ON THE RISE...NATIONALLY

Canada’s home sales back on the rise
Postmedia News
Mar 15, 2012

Following a rough start to 2012, home sales in Canada rebounded in February with a modest increase from the previous month.

The Canadian Real Estate Association (CREA) said Thursday that home sale rose by 1.4% between January and February, which helped recover roughly one-third of the 4.5% drop recorded the previous month.

Compared with the same reporting period the previous year, activity was 8.6% higher than February 2011. Over the first two months of 2012, some 61,772 homes were sold, which represents a 6.7% hike from the same period in 2011.

“The national rise in both sales activity and the number of newly listed homes beyond the normal seasonal increase provides clear evidence that Canadians are confident in housing market prospects,” CREA president Gary Morse said in a new release.

New home listings also jumped 1.9% in February, representing the highest level since May 2010. The association said a spike in new listings in Canada’s two busiest markets — Toronto and Montreal — helped counterbalance a decrease in listings in Vancouver, which is the country’s third-largest market.

CREA said that the balance between sales and new listings remains fairly equal.

On a year-over-year basis, average home sale prices were up fully two% in February 2012. The average price of all homes sold that month was $372,763.

The association said that the increase was partly due to a rise in high-end home sales in the Vancouver area, which was not anticipated. Single detached residences in the Toronto area also continue to fuel home gains.

RESULTS IN VICTORY?

Low-rate mortgage wars are on
John Greenwood
Financial Post Mar 9, 2012

After a string of warnings from policymakers about the perilous state of household debt in this country, it hardly seemed like a good idea.

But this week the big banks launched the latest round in the mortgage war, with Bank of Montreal rolling out its rock-bottom 2.99% five-year home loan, one of the lowest rates on such a product. BMO’s peers quickly followed suit, breathlessly unveiling their cut-price mortgages, available for a limited time.

In public comments the banks wrapped themselves in the maple leaf, claiming the special rates are aimed at bolstering the finances of consumers, since the new products come with fixed rates and shorter amortizations designed to allow borrowers to pay down debt faster. “We think this is totally consistent with the debate about stability of [household finances],” said Frank Techar, head of BMO’s domestic retail bank.

“Canadians have identified effective debt management as their primary focus this year, and these special offers will help new homebuyers and existing mortgage holders reduce interest costs and pay down their mortgage sooner,” said Colette Delaney, executive vice-president at Canadian Imperial Bank of Commerce’s retail bank.

But here’s the thing. Canadian household debt has been steadily rising for more than a decade and it’s now sitting about same the level it was in the United States just before the housing collapse, precursor to one of the biggest waves of consumer defaults since the Depression.

Thanks to low interest rates and a stable economy, Canadians are managing their burden. But Bank of Canada Governor Mark Carney has warned repeatedly that elevated borrowing is the biggest domestic threat to health of the financial system.

But don’t “special offer” mortgage deals encourage people to borrow more, and doesn’t that exacerbate the problem?

Or maybe problem is the wrong word, because from the banks’ perspective it’s not so much a problem as a potential earnings headwind, according Peter Routledge, an analyst at National Bank Financial.

.Residential mortgages are hugely important for the banks, a key business in domestic retail lending which is traditionally one of the most important earnings drivers. At a time of heightened competition, profit margins are razor thin but players are making up for that by hiking the volume of loans they write.

Canadians have about $1.1-trillion of mortgages outstanding, by far the lion’s share of total consumer debt, according to the Bank of Canada.

But the bank’s are mostly protected from risk of default through insurance provided by the Canada Mortgage and Housing Corp.

On average, at least 50% of mortgages held by the banks are covered by insurance, all but the safest, low ratio loans to highly credit-worthy customers.

So in a worst-case scenario — a collapse in the housing market — the banks would have minimal direct exposure to loan losses.

But they would experience a drop in profits since a housing correction would almost certainly result in a consumer pull-back in loan demand, not just for mortgages but across the board, and the banks are very cognizant of that.

“I think banks recognize that scenario would be very bad for earnings, and why would they want to hurt their franchise?” said Mr. Routledge.

When the U.S. market started to turn, lenders responded by bringing out ever more risky products that enabled people to lever up even more because their role in the economy had become distorted.

“But that’s very unlikely to happen here because of the [more healthy] structure of the mortgage market,” he said.

Another reason for Canadian banks to be cautious is that CMHC has been fundamental not just to their business models but also to their funding. Last year the big six issued more than $25-billion of covered bonds, mostly backed by CMHC insured mortgages. Thanks to the CMHC, the interest rate on the bonds is only marginally above Canadian government bonds, and significantly lower than the funding costs of even the strongest foreign banks.

The last thing the banks want to do is anything that might cause the federal government to change the rules around CMHC insurance.

With this in mind, we can ask the question again: Are the banks increasing risk in the system with their special low-rate mortgage offers?

Bank officials suggest the main target is customers of other banks along with new customers with solid jobs and a genuine need to own homes.

Rob Mclister, editor of industry newsletter Canadian Mortgage Trends, says such offers typically result in only a small amount of business from new borrowers. Instead what they do is raise the level of market interest in mortgages and home buying generally, he said.

Not surprisingly, the banks continue to grow home loan volumes at mid single digits, a healthy clip given the weak economy.

RISING DEMAND IN ALBERTA

House prices expected to ease
Financial Post Staff
Mar 5, 2012

OTTAWA — Home resales are expected to rise by 0.3% this year in Canada, with low interest rates continuing to support the market, the Canadian Real Estate Association said Monday.

National sales are forecast to reach 458,800 units in 2012, up from 457,305 in the previous year. “Rising demand in Alberta, Saskatchewan, and Nova Scotia, is expected to offset softer activity in British Columbia, Ontario, and New Brunswick,” CREA said.

In 2013, CREA said, sales are expected ease back to 457,200 units, with modest gains in all provinces except Ontario “as economic and job growth picks up later this year and builds into 2013,” it said.

Meanwhile, the national average price is likely to decline by 1.1% this year to $359,100, followed by a slight increase of 0.9% to $362,300 in 2013.

“Risks to the Canadian economic outlook remain elevated owing to the European sovereign debt quagmire, but the continuation of low interest rates is the silver lining,” said Gregory Klump, CREA’s chief economist.

“So long as the European debt crisis is contained and a global economic recession avoided, low interest rates will support Canadian home sales and prices. Recent trends are reassuring, but interest rates remaining low for longer will doubtless keep the Canadian housing market under scrutiny for signs of overheating.”

LOOKING FOR A GOOD TIME?

