Tag Archives: Mark Carney

Housing ‘bubble’ bound to burst

Posted on by
Reply

When it does, the result isn’t going to be pretty, economist says

With fresh signs from the Bank of Canada that interest rates will stay lower for longer, Canada’s still-hot housing market has many of the hallmarks of the U.S. situation just a few years ago.

House prices dipped during the recession, but bounced straight back and have kept climbing since. And homebuyers are taking on record debt to buy houses at historically high prices.

When interest rates eventually rise, some forecasters warn the result isn’t going to be pretty. “Our view is that we are in a housing bubble, that housing prices have risen very sharply over the last 10 years, and that there is a big disconnect between housing prices and fundamentals, including interest rates,” said David Madani, an economist at Capital Economics in Toronto.

“It really does look like a housing bubble that will have a very unhappy ending.”

He predicted a 25-per-cent drop in house prices, adding Canadian homeowners would end up with negative equity.

Few economists are as willing to use the word “bubble” to describe Canadian real estate, even though the central bank noted in June that house prices are up 31 per cent from an early 2009 trough and are 13 per cent above their previous peak from before the global credit crisis.

Household debt is certainly soaring. Bank of Canada Governor Mark Carney recently warned Canadians were “as indebted as the Americans and the British.”

But faced with a stumbling global economy and European and U.S. debt woes, the central bank opted on Wednesday to keep rates steady, with many economists now expecting easy money until the second half of 2012.

“In order to crash you need two preconditions: a huge increase in rates as in 1991, which is unlikely, and a subprime type situation, namely very low-quality mortgages,” said Benjamin Tal, senior economist at CIBC World Markets. “That is not the situation in Canada.

“So although I see prices going down over next two to three years, I don’t see a crash, I see a moderate gradual softening.”

The government, fretting about high debt levels, is working to engineer that soft landing with tighter rules for government-backed insured mortgages that took effect in March. The changes cap mortgage terms at 30 years rather than 35 and cut the amount homeowners could borrow against their homes to 85 per cent from 90 per cent.

Canada’s national banks are more conservative lenders than America’s fractured regional banks were, and there is virtually no sub-prime market, where riskier borrowers end up paying higher rates. Mortgage interest is not tax-deductible, so the incentive to buy a home is less. And a large slice of the mortgage market is insured by the government.

http://www.theprovince.com/business/Housing+bubble+bound+burst/5376062/story.html

Edmonton Mazda 3 Financing Madza3 Alberta
Winnipeg Used Honda for Sale
Winnipeg Manitoba 2011 Ford Edge Auto Dealer Parts
www.crossfireconsulting.net

Blog Traffic Exchange Related Websites
  • Have Gold Prices Peaked? In case you were asleep, last week saw gold break all records and almost closed at $900/Oz. I still think its a good time to buy for long term investors. Lets see what other investment...
  • Does anyone REALLY know what they are Talking about With Housing Prices? As I was sitting in the dentist’s office waiting for them to call me in so I can get 3 cavities filled (yeah my mouth hurts as I write this) I was reading cnbc.com headlines...
  • 1971 Canadian Fifty-Cent Piece Money -> Coins-Canada -> Fifty-Cents If you're a coin collector, specifically a Canadian coin collector, you might enjoy looking for a 1971 Canadian fifty cent piece to add to your collection. The trick to this...
  • Another Housing Article As if there wasn't enough bad news floating around about the housing market, BusinessWeek had another article on it.The option adjustable rate mortgage (ARM) might be the riskiest and mostcomplicated home loan product ever created....
  • Real Estate Bubble Chartology Post-Government Home Buyer Tax Credits Depending on your views (optimistic vs. pessimistic) of the housing market, you can probably make a pro or con argument on the future direction of home pricing based upon the following 10 year chart. (aka...

Average House Prices a Misleading Gauge of the Health of the Canadian Real Estate Market: CIBC

Posted on by
Reply

The Canadian housing market is becoming highly segmented and multi-dimensional which is making traditional measures, like average prices, increasingly irrelevant in gauging the health and state of the sector, finds a new report from CIBC World Markets Inc.

“Glancing at popular metrics such as the price-to-income ratio or the price-to-rent ratio, it is tempting to conclude that the housing market is already in clear bubble territory and a huge crash is inevitable,” writes Benjamin Tal, Deputy Chief Economist at CIBC, in his latest Consumer Watch Canada report.

“Tempting, but probably wrong. When it comes to the Canadian real estate market at this stage of the cycle, any statement based on average numbers can be hugely misleading. The truth is buried in the details—and there the picture is still not pretty, but much less alarming.”

