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Economy

‘The disinflationary process has started,’ says Jerome Powell

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U.S. Federal Reserve chair Jerome Powell only had to say one word in his Feb. 1 news conference to raise hopes that mortgage rates in Canada may be heading lower.

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“We can now say, I think for the first time, that the disinflationary process has started,” Powell said following the Fed’s decision to hike its benchmark rate by 25 basis points to 4.75 per cent on Wednesday afternoon.

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The key word — “disinflation” — was all markets needed. Stocks soared and bond yields tumbled as markets around the world anticipated that the Fed’s hiking cycle would end sooner rather than later, and might even kick into reverse, as the inflationary threat abates.

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Mortgage strategist Robert McLister noted in a Mortgage Logic newsletter Thursday morning that Canadian five-year yields — a market closely traced in the setting of mortgage rates — quickly shed 10 basis points after Powell’s comments.

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“That’s exactly what Canada’s mortgage market needs if there’s any hope of lower fixed rates by spring,” McLister wrote.

While he said it was too soon to see Wednesday’s decline show up in mortgages, he noted that sliding bond yields over the past three months have already been tugging down five-year fixed rates.

McLister said it would likely take longer than usual for those falling yields to work their way into mortgage rates given the current macroeconomic environment, as banks pocket some of the improvement to buttress against downside risks.

“As we head into recession, lenders will keep their spreads wider than usual to account for perceived risk and other factors,” he said by email. “They may have to deal with higher default rates, less liquidity in funding markets, and more rate volatility (which increases hedging costs).”

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He said short-term fixed rates will edge down as the Bank of Canada comes closer to cutting rates, while variable rates won’t drop “materially” until a cut becomes official.

And he added that there is no doubt markets expect rates to come down.

“If you looked at the bond market, specifically things like overnight index swaps, forward rates and futures, there’s no question that financial markets expect lower rates by the end of this year,” he said.

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“As we speak, markets expect five-year bond yields — a key driver of five-year fixed rates — to be 42 bps (basis points) lower in 12 months.”

The Federal Reserve chair’s comments were interpreted as dovish even though he also indicated more rate increases were coming, and that cuts were unlikely this year.

Last week, the Bank of Canada lifted its key policy rate 25 basis points to 4.5 per cent, but signalled that it would pause future hikes to give higher rates a chance to percolate through the economy.

• Email: shcampbell@postmedia.com

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More felt their financial position deteriorated amid another interest rate hike and holiday bills

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Household sentiment soured in December, as holiday bills piled up and the Bank of Canada raised interest rates for the seventh time in 2022, according to a recurring poll that tracks consumers’ financial outlook.

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The latest version of Maru Public Opinion’s monthly household outlook index (MHOI) — shared exclusively with the Financial Post — found that 29 per cent of Canadians felt their financial position deteriorated last month, representing an increase of five percentage points from November. Meanwhile, 11 per cent of respondents said their financial position improved, compared with 14 per cent the previous month.

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“Coming off of a fairly pessimistic November, Canadians were a little bit more upbeat in early December due to a combination of those who are younger making financial adjustments for better savings, retail bargains for lighter budgets, and the festive season,” said John Wright, executive vice-president of Maru Public Opinion. “However, in the aftermath, they’ve returned to their November more negative sentiments, soured by the impact of higher interest rates, inflation, and gift buying bills that are coming home to roost.”

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The survey was conducted Dec. 29 and 30, a few weeks after the Bank of Canada raised its benchmark lending rate a half point to 4.25 per cent. Maru’s index came in at 88 in December, down one point from November and well off the most optimistic result of 107, recorded in July 2021.

The baseline for the index is 100. A score below 100 indicates negative sentiment, while a score above 100 is considered positive. Maru, a subsidiary of global research firm Maru Group, comes up with its household index by asking a representative panel of about 1,500 people a series of questions designed to probe how they feel about the economy’s prospects over the next 60 days. Maru started tracking Canadian households’ outlook in February 2021.

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Asked if the economy was headed in the right or wrong direction, 63 per cent said the latter, unchanged from November. However, the number of Canadians who said they believe that the economy will improve in the next 60 days fell two percentage points to 37 per cent.

