Weekly Comment - March 12, 2018

Mar 12, 2018 | Nick Foglietta


There are a few topics covered in this week's comment including the changing housing markets in Canada; an update on tax slip mailings, and a look at what Trump has accomplished so far in his presidency.

Canadian Housing Data

Housing markets in Canada are changing. It really depends on where you are as to how much they are changing, but make no mistake about it, a slowing trend is developing.

Let’s look at one aspect of the slowdown – higher interest rates.

Why do higher interest rates make a difference so quickly in Canada?

Well, I guess we could look at the chart above and see that Canadians are the most indebted nation in the world when we exempt New Zealand and Australia.

What prompted me to include another little blurb on Canadian real estate is just how bi-furcated the markets have become.

  • Condos and Townhouses are still on fire
  • Single Family is slowing…rapidly in the high end.
  • Housing starts continue on a torrid pace higher.
  • Inventory for sale is finally growing.

It is going to be a very interesting Spring season for real estate markets.

The comments below were made by RBC Economics after the release of the housing data on March 8th. A great capsule statement.

RBC Economics: Although we do expect that housing starts will lag in response to decelerating resale activity, construction intentions appear to remain strong to start 2018. Canadian municipalities issued $8.4 billion in building permits in January, a 5.4% increase following a 2.5% increase in December with much of the growth in building permits driven by Ontario. Despite the fall in resale transactions, the surge (147.4%) in active listings and average number of days a listing spends on the market (92.3%), the average price of a condominium apartment in the Greater Toronto Area grew by 10.1%, while the average price for a detached home fell by 17.2% in February. Waning resale transactions may be a response to the expectation of future interest rate increases, more prohibitive OFSI-mandated stress tests for mortgage underwriting, and rapidly increasing selling prices in 2017. Residential construction activity is expected to moderate as resale activity slows, potentially reducing the contribution of residential investment to GDP, although a continued increase in regional construction intentions may indicate that this response may continue to lag longer than expected.

We will continue to look at the Canadian real estate data on a regular basis in coming months; it is the key to the Canadian economy at this point in time.

Tax Packages Update

I received an update from head office about where RBC Dominion Securities is in their scheduled tax package mail outs.

Almost all of the material you will need for your tax return has been sent already.

The two packages yet to come are the T3 tax packages, which include income data from income trust investments, and the T5013 tax packages, which includes income from limited partnerships and capital trusts. If you own any mutual funds or get monies from certain Income Trusts, these slips will show on the summary included in the T5 package and are needed before you can file. T3 slips are not mailed by RBC Dominion Securities, they are mailed to you directly from each individual mutual fund company. Keep in mind that even if you don’t hold the mutual fund anymore, it may have paid a distribution that needs to be accounted for in 2017, so the summary in the T5 tax package will say to wait for it. These slips are mailed throughout March.

Please be careful not to rush your tax preparation so you don’t receive one of these notices after you have submitted your taxes. I always like to get my tax information to the accountant early but ask them to hold up filing the return until the end of March to make sure I am not missing anything.

If you have any questions about your tax package, or would you like to authorize us to work directly with your accountant or tax professional, please call Megan at 250-729-3200.

What Has Donald Trump Really Accomplished?

I was in a meeting this week and two people squared off debating the question above.

What struck me as interesting was how the facts they both shot off at each other were totally biased depending upon which news service they took their news from.

At the end of the meeting, I put together a series of charts to show the empirical data surrounding their points of debate, and will share these with you below.

Let me be clear, my goal is not to take any side in this debate.

Point 1: Income growth has been much stronger under the Trump government.

I will present four charts below. The first two show income levels defined by the different income brackets. Chart one is before inflation is stripped out and the second chart strips out inflation and shows REAL income growth.

There has been a clear bias to stronger income growth in the wealthier segments of society for a long time.

The trend has not changed under Trump but income growth is improving for all income groups and the Trump policies have helped with this improvement.

Point 2: Tax cuts have added huge amounts of extra income for the middle and lower classes.

What about the tax cuts? How much of a difference have they really made to American families at different income levels?

Below are three graphics showing the net extra income for families of different income levels under the new rules.

The increases are not insignificant, but they are not “massive” either.

Point 3: New job growth – jobs, jobs, jobs!

Next we look at the new job growth in past years.

I have shown this chart before and all it really says to me is the trends in job growth have not shifted all that much in the past year.

Jobs are growing and wages are improving but the underbelly of this growth is that it is not focused in the usual demographic of society.

Point 4: Trump polices are adding growth to the US economy.

This is where I believe a very important point needs to be defined. Below is a chart from ECRI showing growth rates in major economic areas around the world. Please notice, they are all decelerating.

I have long argued that unrestrained debt growth around the world will ultimately constrain rates of economic growth at low levels. The last 10 years have gone a long ways to prove this point true.

Even the most accommodative monetary conditions in history have not been able to rapidly ramp up global growth.

The graphic below updates the data above to the first quarter of 2018. Look at how fast estimates are declining for Q1:2018 GDP.

The reality of constrained GDP growth due to debt expansion transcends the political debate as meticulously demonstrated in This Time is Different: Eight Centuries of Financial Folly, by Kenneth S.Rogoff and Carmen M. Reinhart, from August 2011. It is a mathematical certainty that debt levels above 90% of GDP will constrain growth.

The only comment I will add is to be sure to consider the source when you hear any news information about Donald Trump. The source usually predicates the tone of the story. Try to stick to the data to draw your conclusions.