Housing Market 2010

"We would, in essence, be dousing the entire Canadian economy

with cold water, just as it emerges from recession," Wolf said in an Edmonton speech delivered on behalf of deputy governor Timothy Lane, who could not travel to the Alberta capital for personal reasons.

"As a result, it would take longer for economic growth to return to potential and for inflation to get back to target," he added.

Finance Minister Jim Flaherty has also openly discussed policy measures to cool the housing market, including raising the minimum down payment requirement above five per cent, or reducing the maximum length a residential mortgage can be amortized from the current 35 years.

Monday's speech came hours after Canada Mortgage and Housing Corp. released a report indicating the annual rate of housing starts reached 174,500 units in December, up nearly 10,000 from November.

The organization said the improvement in housing starts was broad-based, with solid increases in both single and multiple starts to end the year.

Klump said the rise in new supply in market as well as increase in resale market will let some of the air out of tires in the balance between supply and demand, adding that as 2010 progresses price increases will shrink to the rate of inflation.

Wolf said that even if the bank judged that housing prices were getting out of hand, raising interest rates is too blunt an instrument since it would have the effect of cooling off the entire economy.

Statistics Canada also released figures Monday that pointed toward growth in the housing sector, showing construction intentions in the residential sector are starting to approach their pre-downturn levels, rising 9.1 per cent in November to $3.8 billion.

Contractors took out $5.9 billion in building permits in November, down 4.6 per cent from October.

But Statistics Canada reports that they were 23.1 per cent higher than November 2008 and 62.8 per cent above February 2009, when their value bottomed out amid the economic downturn.

Klump said the current hot market is unlikely to cause a bubble because the economy is on an upward swing, reducing the probability of a massive decline in housing demand.

"I don't see where the catalyst is going to come from for some kind of massive decline or popping of any quote unquote bubble," he said.

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Revised Outlook On The Economy

The Bank of Canada offered a rosier, revised outlook on the economy Tuesday.

It now believes the economy is beginning to recover from recession and will perform better than expected in the next 18 months.

The central bank maintained its key overnight rate at the lowest possible level of 0.25 per cent, and committed to keep the rate there until the spring of 2010.

The revised outlook sees less shrinkage and more growth in the economy, according to Michael Kane of BNN.

"The bank of Canada now says the contraction will not be quite as bad as expected, and the expansion greater than expected," Kane told CTV News Channel.

"Previously it was expected that the Canadian economy would contract by 3 per cent this year, and then grow 2.5 per cent next year. They are moderating all those numbers now, and the latest expectation is for a smaller 2.3 per cent contraction this year, a slightly larger 3 per cent growth next year," Kane said.

Kane noted that measures taken by the bank and the federal government to help the economy from slipping too much -- such as stimulus funding and lower interest rates -- appear to be working.

The bank also said credit conditions have improved so much it is reducing the amount of money it is injecting into the system to support lending.

Interest rate cuts

The Bank of Canada has cut a key short-term interest rate about as low as it can go in what is becoming a frantic effort to spark recovery from a recession it admits it has misjudged.

The central bank did what virtually every private sector economist advised it to do Tuesday morning, slashing the trend-setting overnight rate to 0.5 per cent into uncharted territory.

But bank governor Mark Carney, who was criticized for being overly rosy in his January economic outlook, now says that even at such unheard-of lows, the stimulus provided by traditional monetary policy is likely not enough.

And he said the bank now sees recovery coming later than it had projected, possibly in early 2010.

‘‘Given the low level of the target for the overnight rate, the bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing,’’ Carney wrote in a statement.

The central banker does not give examples of specific measures, but BMO deputy chief economist Doug Porter said the bank is considering a process whereby it injects money into the system buy buying up assets such as government bonds, asset-backed commercial paper and even government bonds directly.

‘‘Simply put, the bank is preparing to pull out all the stops to support the economy,’’ he said.

Canada’s major banks appeared ready to play ball with Carney: shortly after the announcement, Royal Bank (TSX:RY), Bank of Montreal (TSX:BMO), TD Bank (TSX:TD) and CIBC (TSX:CM) announced that they would cut their prime rates in step with the central bank.

The reference to non-traditional monetary measures confirms that Carney knows he has exhausted interest rate cuts as a means of stimulating the economy out of a deepening and increasingly stubborn recession.

Darcy Briggs of Bissell Investment Management in Calgary said the bank could trim rates to 0.25 per cent — as the U.S. Federal Reserve has done — but ‘‘practically, what would that do?’’

As former Liberal cabinet minister and economist Doug Peters wrote last week: ‘‘Interest rates that count, such as interbank lending rates, mortgage lending rates, bank commercial lending rates, are all unusually high, especially considering that inflation is also very close to zero.’’

The other surprise was that Carney appeared to back off his relatively rosy forecast for the Canadian economy, which envisioned growth returning in the third quarter of this year and rebounding to 3.8 per cent next year.

‘‘The outlook for the global economy has continued to deteriorate since the bank’s January... update, with weaker-than-expected activity in major economies,’’ Carney said Tuesday.

‘‘National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January.’’

Carney said potential delays in stabilizing the global financial system, along with low consumer confidence and larger hit on household wealth, ‘‘could mean that the output gap will not begin to close until early 2010.’’

Tuesday’s statement does not officially alter the forecast, but strongly implies that both this year’s 1.2 per cent contraction will be worse and that the recession may last until next year.

Most economic indicators have come in far weaker since January’s much-criticized bank outlook, including Monday’s report that the Canadian economy has shrunk by 3.4 per cent in the last quarter of 2008, far worse than the bank’s negative 2.3 per cent projections.

As well, Canada lost 129,000 jobs in January, a massive amount, which Carney did not know when he made his forecast.

But possibly the most critical factor is that the global economy, especially among industrialized nations, appears to be in free-fall.

The fourth quarter saw GDP fall by 6.2 per cent in the United States, six per cent in the United Kingdom, 5.7 per cent in the Eurozone, 10.3 per cent in Mexico and a massive 12.7 per cent in Japan.

And far from stabilizing, the U.S. financial system is lurching from crisis to crisis. On Monday, the U.S. government said it was adding another $30 billion to the bail-out package for the giant insurance company American International Group Inc. after it reported a staggering US$61.7-billion in quarterly losses.

‘‘Stabilization of the global financial system remains a precondition for the global and Canadian economic recoveries,’’ Carney noted in his statement.

Carney also forecast that inflation will likely be lower than expected this year.