Canada Economics Weekly 1

CANADA ECONOMICS
WEEKLY 1
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Editor: David Madani
Housing correction only a matter of timing
While the recent strength of Canada's housing market has been astounding, the regional
breakdown reveals that it has begun to fray at the edges. With house prices already declining in
some smaller regions, it may only be a matter of timing before prices in other larger and much more
overvalued markets begin to fall more sharply. We still believe that the housing market is overdue for
a longer-term correction of as much as 25%.
The housing market slowdown in the regions can't be explained by labour market conditions, which
suggests that high house prices and tighter mortgage qualifying rules are making matters worse. With
economic conditions likely to remain challenging, we anticipate that some regional housing markets
will continue to fray, accompanied by further declines in house prices.
The key data release this week is the consumer price index for April. We estimate that headline
inflation rose to 1.9% in April, up from 1.5% in March. Higher gasoline price inflation is partly to
blame. Official core inflation, on the other hand, was likely only 1.4%, up from 1.3% in the month
before. (See pages 2-3.)


Economic & Market Data (page 4)

Economic Diary & Forecasts (page 5)

Recent Publications (page 6)







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Managing Director Roger Bootle (roger.bootle@capitaleconomics.com)
Chief North America Economist Paul Ashworth (paul.ashworth@capitaleconomics.com)
Canada Economist David Madani (david.madani@capitaleconomics.com)
Economist Amna Asaf (amna.asaf@capitaleconomics.com)

Canada Economics Weekly 2
Canada's housing market performance over the past
year or so has been astounding, with rising prices
defying fundamentals such as household incomes
and rents. While this fact has convinced some
observers that the housing market is healthy, the
regional breakdown reveals some troubling twists
and turns. In short, Canada's housing market
appears to be fraying, surviving for the time being
on rapidly rising prices in some of the most
overvalued and more thinly traded markets.
At the national level, the balance between existing
home sales and the number of newly listed
properties for sale suggests that house price inflation
will slow in the coming months. (See Chart 1.) On
this basis, it does seem as if the housing market is
currently enjoying a soft landing.
CHART 1: NATIONAL HOME SALES-TO-LISTINGS & PRICES
Sources Thomson Datastream, CREA
The regional breakdown, however, reveals that
Canada's housing market is fraying. In Halifax, for
example, housing activity and prices are falling.
(See Chart 2.)
CHART 2: HALIFAX HOME SALES-TO-LISTINGS & PRICES
Sources Thomson Datastream, CREA, Capital Economics
Other regional markets such as Winnipeg and
Victoria are also experiencing a marked housing
slowdown, with prices declining in certain areas.
More troubling to the national picture is Montreal's
softening market, with prices now at risk of a
decline. Despite low interest rates and a stable
unemployment rate, it seems clear that the balance
of demand and supply is almost as soft as during the
recession in 2009. (See Chart 3.)
CHART 3: MONTREAL HOME SALES-TO-LISTINGS & PRICES
Sources Thomson Datastream, QFREB, Capital Economics
The slowdown in regional housing activity and
prices isn't a reflection of worsening labour market
conditions. Regional unemployment rates have
actually nudged lower (see Table 1), albeit partly
because of lower labour force participation.
TABLE 1: UNEMPLOYMENT RATE, BY CITIES (%)
City
Apr-2014 Oct-2013 May-2013
Toronto 7.8 8.1 7.9
Vancouver 5.7 6.6 6.9
Montreal 7.9 8.2 8.2
Calgary 5.3 4.5 4.9
Winnipeg 5.7 5.9 6.3
Victoria 5.1 5.0 5.4
Halifax 6.1 6.4 6.5

Source Statistics Canada
In contrast, house prices in the two largest and most
overvalued markets, Toronto and Vancouver, are
holding up for the time being, though partly
reflecting fewer new property listings. In Toronto,
the sales-to-listings ratio suggests that house price
inflation will remain close to 5.0% over the next
few months. (See Chart 4.)
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MLS Sales-to-Listings Ratio (%, Adv. 7m, LHS)
Teranet House Price (%y/y, RHS)
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Housing correction only a matter of timing