He notes that while the average house price in Canada rose 8.6 per cent on a year-over-year basis in May, that number slows to 5.6 per cent if you take Vancouver out of the picture. Remove Vancouver and Toronto and the average price increase drops to 3.7 per cent.

By digging into the details on the high profile Vancouver market he found that the gap between average and median prices is reaching an all-time high. While the average house price climbed 25.7 per cent on a year-over-year basis to more than $800,000 in May, he found that by removing properties that sold for more than a $1 million there was a much more moderate price appreciation in the market. It also reduced the average sale price by $220,000 to just over $590,000.

“What makes Vancouver abnormal is the high end of its property market,” says Mr. Tal. “And in this context many, including Bank of Canada Governor Mark Carney, point the finger at foreign—mainly Asian wealth—as the main driver here.”

Data on the extent of the role that Asian investors have played in Vancouver housing prices is quite limited. Mr. Tal’s analysis of data obtained from Landcor Data Corporation suggests that only 10 per cent of the nearly 4,500 transactions involving foreign money over the past five years were above the $1 million mark, with an average purchasing price of just under $600,000.

According to the information provided by Landcor, foreign money accounted for only 2.6 per cent of all sales during the same period. However, Mr. Tal believes that could be a serious underestimate, as it is based on where property tax assessments are mailed, and would exclude offshore buying on behalf of children or other local proxies. “There are many reasons to believe that a significant portion of what is perceived to be buying by offshore investors is, in fact, driven by Chinese immigrants that are integrated into the community but still maintain strong links to mainland China, with many residing and working in China while their family establishes roots in B.C.”

“Looking beyond the average price numbers reveals a highly segmented and multi-dimensional market that is probably influenced by different forces,” says Mr. Tal. “But even a multi-dimensional market can overshoot—and the likelihood is that prices in the Canadian market and its sub-segments are higher than what can be explained by factors such as income growth, rent and household formation. Given that, the housing market will eventually correct. The only question is what will be the mechanism of that correction.”

Mr. Tal feels the price correction in Canada will be gradual as the two key triggers for a price crash – a significant and quick increase in interest rates and/or a high-risk mortgage market that is very sensitive to changes in economic factors – are not at play in Canada.

“In Canada, a sharp and brisk tightening cycle is unlikely. The market expects a gradual increase in short-term rates in the coming years. The rising number of mortgage holders that carry a variable rate mortgage will be the first to feel the pain. But if history is any guide, they will return quickly to the comfort of a five-year fixed rate the minute the Bank of Canada starts hiking.”

He also believes that the country is in relatively good shape when assessing the two sub-segments of the mortgage market that traditionally account for most defaults: mortgage holders that carry a debt-service ratio of more than 40 per cent and those with less than 20 per cent equity in their house.

Just over six per cent of households have a debt service ratio of more than 40 per cent—a number that has risen by a full percentage point since 2008. “However, this ratio is still well below the ratio seen in 2003, when the effective interest rate on debt was more than a full percentage point higher, and no correction in house prices ensued,” adds Mr. Tal.

“All other things being equal, even a 300-basis-points rate hike by the Bank of Canada would take this ratio to only just over eight per cent. Not surprisingly, Vancouver has the highest ratio of households with high debt-service ratio, followed by Toronto.”

A little more than 17 per cent of the Canadian residential real estate pool is in properties with less than a 20 per cent equity position, a number that has been rising over the past few years. More than 80 per cent of households with less than a 20 per cent equity position are first time buyers.

“Digging deeper and looking at the households with both low equity positions and high debt-service ratios, we found that this fragile segment of the market accounts for only 4.6 per cent of total mortgages—a number that has been on an upward trend over the past few years,” says Mr. Tal. “Shock the system with a 300-basis-points rate hike and that number would rise to a still-tempered 6.5 per cent. Historically, even in that group, the default rate has been well below one per cent. Thus, short of a huge macro shock, there does not appear to be the risk of large scale forced selling that would typically be the trigger for a precipitous plunge in the national average house price.

“As a result, while house prices are likely to adjust as interest rates eventually climb, the national pace of any correction is likely to be gradual. That could still entail a period in which housing underperforms other assets as an investment class, until rising incomes and a tame price trajectory bring the market back to equilibrium.”

