Hogue noted.

“The situation is different this time because most of the affordability stress is concentrated in the single-detached segment - whereas it was pervasive in 1990 - however, recent acceleration in condo prices tells us that stress soon will mount significantly in this segment, too,” they warned.

“Left unchecked, this situation will get worse, putting at high risk Canada’s largest housing market. Further policy intervention would be prudent to avoid a 1990s-style outcome.”

Ontario Finance Minister Charles Sousa has said he’s looking at budget measures to see the affordability burden.

And, as The Globe and Mail’s Jeff Gray reports, Toronto Mayor John Tory said Thursday he’s open to a tax on vacant homes, a move that would hit property speculators.

There are, Mr. Tory said, an estimated 65,000 homes sitting empty in the city.

Stocks tumble

Global markets are largely sinking so far, setting a sour tone for the end of a generally strong quarter.

“As first quarters go, it’s been a solid start to the year for 2017, all the more surprising given the fact that we’ve seen two U.S. rate rises in the space of three months, and put aside concerns about the first few months of a Trump presidency and the European banking system, against a backdrop of simmering political risk in Europe,” said CMC Markets chief analyst Michael Hewson.

“Economic data by and large has been pretty good across the board from the U.S., U.K., Europe and Asia, while rising inflation has prompted some optimism that we could see some trickle-down effects into higher wages.”

Tokyo’s Nikkei and Hong Kong’s Hang Seng each lost 0.8 per cent.

In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were down by up to 0.5 per cent by about 8 a.m. ET.

New York futures were also down, and the Canadian dollar was just shy of the 75-cent U.S. mark.

Blackberry's loss narrows

BlackBerry Ltd. shares are rising in premarket action after the Canadian company posted a narrower fourth-quarter loss.

The stock was up about 6 per cent heading into the Nasdaq open.

BlackBerry said its quarterly loss narrowed to $47-million (U.S.) or 9 cents a share, basic, from $238-million or 45 cents a year earlier.

“I am pleased to report that our Q4 results came in at or above expectations in all major metrics,” chief executive officer John Chen said in unveiling the numbers.

“In the quarter, we continued to grow our mix of software and services revenue across the company,” he added.

“In turn, this allowed us to expand our operating margin and report positive free cash flow.”

Authorities raid Swiss bank

Authorities have raided the operations of a Swiss bank across Europe and elsewhere.

No one involved is naming the bank, though Credit Suisse says its “offices in London, Paris and Amsterdam were contacted by local authorities concerning client tax matters,” and that it’s co-operating.

The Credit Suisse statement came as Dutch financial authorities said they raided the offices of an unnamed Swiss bank in the Netherlands, Germany, France, Britain and Australia after a tip-off. Their investigation into suspected tax evasion and money laundering involves dozens of people, they said.

Two people have been detained and assets including real estate, luxury cars, paintings, jewellery and gold have been seized.

Britain’s tax watchdog said separately that it had launched a criminal probe into a global financial institution, an investigation that centres on “senior employees from within the institution, along with a number of its customers.”

Dutch launch tax raids over 55,000 suspect accounts

Trump to order probe

President Donald Trump is poised to order a study of trade practices among America’s big trading partners.

“Trump is due to sign a new executive order today, starting a 90-day country-by-country review of the U.S. trade deficit (with China’s contribution to receive close attention),” said Elsa Lignos, RBC’s global head of foreign exchange strategy.

“Trump is set to meet Chinese President Xi next Thursday/Friday in the U.S. (Trump warned it wou ld be a ‘very difficult’ discussion but markets have become used to much talk and expecting little action.)”

Can it last?

Statistics Canada is expected to report later in the morning that the economy kicked off 2017 in fine form.

The questions, then, are how long might that last, and what might it mean for the Bank of Canada.

“The Canadian economy seems to be firing on almost all of its cylinders, and that continued into the start of 2017,” said Nick Exarhos of CIBC World Markets.

Economists have been raising their forecasts for economic growth this year amid a string of stronger indicators, and they expect Statistics Canada’s 8:30 a.m. (ET) report to show gross domestic product expanding by 0.3 or 0.4 per cent in January.

“In fact, monthly GDP has grown 0.3 per cent or better in six of the prior seven months, with growth over that period close to the best pace since 2000,” said Bank of Montreal senior economist Benjamin Reitzes.

“Our call would be an excellent start to Q1 and put the quarter on pace for about 3-per-cent growth even assuming modest gains in February and March,” he added.

BMO and some others now project economic growth of 2.3 per cent this year.

And here’s an interesting twist given the divergence in monetary policy in Canada and the U.S.: “The full-year estimate of Canadian GDP is now within a whisker of U.S. forecasts,” said BMO chief economist Douglas Porter.

“This follows a two-year run of consistently sub-par Canadian growth compared with our neighbour,” he added, attributing the recent improved forecasts to a rebound in oil prices and the fact that Ottawa’s stimulus measures will trickle through the economy this year.

Economists don’t know how long this run can last.

“Growth is coming fast and furious recently, and even with a slower pace expected for the back half of the year, we should be on track to close the output gap sometime in early 2018,” CIBC’s Mr. Exarhos said.

Like others, HSBC Bank Canada chief economist David Watt cited the political uncertainty in North America, among other things, and the threat to vulnerable debt-swamped families.

“Conversely, the recent increase in commodity prices leaves open the possibility of an upside surprise to corporate profits and business investment,” Mr. Watt said in a recent forecast.

“Even so, investment in the oil sector is expected to remain subdued as oil prices are not yet high enough to spark a revival in oil sands investment.”

What’s this mean for a “dovish” Bank of Canada?

It’s true that uncertainty is heightened, notably as the world waits to see what President Donald Trump does with trade policy, which raises the stakes considerably where Canada is concerned.

But it’s also true that Canada’s economy is on a sounder footing, which means, economists say, that central bank Governor Stephen Poloz will have to change his tune.

“The turnaround in the Canadian data has caught us somewhat by surprise and we suspect the BoC is in the same boat,” said Mark Chandler of RBC Dominion Securities.

“At the least, we would expect the implicit easing bias that the bank had in place as recently as the January MPR (when they conceded they had discussed the option of cutting rates) has shifted toward a neutral stance,” he added, referring to the central bank’s monetary policy report early in the year.