Canadian housing prices slowing – Is the jury in for a rate hike?

Between January and April 2010 200,000 jobs were created in Canada of which 30% were related to housing and its ancillary businesses.  Every Canadian economist, starting with the BoC, recognized that housing stability/growth saved the Canadian economy in 2008/09 period.  David Rosenberg did a “bottom-up accounting” to see how much of the recovery could be attributed to housing:

“Based on our statistical work, around half the seven per cent annualized growth rate in nominal GDP from the recession trough has been due to the combined direct and indirect benefits from the housing boom. And when we apply the price deflators to the various sectors of the GDP, we actual find that every penny of economic activity, in real terms since this recovery began, has occurred thanks to the housing sector. In other words, if not for housing, real GDP would have stagnated since Q2 2009 instead of rebounding at a three per cent annualized pace.”

A recovering housing market provided Canadian banks with a good backstop, and credit as a whole remains healthy in Canada.  In fact, rising house price (or their stability) has one very important impact – its supports labor mobility.  If you can sell your house (and in Canada we have no limited liability non-sense as do our American cousins), you can find new employment outside of your immediate neighborhood.

 

This morning the Teranet-National Bank house price index was published for the month of March 2010, and the growth rate in house price is 0.3%, Vs. 0.2% for February.  Looking at the annual figure (+10%) is somewhat “wrong” since several markets in Canada saw a national retracement in house price of 9%.  Much of the data available elsewhere shows house price rising more dramatically, but the reality is that what has changed is the nature of the homes being sold – more expensive ones!  This brings the average up.  The Teranet-National Bank House price Index doesn’t suffer from this bias, but its production lags other indicators because the data needs to be cleaned up. 

Bottom line is that if a red hot housing market was a reason for the BoC to raise interest rates in June, that “excuse” is now gone.  In fact, the only real reason for raising rates in the next few days is to provide the BoC with ammunition in the event of another crisis. 

Recapping the case for and against interest rates hike:

(1)               Its not for the over heated housing market (0.5%, 0.2%, 0.3% growth m/m since Jan)

(2)               Its not because of inflation pressures (right on the mid-point target of 2%)

(3)               Its not for the currency – as a matter of stated policy BoC doesn’t consider F/X movements (Canadian dollar is trading near its fair market value of 0.9200)

(4)               Its not for slowing the economy – although the Q1 print was excellent at 5.0%, anticipation is for Q2 to be lower, and the second half to be difficult (on target for a 3.2% GDP growth in 2010)

(5)               Canada’s economy can sustain a rate hike (There appears to be less slack in the economy than the BoC first thought)

(6)               Commercial banks don’t need the steep yield curve (carry trade) as the balance sheets are in “good” condition (strong Q1 earnings expectations)

(7)               Slow down the pace of “fast money” entering the economy (See March TIC report)

Take your money and place your bets --