Why it’s a good time to buy a home
By Mark Weisleder
Toronto Star  Jan 27 2012

I believe there has never been a better time to buy a home. I’ve been in the industry for 28 years as a lawyer and I haven’t seen so many positive signs for housing, whether you are thinking or buying or locking in a mortgage.

Here’s why:

Mortgage rates at historic lows: They can’t get any lower. Four to five-year fixed mortgages at 3 per cent are unheard of. It is lower than the variable rate that most Canadians have been paying for years. Rates have nowhere to go but up, either later this year or next. If you are paying a variable interest rate, lock in now.

Canada’s appeal: This country has everything going for it — a stable banking and political environment, steady real estate market, the natural resources people want and few social tensions. That makes us a safe haven in a volatile world.

Our immigrant draw: Because of the above, we’re a draw for immigrants, often wealthy ones. When they get here, they need a home. So in my view while the real estate market may level off in some areas of Ontario, it should stay strong in most of the GTA and likely Canada’s other large urban centres as well.

Mortgage defaults: According to CMHC, over 99 per cent of Canadians pay their mortgages on time. It quite a different picture in the U.S. where 7 million homes are in foreclosure and perhaps another 7 million homeowners are under water. This represents almost 15 per cent of all homes. So while the American housing market will likely be weak for the next few years, this should not occur in Canada. Our banks are not dumping homes onto the market, so there is no downward pressure on prices.

Recourse Mortgages: In many U.S. states, if you can’t pay your mortgage, the only thing the bank can do is foreclose; they cannot sue you for any shortfall. So when homes go under water, owners give the keys back to the bank. In Canada, loans are almost all Recourse, meaning if you don’t pay and there is a shortfall, the lender can sue you for the difference. This is another reason why, in my opinion, even if times do get tough, Canadian homeowners will find a way to make the payments until things improve.

Income-to-price ratio: Another misleading statistic is that in major markets, like Toronto, the average price of a home is now 4.6 times the income of the average Canadian. This same statistic was found just before the U.S. and UK markets went into the tank. However, if you look at median incomes of Canadians against the median cost of homes, this average comes down to around 3.5, which is not dangerous. Using averages are wrong. A person receiving social assistance will not buy a home, and should not be included in any relevant statistic.

High consumer debt: The warnings about rising debt ratios must be examined carefully. The Governor of the Bank of Canada is worried that the average personal debt ratio is now 156 per cent in Canada. This means a household making $100,000 per year, owes $156,000, two-thirds of which is mortgage debt. Why is this so bad? At an interest rate of 3 or even 5 per cent, the amount needed to service the debt is manageable. Most people do not pay off their mortgages in one year. Still, this is another good reason to consolidate your debt now, at these low interest rates, and lock in.

No guarantees: Nobody can predict the future and there’s always the possibility of a major economic shock. Yet, in a U.S. presidential election year, politicians will do whatever is necessary to prevent it. If the economy goes into the tank, so do re-election chances. The U.S. is already showing signs of economic recovery.

No matter what, do not take on a monthly payment higher than what you can afford. Meet with your lender or mortgage broker in advance to figure out what you can afford before you start looking for a home. It may be the best time to buy, but you need to buy smart.

Photo By: alykat

HOME FOR CANADIANS

CMHC backing fewer loans
By Garry Marr
National Post Jan 30, 2012

Canada Mortgage and Housing Corp. is cutting back on mortgages it insures as the Crown corporation edges closer to a $600-billion cap imposed on it by the federal government, the Financial Post has learned.

A CMHC spokesman confirmed that it had approached a number of lenders at the end of 2011 about reducing its “bulk or portfolio insurance” after third-quarter results showed the agency had committed to back $541-billion in mortgages. CMHC, which guarantees mortgages held by financial institutions, is ultimately backed by the federal government and needs approval to go over the $600-billion limit — something that would create greater risk for taxpayers should the housing market collapse.

“CMHC has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance.” said Charles Sauriol, a spokesman for the Crown corporation, in an email.

“To ensure equitable access to portfolio insurance within CMHC’s annual limits, an allocation process is being established which has caused some delays. Portfolio insurance provides lenders with the ability to purchase insurance on pools of previously uninsured low ratio mortgages and does not impact CMHC’s transactional business.”

Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

“One of the things that has got them [to the limit] faster than expected is they are doing a lot of conventional insurance for lenders,” said one source. Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.

“I think as a taxpayer you should care. The policy question is why should the Canadian taxpayer take that type of meltdown risk within CMHC,” the source said.

The risk to the taxpayer would be a collapse in the market leading to a defaults like the U.S. saw. If CMHC couldn’t cover those defaults, Ottawa is on the hook for 100% of any shortfall.

On the surface, insuring conventional loans may not appear as risky as traditional mortgage default insurance because it comes with more equity. The banks have been demanding ultra low fees on the conventional mortgages, arguing the equity position makes them a lower risk. However, lenders are skimming their portfolio to load up mortgages that are 70% to 80% debt to equity and may also have other problems, said a source.

With mortgage defaults well below 1%, some might argue the risk to CMHC is negligible. “If you look at what is backing [CMHC’s] guarantee, it should be more than enough to cover any downturn in the market,” said one banking source, who asked not to be identified, about CMHC’s cash reserves. “Besides, what will the government do, not increase their limit? This could kill the entire housing market.”

CMHC gave no indication it would seek an increase in its limit.

“CMHC’s mortgage loan insurance limit in force is $600-billion. CMHC manages its mortgage loan insurance business in accordance with this limit,” said Mr. Sauriol.

The Crown corporation would be going to the government looking for an increase in its limit at a time when both Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have been casting a wary eye at the housing market.

“We watch the housing market carefully and we are prepared to intervene if necessary. Having said that, we’re not about to intervene in the housing market now,” said Mr. Flaherty this month. For his part, Mr. Carney said “we see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there.”

Sources have indicated the government is already considering tough new measures for calculating how the self-employed qualify for loans and tightening regulations for condominium buyers, so there is probably little appetite for backstopping even more debt from CMHC. In addition to CMHC, the government has a $300-billion limit for private mortgage default insurers.

SOME LIKE IT HOT!

More mortgage rules planned if housing market gets too hot
Garry Marr
Financial Post Jan 23, 2012

A new round of mortgage rules from Ottawa could include tough new measures for calculating how the self-employed qualify for loans and tighten regulations for condominium buyers, according to two separate sources.

Ottawa remains concerned about the possibility of an inflated housing market and wants to crack down on the practice where consumers self-disclose what they make when applying for a loan. In the case of the condominium buyer, the government continues to consider a proposal that would have 100% of condo fees count when assessing how much debt a consumer could afford.

