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Housing Boom

Canada's housing boom will continue this spring as exceptionally low mortgage rates - and the expectation that borrowing costs will soon be headed higher - add a sense of urgency to consumer buying.

A Scotiabank global real estate trends report released Tuesday predicts most Canadian regions will remain sellers' markets for the first half of the year, as strong demand and rising prices continue.

"I think you're going to have a very active spring market, probably some cooling off in the second half of the year," Adrienne Warren, the Scotiabank economist who wrote the report said in a presentation Tuesday.

"We're looking at once in a lifetime interest rates that people are taking advantage of...but certainly confidence is coming back, the job markets are stabilizing," she said.

Scotiabank expects about 510,000 home sales this year, up ten per cent from 2009, but just shy of the 2007 record. Average prices are forecast to increase about eight per cent to a record $345,000, while housing starts are expected to reach 190,000, up from 149,000 last year.

The economic recovery from last year's painful recession has improved consumer confidence, although a bounceback in the jobs market is taking more time. Just over a third of the 417,000 jobs lost in the 2008-2009 recession have been replaced and the jobless rate is still at 8.2 per cent, only half a point below its high last August.

Most experts predict the rise in consumer confidence about the economy, and low interest rates, are behind the continued strength in the housing market.

Warren said the spring rush will be driven by an influx of buyers hoping to preempt tighter lending rules for mortgages and the introduction of the harmonized sales tax in Ontario and B.C. But a steady increase in the number of listings and a rise in construction are helping to restore a more balanced market.

"We're starting to see better balance, we're seeing more listings. There was a real lack of listings for the better part of last year...we're moving back into a better balanced situation," Warren said.

Warren said the hot spring market should give way to more subdued activity in the second half of the year, as higher interest rates and higher home prices erode affordability.

Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning in late spring or early summer to fight inflationary pressures in the economy.

Key Rate Unchanged

Canada's central bank held its key interest rate at a record low 0.25 percent on Tuesday and reaffirmed that it expects it will keep the rate steady until July. But the bank also signaled it is getting closer to raising rates.

The Bank of Canada said the 5 percent economic growth Canada saw in the fourth quarter was slightly higher than expected. It said growth has been "spurred by vigorous domestic spending and further recovery in exports" and cited low rates, increased confidence and global growth as reasons.

The bank said the persistent strength of the Canadian dollar and weak U.S. demand continue to act as significant drags on economic activity in Canada. About 80 percent of Canada's exports go to the United States. A higher Canadian dollar hurts exports.

But the bank said the risks to Canadian inflation are now "roughly balanced." Previous statements have said the risks were lower.

Some of Canada's top economists took the bank's changed assessment to mean rates will go up once the conditional commitment ends in July. The Canadian dollar strengthened almost a cent, to U.S. 96.80 cents after Tuesday's statement was released.

Avery Shenfeld, senior economist at CIBC World Markets, said the bank has taken the first steps to set up for a rate hike in July. He expects rates to rise as "as soon as the commitment to keep on them hold until the end of June has passed."

TD Bank chief economist Don Drummond said he thinks the central bank could wait until the September meeting and said he expects Canada to raise rates before the U.S. does.

Royal Bank Chief Economist Craig Wright also expects Canada to raise rates before the U.S. He said Canada's central bank is setting the markets up for an eventual move toward normalizing interest rates with its wording on inflation expectations.

"That to me suggests they are a little bit more worried than they were a short while ago but not enough to shake them off the conditional commitment," Wright said.

Unlike the U.S., Canada has not experienced the failure of any major financial institution. There has been no crippling mortgage meltdown or banking crisis north of the border, where there is greater oversight of mortgages.

The federal government tightened mortgage lending rules last month as historic low rates are raising fears of a potential housing bubble. Wright said some have taken the bank's vow to keep interest rates at an historic low to mean they will always stay that way.

Canada’s Inflation

Canada’s inflation accelerated less than economists expected last month, staying below the central bank’s target because of lower costs for mortgage interest, natural gas and clothing. Prices rose 1.3 percent in December from a year ago, and fell 0.3 percent from November, Statistics Canada said today in Ottawa.

