The great Canadian housing debate continues

Your top financial and economic news for Nov. 26


Top of the morning

The Globe and Mail’s Ian McGugan calls on Ottawa to show a little more concern about soaring Canadian home prices:

Canada’s red-hot housing market has passed the point where anyone should see it as an economic positive…

One problem with the trend to pricier homes is generational inequity: Young people must now pay far more, in real terms, for a house than their parents did. As a result, Millennials have much reduced capacity to save for other things, such as retirement. Considering that most people in their 20s and 30s don’t enjoy the same pension benefits as their parents, this hardly seems fair…

Low interest rates make mortgages seem very affordable at first. But since inflation is also low, the real cost of your mortgage declines only slowly. The upshot is that current home buyers are likely to find themselves still scrimping a decade or more from now. This is not good news for an economy that depends heavily on consumer spending.

On the homefront


The TSX booked a decent gain on Tuesday as weakness in the energy sector was offset by strength from the gold miners. The price of WTI crude oil hit the skids in the afternoon, as a pre-OPEC meeting between Saudi Arabia and Russia didn’t result in a commitment to reduce output. Market participants currently expect the cartel to announce a slight reduction in production quotas following its meeting on Thursday. However, since members of the cartel are prone to cheating, as many are heavily reliant upon oil to fund government spending, it is unlikely that a targeted drop-off would be fully realized. TSX 60 futures are flat ahead of the open.


After falling overnight, the loonie has recovered to 0.888 against the greenback this morning.


Housing affordability improved in Q3. The Royal Bank of Canada’s affordability index found a broad — albeit modest — improvement in the cost of home ownership. The economists attribute this increase in affordability to the continued ultra-low interest-rate environment, rising household incomes, and a slight decline in utility costs. “There is little evidence of undue affordability stress in other markets [outside of Toronto and Vancouver], with the possible exception of two-storey homes in Montreal,” write economists Craig Wright and Robert Hogue. A report released by the Canada Mortgage and Housing Corporation on Tuesday indicated that there was a “modest amount of overvaluation” at the national level, most prevalent in Montreal and Quebec City, but also apparent, to a lesser degree, in Toronto, Calgary and Halifax.



How Mexico is eating Canada’s lunch in the auto sector. Bloomberg’s Brendan Case and Nacha Cattan affirm that Mexico’s auto boom is being driven by cheap labour by highlighting a 37-year-old plant worker who earns less than $300 per month despite having 15 years of experience in the industry. While unit labour costs aren’t the sole consideration companies take into account when setting up a new operation, the rise of Mexico raises these two questions about the future of Canada’s industry: can we possibly be cost-competitive with the Americans’ neighbours to the south? And if that entailed these jobs would pay a pittance, wouldn’t any victory be a pyrrhic one?


Fee hikes for clearing-unit services on the way? TMX Group (X), the operator of the Toronto Stock Exchange, has proposed new fees for clearing-unit services provided by one of its businesses, the Canadian Depository for Securities, Ltd. The big banks would be the most affected in the event that the price hikes are approved by regulators, but these fees do appear to be rather nominal. The Globe and Mail‘s Tim Kiladze reminds us the prospect of clearing-unit fee increases was a contentious issue during Maple Group’s acquisition of TMX Group two years ago. “TMX must win approval from Ontario, British Columbia and Quebec before it makes any fee changes to CDS,” he writes. “With such a high hurdle to clear, anything that’s too aggressive should have little chance of surviving.”


Daily dispatches


Investors are very bullish on U.S. stocks, and that might be a bit of a contrarian indicator. “It’s worth highlighting that funds are running the second-lowest short positions in S&P 500 futures for the year, while a scan of the S&P 500 cash market shows 88 per cent of stocks are now above their 50-day moving average,” writes IG chief market strategist Chris Weston. “It does suggest that a short-term move lower of three to five per cent would be healthy for the next stage of the bull market to materialize, especially with the U.S. index trading at peak EBIT margins.”



Think twice before expecting more monetary stimulus from China any time soon. Citing Chen Yulu, a central bank adviser, Reuters reports that the PBoC will wait to see more economic data from the fourth quarter of the year before making monetary policy more accommodative.



The United Kingdom’s economy expanded by 0.7 per cent quarter-over-quarter in Q3, according to the second estimate of GDP. However, the details were not very positive: consumption and government spending fuelled growth, while business investment declined and trade was a drag on the economy.



There’s a bevy of U.S. economic data on the docket today. The core PCE index, the Federal Reserve’s preferred gauge of inflation, is due out at 8:30 a.m. (EST), along with durable goods orders for October and last week’s initial jobless claims. Around 10:00 a.m., the UofM final reading on consumer sentiment for November and readings of new and pending home sales for October will be released.

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