Canada First Mortgage

Timothy R. Homan and Bob Willis, Bloomberg 

The U.S. economy next year will turn in its best performance since 2004 as spending perks up and companies increase investment and hiring, says Dean Maki, the most-accurate forecaster in a Bloomberg News survey.

The world’s largest economy will expand 3.5% in 2010, according to Mr. Maki, the chief U.S. economist at Barclays Capital Inc. in New York. The rebound in stocks and rising incomes will prompt Americans to do what they do best –consume, said Mr. Maki, a former economist at the Federal Reserve. Faced with dwindling inventories and growing demand, companies will soon become confident the expansion will be sustained, he said.

Household spending “will pick up steam as we move into the second half of 2010,” said Mr. Maki who topped all 60 forecasters in the Bloomberg News ranking of gross domestic product projections for the first three quarters of 2009. “The overall picture for 2010 will be an economy growing rapidly enough to bring down the unemployment rate” to an average of 9.6%.

Mr. Maki, who specialized in researching household finances at the Fed from 1995 to 2000, said the economic recovery this time will be similar to past rebounds. Consumer purchases improved after last year’s 61% plunge in gasoline prices and will keep growing in 2010, reflecting the surge in stocks. Faster growth will push Treasury yields higher and help the dollar strengthen as the Fed raises interest rates, he predicts.

Mr. Maki holds a doctorate in economics from Stanford University near Palo Alto, Calif. His dissertation addressed Americans’ response to the phasing out of tax deductions for interest on consumer loans. He received a bachelor’s degree in economics from St. Olaf College in Northfield, Minnesota, and joined the investment banking unit of London-based Barclays in 2005.

“One area that we put more weight on perhaps than others is the stock market,” he said in an interview. The 67% gain in the Standard & Poor’s 500 Index since a 12-year low on March 9 has helped shore up family balance sheets, putting Americans in a better position to spend.

The prospects for a stronger rebound are consistent with recoveries from past recessions, he said.

“We don’t believe this time is different from all other business cycles,” said Mr. Maki. “The consensus view that growth will stay subdued all through next year — there’s no parallel to that in modern U.S. history.”

Mr. Maki’s forecast for 2010 is among the highest of the 58 economists in a Bloomberg News survey this month. He is more optimistic than Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, who was No. 1 among forecasters of GDP during the 12 months through June 2009. Mr. Hatzius estimates the economy will expand 2.4% in 2010, and his 2.5% first-quarter growth forecast is half the pace Mr. Maki anticipates.

Ed McKelvey, who works with Mr. Hatzius, said the Goldman team forecasts “subpar growth” next year because “employers will be reluctant to hire” and households will exhibit “a bias toward higher saving.” Budget difficulties at state and local governments and credit constraints will also restrain the economy, he said.

Mr. Maki’s projected 5% rate of expansion in the first quarter, the fastest since the same three months in 2006, will reflect the need for companies to replenish inventories cut at a record pace in the first nine months of this year.

Ramped-up production to increase stockpiles and investment in equipment will propel the expansion early in the year, leading to employment gains that will bolster spending in the second half, he said.

“Businesses overreacted to the downside during the recession,” said Mr. Maki, who says he tries to keep fit by playing tennis and jogging with his dogs. “As firms turn to expansion mode rather than survival mode, they start raising both employment and investment spending in a similar way.”

A rebound in corporate spending may be one reason investors have been eager to snap up shares of industrial equipment makers. The Standard & Poor’s 500 Industrial Machinery Index, which includes Cleveland-based Eaton Corp., a producer of circuit breakers and fuel pumps, and Craftsman brand tool-maker Danaher Corp., based in Washington, has outperformed the broader measure, rising 35% so far this year, compared with a 25% increase for the S&P 500.

Economic growth will push the yield on the 10-year Treasury note up to 4.5% by year-end, Mr. Maki said, compared with a yield of 3.8% at the end of last week.

Maki says central bankers will lift the U.S. overnight bank lending rate target to 0.5% in the third quarter, from zero to 0.25 % currently, and to 1% by year-end. His colleague at Barclays, David Woo, global head of foreign- exchange strategy, predicts the dollar will end 2010 around US$1.40 per euro.

Mr. Maki’s top position in the Bloomberg ranking is based on estimates submitted in January for GDP. He forecast that month a 2% expansion for the third quarter. The U.S. economy expanded at a 2.2% annual pace, according to a Dec. 22 Commerce Department report.

He also predicted a 4.5% contraction for the first quarter of 2009, followed by a 1% decline in the period from April through June. The Commerce Department later reported contractions of 6.4% and 0.7%.

Neal Soss, chief economist at Credit Suisse in New York, was the second most-accurate forecaster of GDP over the first three quarters of 2009. He projects the economy will grow 3.3% next year. John Lonski, chief economist at Moody’s Capital Markets Group in New York, was No. 3. He sees a 2.7% expansion.