Economists predicted annual inflation would speed to 1.6 percent from November’s 1 percent, and that prices would fall 0.1 percent on a monthly basis, according to the median estimates of Bloomberg News surveys.

Bank of Canada Governor Mark Carney yesterday kept his benchmark interest rate at a record low 0.25 percent, and said he plans to keep it there through June unless the outlook for prices veers from his forecast.

The bank also said that “considerable excess supply remains” and inflation won’t return to policy makers’ 2 percent target until the third quarter of next year. “For the Bank of Canada, this report underscores the lack of inflation pressure in the economy,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

“It gives the bank ammunition to keep interest rates low later into this year.” The Canadian dollar weakened 1.1 percent to C$1.0433 per U.S. dollar at 7:13 a.m. in Toronto, from C$1.0314 yesterday. Price Declines Natural gas costs dropped 31 percent in December from a year ago, while Statistics Canada’s index of mortgage interest cost declined 4.9 percent.

Clothing and footwear costs fell 0.8 percent. The rise in inflation from a year earlier was led by a 26 percent jump in gasoline costs. Prior gasoline-price declines helped drive the inflation rate below zero for four straight months through September, the longest period since 1953.

The so-called core inflation rate, which excludes gasoline and seven other volatile items, was 1.5 percent on an annual basis in December, unchanged from the previous month. On a monthly basis, core inflation fell 0.3 percent. The Bank of Canada said yesterday that core inflation has been “slightly higher than expected in recent months.”

Economists forecast the annual core inflation rate would be 1.7 percent, based on the median of 26 estimates, and fall 0.2 percent on a monthly basis. The inflation rate was 0.3 percent for all of 2009, the lowest since 1994, Statistics Canada said.

Tighter Mortgage Rules

Tightening mortgage eligibility rules to prevent a housing bubble may not be such a bad idea, says the founder of Canada’s largest homebuilding company.

“Housing is meant to shelter. Secondly, it is an investment,” Peter Gilgan, chief executive officer of Mattamy Homes, told a luncheon at Wilfrid Laurier University Wednesday.

Gilgan, who was in town to accept the Outstanding Business Leader of the Year Award from Laurier’s school of business and economics, was asked about recent statements by federal Finance Minister Jim Flaherty that Ottawa may increase minimum down payments for residential mortgages to ensure that homeowners don’t face huge bills if interest rates rise.

“It would be a very responsible thing to do,” said Gilgan, whose Mississauga-based company has built several thousand homes in Cambridge, including some in an indoor factory, and has land available for development on the west side of Kitchener.

When people start treating houses “as a derivative,” as some kind of vehicle to make a quick buck, “it creates too much volatility in the market,” Gilgan said.

As for the province’s recent law establishing greenbelts around urban areas in southern Ontario to avoid sprawl, he said builders have to adjust to the new reality. Twenty years from now, all the desirable greenfield land in the Golden Horseshoe will be gone, he said.

Mattamy has enough greenfield land to build on for the next 10 years, he said, but after that it will have to adopt a new strategy of infilling, intensification and redevelopment in urban areas.

Gilgan doesn’t oppose the province’s thrust as long as everyone faces the same rules. “You can throw anything at me. As long as it’s a level playing field, we’ll figure it out.”

The development restrictions in Ontario are one of the reasons Mattamy is expanding into other geographic areas such as Alberta and the U.S., he said.

Since its launch in Burlington in 1978, Mattamy has built more than 47,000 homes in over 100 communities. Fifty per cent of those homes are in greater Toronto and beyond, Gilgan said, with Cambridge accounting for about 10 per cent of that activity.

The company has had mixed success south of the border. It has “dug a little trench” in five American cities and hopes to break even this year. Doing business in the U.S. is different, Gilgan said. While Canadians tend to plan a lot and adopt a cautious approach, Americans plunge ahead much more aggressively, he said.

Gilgan also touched on the company’s efforts over the years to be innovative. During the 1990s, it decided there was a better way to build housing than having the garage as the most dominant feature. It started building houses on wider lots, as much as 36 feet in width, so that more living space could look onto the street.