“None of this is happening just yet. The housing market has slowed down and the government wants to see what will happen next,” said one source. “If the spring market picks up, then we will see more changes to the rules.”

Bank of Canada Governor Mark Carney said Sunday that some parts of the Canadian real estate market are “probably overvalued” and policymakers are monitoring to see if further steps are needed to cool it.

“We see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there. We’re watching it closely. We’re working with our partners, the federal government, the superintendent of financial institutions,” he said in an interview broadcast on Sunday on CTV.

” Measures have been taken. They’ve been effective. We’ll keep up that vigilance. If more needs to be done, I’m sure the appropriate authorities will take those measures.”

Stated-income products have become very popular during this housing boom, allowing more banks to get involved in loaning to the selfemployed.

“These are individuals that are self-employed, have great credit and won’t be able to validate their ability to pay if they are not showing their income on their notice of assessment,” said one source.

He says those people with stated income could have to make an even higher down payment than the normal 20% that exempts consumers from buying expensive mortgage default insurance.

The source said some self-employed are qualifying for loans based on the assumption they have a lot of write offs, like car payments and housing costs associated with home office costs.

“They get to include that based on the assumption that self-employed people have an advantage from a tax perspective,” said the source. “The government is trying to figure how they would present this.”

A source with one of the banks said the government is trying “zoom in” on marginal borrowers so it doesn’t get into a U.S. type of situation where they were not verifying income.

“What banks are doing usually when it comes with self-employment is not dealing with declared income because nobody believes it. What they do is look at their behaviour and put more weight on it,” said the source, referring to how those consumers handle their debt. “With an employer, you can call and verify their income.”

The labour market is roughly about 13% self-employed so new rules could have a major impact but the source indicated it does not mean those people would be shut out of the loan market. “It will be just more difficult for them. You are going to have to prove income in a more precise way,” he said.

The suggestion the government might crack down on condo buyers is not new, having been scrapped last year in favour of tougher new rules on amortization lengths and refinancings. Most people in the real estate sector now believe amortizations will be reduced to 25 years after having been as long as 40 just three years ago.

Brad Lamb, a Toronto real estate broker and condo developer, has heard the government is again considering including 100% of condo fees in calculating debt levels but doesn’t think it will happen.

“The 25 year amortization is a no brainer, they should do it,” said Mr. Lamb. “It’s not smart to have loose lending rules. But the condo market is hot because of investors not speculators. These investors are coming [from around the globe]. This silly [condo fee] change will do nothing. These people are buying with cash.”

Photo By: Todd Klassy

ALBERTA...THE REVIVAL

Energy revival fuelling boom
Province set to regain status as national leader
By Tamara Gignac
Calgary Herald December 27, 2011

Albertans know all about the B-word: boom.

For much of the past decade the economic pace was blistering, led by massive projects in the oilsands. The result was scores of high-paying jobs, a red-hot real estate market and an influx of thousands of new migrants.

The party was good while it lasted.

But in 2008, Albertans were blindsided by another B-word: bust.

A collapse in energy prices, the result of the U.S. financial crisis, took the steam out of Alberta's once-buoyant economy.

The oilpatch shelved or cancelled billions of dollars worth of projects, jobs evaporated virtually overnight and ordinary Albertans struggled to pay their mortgages.

But after sputtering for much of the past three years, Alberta appears poised to regain its position as Canada's economic juggernaut.

All signs suggest prosperity is sweeping the province. Unemployment is low, cash registers are ringing and the energy sector is once again on a hiring spree.

It begs the question: is Alberta headed for another overheated economy?

Economists are certainly bullish when it comes to the province's prospects.

The Royal Bank of Canada predicts Alberta's rate of growth - four per cent this year and 3.9 per cent in 2012 - will outpace all provinces except Saskatchewan.

"Oilsands megaprojects will continue to generate tremendous economic activity and will be a boon to Alberta's economy for years to come," says RBC chief economist Craig Wright.

"The boom entirely emanates from the private sector - the source of an astounding 116,000 new jobs this year," Wright said.

Improved employment prospects have translated into a record quarter for Sharlene Massie's local recruiting firm, About Staffing.

Alberta is bucking the national trend, a welcome relief from the hiring freezes of recent years.

As long as there's continued growth in oilsands production and Alberta's unemployment rate holds steady at about five per cent, the good times should continue, Massie says.

But she admits the spectre of an overheated economy could spoil the party and usher in a labour shortage similar to that of 2006.

In the worst-case scenario for employers, Alberta's jobless rate would return to levels seen in the last boom, driving skilled and unskilled wages to unprecedented levels.

"We're not there right now. We're comfortable," Massie says. "There's enough jobs out there and every-body's happy. Let's hope we can stay this way."

A report this year warned that a looming labour shortage is the Achilles heel of the provincial economy and that industry should brace for a chronic scarcity of workers in the years ahead.

It comes as Calgary's oilpatch, and the rest of the natural resources sec-tor, is set to lead the nation with the highest projected salary increases in the year ahead.

But boom or bust, Alberta's shifting demographics will probably require a new approach to labour issues in the coming years, suggests Calgary Chamber of Commerce CEO Adam Legge.

The province has repeatedly looked to the federal government to change immigration policies so Alberta can hire the workers it needs.

There's expected to be a short-age of everything from tradespeople and health-care workers to financial service employees, retail staff and public-service jobs.

"We're going to face a labour shortage whether we have a strong economy or not because there aren't enough workers to backfill the retiring baby boomers," says Legge.

He says he believes inflation pressure associated with rising labour costs could prove troublesome for Alberta.

"As soon as you see wages being driven up - as they are right now - people have more spending power and are able to bid up prices on everything from houses to goods and services," Legge says.

"The Bank of Canada will want to keep an eye on Alberta because we will have stronger inflation in our economy than the rest of Canada."

A heated labour market is only one indicator of Alberta's changing economic fortunes.

Figures from Statistics Canada show a three per cent increase in retail sales in October compared with the month before - the largest increase in Canada.

It comes as more Albertans purchase new vehicles, electronics and clothing - a welcome prospect for retailers, who saw cash register receipts dwindle during the recession.

Discretionary spending is also on the rise in the province.

Recent reports suggest people are choosing to dine in restaurants more frequently, purchase a morning latte or even fly away on a holiday.

Alberta's housing industry also got a much-needed boost in 2011.

"The strength in our economy, combined with affordability levels that outperform most major centres, will continue to attract migrants to the city and spur further growth," says Sano Stante, president of the Calgary Real Estate Board.

But along with an economic boom comes social challenges, as cities and smaller communities struggle to meet infrastructure pressures caused by an influx of new workers.

