Inflation in Canada in September was the same as in August, according to Statistics Canada, a modest +1.2%.
At the same time, the “core” inflation rate which omits 8 of the most volatile sub-components in the CPI slowed from +1.6% the month before to +1.3%.
The Governor of the Bank of Canada, Mark Carney, may find a reason to raise interest rates in the high level of household debt in Canada, but he won’t find it in the inflation figures.
With a record-high household debt to income ratio of 163.4% in the second quarter, borrowers may need protecting from themselves. With interest rates so low, they are lining up to take on too much credit. This is showing up in a housing market that may be approaching bubble status.
Auto sales are also extremely strong, but that’s not likely to worry anybody too much.
A car purchase is a big ticket item, but not nearly so big as a house. And there’s another huge difference. Mortgages may be amortized over a long period of time, such as 25 years, but the monthly payments are calculated over a fixed term that is usually five years at the most. After that, they need to be renegotiated at whatever interest rates are in effect at the time.
The expectation is that interest rates five years from now will be much higher than at present. Adding to the problem is the fact many mortgages are written for terms that are much shorter than five years. For example, there are one and two-year variable rates.
When rates go up – and they inevitably will, according to Mr. Carney – many homeowners may not be able to make their payments.
An excess of properties will be put up for sale. This will depress prices. Homeowners will be forced to lower their wealth estimations and all consumers will suffer a blow to their confidence.
This is how housing markets collapse. It’s what happened in the U.S. That market is only now beginning to turn around. Before proceeding to some of the detail in the CPI report, let’s take a short detour into the latest numbers on U.S. housing.
In previous articles, I’ve written about the big pick-up in U.S. housing starts. What’s going on in the existing homes market?
For September, the National Association of Realtors (NAR) reported that U.S. resales declined 1.7% to 4.75 million units seasonally adjusted and annualized, versus 4.83 million the month before.
But this presents too negative a picture. The year-over-year performance of resales was +11.0%.
Furthermore, the national median selling price of resales ($183,900) this September was +11.3% versus September 2011, marking the seventh straight month of year-over-year gain. The last time that happened was almost seven years ago, from November 2005 to May 2006.
Available existing homes for sale in September fell to a 5.9-months supply at the current sales pace, down significantly from 8.1 months in September of last year.
For properties sold in September, the median number of days they were on the market was 70. A year ago, that figure was 101 days.
The NAR’s report specifically states that “inventory shortages are limiting sales, notably in parts of the West”.
The NAR report records the following regional median selling prices. From highest to lowest, they were: the West, $246,300; the Northeast, $238,700; the South, $163,600; and the Midwest, $145,200.
Returning to the CPI report, only one major sub-category recorded a year-over-year price decline in September, “clothing and footwear”. The overall drop was 1.8%. For women’s clothing specifically, the decline was 4.9%.
U.S. retailers are coming to Canada and it will be interesting to see their impact on prices. Target Corp. is planning to open 100-plus outlets across the country in locations formerly run by Zellers. The launch will occur next spring.
The largest price gain among sub-categories was a tie between food and transportation (+1.6%). The latter includes gasoline which was +4.7%, In August, the change had been +2.2% year over year.
During the three months from May to July, petroleum prices actually declined on a year-over-year basis. Now we’re back into increases, but maybe we should count our blessings. In September 2011, the price of gasoline was +22.7% year over year.
Among food items, some of the largest price gainers were “fresh or frozen beef” +6.2%, “canned and other preserved fish” +8.6%; and eggs, +5.8%.
The Conservative government in Ottawa is aggressively seeking free trade agreements with other countries around the world, most notably in Europe and Asia. To gain the benefits of overall tariff reductions, Canada might have to give up some of its favourite practices. Chief among these might be our supply management policies.
That would probably mean lower-priced dairy products entering the country and smaller family-owned Canadian operations being absorbed into giant corporations. This would have political ramifications, with Stephen Harper’s government sure to come under fierce attack in certain regions of the country - e.g., the poultry farming communities in Ontario and Quebec.
Finally, let’s look at the price performance of several products that appear on almost every family’s utility bills. Nationwide, the price of electricity is +6.0%. Water is +6.5%.
Contrast those two percentage changes with natural gas which is -14.2%. Anyone who is signed up with a natural gas provider is probably patting himself or herself on the back.