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/cw-20110707.pdf.

http://www.digitaljournal.com/pr/356694#ixzz1XkKwWyPi

Edmonton Used Car Dealers
Edmonton Auto Finance Calculator
Winnipeg Used Honda for Sale
www.crossfireconsulting.net

Blog Traffic Exchange Related Websites
  • Gold Is A Lousy Investment Gold hit another record today and is currently trading over $1,100 as I write this. However, it hasn't prevented several news stories coming out about how gold is a lousy investment. Investment stalwarts from Warren...
  • Gasoline Prices Expected to Top Out at $2.35 per Gallon This Summer Over the last two summers we've seen gasoline prices hit skyward of $4.00 per gallon as the driving season picks up over the summer. Seasonal demand causes an increase in demand for gasoline every summer...
  • What Do I Need to Buy a Home Buying a house is one of the biggest financial decisions anyone can make. Few people have enough money to purchase a house outright and must finance the remainder of the purchase in what is known...
  • How to Invest for the Long Term If you are looking to build your retirement portfolio or just investing for passive income, then you are probably more likely to look for stocks that you can invest in for the long term. Sometimes...
  • My Plan to Beat the Lending Club, Peer-to-Peer Investing Average ~ ~ ~ April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change ~ ~ ~ ~ ~ ~ December 2010 Update: Earning 15.6% NAR on Lending Club investment portfolio ~ ~ ~...

August Canadian Housing Market Performance

Posted on by
Reply

August home price value jumped 0.2 per cent from July statistics— a clear indication that home prices is moderating across Canada, based from the recent Teranet-National Bank composite home price index.

According to the authors, for the second consecutive month, home value did not rise from the month before in all six markets. The trend of Canadian home prices has been different in every region, there was a noted decline in Calgary and Vancouver while on opposite direction in Toronto, Montreal, Halifax and Ottawa.

See the price gain in these 6 major Canadian cities based from the data gathered from public land registries:

clip image002 thumb August Canadian Housing Market Performance

Results had shown that home value was up 10 per cent in August compare to the previous year. Although majority were gained in the first half of the year.

Buyers rushed into the market amid fears of higher interest rates, tighter mortgage rules and a new harmonized sales tax in B.C. and Ontario—one good explanation why home prices inflated quickly at the beginning of the year. However, the market went on the opposite by spring which was supposed to be the busiest period.

According to a Royal Lepage poll, housing prices drop as well as the sales in the third quarter and increases in housing slowed to a more normal 5 per cent rate year-over-year. The Canadian Real State Association said in its monthly report that home prices in September were little changed from last year at $331,089.

Despite the weak market condition, prices continue hover record highs, which may place the country in a housing bubble. Canadian homes may be overhauled and that home prices drop could more sharply than expected. If this takes place it would exacerbate growing debt burdens that households are facing, said Bank of Canada Governor, Mark Carney.

Edmonton Premium Used Trucks
Winnipeg Manitoba Extended Stay Mainstay Hotels
Furnasman One Hour Heating CBC Winnipeg
Crossfire Consulting Blog
www.crossfireconsulting.net

Blog Traffic Exchange Related Websites
  • The IRS No Longer Likes Our Vacation Home The Capital Gains Exemption for Second Homes is Fading Away  Mr. and Mrs. ToughMoneyLove bought themselves a 25th anniversary present six years ago: a lake house about 90 minutes away.  We have enjoyed it immensely...
  • Existing Home Sales Exploding I feel as if a lot of the recent economic news has been more positive than just a few months ago. From Bernanke saying that the recession is over for all intents and purposes to...
  • Canadian Pharmacies Many people are preaching the benefits of choosing a Canadian pharmacy over American pharmacy options, but this opportunity for acquiring your medications across the border may not make sense to you unless you understand why...
  • Weakening Economy Can Mean Good News for Homeowners On Tuesday the Federal Open Market Committee (FOMC) dropped the federal funds rate by 0.75% in an emergency meeting. What does this mean for mortgages? The federal funds rate does not actually directly impact fixed...
  • Counter Argument to China's Threat To Dumping US Dollars/Treasuries/ A few days ago,China threatened to offload its Billions of US Treasuries in retaliation to any US imposed trade tariffs.One of the newsletters I read regularly is from John Mauldin who doesn't think its likely...

Days of low-interest borrowing may soon end in Canada, economic leaders say

Posted on by
1

Canada’s economic leaders are worried that low interest rates are luring consumers into amassing huge amounts of debt that they may not be able to pay back when interest rates rise from their historic low levels.

Canada’s central bank lending rate is 0.25 percent. Mortgage rates are about 4.5 percent, while five-year consumer loan rates for items such as automobiles are about 8 percent.

Recently, Canada’s Finance Minister Jim Flaherty and the governor of the country’s central bank, Mark Carney, have sent warning signals that the days of low-interest borrowing may soon end.