Todd Hirsch, senior economist with ATB Financial, says he doesn't expect to see a repeat of 2006, when "people lived in tents by the river" due to lack of affordable housing.

"I think you can call this a 'mini-boom,' at least relative to everywhere else in the country and even the industrialized world," Hirsch said.

"(But) if we did see a major collapse in Europe or a real calamity, that could knock the stuffing out of oil prices pretty quickly."

Hirsch is keeping an eye on developments with the Keystone XL project. The $7-billion Alberta-to-Texas pipeline proposed by TransCanada Corp. has been held up by a political battle in Washington.

The fate of Keystone XL could be a "harbinger of a more challenging environment" for Alberta's energy industry, he says.

"My feeling is this is not just one project we're talking about. It indicates we are in a whole new world in which putting pipelines in the ground is not going to be as easy or straight-forward as it was in the past."

So far, the province's fortunes have been mostly insulated from global economic turmoil relative to other regions.

But some observers, like Leonard Waverman, wonder if sluggish growth for Alberta's biggest trading partner - the United States - will eventually hit home.

The dean of the University of Calgary's Haskayne School of Business chooses a weather analogy to characterize Alberta's economic prospects in 2012.

"I'd suggest we have an economic chinook," Waverman says. "One must remember that chinooks are very capricious. They come in and move out very quickly."

But even as Alberta prepares for a new round of prosperity and good times, some still struggle to make ends meet after the recession.

During the past three years, Alberta recorded the country's second-highest increase in food bank usage, according to a recent HungerCount survey.

Talk of an economic boom is probably meaningless for the many house-holds still trying to find a way out of the last economic bust, says Kathryn Sim, a spokeswoman for the Calgary Inter-Faith Food Bank.

"We're seeing people bouncing back and they are coming to us as donors, which is lovely to see," she says.

"But it's hard to dig out of the hole. It's taking a longer time for people to get out of the situation they found themselves in when the economy crashed."

Photo By: Larry He's So Fine

BULLISH CONSUMERS

Canadian consumers remain bullish on real estate market
October sales highest since beginning of year
By Garry Marr
Financial Post November 16, 2011

The Canadian housing market continues to defy those who have long predicted its collapse.

It was just another set of numbers, but if anything the market seemed to pick up steam with October sales across the country the best they have been since January.

The upward push caused the Canadian Real Estate Association to slightly revise its predictions for 2011. The group now says sales will be up 1.4 per cent from a year ago, instead of 0.9 per cent.

"The continuing strength of home sales activity in the face of ongoing financial volatility speaks volumes about the confidence of Canadians in our housing market," said Gary Morse, president of CREA.

Even going into 2012, CREA doesn't see much changing in the marketplace with interest rates near record lows. It's calling for a relatively minor 0.5 per cent reduction in sales next year.

The industry continues to have plenty to gloat about as annual sales have held steady in the $450,000 range for the past three years. Prices have also shown a steady upward trajectory and are now forecast to reached an average of $362,700 in 2011, which would be a seven per cent jump from the year before. Next year, prices are expected to remain flat - something most people in the real estate industry see as an accomplishment in the present economic environment.

"Home sales activity over the past couple of months suggests buyers are confident that the Canadian economy will remain relatively unscathed by global economic risks, since every home purchase is a homebuyer's vote of confidence in the future," said Gregory Klump, chief economist with CREA, adding there is strong feeling the government's fiscal policy would be coordinated to give housing any support it should need in the event of a pullback.

So far, the industry seems to be getting all the support it needs from a low interest rate environment that has kept people in the market. Variablerate mortgages tied to prime are still available as low as 2.7 per cent while a five-year fixed rate closed mortgage is now being discounted down to 3.19 per cent.

Toronto continued to carry the national market in October with sales up 14.3 per cent from a year ago. The activity in Canada's largest city helped boost overall sales activity, which rose 8.5 per cent from a year earlier. Prices across the country continue to be moderate with the 5.5 per cent year-over-year increase the smallest it has been since January.

The consensus among economists is that the housing industry might not have much more to give in terms of price increases or sales but they also are not predicting a massive decline either. "The fact that prices are overvalued today does not necessarily mean they will crash tomorrow," said Benjamin Tal, deputy economist with CIBC World Markets.

He thinks a "violent market meltdown" would need a catalyst like the a sub-prime crisis or a jump in interest rates like the industry saw in 1991. "We do believe the housing market in Canada will stagnate in the coming year or two," Tal said.

That housing market has become a key component of the country with a report from TD Economics saying the construction industry was second fastest growing industry in the country and accounts for 10 per cent of GDP. "While the industry's performance over the last decade has been astonishing, some of the recent strength is likely to taper off in the coming years," the bank said.

Photo By: WCampos3

BLAZING AHEAD

Canada’s housing market steams ahead
Reuters  Oct 11, 2011

TORONTO — Canadian housing starts jumped much more than expected in September, helped by a surge in the condominium sector, suggesting Canada’s property boom stayed intact last month and should help the economy avert recession.

Canada Mortgage and Housing Corp. said on Tuesday that starts rose to seasonally adjusted annualized rate of 205,900 units last month. August starts were revised up to 191,900 from 184,700.

September starts far exceeded the consensus expectation of analysts, who had called for 188,000.

Driving the gains were a jump in construction of multi-residential buildings such as condominiums.

“Housing starts picked up in September due to an increase in multiple starts in the Atlantic region, Quebec and in British Columbia,” Mathieu Laberge, a deputy chief economist with CMHC said in a statement.

“Multiple housing starts are expected to move back toward levels consistent with demographic fundamentals in the near term.”

The agency said urban starts increased by 8% to 185,900 units in September, with multiple urban starts up by 14.2% to 118,000 units. Single family housing starts in urban areas decreased by 1.5% in September to 67,900 units.

Rural starts were estimated at 20,000 units.

CIBC World Markets economist Emanuella Enenajor said in a note to clients that while multiple starts are widely expected to scale down in the months ahead, residential construction could be a plus for GDP in the third quarter.

Canada’s economy contracted marginally in the second quarter, partly due to the supply chain impact of Japan’s earthquake and tsunami. There had been fear the economy could shrink again in the third quarter, meeting the textbook definition of a recession.

But recent data has been encouraging. A report on Friday showed Canada created six times as many jobs as expected in September, helped by an economy that is largely humming along even as other rich nations struggle with debt and slumping confidence.

Canada’s housing sector has played a major role in the recovery. The country avoided the subprime housing boom that drove the United States into recession and helped trigger the global financial crisis.

Property prices and sales briefly weakened after the crisis. But the Bank of Canada’s decision to cut interest rates to a record low, which pulled mortgage rates lower, fueled a fresh boom.