Sixty-three per cent of respondents said they could muster two or more months’ of savings to cover an unexpected cost, down from 69 per cent from November. The number of respondents who said they were likely to make a large purchase such as a car or furniture declined six percentage points to 13 per cent in December, meaning 87 per cent were unlikely to make such a purchase in the next 60 days.

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Financial markets appeared to be off limits.

Sixty-eight per cent said they were unlikely to invest in financial markets “because now is not a good time to do so,” up from 61 per cent. The last time Canadians held a similarly negative view was in September 2022.

“When we do the next survey it will be a real telltale sign of where we are headed in the spring,” Wright said, as Canadians continue to juggle inflation and interest rates that have risen on a “hockey stick” curve.

The benchmark interest rate began 2022 at 0.25 per cent, making last year the most aggressive tightening of monetary policy in the Bank of Canada’s history. Policymakers said they spike in borrowing costs was necessary to control inflation, which surged to 8.1 per cent in June and was hovering around seven per cent in November.

• Email: gmvsuhanic@postmedia.com | Twitter:

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After breaking through the $2,000-a-month level in September, the national average rent for all property types slipped 3.2 per cent to $1,976 in October, according to the latest report by Rentals.ca and Urbanation Inc.

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While the month-over-month average decreased slightly in October, year-over-year results rose 11.9 per cent. Rents charged last month averaged $209 per month higher than in the same month a year ago at $1,767. The overall rise in rent comes as many potential home buyers continue to lease as interest rates rise and inflation runs hot. The Bank of Canada’s final interest rate announcement of the year is expected in December.

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“The unprecedented growth in rents underway is broad-based across Canada, with most markets reporting double-digit annual rent inflation,” said Shaun Hildebrand, president of Toronto real estate research firm Urbanation, which co-released the report. “The rental market keeps getting hotter with each interest rate increase, coupled with a record-high increase in the population. The need to ramp-up rental supply has never been greater.”

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Atlantic Canada has experienced the steepest rises in rental costs over the past year, with an average rent increase of 32.2 per cent. In Ontario, British Columbia and Alberta, rents have still risen dramatically, by 17.7 per cent, 15.1 per cent, and 13.2 per cent, respectively, over the past year.

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The Greater Toronto Area saw larger increases than the province as a whole. Toronto’s average rent surged by 26.8 per cent year over year, Brampton’s rents were up 28.9 per cent and in North York the increase was 24.2 per cent. Burlington and Missisauga saw increases of 18.5 per cent.

The average monthly rent for purpose-built and condominium apartments in Vancouver was $2,976, the highest among markets with populations of more than one million. Meanwhile, rents in Toronto for purpose-built and condominium apartments stepped back to an average of $2,820 in October, down from $2,855 in September.

Edmonton remains the most affordable market in Canada, with an average rent of $1,273.

• Email: shcampbell@postmedia.com

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Sean Fraser says Canada will need to bring in more workers who can build homes and shift them to where they are needed

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Closing the door on immigrants can “never be” the solution to solving the Canada’s housing shortage, says immigration minister Sean Fraser, as the country prepares to welcome a record 1.45 million newcomers in the next three years.

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Speaking to immigration experts at an event in Ottawa on Monday, Fraser said Canada will need to bring in more workers who can build homes and encourage people to shift to parts of the country that have a better “absorptive capacity” to tackle the housing sector’s problems, which include a steep rise in prices in the past few years.

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“The solution to our housing shortage is not to close the door to newcomers, it will never be,” Fraser said at the annual Pathways to Prosperity National Conference. “We intend to bring skilled workers in, in larger numbers than was historically the case, who have the ability to work in home building.”

Canada has increased its immigration targets for the next three years, but some economists, such as Carrie Freestone from the Royal Bank of Canada, believe the government needs to embed its targets into its infrastructure plans to make sure the necessities are in place to “welcome everyone.”

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The country wants to bring in 465,000 permanent residents in 2023, 485,000 in 2024 and 500,000 in 2025 as it looks to tackle labour shortages. The numbers are higher than last year’s plan, which targeted 447,055 newcomers in 2023 and 451,000 in 2024.

Canada will also introduce new tools next year to better help the immigration system target sectors such as health care and construction that have the highest need for labour.

Construction continues to be among those industries reporting employment gains, yet there are still increases in the number of job vacancies, according to BuildForce Canada, a national organization representing all sectors of the construction industry.