Canada Economics Weekly 3
CHART 4: TORONTO HOME SALES-TO-LISTINGS & PRICES
Sources Thomson Datastream, CREA, Capital Economics
In Vancouver, the sales-to-listings ratio suggests that
house price inflation will decline materially over
the next few months. Should home sales, following
the weather-related uptick in April, begin to soften
again as we expect, then prices will once again
come under downward pressure. (See Chart 5.)
CHART 5: VANCOUVER HOME SALES-TO-LISTINGS & PRICES
Sources Thomson Datastream, CREA, Capital Economics
Overall, with house prices already declining in
some smaller regions, it may only be a matter of
timing then before prices in other larger and much
more overvalued markets begin to fall more sharply.
We still firmly believe that the housing market will
ultimately experience a hard landing with prices
falling by as much as 25%.
David Madani
The Week Ahead
The key data releases this week are March's
wholesale and retail sales figures, along with April's
consumer price data.
We estimate that retail sales values rose by 0.3%
m/m in March, down from a gain of 0.5% m/m.
While sales are getting back to normal after the hit
from the bad weather, weakness in both autos and
gasoline station sales may have prevented sales to
revert back to trend. (See Chart 6.) Preliminary new
motor vehicle sales figures suggest that auto sales
dropped back a bit in March. Even allowing for a
modest rise in vehicle prices, we have pencilled in
a fall of 0.5% m/m in motor vehicle sales values. In
addition, a fall in gasoline prices may have
dampened gasoline stations sales. However, we
think that these declines were more than offset by
increases in most of the other categories.
CHART 6: RETAIL SALES ($CBN)
Source Thomson Datastream
We estimate that headline inflation rose to 1.9% in
April, up from 1.5% in March. (See Chart 7.) Higher
gasoline price inflation is partly to blame. Official
core inflation, on the other hand, was likely only
1.4%. With the Bank of Canada still focused on the
sluggish economy and the corresponding downside
risks to the inflation outlook, it will look through
any modest uptick in underlying inflation.
CHART 7: CONSUMER PRICE INFLATION (%)
Source Thomson Datastream
Amna Asaf & David Madani
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MLS Sales-to-Listings Ratio (%, Adv. 7m, LHS)
Teranet House Price (%y/y, RHS)
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Teranet House Price (%y/y, RHS)
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2009 2010 2011 2012 2013 2014
Volumes
Values
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05 06 07 08 09 10 11 12 13 14
Total
Core
Target Range: 1-3%

Canada Economics Weekly 4
Latest Data & Main Forecasts
LATEST CANADA ECONOMIC INDICATORS
Monthly Indicators %m/m(%y/y) unless stated Jan Feb Mar Apr
GDP +0.5%(+2.6%) +0.2%(+2.5%) - -
Industrial Production +1.2%(+3.5%) +0.9%(+3.6%) - -
Manufacturing Sales +0.3%(+2.8%) +1.5%(+3.0%) +0.4%(+3.5%) -
Wholesale Sales +0.5%(+2.3%) +1.1%(+3.5%) - -
Retail Sales +0.9%(+4.0%) +0.5%(+3.7%) - -
International Trade (C$bn) Balance -0.3 +0.8 +0.1 -
Exports 40.9 43.3 42.7 -
Imports 41.2 42.4 42.6 -
Housing Starts 176,463 191,633 156,592 194,809
Teranet-National Bank House Prices +0.4%(+4.5%) +0.3%(+5.0%) 0.0%(+4.6%) +0.5%(+4.9%)
Change in Employment +29,400 -7,000 +42,900 -28,900
Unemployment Rate 7.0% 7.0% 6.9% 6.9%
Consumer Prices +0.3%(+1.5%) +0.8%(+1.1%) +0.6%(+1.5%) -
Core Consumer Prices (Bank of Canada) +0.2%(+1.4%) +0.7%(+1.2%) +0.3%(+1.3%) -
Quarterly Indicators %q/q ann.(%y/y) unless stated Q1 2013 Q2 2013 Q3 2013 Q4 2013
GDP +2.9% +2.2% +2.7% +2.9%
Household Consumption +1.0% +3.5% +2.4% +3.1%
Productivity (Business) +1.6% +3.1% +1.0% +3.9%
Current Account (C$bn Ann., as a % of GDP) -58.7(-3.2%) -60.8(-3.3%) -59.2(-3.1%) -64.0(-3.4%)
LATEST MARKET DATA*
Instrument/rate 1 mth ago 1 week ago Latest* Instrument/rate 1 mth ago 1 week ago Latest*
Official Rates Canada 1.00 1.00 1.00 Equity Indices S&P/TSX 14447 14534 14589
US 0-0.25 0-0.25 0-0.25 S&P 500 1862 1878 1871
ECB 0.25 0.25 0.25 Currencies USD/CAD 0.908 0.917 0.919
3mth Rates Dec 2014 1.28 1.27 1.25 CERI** 109.2 110.5 110.7
Dec 2015 1.62 1.59 1.52 Commodities*** Total 671 663 664
Dec 2016 2.22 2.16 2.06 Energy 1809 1769 1763
Gov't Canada 2yr 1.05 1.06 1.04 Excl. Energy 386 388 393
5yr 1.66 1.63 1.53 Nat'l Gas (USD/btu) Henry Hub 4.62 4.57 4.35
10yr 2.39 2.36 2.26 Oil Price (USD/pb) West Texas 103.8 99.9 101.9
Inflation-indexed 15yr 0.42 0.44 0.34 Gold (USD/oz) 1299 1289 1294
Global Yields US 10yr 2.63 2.62 2.51
Euro 10yr 1.49 1.46 1.33
*Latest as at 09.15 EST 16
th
May 2014. **Bank of Canada Canadian-dollar Effective Exchange Rate Index. ***Bank of Canada Commodity Price Index (BCPI).

