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Benjamin Tal says

Canadian rental demand likely to rise By John Dickie, CFAA President

At the CFAA Rental Housing conference held in June 2012 the keynote speaker was Benjamin Tal, Managing Director CIBC World Markets, a leading expert on the rental housing market in Canada. Mr. Tal addressed five key questions which will determine the direction of the world and Canadian economies, including the residential rental markets and apartment asset markets in Canada. Mr. Tal has confirmed that the answers still apply as of August. Europe – only a recession or more than that? In Europe the key issue is Spain, which has twice the amount of sovereign debt of Greece, Portugal and Ireland combined, and a high ratio of externally held debt. Spanish banks have very high exposure to the real estate development sector, which has been hard hit by the housing bubble and the economic downturn. Mr. Tal is optimistic about the survival of the Euro, but expects major volatility over the next few years (potentially including some departures from the Euro zone). China- hard or soft landing? Economic growth in China has been driving the world economy. The danger is that real estate now makes up 13% of Chinese GDP. That contrasts with 6.5% in the U.S. at the peak of the real estate bubble. Despite that, the Chinese authorities will probably be able to engineer a soft landing because their complete control of fiscal and monetary policy (absent a decision maker like the U.S. Congress). US Economy – how durable is the recovery? IIn the U.S., a number of recent indicators have been relatively positive, including average weekly hours, total real wage and salary income, the consumer loan delinquency rate, credit quality, commercial property prices and manufacturing output. Also positive is the deleveraging reflected by a falling household debt-to-disposable income ratio. The U.S. economy is on track to post a 2% increase in GDP in 2012. The programmed end of certain tax reductions could impose a fiscal drag of up to 3% in 2013, but the U.S. private sector is likely to show some improvement, offsetting the withdrawal of support by government.

36 august 2012

The impact of Canadian corporate strength? CIBC’s indicator of Canadian corporate strength has never been higher. It encompasses a strong profit margin, debt-to-equity and cash to credit ratios, return on equity and on capital, business confidence and export diversification – both by commodities and by countries. Together with rapidly increasing corporate cash holdings, those factors suggest business investment should grow strongly, boosting the Canadian economy, and compensating in part for reduced consumer demand. Canadian household debt? Households with debt at or above 1.6 times their gross income make up 34% of households, but hold 73% of total household debt. They accounted for all the increase in household debt since 2007, producing an overall increase in household mortgage debt of 24% from 2007 to 2011. However, the average annual rate of increase of real household debt in total has slowed from nearly 8% from 2003 to 2010 to 4% in 2011, which is at or below the average rate of increase in household debt in the previous decade. Conclusion According to Mr. Tal, the world economy will be slow to recover. Ironically, that will help the real estate markets in Canada because it will keep interest rates low until mid to late 2013 or even 2014, which will support the apartment asset markets at close to their current levels. Government action to reduce or moderate excess household debt is crucial to achieve a soft landing in the single family home and condo markets. Measures to prevent under-qualified borrowers from moving from rental to homeownership will tend to reduce the homeownership rate modestly, and thus to increase demand for rental housing, even though Canadian GDP growth is not likely to exceed 2% over the next 12 months. RHB


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