The Ontario government last month said the province will need about 100,000 more construction workers this decade to meet its goal of building 1.5 million homes by 2031.

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Fraser said the government is about to embark on a “long-term planning exercise” to tackle future problems related to housing, adding he has “all the faith in the world” that the country will be able to avoid creating a “long-term systemic problem when it comes to the conversation about welcoming large numbers of newcomers.”

The minister added he was in constant touch regarding the issue with housing minister Ahmed Hussen, who sits next to him at the House of Commons.

“Our running joke as I sit down and say, ‘Ahmed, if I can continue to increase our immigration numbers, can you build enough houses?’ He says, ‘Well, depends, can you bring enough newcomers with the skills to build houses to make sure we all have … places to live?’” Fraser said. “Though we kind of joke about it, that’s part of the solution.”

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Rebekah Young, head of inclusion and resilience economics at the Bank of Nova Scotia, said the minister’s message was broadly positive since labour shortages are “clearly one of the bottlenecks impeding greater supply.”

But she added the ministers should “be sure to let their provincial and municipal counterparts in on the joke” to ensure the federal policies align across all government levels since many of the “policy levers” for unlocking more homes are at the provincial and municipal levels.

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Immigration plays a key role in Canada’s labour supply, accounting for 84 per cent of the growth in the total labour force during the 2010s, according to Statistics Canada.

At the same time, data shows the skills of newcomers are regularly underutilized. The number of university-educated immigrants working in jobs requiring a university degree fell to 38 per cent in 2016, from 46 per cent in 2001, compared to 60 per cent for Canadian-born workers, according to Statistics Canada.

• Email: nkarim@postmedia.com | Twitter: naimonthefield

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The global economy’s prospects have deteriorated dramatically since the April Pre-election Economic and Fiscal Outlook (PEFO). 

The likelihood of major industrialised countries entering a recession in the near future is growing, and China’s development outside of the pandemic is likely to be the slowest in more than 30 years. Dr Steven Kennedy, the Treasury Secretary, released a statement warning that the slowing of consumption growth will be worsened further by diminishing household wealth due to continuous, predicted reductions in housing values.

The impact of pandemic activity restrictions is still being felt, albeit the 612 per cent increase in consumption in 2022-2023 is expected to be relatively transitory, owing primarily to the sustained recovery in services spending and travel abroad. The services-driven recovery is expected to slow by early 2023, with consumption growth falling to 11 per cent in 2023-2024.

Furthermore, as more mortgages exit fixed-rate periods, more households will experience the effects of higher interest rates on their budgets.

“Workers at the lower end of the income distribution are expected to be impacted most sharply by the rising cost of essentials, as the cost of food, housing and energy make up a larger share of their spending, Dr Kennedy said.

“With prices set to grow faster than wages for a period, indexation of pensions will continue to be linked to growth in consumer prices rather than benchmarked against male total average weekly earnings.

Furthermore, it is predicted that inflation will reach a peak of 73.4 per cent by December 2022 before progressively decreasing to 31.2 per cent by June 2024.

“While this peak remains the same as the profile prepared for the July Ministerial statement, high inflation is expected to persist for longer than previously expected, largely due to the pass-through of higher energy prices to household bills.

“Electricity and gas prices are expected to directly contribute ¾ percentage points to inflation in 2022–23 and 1 percentage point in 2023–24. This assumes consumer electricity prices will increase by an average of 20 per cent nationally in this financial year and 30 per cent next year.”

Without the subsidy programmes, data from the ABS released the day after the Budget shows that energy costs would have risen by about 16 per cent in the third quarter of this year. The increase in pricing this fiscal year is attributable to market dynamics and increases in default market offer published by the Australian Energy Regulator (AER) in May. Wholesale gas prices on the east coast remain more than double their pre-Russian invasion of Ukraine norm, while wholesale power prices have nearly tripled this year over last.

At the same time, domestic weather events and supply constraints, combined with strong demand in residential construction and consumer goods, are contributing further to generalised price growth.

The way ahead

According to the statement, the fiscal position’s near-term prognosis has improved following PEFO, with the underlying cash deficit falling by $41.1 billion in 2022-2023 and $12.5 billion in 2023-2024. Future projections show a decrease in gross and net debt each year. The cost of sending payments has risen due to higher-than-expected inflation. Payments have increased by $92.2 billion over four years, excluding the new policy. 