"We’re providing something more than a house, we’re providing a community.”

“Pocket parks” or smaller green spaces among subdivisions was another popular Mattamy innovation, he said.

“Be really aware of the competition,” he advised young entrepreneurs, but try to do something unique or different.

Gilgan had the audience in stitches when he told them about his daughter enrolling at Laurier 13 years ago. When he came to visit her, she and four roommates were living “in something resembling a house on King Street.” You could put your hand through open space in the front door, he said. “There was no glass there.”

He drove around the neighbourhood and found a house for sale on Ezra Street. With the help of an all-female team of architects and designers, he turned the house into a “chick machine” with five bedrooms, five bathrooms and a giant shoe rack.

He assuaged his guilt over doing this for his daughter with the knowledge that some years later “a greater fool” would buy it. And sure enough, someone did. A few years later he came back when his son enrolled at the University of Waterloo, but the house was already gone. It had been replaced by a residence for 80 students.

“At first I was offended. Then when I did the math on it, I thought, yeah, it makes sense.”

Bank Of Canada Rate Decision

On Monday, Statistics Canada reports on building permits for October. A month-over-month increase of 1% is expected.

On Tuesday, the Bank of Canada makes its interest rate announcement. Economists expect the target for the key overnight rate to remain unchanged at 0.25%.

Canada Mortgage and Housing Corp. reports on housing starts in November. Economists expect 156,000 starts, on an annualized basis, down from 157,400 the previous month.

On Thursday, StatsCan reports on international merchandise trade for October. A deficit of $700-million is forecast, compared with a $900-million deficit the previous month.

The Bank of Canada releases its semi-annual review of the financial system.

On Friday, StatsCan reports on the new housing price index for October.

U.S. and overseas

On Monday, U.S. Federal Reserve chairman Ben Bernanke speaks to the Economic Club of Washington.

The U.S. Federal Reserve Board reports on consumer credit in October. Economists expect a drop of US$9.3 billion, compared with a decrease of $14.8 billion the previous month.

On Wednesday, the U.S. Department of Commerce reports on wholesale inventories for October. A drop of 0.5% is expected, compared with a 0.9% decline the previous month.

On Thursday, Bank of England monetary policy committee announces an interest rate decision.

The U.S. Commerce Dept. reports on the country’s trade balance for October. A deficit of US$37 billion is forecast, up from a deficit of $36.5 billion the previous month.

The U.S. Department of Labour reports on initial jobless claims for the week ended Dec. 5. Economists forecast 465,000 claims, up from 457,000 a week earlier. Continuing claims for the week ended Nov. 28 are expected at 5.44 million, down from 5.47 million the previous week.

The U.S. Treasury Department releases its monthly budget statement for November. A deficit of US$134.1 billion is forecast, compared with a US$176.4 billion deficit the previous month.

On Friday, the U.S. Labour Dept. forecasts a 1.2% increase, month-over-month, in the import price index in November, up from a 0.7% increase in October. A year-over-year increase of 3% is forecast, compared with a 5.7% decrease, year over year, the previous month.

The U.S. Commerce Dept. reports advance retail sales for November. Economists expect a 0.7% increase. Excluding autos, a 0.4% increase is forecast; excluding autos and gas, an increase of 0.3%.

Separately, Commerce reports on business inventories for October. A decline of 0.3% is forecast.

Mortgage-Interest Deduction

It has been referred to as an American birthright, the most sacred tax break, something so sacrosanct that the mere thought of tampering with it was unpatriotic.

And Canadian taxpayers have long coveted our southern neighbour's beloved mortgage-interest deduction, which permits U.S. homeowners to deduct their mortgage interest from their income for tax purposes.

While such a policy applied in Canada would be extremely popular, it is unlikely to see the light of day, especially given its role in the recent U.S. housing crisis. Homeowners may have been influenced, at least partially, by the tax writeoff to seek larger homes with larger mortgages.

Last week, Professor Dennis J. Ventry Jr., of the University of California Davis School of Law, presented a paper entitled, "The Accidental Deduction: A History and Critique of the Tax Subsidy for Mortgage Interest" at a U.S. tax conference.

