Stock markets around the world shrugged off Brexit and posted strong gains in July.  The B.C. government surprised many with a 15% additional property transfer tax on foreign buyers in Greater Vancouver.

 

July 2016 Market Performance

All index returns are total return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.

 

Other Market Data	Month-end Value	Return for July	Return for 2016
Oil Price (USD)	$41.60	-13.93%	+9.19%
Gold Price (USD)	$1,349.00	+2.15%	+27.24%
US 3 month T-bill	+0.28%	+0.02%	+0.12%
US 10 year Bond	+1.46%	-0.03%	-0.81%
USD/CAD FX rate	1.3056	+1.08%	-5.66%
EUR/CAD FX rate	1.4594	+1.84%	-2.89%
CBOE Volatility Index (VIX)	11.87	-24.05%	-34.82%

*Absolute change in yield, not the return from holding the security.

The stock markets shrugged of the initial knee-jerk drop following Brexit very quickly and posted strong performance in July.

The S&P/TSX Composite Index was up 3.7% for the month.  Despite oil declining -13.9% in July, Canadian small caps were up strongly.  European markets performed well, particularly Germany which was up 6.8%.  Japanese stocks were up 6.4%, but are still down -12.9% for 2016.

Canadian bonds had a good month, in both government and corporate markets.  The government bond indexes were up 0.4% to 1.4% in July, and corporate bonds rose 0.2% to 1.4%.  The broad FTSE TMX Universe Bond Index was up +0.8%, and is up 4.9% for 2016.  US bonds also performed well; most US bond market indexes were up +1.3% to +3.0%.  Emerging market bonds were also up in July, +2.2%.

Oil was down -13.9 in July, while gold was up 2.2%.  The broad Bloomberg Commodity Index was down -5.1% for the month.

The Canadian dollar continued its slide from June and was down -1.1% against the US Dollar to 1.3056, and lost -1.8% against the Euro.

 

Commentary

In a surprise move, the B.C. government introduced an additional 15% property transfer tax on residential properties in Greater Vancouver that are sold to foreign buyers.  The announcement was made on July 15, and took effect on August 2.  That the government did not have the tax apply only to offers accepted after August 1 was also a surprise.  That is a very short window, leaving many sellers with signed contracts which involve a foreign buyer wondering if the sale will indeed complete. Until the money is transferred from the buyer to the seller, there is always the possibility that the sale will not complete.  Real estate lawyers are expecting a sharp rise in lawsuits as a result of this new tax.

Foreign buyers who have had their offer accepted will have to decide whether they will go ahead with their purchase and pay that 15% tax or walk away and forfeit their deposit and accept any legal consquences.  Deposits on real estate deals have generally not kept up with the price increases, so in many cases it will be cheaper to walk away and forfeit the deposit than pay the 15% tax.  Breaching their contract will likely mean that the seller will sue them for compensation.

The tax is going to hit hardest for those people moving to Vancouver for work who aren’t buying multimillion dollar properties.  Someone who is maxing out their budget on a $500,000 condo won’t be able to come up with that additional $75,000 in tax.

Those with deeper pockets won’t be as affected.  Buyers looking to drop $4 million on a luxury home in Vancouver might not be willing to pay asking (or over) any more, but it doesn’t mean they won’t buy.  Instead, they might offer $3.5 million.  That is still above what the home was likely valued at 12 months ago; according to Teranet, Vancouver housing prices rose 23.4% over the past 12 months!

This additional property transfer tax only applies to residential property taxes.  That means foreign buyers could shift their purchases to commercial buildings, such as office buildings, industrial buildings and retail spaces.  In Canada, large prime commercial real estate is dominated by pension plans like Ontario Teachers, Caisse de Depot, and bcIMC, and the real estate investment trusts (REITs).  It is unlikely that foreign buyers would be able to buy from these parties with their multi-decade time horizons, unless the price offered represented a substantial premium to the current value.  Of course if you wildly overpay, your future returns will be greatly reduced – something most foreign real estate buyers would not be interested in.

 

July Economic Indicator Recap

Below are the current readings on the major economic indicators: central bank interest rates, inflation, GDP and unemployment.

Below are the current readings on a few other often followed economic indicators: retail sales and housing market metrics.

A Closer Look at the Canadian Economy

Canada’s unemployment rate dropped to 6.8% in June despite 700 jobs being lost (40,100 full time jobs lost and 39,400 part time jobs added), since the labour force participation rate slipped slightly to 65.5%.

The number of new housing starts rose to 218,300 in June, an increase of 16.9% from May. Building permit activity declined by 1.9% in May.  Housing prices across Canada rose 2.3% in June according to Teranet.  Victoria, Halifax, Toronto, Vancouver, Ottawa, and Hamilton all posted monthly gains for the month that were above the national average.

Inflation was +0.2% in June.  On an annual basis, the inflation rate rose +1.5%, and remains under the Bank of Canada’s target rate of 2%.  Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest was up +2.1% for the last year.  Retail sales rose 0.2% in May and were up 3.6% for the past year.

GDP was down -0.6% in May, due largely to the shutdown in the oil and gas sector in Fort McMurray as a result of the devastating wildfire.  With growth slow, and inflation remaining low, the Bank of Canada left interest rates unchanged at their meeting on July 13.  The next meeting is on September 7.

 

*Sources: MSCI, FTSE, Morningstar Direct, Trading Economics