ECONOMICS ANDTHE CANADIAN MARK Lyrics

ECONOMICS AND
THE CANADIAN MARKETPLACE
The Canadian economy is classified as a mixed economy given the interplay of private (individuals, families, and corporations), and public (governments) interest that direct and sustain economic activity. The cyclical mechanism involves business, consumers, and the production of goods and services. At the centre, the government participates in various aspects of the economy through intervention, e.g., spending policies (including monetary policies), activities of crown corporations, taxation, and government legislative controls.

Statistics and Trends
The grand picture is difficult to grasp. Canada's economic fabric consists of intermingled forces, factions, philosophies, and activities. Business statistics bring some order to a___ysis by a__isting those seeking important trends and cause/effect relationships. Canadian statistics focus on three broad categories and many sub-categories:

For example, popular consumer-related indices include retail sales, consumer confidence, consumer disposable income/debt, and the consumer price index. Economists commonly use different indices to reflect change over time, e.g., base year comparisons, seasonally adjusted figures, and three-month moving averages.

Markets In Motion
Canadian markets are continuously changing, driven by supply/demand forces. In theory, a perfect marketplace could attain balance and market equilibrium. In reality, the situation is vastly different. Most energies are devoted not to balance, but to understanding and controlling market instabilities, intrusive forces, unexpected events, and competing social/political factions.

CPI Focus

Consumer Price Index (CPI) 1995-2003 (based on 1992 = 100)

This popular indicator of inflationary pressure (loss of buying power) is closely watched. The CPI, as a cost of living measure, tracks 600 goods and services purchased by the average family, e.g., a family spending $100 for a basket of goods in 1992 would require $122.10 for that same purchase in 2003.

LABOUR FORCE FOCUS

Unemployment Rates 1976-2004

An undeniable link exists between unemployment rates and housing activity. Fewer dollars generated through jobs impact large ticket purchases including housing.

View unemployment rates with caution. The real rate might be significantly higher due to various factors including unreported unemployment (those discouraged in the job search) and/or those not registered with established agencies.

Source: Statistics Canada. CANSIM Table 282-0087

Business Cycles
Business cycles often captivate both professional and casual market watchers. The procession through prosperity, recession, and recovery are well documented. No two cycles display the same time interval, intensity, or precise curvature.

Extensive research has recently focused on real estate cycles. Many researchers contend that both short and long term cycles are present. Short-term are driven by consumer confidence, interest rates, and localized economic conditions. Longer cycles are impacted by broader demographic considerations. Real estate cycles typically vary from traditional business cycles given inherently unique qualities.

Indicators that measure the length and amplitude (distance between prosperity and recession), of real estate cycles include housing prices, available new and resale inventory, building starts/completions, consumer confidence, and mortgage rates. In commercial real estate, the focus expands to vacancy factors, capitalization rates, and rents.

Study Links

Encyclopedia

Economics
Consumer Price Index
Employment [Statistics]
Business Cycle

Index

A statistical calculation that provides an indication of trends relating to an economic or financial circumstance in the marketplace. Major financial indexes for stock trading include the Toronto Stock Exchange (TSE), the Dow Jones, S & P 500, and NASDAQ.
Application

For real estate purposes, the Consumer Price Index (CPI) is commonly used as a price index. For example, office lease rates may be adjusted based on the CPI. a__ume that the CPI index is 1.00 and the current rent is $24,000 per year with an escalator clause based on the CPI. If the index moved upwards to 1.05, then the rent for the subsequent year would be:

1.05 x $24,000 = $25,200

Indexes are also used in mortgage financing. Adjustable rate mortgages are sometimes referenced as fully indexed. In other words, the mortgage rate will vary directly in proportion to an indexed base rate, e.g., the prime rate, T-bill rate, or another declared rate. The lender selects a base rate and then adds a margin to arrive at the mortgage rate, for example:

prime + .0250 (2.5%) (margin) = mortgage interest rate

The adjustable rate mortgage is then modified at predetermined intervals based on changes in the prime. As a qualifying note, adjustable rate mortgages for residential purposes are rarely fully indexed but rather are limited by cap provisions restricting:

- The maximum change in a mortgage interest rate during specified periods (e.g., adjustment not to exceed 1.5% in any year); and

- The maximum rate that can be charged.

Economics

The study of how individuals and society allocate scarce resources in satisfying their wants and needs, including the production, distribution, and consumption of goods and services to meet the needs of various economic units (e.g., individual, family, corporation, and government).

Consumer Price Index

Acronym: CPI An indicator of consumer price fluctuations over a period of time. The CPI is based on a basket of goods and services and a__ociated prices that Canadians must pay for these goods and services. The basket consistently reflects equivalent quantity and quality and, as a result, the CPI measures true price movements. The CPI is generally regarded as a reliable measure of purchasing power, i.e., inflation (when the purchasing power of the dollar decreases) or deflation (when the purchasing power of the dollar increases).
Application

Practitioners commonly encounter the CPI in relation to commercial tenancy agreements in which rents are geared to CPI fluctuations over part or all of the lease term. However, the index has far-reaching applications for Canadian society involving such items as spousal and child support payments, Old Age Security pensions, Canada Pension Plan payments, and cost-of-living increases for labour contracts, often referred to as COLA (cost-of-living adjustment) clauses.

Components/Weightings

Canadians are most familiar with the all-items CPI that is regularly published in the media. This index is based on selected components and each component has a relative weighting of importance in making up the index.