A third ($34.1 billion over four years) reflects increased payment indexation. On September 20, the most current indexation of income support payments occurred, representing the greatest indexation rise for pensions and allowances in 30 years. 

Higher inflation will continue to materially increase payments in the subsequent six-monthly indexation updates (March and September) until inflation returns to the RBA’s target range. Payments will then stabilise at a proportionally higher level.

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The tax plan is expected to increase federal revenues by $2.1 billion over five years

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The federal government plans to impose a new tax on public companies who pursue share buybacks, a popular way to reward investors and reduce volatility, but one criticized by some politicians for diverting funds away from pressing goals like the energy transition and domestic job creation.

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The tax plan, unveiled by Finance Minister Chrystia Freeland in her fall economic update Thursday, is to be fleshed out in the 2023 budget and come into force Jan 1, 2024. It is expected to increase federal revenues by $2.1 billion over five years.

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Freeland said the tax will be “similar” to the one per cent buyback tax in the Inflation Reduction Act signed into law by U.S. President Joe Biden in August.

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“We’re taxing share buybacks to make sure that large corporations pay their fair share, and to encourage them to reinvest their profits in workers and in Canada,” Freeland said in prepared remarks for the economic update.

“While buying back shares is one legitimate way that corporations can return value to their shareholders, it can also divert corporate resources away.”

Energy companies weren’t singled out, but recent share buybacks amid record profits from rising oil prices and inflation have drawn criticism from government.

Environment Minister Steven Guilbeault, in particular, criticized oil companies earlier this month for returning money to shareholders while making limited investments in energy transition.

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At a news conference Thursday, Freeland said she believes the share buyback tax is better than a “windfall” tax on energy companies, such as the ones imposed by the United Kingdom and European Union. Canada itself has imposed specific levies on financial institutions including banks and insurers, noting that government initiatives helped them remain were profitable throughout the COVID-19 pandemic.

Freeland said she believes the share buyback tax announced Thursday is a “very appropriate step” because it sets up an incentive for all public companies.

“What that tax does is it create an incentive to do precisely what we want to see big Canadian companies doing… taking their profits and investing them in the productive capacity of Canada,” she said.

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“It’s a smart tax. It will raise some money for Canada, which is a good thing. But perhaps even more importantly it creates the right set of incentives for companies to do the right thing.”

Word of the planned share buyback tax leaked out before the economic update, and received a chilly reception from some business leaders and finance experts.

Speaking before the tax on corporate share buybacks was confirmed, Alex Gray, senior director of fiscal and financial services policy at the Canadian Chamber of Commerce, said the tax would limit “efficient” allocation of capital. He added that, in the Chamber’s view, it would hinder Canadian businesses’ ongoing recovery from the economic consequences of the COVID-19 pandemic and as recession concerns mount.

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“As stock buybacks help improve stock liquidity while limiting stock volatility, such a proposal would ultimately increase economic uncertainly at an already precarious time,” he said.

“When higher volatility is expected, companies can increase their buyback intensity to stabilize stock prices, thereby enabling smoother trading and lowering transaction costs.”

Yrjo Koskinen, a professor of Finance at the University of Calgary’s Haskayne School of Business, said share buybacks are being “vilified” in public discussion even though it makes more sense to return funds to shareholders via buybacks and dividends than to invest in unprofitable projects.

“This applies to all companies, including energy,” he said.

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Moreover, Koskinen said that if Canada matches the one per cent buyback tax in the United States, it would be unlikely to change the calculus for energy companies that are unlikely to profit from transition investments in the short term.

“If investing in energy transition was unprofitable before the tax, it would also remain so after the tax,” he said. “So the tax on buybacks would be mostly a symbolic act with limited consequences.”

Koskinen said he thinks there should be accelerated investments in energy transition to address the risks of business as usual, but he said there are probably better ways than a new tax.

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“In order to foster long-term investments, it would be of utmost importance to create a stable regulatory and tax environment, so that companies dare to take the plunge,” he said. “To me the tax on stock buybacks sounds more like a gimmick rather than a serious policy.”

In the fall economic update, Freeland reiterated her government’s earlier pledge to introduce a new minimum tax regime for the wealthiest Canadians, and to implement a global minimum tax regime to ensure that large multinational corporations cannot avoid paying taxes, regardless of where they do business.