In it, Dr. Ventry traces the history of the U.S. mortgage-interest deduction "from accident to birthright, from one of many deductible personal-interest items to one of the few left standing, and from a nominal tax offset to the second-most expensive tax subsidy."

He also includes a eulogy to the mortgage-interest deduction that draws on criticisms of the subsidy from two generations of tax reformers and tax policymakers that are more applicable today than at any time during the deduction's nearly 100-year history. Believe it or not, the mortgage-interest deduction was never intended to be a way of promoting home ownership.

Rather, it had its origins in a general deduction for personal interest, which originated in 1913 and has since been curtailed. In Canada, interest expense is deductible only for the purpose of earning income from business or investments. That's why Canadian taxpayers can generally only write off mortgage interest on rental properties.

Perhaps the biggest criticism aimed at the U.S. mortgage-interest deduction is that there is no corresponding taxable income arising from your personal residence to justify the tax deduction. In order to truly rationalize the deduction, many critics argue that homeowners should be required to declare some sort of notional, taxable rental income associated with living in their own home.

Prof. Ventry's paper cites numerous other problems with the deduction, including its role in artificially raising U.S. housing prices, encouraging Americans to buy bigger and more expensive homes. The deduction also disproportionately favours higher-income taxpayers, since the deduction is worth more for those in a higher marginal tax bracket.

But ultimately, the deduction distorts the entire "rent vs. buy" decision by providing what is essentially a tax subsidy to mortgage-laden homeowners at the expense of debt-free tenants and other taxpayers. In his conclusion, Dr. Ventry calls for a repeal of the mortgage-interest deduction, potentially replacing it with a targeted tax credit for homeowners that is unrelated to the price of the home and the amount borrowed.

Quebec Home Improvement And Renovation Tax Credit (HRTC)

If you meet certain eligibility requirements, you may be entitled to a refundable tax credit for the 2009 taxation year for expenses incurred under a residential renovation agreement entered into in 2009 for home improvements or renovations.

The tax credit is equal to 20% of the eligible expenses in excess of $7,500. The maximum amount of eligible expenses is $20,000 for a maximum credit of $2,500.

Calculator

To obtain an estimate of the tax credit for home improvement and renovation that you could be entitled to for the 2009 taxation year, use the calculator available on the website of the Ministère des finances.

Eligibility requirements

To be eligible for the refundable tax credit for home improvement and renovation, you must:

Own an eligible residential unit located in Québec
Have the qualifying work for improvement or renovation carried out at your principal place of residence
A qualified contractor must be hired to carry out the work under the terms of an agreement entered into after December 31, 2008 and before January 1, 2010.
The expenses incurred to carry out the work must be paid no later than June 30, 2010.

Eligible residential units

An eligible residential unit is a residence built before 2009. The individual who incurs the home improvement or renovation expenses must be the owner (or co-owner) at the time the expenses are incurred. The residential unit must not only be the owner's principal place of residence, but also:

an individual house
a manufactured home or a mobile home permanently installed
a unit in a building held in divided co-ownership
an apartment in a building held in undivided co-ownership or held by a sole owner

Qualifying work

Qualifying work that gives entitlement to the refundable tax credit for home improvement and renovation consists of:

the renovation, modification, improvement, conversion or expansion of an individual's eligible residential unit, including the addition of structures adjoining or incidental to the unit
the work needed to restore a lot to its condition before the work described above was carried out

Examples of qualifying work

Division of rooms (knocking down walls or addition of partitions)
Finishing of a basement, attic or garage
Installation of a fireplace, a heat pump or an air conditioning system
Installation of an alarm system or home automation system
Insulation (including for a garage)
Replacement of the plumbing, electrical system,heating system, air exchange system
Replacement of the roofing, rainwater gutters and chimney
Replacement of doors and windows
Replacement of sewage treatment systems (septic tanks and septic field)
Renovation of a kitchen, bathroom, washroom
Expansion of a house built before 2009
Construction work on structures adjoining or incidental to a house built before 2009