This weeks top stories include how the downtown core is no longer the business friendly place it used to be, how the U.S is expected to take another hit, how commercial real estate is finally bouncing back, how the loonie fell over strong words, how the Bank of Canada is all talk, how majority of renovations will be in cash, how there’s been a raise in growth forecast for the world, and how Carney threatens to make a move on the dollar again.
Why are businesses leaving Toronto? The answer is the increase in taxes on all levels. Toronto is now listed as dead last on a recent list ranking entrepreneurial cities. The list of 96 cities has downtown Toronto in last place but the 905 Greater Toronto Area (GTA) is 33rd on the list. Most companies need to be close to the downtown core but can no longer cover the expenses involved with locating themselves downtown. One building had yearly property taxes between $4000 to $600 from 1992 to 2005 but was recently re-assessed and the owner now pays property taxes of $27 000. The only way for his business to survive was to was to move seven kilometres from where the business was located to a new location outside of the GTA where taxes were lower. Although there are still some new real estate projects coming into Toronto the numbers show that most businesses are finding their way out in to the surrounding area’s where the costs eat up less of their profits. That’s not to say that all businesses are leaving Canada’s largest city. In 1986 the inventory of office space in central Toronto was only 59.7 million square feet and now sits at 82.3 million square feet. Suburban commercial real estate was at 38.8 million square feet back in 1986 and now sits at 83.3 million square feet. The impact that the costs associated with down town are having on businesses is that more and more jobs are migrating to the suburbs and causing unemployment to go higher in Toronto than it is outside. Right now there is little confidence that the conditions will improve as Toronto’s spending just keeps increasing and is causing more of a need for greater taxes. Even though Toronto is known as a central high profile location it only did well on 1 factor in the entire survey which is its diversity of business section. But how does that help the local businesses bottom line?
New reports released recently outline a deep correction that may be shaping up for the second half of 2010. The concern is that we are past the first half of the “W” double dip recession and are now looking at a “V” shaped recovery with another hit expected to take effect. The concern is that the investing bubble will take toll and turn into a rough patch caused by a swift rise in short term interest rates mixed with a rally in the U.S dollar and a quick drop in stock prices. Although a robust economic recovery is taking place and includes U.S consumer spending the only recommended investments right now are near term. U.S. jobless claims are falling fast and with rising retail sales increasing it may be the sign that household savings have peaked and spending may begin again. The market is prime for picking due to the long term rates being in better standing than the short term rates, which is a sign that the global economy is in reflation mode with investors sitting on large sums of cash. The investing environment is expected to last longer than usual as the Federal Bank is not expected to produce rate hikes in the near future with the U.S economy is bad shape and an absence of inflation pressures. Once this period comes to an end and the economy begins its recovery with inflation taking its toll, there will be a deep correction. The consensus is that Americans keep protected with U.S treasuries, gold and the U.S dollar which all had great rallies during the recent credit crunch.
Canada’s commercial real estate market is working its way back to life after an 18 month slump has finally ended in Toronto and other urban centres. There are signs of renewed activity that suggest the commercial market has finally separated itself from the troubled U.S market. After seeing two years of declining or flat activity investments in commercial properties in the Greater Toronto Area (GTA) have increased by 46% in the third quarter over the second quarter to $1.31 billion with the number of transactions up by 20%. Statistically looking at the numbers shows signs of recovery but we are not in the all out stages quite yet. Sales are still coming in at half the numbers they were at before the recession and it’s hard to call the bottom out until it has passed but the numbers are strong and precise. The third quarter of this year is a positive one with 27 commercial deals valuing $617 million by themselves which is nearly double the value seen in the second quarter when 17 deals valued $313 million and was considered a low point during the recession. We require a healthy real estate sector to hold together the economy and financial system as residential and commercial property make up a large portion of pension funds and bank assets. In the early 1990’s during the last recession, we saw the fall of some large trust companies when there was trouble in the commercial sector but the chances of that repeating itself this recession is quite low. The challenges we face are that corporate tenants not only negotiate cheaper leases but they easily abandon warehouses and factories without a second thought. The positive side is that the numbers are encouraging as commercial real estate generally tends to lag behind the broader economy when coming out of a recession. The consensus is that things can only get better once they stop getting worse and this is the point that we stand at today. The data in this report is specifically centred on the GTA but there are promising signs all around as vacancy rates remained below the 10% marker in contrast to the U.S where vacancy rates have made their way past the 20% marker. Volume will continue to pick up with each passing week as brokers across the country are getting more and more commercial inquiries daily. Real estate investment trusts are in a position of great strength as they continued to raise equity past the $1 billion mark last year and left their main competitors, the private buyers, behind struggling to find capital and obtain financing. Only time will tell if the commercial side will really make a comeback but the numbers that are popping up right now may be laying groundwork for the future.