The housing boom was helped along by the fact Canada’s conservative banks escaped the crisis largely unscathed and were able to keep lending.

The fear now for many policymakers is a fresh asset bubble could be in the works.

EVERYBODY'S WELCOME

Low rates to keep house party going
Eric Lam
Financial Post  May 30, 2011

With the Bank of Canada now widely expected to hold off on a rate hike until the end of summer, house prices in Canada are likely going to stay hot for a few months longer.

The central bank will again leave its benchmark lending rate unchanged at 1% at its regular policy announcement on Tuesday, according to the unanimous result of 22 economists surveyed by Bloomberg News.

With signs the U.S. and global economies have entered a soft patch and the European debt crisis continuing to roil, most economists do not expect the bank to raise its overnight target rate until at least September. That would mark a full year on hold for the bank, which last raised rates in September 2010.

The upshot is, these ultralow lending rates will continue to a fuel a Canadian housing market that appears in full spring bloom. Average prices hit $372,544 in April, up 8% year over year for the third straight month, led by a supercharged Vancouver market.

"It will lead to more strength in housing in the near term than anticipated, and the slowdown in housing will be more of a 2012 story," said Derek Burleton, deputy chief economist at TorontoDominion Bank, in an interview.

TD and economists at Royal Bank of Canada and Bank of Montreal have recently pushed their expectations for a hike back to September. TD and Royal forecast the rate to settle at 1.75% by the end of the year, while BMO does not expect it to rise past 1.50%.

Mr. Burleton figures homes are at least 10% overpriced. Extending a low-borrowing environment into the prime sum-mer shopping season would encourage more prospective buyers to take the plunge, creating even better pricing opportunities for sellers.

However, Phil Soper, chief executive of Royal LePage Real Estate Services, said recent price increases have been driven by intense foreign investment in Vancouver, especially from newly cash-rich investors from China, and not low interest rates.

"Much of it is concentrated in a few neighbourhoods, which have attracted Asian investors who use largely cash," Mr. Soper said. "Also, there just aren't enough homes for sale in Canada right now. An increase in the cost of buying would not impact the supply side at all. In general, the pent-up demand for housing that grew during the recession has been exhausted."

Data from Re/Max Canada showed that 747 homes in the Greater Vancouver Area sold for $2-million or more between January and April 2011, a 118% increase on 2010, the biggest increase by far. To compare, 435 homes sold for $1.5-million or more in the Greater Toronto Area in the same time period, a 9% increase on 2010.

"When you take Vancouver out of the equation, the rate of house price appreciation is cut in half," Mr. Soper said.

Doug Porter, deputy chief economist at BMO Capital Markets, agreed that Vancouver has skewed averages.

"We aren't calling for a massive correction on the market, but Vancouver is a market unto itself, and it's certainly at risk of a full-fledged correction in the years ahead," he said. "But most other major markets don't seem to have broken from fundamentals. The likely outcome is a long period of subpar increases or flatness for prices."

Mr. Burleton said even the small rate hikes forecast for the end of the year are unlikely to have much of a material impact on the economy.

"I don't see the impact being dramatic. We're really talking about a quarter difference here, and part of the Bank of Canada's job is being done by the high Canadian dollar, so there's some wiggle room," Mr. Burleton said. "There's a good likelihood the increase next year will be accelerated to some extent to make up for some of the lost ground this year. Most of the action on the interestrate front will happen in 2012."

GROWTH OUTLOOK

The Bank of Canada leaves overnight rate unchanged and 2011 growth outlook revised modestly higher


As was almost universally expected, the Bank of Canada left the overnight rate unchanged at 1.00% for the third meeting in a row and followed a string of three meetings where it opted to raise rates 25 basis points each time from a recessionary trough of 0.25%. Steady policy was largely a reflection of little change in the economic outlook. As expected, growth for 2011 was revised up although by a minimal 0.1 percentage point (pp) to 2.4%. Inflation expectations were characterized as remaining “well-anchored”.

With no move on interest rates expected coming out of this meeting, attention was more focused on the statement issued following the meeting to provide clues as to any eventual shift in policy. What was most widely expected was a likely upward revision to growth in the wake of some aggressive stimulative measures in the US that are expected to boost growth in that economy. In the statement, the Bank of Canada acknowledged that “private domestic demand in the United States has picked up and will be reinforced by recently announced monetary and fiscal stimulus.” In the end, however, the Bank of Canada opted to notch up 2011 growth only 0.1 pp to 2.4% from 2.3% previously. Growth in 2012 was raised to 2.8% from 2.6%.

The release on Wednesday (January 19, 2011) of the Monetary Policy Report (MPR) will provide more details of the revised outlook. Of interest will be the extent that U.S. 2011 growth has been revised up relative to a current forecast of 2.3%. On the surface, the upward revision to Canada implies growth in the US has only been revised to around 2.5%. This amount implies a fairly modest effect from the fiscal and monetary policy stimulus recently introduced. Our current U.S. growth this year is 3.4% with recent consensus numbers indicating expected growth of 3.2% for 2011.

The upward revision to Canadian growth this year and next did not alter the central bank’s view on the output gap closing by the end of 2012. The offset was “a little more excess supply in the near term.” This statement is likely a reference to growth in the second half of 2010 coming in below the Bank’s forecast of 1.6% and 2.6% in third and fourth quarters of 2010, respectively. The actual third-quarter 2010 growth rate was 1.0%, and we are currently monitoring a fourth-quarter gain of 2.3%. Tomorrow’s MPR will provide further clarification of the source of this addition of near-term excess supply.

The stronger U.S. outlook contributed to global growth improving slightly faster than the Bank of Canada had anticipated; however, this also reflected stronger growth in Europe although the central bank cautioned that sovereign and bank balance sheet issues in the region continue to be a source of uncertainty. With respect to emerging markets, it was noted that more restrictive policy measures were being introduced in the region implicitly to counter stronger than desired growth.

The description of the Canadian economy was marginally more upbeat as it acknowledged “the beginning of the expected rebalancing of demand.” This statement referred to the increased role of business investment to support growth near term as fiscal stimulus unwinds and household spending continues to be constrained by overextended balance sheets.

Comments on the currency were limited to a reference to its “persistent strength” that was restraining the recovery in net exports.