Robert MacIntosh, chief economist at Boston-based Eaton Vance Management, was the most pessimistic forecaster on employment this year — and the most accurate. He expected unemployment to reach 10% in the fourth quarter and average 9% this year.

The rate fell to 10% in November from a 26-year high of 10.2% the previous month, according to the Labor Department.

Mr. MacIntosh agrees with Mr. Maki that the economy will rebound in 2010, forecasting growth of 3.5%, and that the jobless rate will average 9.5%.

“The combination of exports, investment and consumption will be enough to give us, on paper at least, a decent-looking economy,” said Mr. MacIntosh, a graduate of Harvard University in Cambridge, Mass., with an MBA from Dartmouth College in Hanover, New Hampshire. He manages US$4-billion in municipal bonds for Eaton Vance.

He sees an “upward trend” in payrolls, with the first positive reading coming as early as January. The gains in hiring will lower unemployment “modestly,” he said.

Mr. Hatzius and the economists at Goldman Sachs project the unemployment rate will average 10.3% next year, compared with a median estimate of 10% for 58 responses in this month’s survey.

Bart van Ark, chief economist at the Conference Board, a New York-based research firm, forecasts a 10.4% average unemployment rate next year that he said will restrain household purchases.

Mr. Van Ark, the best forecaster of consumer spending for the period from January through September, said he sees household purchases rising 1% in 2010 after falling 0.6% this year. Mr. Maki forecasts a 2.1% gain in 2010.

“Even though we do see a pickup in recent quarters, it’s not a signal that the consumer is going to lead us out of the recession into solid growth territory,” said Mr. van Ark. “The consumer cannot play that role” any longer.

Julian Beltrame, THE CANADIAN PRESS
The Canadian Press, 2009

OTTAWA - Canada’s hot housing market received a clean bill of health from a major Canadian bank Friday, dismissing concerns voiced by the Bank of Canada that consumers may be taking on too much debt.

In a report on house and stock market rallies, economists with CIBC World Markets argue that the central bank’s concerns are exaggerated, even though the bank was justified in raising them.

“Canada is not doomed to see a U.S.-style housing and mortgage blow-up,” wrote CIBC’s chief economist, Avery Shenfeld.

“The lessons for the U.S. were not that an extended period of low rates caused a mortgage and housing blow-up. It was a massive failure to supervise the worst excess of the American mortgage market that caused the trouble.”

Last week, the Bank of Canada called record household debt the top risk facing the country’s financial system, a warning repeated in Toronto earlier this week by the central bank’s governor, Mark Carney.

The central bank did note that the risk to Canada’s banking system was small, but worried that when interest rates rise to normal levels, up to 10 per cent of households could face difficulties in meeting monthly payment requirements.

Fresh data released Friday showed that spending by Canadian households averaged $71,360 last year, two per cent more than in 2007, with shelter representing about 20 per cent of the load.

Others have also expressed concern about consumer debt levels. In a note Friday, Bank of Montreal economist Sal Guatieri said at current rates the debt burdens being piled on by Canadians could reach American and British levels “just before they keeled over.”

CIBC’s Shenfeld and Benjamin Tal say their analysis shows that there is basis for the concern, but there are also critical factors that make the Canadian situation different.

By their calculation, the current $350,000 average selling price for a home in Canada is about seven per cent too high.

But they also say that with housing starts on the rise, thereby increasing the supply, the price of housing in Canada will moderate, not collapse.

And Canadian households are not exposed as their southern neighbours were to a market collapse.

Some have substantial equity in their homes and could downsize. Others, about 40 per cent of mortgage holders, have high debt payments because they are making accelerated pay-downs on principal, which they could suspend.

They note that while mortgage interest rates average about 4.4 per cent, payments as a share of after-tax income are higher - at the level they would be if rates were effectively six per cent.

And “history suggests many will jump into fixed mortgages” once variable rates come under upward pressure.

“The Bank of Canada was justified in raising these concerns, but once you get into the details, some of those threats don’t appear quite as ominous,” Shenfeld explained in an interview.

The CIBC economists agree with Carney that interest rates will rise, likely starting in the second half of next year, but “we don’t see that as endangering a bubble either in the mortgage market or the equity market.”

In a separate analysis, Shenfeld, Peter Buchanan and Krishen Rangasamy, all of CIBC, judged that the equity markets in Toronto still have room to grow even if some analysts believe stocks are overpriced already.

And they predict the Canadian dollar will average $1.05 US next year.

The Canadian Press  - After a challenging year, the economy is set for a recovery in 2010, according to a new forecast by RBC Economics.