The Canadian dollar was down almost 2 cents U.S on Tuesday as the Bank of Canada (BoC) warned that the loonies strength could have a huge impact on the economy. The BoC stated, “Heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures. The current strength of the dollar is expected, over time, to more than fully offset the favorable developments since July.” The recent comment is the strongest statement made from the central bank in regards to the Canadian dollar. The dollar has been a major risk to our recovery since it was first identified in the June policy report. The bank decided this week to keep its overnight lending rate at a record low of 0.25% at least until the next policy meeting on December 8th, 2009. Some analysts felt that the bank would renege on its promise to hold rates steady until 2010 after Australia, which also has a commodity based economy, raised their rates before any other developing country on October 6th, 2009. When Australia raised their rates, investors began pushing up Canadian short term yields in anticipation that Canada would follow suit. Although Canada decided to keep their rates where they are, the strengthening U.S economy will be the key factor in seeing if they will stay there. Conditions in the United States are in place for the economy to improve faster than expected. This will lead to stabilization in the labour market and possibly a reassessment from the Federal Reserve Bank in regards to their current zero policy stance. When this takes place, it is expected to relieve pressure off the Canadian dollar. Let’s just hope that it happens sooner than later.
The Bank of Canada (BoC) has tried its best this week to stop analysts in their tracks from thinking that Canada will follow suit behind Australia and raise rates. Sheryl King, chief economist at Merril Lynch Canada feels that we should not take the BoC’s comments at face value. Her concern is that Canada will in fact pull a quick change on their stance and raise rates without notice. The BoC’s latest rate announcement on Tuesday outlined the fact that the BoC will be keeping rates where they are until the third quarter of 2010 but the concern is that with the low rates available, companies are already seeing money growth and job creation and that the economy will reach its full potential well before it is currently anticipating. Sheryl said, “We predict the Bank of Canada will come to this conclusion sooner rather than later and the first half of 2010 will deliver sufficient evidence of that overheating potential.” October 6th saw Australia’s central bank raise its key policy lending rate to 3.25% which was a hefty change in a short period of time. Australia was in an easing bias in the month of August and went neutral in the month of September with a change in their stance causing a rate increase in October. This left the world wondering who would be the next country to raise their rates. This week’s BoC policy statement only proves that the central bank feels no way about disrupting markets and that we should watch the facts available to us rather than take the BoC’s word at face value. The U.S fiscal deficit is the major concern for U.S dollar reserve holders and the situation is not getting better. The U.S must act to change government spending or adjust the rates in order to create some strength in the dollar. This in turn, would lower the value of the Canadian dollar and bring it back to its real value. The problem is that congress in the U.S is actually increasing their spending and the Federal Reserve is not looking to raise their rates. Does this mean that we have to wait for the economy to correct itself? Please comment below.
The latest survey from Ipsos Reid shows that Canadians are now less likely to use their credit cards to pay for home renovations this year than they were last year. In fact, 76% of the people surveyed stated that they would pay in cash rather than build up more debt. That numbers up from the 70% planning to pay in cash for home renovations last year. Last years numbers show that 32% of people were going to use their credit cards to pay for renovations and dropped down to only 24% of people this year that said they would use plastic to pay. Over the years, Canadian consumers have gradually been building their debt and now the levels of debt have become much higher than seen in the past as consumers change spending habits to reduce their financial risk in this weak economy. Out of the 3000 Canadian consumers polled two out of three say that they plan to renovate their properties within the next two years. The average costs of renovations this year will run in the range of $11 272 and this is mainly due to the help of the governments home renovation tax credit which has caused 47% more people to do renovations this year. The tax credit was one of several measures provided by the Finance Minister in response to the recession that started last year as a result of a global shortage of available credit. The credit crunch took flight after the failure of several major U.S financial companies and worked its way through most of the worlds banking systems. This caused several countries to bail out banks, insurance companies and lenders during the downturn. Canada’s banking system was among those that were the most stable in the world with none requiring a direct government bailout but there was still a negative impact felt from the south as unemployment began to rise and companies either cut back or failed outright during the economic crisis. You can see now why Canadians will not be turning to their credit for repairs.