As expected, the Bank of Canada opted to hold the overnight rate steady at 1.00%. This result occurred despite an acknowledgement of slightly stronger growth in both the US and globally along with some optimism about the “beginning of the expected rebalancing of demand” in Canada. The Canadian growth outlook was revised up as a consequence although by a minimal 0.1 pp this year and 0.2 pp for 2012. These minimal changes to growth did not alter the expected closing of the output gap by the end of 2012 because of weaker growth in the second half of 2010 and thus provided the strongest justification for unchanged policy. Our view, however, is that growth will likely come in stronger than expected this year. As it becomes more evident in the data, we assume a return to tightening mode by the second quarter of 2011. Low inflation will not prevent further tightening, yet it will keep the pace of tightening gradual with the overnight rate rising to only 2.00% by the end of 2011.

Paul Ferley, Assistant Chief Economist, RBC Economics

RESALE PACE TO CLIMB

Resale home pace expected to climb
By Marty Hope, Calgary Herald
October 16, 2010

With a struggling economy and housing sector, anything the least bit positive is a good thing.

So it has been for the past couple of weeks -- a scrap of good news here and there.

Statistics Canada was first out of the chute with news that the Calgary area's unemployment rate for September declined to 6.6 per cent -- down from 6.7 per cent in August and declining even further from the 6.9 per cent in September 2009.

That being said, there were 1,400 fewer jobs created last month compared with August 2010.

But since the first of the year, job creation is still ahead of 2009, says Statistics Canada.

Job creation is good news for the new and resale housing sectors for obvious reasons.

The Calgary Real Estate Board has also chipped in with its good news.

In its latest activity report, the board reported sales of both detached single-family homes and multi-family condos climbed in September compared to August.

In terms of detached homes, 958 changed hands, up from 867 in August.

As for condos, the September sales total was 366, two more than were sold in August.

But compared to the same month last year, sales numbers for September were off.

CREB president Diane Scott took the positive road in her September summary, saying fall sales "should improve slightly" to reflect the latest Statistics Canada report.

"There are signs that September may mark a gradual, if not slight, uptick for Calgary's housing market," she says. "We are seeing a modest improvement since the market's decline that started in April of this year."

In the earlier part of the year, home-buyers -- first-timers for the most part -- decided to move up their purchase dates to beat expected hikes in interest rates and changes to mortgage rules.

When both these factors came into play, people who hadn't bought stepped back from the market, taking a wait-and-see attitude.

There were also those who continued to be concerned about the strength -- or lack of strength -- in the economy.

Here again was a bit of good news. Mortgage rates have not moved dramatically and the average price of used homes is holding fairly steady.

"The Bank of Canada is in no hurry to raise interest rates to any significant level and affordability continues to improve in key segments of the Calgary housing market," says Scott. "These factors, along with great selection, have clearly tipped this market in favour of the buyer."

The average price of detached single-family homes in September within Calgary was $460,278, up three per cent from August but almost unchanged from $459,085 in the same month last year.

The average selling price for condos inside Calgary was $284,028 last month -- down one per cent from August and two per cent from September 2009.

While the market, itself, appears to be undergoing a slight change, the makeup of the buyer is also getting a facelift.

"Clearly, there is a shift in the types of buyers entering the market," says Scott.

"It was first-time buyers who drove the late market recovery last fall and this spring.

"While lower-priced home sales have declined, sales over $1 million have actually increased by two per cent this year compared with the same period last year."
- - -
MILLION SALES UP

For the first nine months of this year, million-dollar-plus sales of used homes totalled 286, up from 229 during the same period last year, says the Calgary Real Estate Board.

But the highest volume of sales of detached single-family resale homes are occurring in Calgary in homes priced between $300,000 and $399,999.

They amount to nearly 38 per cent, a slight improvement over 2009. Meanwhile, the vast majority of condo sales -- more than 47 per cent -- were priced from $200,000 to $299,999.

A year ago, this category accounted for nearly 51 per cent of all condominium sales. "While consumer confidence has strengthened and the unemployment picture has improved, economic jitters will continue to impact Calgary's housing market," says president Diane Scott of CREB. "More and more home buyers will eventually return to the marketplace, but for the moment, they remain moderately cautious."

Photo By: Dave van Hulsteyn

BANK OF CANADA RATE ANNOUCEMENT

Bank of Canada edges up interest rates

By Andrew Mayeda, 8 Sep 2010

As expected, the Bank of Canada on Wednesday raised its benchmark lending rate by 25 basis points to one per cent.

My colleague Paul Vieira at the Financial Post covered the central bank's interest-rate announcement today.

Paul notes that the bank's accompanying statement was not as hawkish as many economists had been expecting. In the statement, the bank predicts Canada's recovery will be "slightly more gradual" than expected, but solid domestic demand and strong business investment should keep the economy humming, despite fears of a double-dip recession south of the border. Many analysts have been expecting that the bank will take a prolonged pause from raising rates, as the global economic picture clears.

What does this mean politically? The big challenge for the Harper government over the coming months will be managing the economic expectations of the Canadian electorate. As the government winds down its stimulus spending, there is expected to be very few fiscal goodies in the bag for Finance Minister Jim Flaherty to spread around. If the government stays in power through the new year, Flaherty could be in the position of having to table a relatively lean budget that begins to lay out how the government will reduce the deficit--not a process that lends itself easily to big campaign slogans.

THE FACTS ON FACTORY SALES

Factory sales rise unexpectedly in June

Postmedia News · Tuesday, Aug. 17, 2010
OTTAWA — Canadian factory sales rose unexpectedly in June, marking the 11th advance in the past 13 months from a low in May 2009, Statistics Canada reported on Tuesday.

Manufacturing sales were up 0.1% to $44.8-billion during the month, with gains in nine of the 21 industries tracked by the federal agency said.

Most economists had expected sales to decline by around 0.5% in June.

Meanwhile, Statistics Canada revised its estimate for May sales to an increase of 0.5% from a previously reported 0.4% rise.

Photo By: CTS Cable

MARKS ON THE MARKET

High marks for Canada's real estate market
National Post · Saturday, Jul. 10, 2010

Canada may no longer be the most transparent housing market in the world, but it's close, according to a biannual survey of 81 countries.

Canada came in second behind Australia in the 2010 Jones Lang LaSalle Global Transparency index, which measures countries' legal and regulatory environments, market strength and real estate debt transparency, among other metrics. Canada ranked first in 2008.

"Canada differentiates itself on having a combination of a sound banking system, well-developed commercial real estate lending standards and stable property markets with relatively low vacancy and rental volatility," the report states.

The country's large, conservative financial institutions contributed to its high ranking, as did its relatively stringent protections for investors. Canada's largest investment banks are housed within its chartered banks, which have strong deposit bases and high capital reserve ratios, making bank runs and wholesale failures unlikely.

In addition, Jones Lang La-Salle notes that cashflow and collateral value of real estate loans are adequately monitored in Canada.