It says although the economy contracted at an average of 2.5 per cent this year, the stage is set for positive growth in 2010. RBC predicts real gross domestic product will rise by 2.6 per cent next and will continue to expand in 2011, at a 3.9 per cent clip. The report suggests the peak of stimulus spending will occur in 2010, with improving credit conditions fuelling growth next year and in 2011.

In addition, consumer spending is projected to increase by 2.3 per cent next year before accelerating to 2.7 per cent in 2011.

However, the bank says the jobless rate is expected to remain high at about 8.7 per cent in 2010 before falling to 7.8 per cent in 2011.

“With the financial crisis behind us and the U.S. economy on the mend, Canada’s economic growth is expected to rise steadily throughout the next year,” said Craig Wright, RBC senior vice-president and chief economist.

“While challenges remain, a peak in stimulus and infrastructure spending across the federal, provincial and municipal governments, along with low interest rates, should result in a sustained recovery.”

Paul Vieira, Financial Post 

What: Bank of Canada interest rate announcement –

When: Tuesday, Dec. 8, 9 am ET – watch for an update at that time

Consensus: Rates to be left unchanged, at 0.25%.

What to look for: No change in the central bank’s key policy rate, which is at a historic low of 0.25%, is expected. Instead, what most observers are looking for is any change in nuance – most notably, a hint or two that the Bank of Canada might move before its conditional pledge to keep rates at a record low until June 2010.

Sure, GDP growth of 0.4% annualized in the third quarter did disappoint. But the continued strength in the housing market, as consumers take advantage of record low rates, and the stunningly strong jobs data for November (an addition of 79,000 jobs) have some analysts wondering whether the central bank will adopt a less dovish tone. Some economists have also said the weak GDP data is masking the underlying strength of the domestic economy.

“The economic assessment is likely to continue referencing improving conditions and expectations for more,” said Eric Lascelles, chief economics and rates strategist with TD Securities. “While it is most likely that the Bank of Canada will reiterate its view that the risks to the inflation outlook are roughly balanced, we highlight the possibility that the risks themselves could be discussed more explicitly with reference both to the Canadian dollar’s drag and the possibility of additional strength from domestic demand and housing.”

Since the last rate announcement, the dollar has traded below the US96¢ level – or the value the central bank assumed the dollar would be trading at in its most recent Monetary Policy Report.

The jobs data certainly kicked off a fresh round of interest rate speculation, with more bullish analysts believing the Bank of Canada will move before its June 2010 deadline – a conditional date it set based on inflation meeting expectations. The central bank sets its key rate in the hope of generating inflation of 2%.

In its outlook released last week, the C.D. Howe Institute’s monetary policy council suggested the central bank needed to emphasize its rate commitment is not set in stone.

“While some members thought the Bank of Canada should follow that course even at the cost of a larger-than-otherwise increase in the overnight rate after June, others thought that the bank needed to re-emphasize the conditional nature of the commitment, and the possibility that changed circumstances would warrant an earlier rise,” said the council, made up of private-sector economists and academics.

CALGARY - The average sale price of a Calgary existing home is forecast to rise by five per cent next year after falling by an estimated five per cent in 2009, according to a report released today by Re/Max.

The real estate firm’s Housing Market Outlook for 2010 said the MLS sale price this year for Calgary, which includes all residential properties, is estimated to be $385,000 but it is forecast to rise to $403,000 next year.

Re/Max is estimating MLS sales to hit 26,000 this year in Calgary for a 12 per cent gain from 2008 and it is expecting sales to continue to rise by another eight per cent in 2010 to 28,000.

At the national level, the company says the average sale price across Canada will be up five per cent this year to $318,000 and increase by a further two per cent in 2010 to $325,000.

MLS sales in Canada, it said, will rise by seven per cent in 2009 to 465,000 units and increase by a further two per cent in 2010 to 475,000 units.

The Re/Max Housing Market Outlook for 2010 examined residential real estate trends in 23 markets. The report found that sales are forecast to recover in almost all major centres by year-end 2009, led by an anticipated 45 per cent increase in Greater Vancouver. Two markets –Ottawa and Quebec City — are expected to hit historic highs in the number of homes sold. Average price should post new records in 65 per cent of markets surveyed this year. As economic performance ramps up across the country, so too will residential real estate. Eighty-three per cent of markets (19/23) are expecting sales to increase over 2009 levels while housing values are forecast to escalate in 91 per cent (21/23) of Canadian centres in 2010. The remaining markets will match 2009 levels.

“A number of factors will help prop up activity going forward, including improved economic conditions, continued low interest rates, rising consumer confidence and solid capital spending which will buoy employment,” said Re/Max. “Inventory will once again assume the wildcard role, with any decline placing upward pressure on prices. Multiple offers will remain the exception in most markets, more commonplace on quality entry-level product which remains in tight supply. “