• Email: bshecter@nationalpost.com | Twitter:

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Calgary home sales are on track for a record year even as the real estate market continued to ease in October, with sales and new listings down for a seventh straight month, and benchmark prices dipping slightly from September.

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Total sales dropped to 1,857 units for the month, down from 1,901 in September and 2,184 in October last year, according to figures released Tuesday by the Calgary Real Estate Board (CREB). So far this year, sales have reached 26,823, setting the market up for a record 2022 with only two months left to go.

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The upcoming recession could be deeper than what Bay Street folks are expecting

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By David Rosenberg and Alena Neiland

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Canada’s housing bubble has burst. The MLS house price index is now down nine per cent from last February’s peak en route to a 30 per cent or so decline, which we view as consistent with deteriorating affordability and the uber-aggressive tightening of monetary policy by the Bank of Canada.

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We estimate the negative wealth effect associated with such a price slump will pull down gross domestic (GDP) growth by about 2.5 percentage points. Add to this the deleveraging effect of higher interest rates on consumption and investment, and the hit to trade from the expected downturn in the United States and global economy, and it’s not difficult to see why Canada’s upcoming recession could be deeper than what Bay Street folks are expecting.

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The last time all these factors were at play was the early 1990s, when Canada entered a Bank of Canada-induced recession

Individuals spend more when the value of their assets (for example, equities and houses) rises because they feel they are getting wealthier. This occurs through several channels: there is a behavioural aspect that translates into spending more of one’s earned disposable income, as well as an increase in credit access, a theme that has dominated in the face of persistently low borrowing costs over the past decade-plus. As homeowners continue to make regular payments on their mortgages, their credit scores improve, making them better candidates to pile on more debt.

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But with the Bank of Canada’s overnight target rate having risen 350 basis points since March (with more to go), the theme of rising wealth is bound to fade as credit access dries up and real estate prices collapse. The MLS house price index is already down nine per cent from last February’s peak and the correction is far from over.

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Households are being hit with a confluence of factors heading into this recession: rapid restrictions on credit access, higher debt-servicing costs on near-record-high household debt levels and inflation limiting disposable income. This is all being compounded by wealth depletion in both equity and residential markets, which also weigh on sentiment.

The last time all these factors were at play was the early 1990s, when Canada entered a Bank of Canada-induced recession and residential property prices fell by almost 30 per cent from their peak between 1989-1996.

This housing drawdown is just getting started

While consumption is set to slow because of the multitude of factors mentioned above, the wealth effect will also contribute negatively. If home prices end up falling 30 per cent from the peak — which we view as consistent with deteriorating affordability and the uber-aggressive tightening of monetary policy by the Bank of Canada — consumption would fall about five per cent (using the central bank’s estimate of nearly six cents per dollar of marginal propensity to consume due to changes in housing wealth), and this translates to a hit of roughly 2.5 percentage points to annual GDP growth.

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Even if you assume Canada Mortgage and Housing Corp. is right about a more modest 15-per-cent peak-to-trough decline in home prices, the GDP hit from the wealth effect will be around 1.3 percentage points, which is still significant. Worse, there is reason to believe the overall economic impacts will be further skewed to the downside, because this analysis does not even consider the deleveraging effects of higher interest rates on consumption and investment.

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While acknowledging the housing-induced negative wealth (albeit not necessarily the extent), the Bank of Canada is not about to drop its hawkish stance amid still-hot and above-target inflation. With further policy tightening in the pipeline, the overnight swap market is now pricing a peak rate of 4.25 per cent by year-end, so this housing drawdown is just getting started. And given consumers’ sensitivity to the pullback in real estate prices, Canada’s recession is likely to be deeper than what many Bay Street types are expecting.

As such, the Canadian dollar is bound to have many more months and quarters of weakness and not just because of the bear market in commodities, but also because of the serious repercussions surrounding the economic outlook from the escalating weakness in home values and the multiplier impacts on the consumer broadly speaking.

David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. Alena Neiland is an econoimist there. You can sign up for a free, one-month trial on Rosenberg’s website.