Canada and the United States (sixth place) were the only two countries in the Americas to score in the "highly transparent" category. The next closest, Chile, placed 34th ( "semi-transparent").

"The global recession which started in the United States has kept transparency levels stagnant as the flow of information, business and capital has declined," the report says.

Also in this third-tier category with Chile were Mexico, Argentina, Costa Rica and Brazil, the only major economy to register notable progress.

Fully one-third of the world markets surveyed showed no change or declined from the 2008 index. Among the countries that showed improvement were Turkey, China, India, Poland, Portugal, Romania, Greece and Hungary.

Algeria came in last place, one of three countries labeled "opaque." (The other two were Syria and Sudan.) Pakistan showed the largest decline from the 2008 survey.

LIFE is NOT waiting for you

Forget market timing, it's all about life timing
Garry Marr, Financial Post 
Wednesday, Jun. 9, 2010

'You know, you're making the biggest mistake of your life. The housing market is going to fall."

I got this great piece of advice from another journalist at the Financial Post, who has since left the newspaper, after buying my first home. Not exactly the type of thing you want to hear after taking on huge debt and making the biggest financial decision of your life.

Lucky for me, I didn't heed that advice about Toronto's red-hot real estate market -- in 1998. I'm not going to say I made a shrewd business decision 12 years ago, or even six years later when I bought a larger house.

For me, it wasn't a case of not following what turned out to be bad advice from a fellow business journalist. Nor was it about trying to time the market.

I was simply following the same pattern as most Canadians: I got married and decided to stop renting and buy something. Later came the need for a bigger home when the second kid was on the way.

Which brings us to today. The supply of housing is rising fast as people try to list their homes for sale before the market "crashes." This is happening at the same time that demand is starting to wane. Economists and even the real estate industry are all predicting a correction, the only argument being how severe it will be.

So, the question for anyone buying is, should you wait?

Don Lawby, chief executive of Century 21 Canada, thinks the strategy of waiting for a crash is not going to work during this economic cycle. "For a market to crash, you have to have people who are desperate to sell," says Mr. Lawby. "People will [only sell] if they can't afford their mortgage or they don't have a job."

He doesn't see a decline in prices, "unless you are predicting that mortgages will renew at a hefty premium, which is not the case, or a whole bunch of people are going to lose their jobs."

Mr. Lawby believes neither will happen.

And, he adds, you are really into a risky game if you are timing the market. "A house is a home. If all you are doing is looking at it as an investment --that's what happened the last 15 years--it's not just that. It's a place to live and a place to raise a family," says Mr. Lawby.

Even Benjamin Tal, a senior economist with CIBC World Markets, who last month said in a report that Canadian housing is 14% overvalued, has doubts about playing the market. But he suspects that's exactly what some Canadians will do.

"Is there a sense that prices will go down and people will wait? I think it might be an issue," says Mr. Tal. "It won't be the main reason [people don't buy], but it will happen at the margins. The fact that people sell at the peak and wait to buy is a normally functioning market."

But even if you do make the right call on housing prices, it could end up backfiring on you in other ways. For example, if interest rates rise fast enough, any gains you make on price could be erased by interest charges, says Mr. Tal.

Edmonton certified financial planner Al Nagy says you need to think of your house the way you think about any long-term investment. "Whether it's an investment for use in your retirement or a house to live in, it's a long-term thing. The timing becomes less critical than it would be if it is a speculative [investment]."

And he says making a call on the housing market is as tricky as any other investment call. "It's very rare you catch the bottom. You can't let the market dictate when it's time to buy. The time to buy is when you can afford it," says Mr. Nagy.

I'm not sure that philosophy would fly with my former colleague, but the problem with timing the market is, what if your timing is off?

EMPLOYMENT SIGNS

Canada gains 24,700 jobs in May; unemployment rate remains at 8.1%
Paul Vieira, Financial Post · Thursday, Jun. 3, 2010

OTTAWA -- The Canadian job market continued to churn out jobs in May, adding 24,700 workers -- mostly full-time and in the private-sector -- to payrolls, Statistics Canada reported on Friday.


The May data were well above Bay Street expectations for a 15,000 gain, and has some analysts suggesting this represents more evidence interest rates in Canada will continue to head upward.

“This should up the ante on further Bank of Canada hikes,” said Derek Holt, vice-president of economics at Scotia Capital. “This is simply an astounding jobs report.”

In contrast, the U.S. jobs data for May came in well below expectations, with 411,000 people added to payrolls versus an anticipated 533,000 gain. Particularly disappointing was that gains in private-sector employment, of 41,000, were little changed from the prior month. The anticipation was that the private sector would add 190,000 jobs. As a result, most of the U.S. job gains were temporary hires by the U.S. government to help conduct that country’s census.

John Lonski, chief economist at Moody’s Investors Service, said the U.S. data were “disappointing,” and would mean the U.S. Federal Reserve would be in no hurry to raise its benchmark rate for the foreseeable future. “This tells us the recovery in the U.S. labour market is happening at a snail’s pace.”

The Bank of Canada this week raised its key interest rate for the first time in nearly three years, to 0.50% from 0.25%, as strong domestic fundamentals outweighed worries in Europe. However, its cautious rate statement, which emphasized the risks in Europe, had some analysts questioning whether the central bank would hike rates at its next meeting in mid-July.

The gain of 24,700 jobs comes on the heels of a record performance in April, in which 108,700 people were added to payrolls. The unemployment rate remained unchanged in May at 8.1%, as more people entered the labour market in search of jobs.

The headline May number is smaller than April’s whopping performance, but analysts were nonetheless impressed with underlying data that suggest the recovery has legs.

Full-time employment rose by 67,000 in May, while part-time positions fell by 43,000. The private sector accounted for 43,000 new positions during the month, while there were 28,000 fewer self-employed workers, the agency said.

“Those part time jobs that were taken in lieu of more suitable employment are giving way to more suitable full time jobs,” said Stewart Hall, economist at HSBC Securities Canada. “So too may it be the case that part time jobs have evolved into full time positions as companies respond to increased economic activity.”

The strongest job gains were in transportation and warehousing, and health care and social assistance. Public administration and agriculture were also higher. The biggest declines were in the information, culture and recreation sectors, as well as in the accommodation and food services, and natural resources industries.

Ontario, Alberta, and Newfoundland and Labrador recorded the most robust jobs gains. Meanwhile, average hourly wages rose 2.4% in May, in line with gains in the same month a year earlier.

Employment has risen by 215,200 over the past five months. So far this year, the labour force increased by 166,000 and the participation rate, which fell by close to one percentage point during the recession, has risen 0.3% from its recent low.