Household operations and furnishings 10.0%
*

Shelter 27.9%
*

Food 18.0%
*

Alcoholic beverages and tobacco products 4.5%
*

Recreation, education, and reading 10.4%
*

Health and personal care 4.3%
*

Transportation 18.3%
*

Clothing and footwear 6.6%

Six hundred goods and services are tracked within these overall components. Each item is weighted based on its relative importance. The weighting used reflects the impact that a price fluctuation in a particular item would have upon the average consumer budget. For example, an increase in gasoline prices would have greater impact than a corresponding rise in tea prices, as most families are impacted more by the former than the latter. The combined weighting of all goods and services within a component is totalled for the overall weighting of that component. The current set of weightings represent household expenditures for 1992.

Scope of Indexes

The primary all items CPI is complemented by a range of sub-indexes. For example, each component has a corresponding index, e.g., transportation, shelter, and clothing. These in turn are broken into small groups made up of selected, similar products or services within the overall component, e.g., grouping of dairy products, childrens' footwear, and specific tobacco products. In fact, the entire range of 600 goods and services is grouped under an elaborate classification system with the lowest level having 182 basic classes (products or services that have common end-uses or are viewed as substitutes for one another) and progressively consolidating to the eight major component classes.

Shelter

The shelter index is a component within the overall (all-items) CPI consisting of home ownership and related costs. Various items are tracked including electricity costs, mortgage interest, homeowner's insurance, and rent.

Time Base

CPI indexes are time-based using a particular year as the base mark for comparison purposes. At present, 1992 is used with all subsequent years compared to that reference. If, for example, the overall (all-items) CPI was 120.3, this means that consumer prices for the index are 20.3% higher than the base year. The time-base is updated periodically by Statistics Canada. Exercise care in interpreting CPI charts as differing base years may be involved.

Publication
Components/Weightings

Household operations and furnishings 10.0%
*

Shelter 27.9%
*

Food 18.0%
*

Alcoholic beverages and tobacco products 4.5%
*

Recreation, education, and reading 10.4%
*

Health and personal care 4.3%
*

Transportation 18.3%
*

Clothing and footwear 6.6%

Components/Weightings

Household operations and furnishings 10.0%
*

Shelter 27.9%
*

Food 18.0%
*

Alcoholic beverages and tobacco products 4.5%
*

Recreation, education, and reading 10.4%
*

Health and personal care 4.3%
*

Transportation 18.3%
*

Clothing and footwear 6.6%

Scope of Indexes

Shelter

Time Base

Publication

The CPI is normally published by Statistics Canada in the third week of the following month. As already referenced, a wide array of sub-indexes are provided including major components right through to specific goods and services in basic classes. The CPIs are published for Canada, the ten provinces, the territories, and 16 major centres across the country.

Business Cycle

(see also Real Estate Cycle)

A series of events within the business environment that take place in roughly the same order and at the same approximate intervals. A business cycle is concluded when this series of periodically recurring events brings circumstances back more or less to overall conditions that existed when the cycle began.
Application

The concept of cyclical trends in business has remained a popular theoretical basis for a___yzing, explaining, and forecasting long term economic trends. Cycles are particularly evident in real estate and are a consequence of supply and demand factors combined with a host of intrusive elements from both private and public sectors. No two cycles display the same time interval or intensity. The business cycle is typically a__ociated with three phases as outlined in Figure B.18:

- Prosperity (high employment, consumer confidence and intense market activity);

- Recession (rising unemployment, waning consumer confidence, and no real growth); and

- Recovery (economic corrections and improvement in key growth indicators).

Economic recovery leads to prosperity and the cycle begins once more. Real Estate Cycle

(see also Real Estate Market)

The real estate market generally moves through phases similar to general business cycles. However, real estate may demonstrate more p___ounced peaks and valleys. Prosperity can occasionally linger in the marketplace, buoyed by fervently optimistic consumers and speculators. Conversely, recessions deepen unnecessarily as developers flood an overheated market with new structures, only to see consumer demand vanish before their completion. On a more optimistic note, real estate markets have traditionally tended to be on the leading edge of the recovery cycles as improved economic conditions emerge.
Application

Economists have long debated the existence of both long- and short-term cycles operating in the real estate market. However, to date, both defy the regularity and consistency necessary to permit accurate predictions. Many believe that the long cycle is driven by demographics (e.g., age composition, marriage patterns, population changes, and migration), transportation patterns, macro economic growth cycles, and long-term government policies. The shorter cycle appears affected predominately by interest rates, consumer confidence, and general economic conditions, particularly within the local area or region.

Some argue that the current, long-term cycle originated in the mid-forties with the appearance of baby boomers, post Second World War consumer confidence, substantial immigration to Canada, favourable government regulations, and an expanding easy money policy in both public and private lending institutions. The 1945-2000 period appears as an extended recovery/prosperity curve in a long-term cycle, following the disastrous impact of the depression years. Others dispute the long cycle theory but point to the sustained attractiveness of real estate holdings. Despite various fluctuations, the size and strength of real estate markets have moved in progressively upward trends.

Other industry observers contend that the real estate market has demonstrated consistent short cycles. The duration seems to be approximately every six to ten years. However, it is important to emphasize that the length and intensity of the prosperity, recession, and recovery stages may vary considerably by geographic locale. As with extended cycles, conflicting opinions must be noted. Some a__ert that the existence of short cycles is largely illusory and too simplistic to address economic complexities in the real world. These individuals insist that unique events in the marketplace (e.g., credit restrictions, short-term housing scarcity, government policies, and employment trends), randomly impact the housing market, thereby creating unusual, often erratic activity that defies accurate cyclical prediction. Such movements may not be recession/ recovery cycles but merely statistical evidence of the constant imbalance of supply and demand. Based on this explanation, economists may be force-fitting market blips into neatly packaged cycles where none really exist.

Obviously, the entire topic is one of ongoing investigation.

Figure R.5 illustrates variances in a real estate cycle compared to a business cycle