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‘Of everything I’ve seen in Canada to address the problem, this has the best chance of actually closing the gap’ — Royal Lepage CEO

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The Ontario government unveiled a series of new measures aimed at tackling the province’s housing supply shortage and affordability crisis on Tuesday, including plans to cut development costs and to allow property owners to build up to three residential units on a single lot without a bylaw amendment.

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The government provided details on the new legislation, which largely targets red tape and municipal zoning laws that stall housing construction, this week.

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“The legislation supports our new plan to further reduce bureaucratic inefficiencies that delay construction and increase costs for homebuyers and renters,” Minister of Municipal Affairs and Housing of Ontario Steve Clark told reporters on Oct. 25. “It also supports greater density near transit, as well as measures to protect and help homebuyers and also use provincial lands as sites more for attainable housing.”

Clark said the proposals would help the province reach its goal of building 1.5 million homes over the next 10 years. The City of Toronto has been given a target of creating 285,000 new homes by 2031, Ottawa is tasked with delivering 161,000, Mississauga holds a target of 120,000, and Brampton’s goal is 113,000 new homes.

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The new measures drew strong praise from some in the real estate industry, including Phil Soper, chief executive officer at Royal LePage.

It’s the boldest step I’ve seen to try to address the problem

Royal LePage CEO Phil Soper

“This is pretty dramatic,” Soper said. “It’s the boldest step I’ve seen to try to address the problem in our most populous municipality or region – the Golden Horseshoe, in particular. And I’d say of everything I’ve seen in Canada to address the problem, this has the best chance of actually closing the gap.”

Still, there could be some jurisdictional challenges as Premier Doug Ford’s government gets tougher on overriding municipal zoning laws that slow the pace of housing construction. Soper hopes that these territorial stand-offs do not turn into acts of bureaucratic spite.

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“One of the things I fear is jurisdictional anger over intrusion into another leader’s sandbox,” Soper said. “There are lots of other tools they can use, a leader at the municipal level, to slow down the effectiveness (of these measures): environmental studies, they could blame supply chains, there could be lots of ways they could throw roadblocks. My hope is that (municipal leaders) see this as an opportunity … and we use this as a turning point.”

The Toronto Regional Real Estate Board also supported the measures.

“Municipalities have a direct impact on housing affordability, not only by adding direct costs like development fees and land transfer taxes, but also by delaying and preventing desperately needed new housing supply with slow approval processes, duplication, and outdated restrictive zoning,” TRREB president Kevin Crigger said in a statement.

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Crigger added that the board respects the role municipalities play in community development, but noted it’s important for such policies to reflect the wider public interest.

Some environmentalists, however, bristled at details in the technical document accompanying the announcement, which included proposals to streamline the process through which conservation authorities issue permits to develop in wetlands or areas prone to flooding, potentially exempting certain developments from requiring a permit set out by the Conservation Authorities Act.

This new legislation comes in the same week that the Ontario government announced it would be raising the non-resident speculation tax on homes purchased by foreign nationals to 25 per cent from 20 per cent, making it the highest rate in Canada. Finance Minister Peter Bethlenfalvy said the increase would come into effect on Tuesday and would aim to curb foreign speculation.

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The Ontario government previously raised the foreign homebuyer tax to 20 per cent from 15 per cent in March, and made the measure province-wide as opposed to focusing solely on the Greater Golden Horseshoe region.

Real estate experts were quick to cast doubt on the effectiveness of the tax hike, arguing that markets are cooling already. Soper is among the skeptics, arguing it’s more of a provincial revenue generator than an effective piece of housing policy.

“It’s very few people that are paying that tax, but it contributes to government coffers and general revenue, and so it’s hard to argue against that,” Soper said. “Will it make a condo for a young family in Toronto more affordable? No, not at all. It’s such minutiae in the face of the overall problem.”

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The Ford government has brought other measures to the table aimed at reducing red tape, including a move to give Toronto and Ottawa mayors “strong mayor” powers that would give city leaders the ability to overrule council decisions that interfere with home building.

“I know, the actions are bold,” Clark said. “Our government stands ready to do what it takes to help meet the demand of housing with a plan aimed at solving the housing supply crisis in the long-term. These measures place a very strong foundation in our province of Ontario and will help us get to the 1.5 million homes over the next 10 years in partnership with municipalities, the private sector, non-profit and the federal government.”

• Email: shughes@postmedia.com | Twitter:

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