The Bank of Canada (BoC) released its economic outlook yesterday and expects consumer spending to see a large increase. Improved financial conditions and business investment will allow Canada to post growth early in 2010 after 5 consecutive quarters of declines as projected. The quarterly monetary policy report also had the BoC upgrade all growth projections for the remainder of 2009. It expects an expansion of 2% rather than the previous 1.3% in the third quarter of this year and expansion of 3.3% rather than the previous 3% projected for the current quarter of this year. The BoC forecast is based on the resumption of growth in the global economy and the firming of commodity prices. The BoC also acknowledged that there is a possibility that the global recovery could be protracted due to evidence that the private sector demand is ready to return and the unwinding of global trade imbalances could create disorderly adjustments. The Canadian dollar is still of concern and will hold down the trade oriented sector of the economy with net exports expected to fall by 1% next year. Domestic demand in Canada will help boost our recovery with a growth of 3% expected in 2010 and 3.3% expected in 2011. Consumer spending is set to make up half of the gain in final domestic demand in 2010. Looking forward into 2011, consumer spending will make up almost 75% with government spending winding down. The thought is that improved wealth and consumer confidence mixed with re-emergence of demand postponed from previous quarters will help fuel consumer spending. Another concern is the existing home sale market, particularly big urban centers, where gains in recent months may be forming an asset bubble due to low borrowing costs. The BoC expects growth in housing investment to remain steady until early 2010 when it is expected to slow down as pent up demand for real estate is met and affordability declines. Economists have voiced concern that the low rates are making consumers feel like they are capable of taking on more debt which they have been doing since the start of the recession. Consumers should be aware that the cost of borrowing is going to increase and increase dramatically. When looking at the global numbers, the United States is expected to expand by 1.8% next year with Europe only expanding by 0.9% and China seeing huge growth with an 8.9% expansion. As a whole the global economy is set to expand by 3.1% in 2010 but will be more gradual than usual as underlying private demand recovers and significant balance sheet and global trade adjustments run their course.
Bank of Canada (BoC) Governor Mark Carney made it clear yesterday that he will take steps to stop the dollar from gaining strength if international investors continue to push it higher at the current pace that they are doing so. The dollars gain to over 95 cents U.S is preventing our recovery and leaving policy makers struggling to get inflation back to their target of 2%. Mr. Carney stated that he has a large arsenal of tools at his disposal to stop the currency’s rise and is not scared to use any of them. In his latest statement he said, “Markets should take seriously our determination to set policy to achieve the inflation target.” The dollars most recent increase is mostly the result of investors seeking higher yields than can be found in the U.S. Higher commodities prices have helped strengthen the Canadian dollar but have been increasingly driven by a broader depreciation of the U.S dollar against most major currencies. This distinction is important because the central bank doesn’t have too much of a problem with a higher currency as long as it is the result of increases in oil prices, wheat, natural gas, or more demand for Canadian goods as those create more money flowing into our economy. Like now, when the currency appreciates as the result of speculative portfolio flows, the BoC feels the gain has a negative effect on the economy due to the stronger currency making Canadian exports less competitive in global markets and companies losing out on sales of goods that are priced in U.S dollars. Prices declined at an annual rate of 0.9% in the third quarter with the central bank not expecting prices to increase at a 2% pace until the third quarter of 2011. The report stated, “A stronger than assumed Canadian dollar, driven by global portfolio movements out of U.S. dollar assets, could act as a significant further drag on growth and put additional downward pressure on inflation.” The BoC has been stating since June that they will intervene in foreign exchange markets if necessary but few have believed their words. The more likely response that they will take will be to leave the benchmark overnight target near zero. What do you think? Please comment below.
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