Their statements show that the Canadian government is afraid that Canadians will default on the loans that are used to buy homes. About 70 percent of Canadian families own their houses, and real estate makes up the bulk of the assets of typical Canadian families.

Besides, Canadians, especially those who have not saved for their retirement or do not have a workplace pension, see home ownership as a way of locking away money until their retirement, using the money from their house sales to top up their small government pensions.
Still, most Canadians must borrow the bulk of the money they use for home purchases. Most are content to assume this large debt if the cost of the monthly payments is comparable to rent charges, and if house prices continue to rise.

In the past decade, the government has allowed the term of mortgages to be extended from a maximum of 25 years to 35 years, and has permitted its home loan insurance agency, Canada Mortgage and Housing Corporation, to sell insurance on loans with a down payment of only a 5-percent.

The system has worked to stimulate house construction, but analysts worry that it has created a speculative bubble that may burst, allowing house prices to settle back to a level that will leave many families owing more than their homes are worth. If that happens, the national government, already running a massive annual deficit, would be stuck with the loans of Canadians who defaulted.

Last year, Canadian resale house prices rose by more than six times the rate of inflation. Interest rates have also been kept low to stimulate borrowing for capital investment.

However, the rates will probably have to rise if Canada’s national government, its provinces and cities hope to sell bonds in a market already flooded with U.S. government debt.

In an interview broadcast this week on the country’s largest private television network, Finance Minister Jim Flaherty warned Canadian families that the days of easy home ownership debt may becoming to an end.

“If we see further evidence that there is excessive demand in the housing market or that there’s an indication that people are taking on obligations that they will not be able to handle in the future when interest rates rise, then we will take some action,” Flaherty said on CTV television.

“The likely action we will take is to increase the size of the down payment from 5 percent to a higher number, reduce the amortization — bring it down from 35 years to something less,” he said.

Canadian families traditionally saw home ownership as a sign of financial security. Prices have rarely fallen in the past century. When they have, the values quickly recovered. Last year, house prices rose an average of about 20 percent, while the official inflation rate is less than 3 percent.

The average Canadians have increased their personal debt by more than 1,000 Canadian dollars (about 955 U.S. dollars) in the first half of 2009, driving up the nation’s personal debt by 44 billion Canadian dollars (42 U.S. dollars).

However, Canadians gamble on interest rates. In the early 1960s,a time of low inflation, interest rates were comparable to today’s. In the fall of 1981, with inflation near 15 percent, mortgage rates reached 20 percent.

On a 300,000 Canadian dollars (287,000 U.S. dollars) debt, which is not unusual in a major urban market, a 20 percent interest payment would amount to more than a typical Canadian family earns, after taxes, in a year. Even a 12 percent rate, which was typical of the 1980s, would generate a monthly payment of more than 3,000 Canadian dollars (2,865 U.S. dollars).

On top of those charges, Canadians must pay property taxes and most mortgage companies require the house to be insured for its full value.
Flaherty said recent price increases for homes in Canada are due to a “confluence” of factors including low interest rates, an improving economic outlook and a stabilizing job market.

On Dec. 10, Mark Carney, the governor of Canada’s central bank, warned that Canadian families were becoming more vulnerable to interest rate fluctuations because they have added debt this year while other countries such as the United States and Britain have seen reductions in personal debt-to-income ratios. The bank echoed the warnings of several non-government economists who warn that the Canadian rush to indebtedness is unsustainable.

In the Bank of Canada’s semi-annual report, Carney wrote: “House
holds need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates.

“Financial institutions need to carefully consider the aggregate risk to their entire portfolio of household exposures when evaluating even an insured mortgage, since a household defaulting on an insured mortgage would likely be unable to meet its other debt obligations.”

Carney warned that the risk to Canadian banks is relatively low, but up to 10 percent of households would face serious problems meeting their house payments if interest rates rise.

However, Benjamin Tal, an economist with the Canadian Imperial Bank of Commerce, a major mortgage lender, said Canadians find ways of hanging onto their houses when interest rates fluctuate, and tend to default only when they have lost their jobs.

Still, Tal said, “It is time for both borrowers and lenders to exercise prudence in continuing to build up household debt loads to the point where they are overly reliant on today’s low rates.”