“The latest employment data confirm a relatively strong domestic economic recovery that has begun to mature – where incremental gains diminish while becoming self-sustaining,” said Pascal Gauthier, senior economist at Toronto-Dominion Bank.

Yanick Desnoyers, assistant chief economist at National Bank Financial, said that based on statistics from the first two months of the second quarter, total hours worked jumped “notably” to 4.6% annualized, the strongest showing in three years. Meanwhile, wages are up a robust 6.4% annualized, the best showing since the third quarter of 2007.

“Since both labour input and the wage bill are accelerating, it is hard to argue for a slowdown in domestic demand in Canada anytime soon,” he said. “As the Bank of Canada stated [this week], there is still considerable monetary stimulus in place this side of the border.”

GLOBAL CAUTION

Bank of Canada raises policy rate on the strong domestic economy but cautious about global events
RBC ECONOMICS RESEARCH - DAILY ECONOMIC UPDATE – June 1, 2010

The Bank of Canada boosted the overnight rate by 25 bps to 0.50% this morning, hinting that further reductions in amount of stimulus are forthcoming but providing no concrete timetable for additional rate increases. While the domestic economy is performing in line with the Bank's forecast, the external environment remains volatile, with the Bank pointing to tensions in Europe and the continued deleveraging across the global economy as likely to "temper the pace of global growth." "Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," the Bank said. Additionally, the Bank highlighted that, even with today's rate increase, there remains "considerable monetary stimulus in place.”

The Bank also announced that it is re-establishing its standard operating framework for implementing monetary policy. The 50 bps operating band for the overnight rate was re-established.

The economy posted a solid 6.1% annualized growth rate in the first quarter of 2010 building on an already impressive 4.9% increase in the fourth quarter of 2009. The solid gains during these two quarters provided strong evidence that the stimulative monetary and fiscal measures helped to pull the Canadian economy out of the recent slump. The 0.6% gain in March’s GDP indicated strong momentum late in the first quarter setting up for the strength to be maintained in the second quarter. The surge in payrolls in April also corroborates this view with a smaller, but still positive, report for May expected on Friday, June 4, 2010.

While the global environment presents risks to Canada's economic outlook, the strength in the domestic economy and a core inflation rate that is only marginally below the 2% target took precedence in today's rate decision. Furthermore, the statement indicates that the strength of the domestic economy will see the Bank continue to reduce the amount of stimulus, although the statement did not provide clear guidance about the pace of interest rate increases. So far, the Bank assesses that the effects of external events on Canada's economy have "been limited." On balance, the statement supports our view that the Bank views domestic economic conditions as strong enough that the ultra-low level of interest rates is no longer needed and that the recovery can withstand a gradual rise in interest rates going forward. To that end, we expect that the Bank will raise the policy rate to 1.5% in 2010 and that the tightening will continue in 2011 as the Bank moves the policy rate closer to neutral by the time Canada's output gap is eliminated.

Dawn Desjardins, Assistant Chief Economist, RBC Economics

Photo By: Picture Perfect Pose

POINTING TO A RATE HIKE

Canadian growth best in ten years
Paul Vieira, Financial Post
Published: Monday, May 31, 2010

The Canadian economy posted better-than-expected growth in the first three months of 2010, marking the best quarterly performance in over a decade, Statistics Canada reported Monday -- and all but cementing the likelihood of a Bank of Canada rate hike this week.

Strong domestic demand and a robust manufacturing sector helped the Canadian economy record annualized growth of 6.1% for the first quarter, the strongest three-month showing since 1999. This followed a stellar 2009 fourth-quarter performance, of 4.9% annualized (although revised down from 5%).

The expectation was for a 5.8% expansion for the first quarter. The 6.1% gain in output marks the third straight quarter of positive growth after the recession, which lasted three quarters. Further, the first-quarter result is just over double the growth the U.S. economy produced for the first three months of 2010, of 3%.

"While there are some questions on the sustainability of the rebound, there is simply no question that the early stages of Canada's recovery exceeded even the most optimistic expectations," said Douglas Porter, deputy chief economist at BMO Capital Markets.

Analysts suggest this pace of growth can't last. However, they said the strong handoff from first quarter to second quarter likely means annualized growth of roughly 3.5% to 4% for the three-month period ending June 30.The first-quarter bump was helped by a stronger-than-expect March result, of a gain of 0.6%.

In early trading, the Canadian dollar had gained nearly a cent, to trade in the US95.9¢ range.

The consensus as of late last week was that the Bank of Canada would raise its key benchmark rate on Tuesday, by 25 basis points to 0.50%, given the stronger-than-expected domestic economy. The first-quarter result all but cements that view.

The solid gains over the fourth quarter of 2009 and the start of 2010 "provide strong evidence" and the near-zero interest rates, combined with a dollop of fiscal stimulus, "have helped pull the Canadian economy out of its recent recession," said Paul Ferley, assistant chief economist at Royal Bank of Canada. "With the monthly numbers showing strong momentum late in the first quarter, the Bank of Canada will take reassurance that this strength is likely to be sustained near term. This suggests an environment where the Bank of Canada will continue to withdraw stimulus from the system."

There was a belief the central bank could hike its target rate by 50 basis, but market uncertainty due to developments in Europe might cause the central bank to hold back.

Production grew faster in the first quarter of 2010 than in the fourth quarter of 2009, and inventory levels rose after being drawn down in all four quarters of 2009. Residential investment increased for a fourth consecutive quarter, as did consumer spending on goods and services. Export and import volumes both rose for a third consecutive quarter, with growth in imports outpacing growth in exports in the first quarter.

First-quarter strength was broad-based with domestic demand at the top of the list. Consumer spending, up 4.4% annualized, and residential investment, up 23.6%, contributed the most to economic growth. Meanwhile, business investment grew by 0.9% following a 9.8% decline in the previous quarter, led by a 7.6% gain in investment in machinery and equipment. Economists at Toronto-Dominion Bank note that non-residential construction is one component of GDP yet to head down the road of recovery.

The goods-producing component of the economy expanded 2.7% in the first quarter, led by a 4.2% gain by manufacturing. The manufacturing sector was able to post this gain even though the Canadian dollar traded mostly above the US90¢ mark in early 2010.

This is the latest in a string of Canadian economic data that have been consistently surprised to the upside. Job creation is in full swing, with a record 109,000 workers added to payrolls in April; consumers are buying up goods at a healthy pace, tax credits or not; corporate profits are rebounding to pre-recession levels; and inflation is creeping closer to the central bank's preferred 2% target.

The sterling fundamentals prompted the Bank of Canada last month to ditch its conditional commitment to keep its policy rate at a record low 0.25% until July.

Photo By: JoLoLog