Canadian Economic & Financial Market Outlook

April 12, 2008 · Filed Under St. John's Real Estate · 1 Comment 

RBC Economic & Financial Market Outlook

Debt load rising, but so are asset values

Household balance sheets remain in fair condition with the ratio of debt-to assets remaining within the range of the past 40 years. Still, with debt service costs high relative to personal disposable income, the recent tightening in credit conditions does present some downside risks for the outlook for consumer spending this year. Mitigating this, however, is the strong growth in asset values — house prices have recorded gains of about 10% for six years running and the TSX posted a decent 7.2% return in 2007 despite a soggy fourth quarter. However, if the weakness in equities evident late last year and early this year persists, it would present a clear downside risk to household spending during the forecast period.

Stretched affordability to exert modest downward pressure on housing market

The rise in house prices has stretched affordability. RBC’s housing affordability index showed that conditions were the worst since early 1990 for homebuyers in last year’s fourth quarter.  Our view that the Bank of Canada will continue to lower interest rates, with attendant easing in credit market tightening, and that the pace of house price increase will slow this year both point to a modest improvement in affordability. There were 227,000 new homes started in Canada last year, marking the sixth year that starts were greater than 200,000 units. The erosion in affordability and uncertain global economic environment will likely result in slower housing market activity in 2008, although, with interest rates declining, the weakening is likely to be relatively modest.

Bank of Canada to cut rates to mitigate impact of trade drag

The Bank of Canada cut the policy rate by 25 basis points at each of its December and January fixed action dates, concluding that “further monetary stimulus is likely to be required in the near term” to mitigate the downside risks coming from the widening in credit spreads and the weakening U.S. economy. The Bank picked up the pace of easing in March to 50 basis points, sending the overnight rate down to 3.50% as concerns about the U.S. economy escalated. Continuing concerns about the downside risks to growth will send this policy rate down to 2.75% by mid-2008.

U.S Housing recession to continue in 2008; market to stabilize in 2009

The U.S. housing market is showing little sign of recovery. The stock of homes available for sale stands very close to record-high levels and, as a result, new residential construction continues to contract.  In February, the level of housing starts was 54% below the recent peak level and the pace of new and existing home sales was the slowest since the mid-1990s. The inventory overhang and slow sales pace point to construction activity contracting at a double-digit annualized pace for at least the first half of 2008. We estimate that the decline in residential construction spending will trim slightly under one percentage point from the 2008 growth rate. Weakening demand will continue to push prices lower, pointing to a mild deterioration in housing-related net worth in the quarter.

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