MAIN ECONOMIC & MARKET FORECASTS
%q/q ann. (%y/y) unless stated Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 2013 2014 2015
GDP +2.7 +2.9 +2.0 +2.5 +1.0 +1.0 +2.0 +2.0 +1.5
CPI Inflation (+1.1) (+0.9) (+1.4) (+1.7) (+1.8) (+1.9) (+0.9) (+1.7) (+2.0)
Unemployment Rate (%), Period Ave. 7.1 7.0 7.0 7.0 7.0 7.1 7.1 7.0 7.3
Overnight Rate, End Period (%) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
10 yr Gov't Canada, End Period (%) 2.54 2.76 2.46 2.60 2.70 2.80 2.76 2.80 3.50
USD/CAD, End Period 0.97 0.94 0.91 0.90 0.90 0.89 0.94 0.89 0.87

Canada Economics Weekly 5
Economic Diary & Forecasts

CANADA
Date Country Release/Indicator/Event
Time
Previous* Median* CE Forecast*
EDT (BST)
Mon 19
th
CA Victoria Day Holiday - Markets Closed - - - - -
Tue 20
th
- Capital Economics Annual Conference, Toronto 08.30 (13.30) - - -
CA Wholesale Sales (Mar) 08.30 (13.30) +1.1% +0.4% +0.6%
Wed 21
st
- Capital Economics Annual Conference, New York 08.30 (13.30) - - -
Thu 22
nd
- Capital Economics Annual Conference, Boston 08.30 (13.30) - - -
CA Retail Sales (Mar) 08.30 (13.30) +0.5% +0.2% +0.3%
Fri 23
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CA Consumer Prices (Apr) 08.30 (13.30) +0.6%(+1.5%) +0.3%(+2.0%) +0.2%(+1.9%)
CA Core Consumer Prices (Apr) 08.30 (13.30) +0.3%(+1.3%) +0.2%(+1.4%) +0.1%(+1.4%)
*m/m(y/y) unless otherwise stated
KEY FORTHCOMING EVENTS/DATA
Date Event Date Event
29
th
May Current Account Balance (Q1) 4
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Jun Bank of Canada Policy Announcement
30
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May GDP (Q1)


Canada Economics Weekly 6
Selected Recent Publications
Date Publication Title
Mon 12
th
Capital Daily What next for EM dollar-denominated government bonds?
UK Housing Market Focus Can the Financial Policy Committee cool the housing market?
Emerging Asia Economics Update Is the Korean won overvalued?
Africa Economics Focus What another five years of ANC rule means for South Africa
Emerging Asia Economics Update Indias next government forced to build on sluggish economy
Middle East Economics Update Saudi Arabian economy looks set to slow from here on
US Housing Market Update Positive signs on home sales and mortgage lending
Latin America Economics Update Argentine economy probably slipped into recession in Q1
Commodities Update Soybean supply set to be more than ample this year
Tue 13
th
Capital Daily Will India's stock market continue to outperform?
Emerging Europe Update Rise in the Turkish lira belies external vulnerabilities
Emerging Europe Watch Q1 GDP data to show strengthening recovery in Central Europe
China Economics Focus Where is China heading?
US Economics Update Rebound in household debt provides further encouragement
Wed 14
th
Capital Daily Will the S&P 500 go from strength to strength?
Emerging Asia Economics Update Tight fiscal policy another reason to expect Australian slowdown
Global Markets Update Will India really deliver equity-friendly reforms?
Middle East Economics Update Egypts public finances still dire, but default risk seems limited
Emerging Europe Update Market may be too quick to price in Russia rate cuts
Latin America Economics Update Colombia Election Watch major reforms unlikely (again)
Africa Economics Update South Africa GDP Tracker suggests sharp slowdown in Q1
Canada Data Response Teranet-National Bank House Prices (Apr.)
Japan Economics Update Monetary Indicators Monitor (Apr.)
UK Housing Market Monthly Housing market sending out mixed messages
Thu 15
th
Capital Daily Treasuries unlikely to be undone by surging term premia
Japan Economics Update How much could higher female employment boost GDP?
Middle East Economics Update Little sign of a turnaround in Saudi consumer spending
Emerging Asia Economics Update Indias wholesale inflation eases, but RBI unlikely to budge
Global Markets Update Do rising term premia pose a threat to US Treasuries?
Emerging Europe Update Central Europes recovery strengthened in Q1
UK Cities & Regions Update Heathrow expansion: becoming more likely, but not a game-changer
Commodities Update Something has got to give in the global steel industry
Emerging Markets Economics Update Which EMs will benefit from Chinas rebalancing?
Canada Data Response Survey of Manufacturing (Mar.)
Global Economics Update Explaining the divergence between the G7 economies
UK Markets Chart Book Inflation Report stems rise in market interest rates
Fri 16
th
Capital Daily Three compelling reasons for the Bank of Japan to ease further
US Economics Weekly Economic outlook remains positive
European Economics Weekly German engine can't power euro-zone recovery
Canada Economics Weekly Housing correction only a matter of timing
Japan Economics Weekly What to expect from post-tax hike data
Emerging Asia Weekly Is a credit bubble building in the Philippines?
UK Economics Weekly Is the MPC's view on slack still plausible?
For copies of any of these reports, please call +44 (0)20 7823 5000 or e-mail publications@capitaleconomics.com