Surrey Coquitlam Vancouver Victoria Auto Financing Interest Rates
BBB Review of Furnasman
Crossfireconsulting Blog

Blog Traffic Exchange Related Websites
  • Want a Loan? Do Your Homework First! Understanding the differences between loan types is difficult enough, so researching them for comparison purposes is not always at the top of everyone's list. Before you walk into your current bank to fill out a...
  • How to Save Money on Your Home's Mortgage The biggest expense in most people’s budget is their mortgage payment. Mortgage payments can account for 30 to 35% of a person’s monthly income. If you find ways to reduce your mortgage payments, you could...
  • The Economic Dangers When Banks Can't Collect Fantastic real estate and banking article in The New York Times today entitled Borrowers Refuse to Pay Billions in Home Equity Loans regarding the fallout of America's popped real estate bubble: Each deal financed the...
  • The Sun Sets On Dollar Supremacy According to a quote in the Telegraph, HSBC has issued a new report stating that the Federal Reserve's ultra-loose monetary policy is forcing China and other emerging countries to create a new global currency "order"....
  • Introduction to Mortgages pt 4 of 5 This is part four in a five part series on what you need to know about mortgages before you buy a home. The housing market is an interesting beast, because it comes and goes, rises...

Carney dismisses issue on housing bubble

Posted on by
Reply

In a question-and-answer session following his speech, Mark Carney, the governor of the Bank of Canada was quick to dismiss talk of housing bubble in Canada or in Winnipeg’s stable market. Here are some of his dropped statements:

“Canada’s corporate sector begins with a number of advantages. Domestic demand is expected to be relatively strong, providing a base of support for some sectors. Corporate balance sheets are in outstanding shape, and margins have help up very well for this stage in the economic cycle. ”

“Canada’s overall financial conditions are now contributing to, rather than retarding the recovery. While net financing needs would be expected to be limited, given the stage in the economic cycle, business credit has started to grown again. In fact due to monetary stimulus, overall borrowing costs for Canadian business remain very low.”

“Taken together, results from the bank’s latest Senior Loan Officer Survey and the Business Outlook Survey suggest that, following a period of substantial tightening, credit conditions for businesses eased slightly in the fourth quarter of 2009, for the first time since the financial crisis began. The improvement in credit conditions mainly affected large firms, as some small and medium sized entities continued to experience tightened conditions.”

“It is in this environment that the first signs of thaw corporate attitudes have begun to emerge. In our latest Business Outlook Survey, more firms said they are now planning to increase investment sending and employment than did either last summer or fall. With the improvement in financial conditions, economic activity, commodity prices and growing confidence, business fixed investment should pick up in 2010. This recovery will be relatively modest; it is not until 2011 that we anticipate an acceleration of investment sending, as the excess supply in the economy is taken up.”

“However, given the external environment, the question is whether this pickup will be sufficient. The significant drop in investment that occurred during the recession included spending on new technology, which could have helped firms address coming economic challenges. The relatively slow recovery expected in our most important trading artner, along with ongoing sectoral adjustments, means that firms have to find new markets. In doing so, they will face increased competition. For example, due to exchange rate moves and stellar productivity performance, the competitiveness of the U.S. corporate sector has improved significantly. The need for capital investment by Canadian businesses to meet these challenges is clear.”

“In short, Canadian companies are emerging from the recession to an altered world— one that may require deeper restructuring and bolder strategic initiatives than currently contemplated. New suppliers need to be sourced; new markets opened; a new approach to managing for a more volatile environment developed. To recognize this reality is also to recognize the opportunities available to corporate Canada.”

“To conclude, recent events were a watershed. The global economy that emerges from the recession will be different than the one that led into the crisis. A powerful and sustained restructuring of the global economy has begun. Canadian business will need to develop new markets as the traditional advantage of relatively open access to U.S. market becomes less valuable. To seize new opportunities our productivity levels must improve.”

Property Tax Assessments to be Mailed Soon
One Hour Canada
Crossfireconsulting Blog

Blog Traffic Exchange Related Websites
  • Protecting Your Investments In Times of Economic Crisis The United States economy is currently experiencing a serious financial shake up. No one really understands just how deep or how far reaching the damage is going to be, but what we do know is...
  • How Coins are Valued A coin collection can be a fascinating hobby or an investment the can increase in value over time. If you have a sizable collection or want to become a serious collector, it may be wise...
  • Part 2: Financial Spread Betting Advantages & Markets We find that financial spread betting is just one of the trading options available to retail investors and may not be suitable for everyone and every trading activity, but at the same time if it...
  • New Way to Buy Gold Online in Canada - Scotiabank Opens Gold and Silver eStore With the recent rally in gold prices, maybe you've found that your favourite gold dealers were backed up with 3 and 4 week waits on delivery.  Now there's another alternative for Canadian clients - you...
  • Home Based Business - 2011 predictions Home Based Business - A New Year Approaches Image via Wikipedia As we get ready to celebrate the new year, it is also a time to reflect on what has happened the previous year.  The...