Financial Update

Commodities fuel up TSX sentiment as Wall Street gets a boost on Citigroup deal

· TSX +285.48 pts (Reuters). resource issues supported by rising oil prices and the U.S. government's rescue plan for banking giant Citigroup lifting market sentiment, particularly in the financial group.
· DOW +396.97pts
· Dollar +2.70c to $81.00US. rises to its highest level in a week as prices for oil, a key Canadian export, rose while a more optimistic tone in the market took the shine off the U.S. dollar's safe-haven status.
· Oil +$4.57 to $54.50US per barrel. as investors considered the prospect of a further OPEC supply cut and as stock markets rallied on the Citigroup news.
· Gold +$27.70to $819.50US per ounce

www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices were down across the curve as news that the U.S. government stepped in to prevent the collapse of the world's largest banking group prompted demand for recently beaten down equities.

Banks scramble to shore up reserves

Eoin Callan, Financial Post Published: Monday, November 24, 2008
Canada's two largest banks Monday moved to raise fresh capital to shore up their reserves as the worst financial crisis since the Great Depression continued to weaken the country's banking system.

TD Bank Financial Group said it was being forced to brave extremely volatile markets with a bid to raise up to $1.4-billion in cash, after coming under pressure from investors to take action over its shrinking capital base.

The bank took the remarkable step of selling a stake in itself on the open market, making it one of the few financial institutions in the world to issue common equity amid unprecedented turmoil in stock markets.

The risky move came as Royal Bank of Canada said it would make a more modest effort to raise $225-million by selling recallable preferred shares, after disclosing a $1-billion loss on investments that depleted its reserves.

The appeals for fresh capital underline how mounting credit losses are sapping Bay Street's financial strength at a time when the industry is bracing for the country's first recession in two decades.

RBC is attempting to raise the funds after revealing Monday that its capital level had fallen to 9% from 9.5%.

Bank of Montreal is expected to detail its own setbacks Tuesday.

But it was TD that has been forced to take the most dramatic step after revealing last week that its reserves had fallen to 8.3%, the lowest level of the big banks.

That disclosure triggered the worst fall in the firm's shares in a quarter century and prompted major shareholders to pressure Ed Clark, its chief executive, to address concerns about the capital base of the country's second-largest bank.

"We would probably prefer you get this issue behind you," investors told the executive, according to a person familiar with the dialogue.

The bank chief said in an interview that he "suddenly saw an opening" Monday to take the bold step of raising capital as markets rallied worldwide following a decision by Washington to inject $20-billion into Citigroup and backstop about $300-billion in potential losses.

The executive had said only days ago that it would be "extremely challenging" to raise cash in the current environment, but Monday said there appeared to be signs of healthy demand to buy shares in the bank at a discounted price.

Mr. Clark predicted it would "primarily be our existing shareholder base" that would provide the injection, adding that it also "looks like there is strong retail demand, which is very helpful."

The bank appeared to have completed the capital raising by last night, which Mr. Clark said would send a "powerful statement" that private investors were ready to pour more capital into the country's banks.

"It's done," said a person familiar with the sale process.

The shares were thought to have been sold at a cost of $39.50 each, or a discount of 8% from the price of $42.90 that TD's shares closed at Monday.

That means existing shareholders will see their claim on the bank's future earnings diluted, though Mr. Clark said he could compensate for this by increasing lending to consumers and businesses, and growing the bank's retail operation.

RBC was expected to take more time to issue preferred shares, after it warned Monday that net income would fall by 15% to $1.1-billion in the fourth quarter after accounting for a charge of $670-million arising from a $1-billion loss on its investments and a move to set aside more than $600-millon to cover bad loans.

The move to raise capital comes after Ottawa introduced emergency measures allowing the country's financial institutions to top up their reserves using increasing amounts of preferred shares, or "capital lite."

RBC said it was also taking advantage of new looser capital requirements to avoid recording heavier losses on its investments, by retroactively shifting securities out of its trading portfolio so their impaired value would not have to be recognized.

The losses are unlikely to be the last for Canada's top banks amid the ongoing credit crisis.
"I think there is more to come," said one financial analyst.

Housing, the market and you

Globe and Mail Update

November 24, 2008 at 1:21 PM EST

How much is your house or condo worth?

Property values have become a topic of consuming interest over the past couple of years, first as house prices soared and, more recently, as they have started moving in the other direction.

The question for Canadians is how closely the experience here will mirror that in the United States, where an orgy of high-risk mortgage lending earlier in the decade has led to an unprecedented collapse in house prices that is the root cause of the financial and economic crisis that has spread from south of the border around the world.

Some commentators have suggested Canada could be on the brink of the same sort of tidal wave of mortgage defaults and foreclosures now sweeping through the United States.

But Adrienne Warren is not among them.

Ms. Warren is a senior economist and manager at Bank of Nova Scotia in Toronto, which she joined in 1993 after graduating with a PhD in economics from York University.

Since 2004, she has been the editor of the bank's "Real Estate Trends" report, which focuses on the economic and financial market conditions shaping the North American residential and non-residential construction outlook. She is also the editor of the widely circulated "Weekly Trends," a round-up of economic, industry and financial developments from around the world.

Last Thursday, in the latest edition of Real Estate Trends, Ms. Warren argued that while Canadian house prices are down significantly, there is little or no danger that our real estate market will be crushed like its U.S. counterpart.

“This is not a U.S.-style bust caused by overbuilding, speculative buying and imprudent lending, but rather a cyclical slowdown accompanied by a valuation adjustment in several large centres where booming demand conditions and temporary supply constraints led to an overshooting in prices,” she said.

Ms. Warren is primed to take your questions on real estate and the prognosis Monday at noon, or get a jump on the queue by submitting your question here.

Editor's Note: globeandmail.com editors will read and allow or reject each question/comment.

Comments/questions may be edited for length or clarity. HTML is not allowed. We will not publish questions/comments that include personal attacks on participants in these discussions, that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.

Sonali Verma: Welcome to the discussion. We have a lot of questions, so let's get right to it.

Zafar Abbas from Mississauga Canada writes: I have the same opinion that Canadian slide will not be like US. My question to Ms. Warren is how long the downwards trend will continue in the housing market, what areas will be affected most and what will the percentage decline. TI would apprecaite your response. Thank you.

Adrienne Warren:We think there are further downside risks to home prices in Canada, but the risks stem primarily from reduced affordability (typical at this point in any housing cycle) and a weakening economy, as opposed to the mortgage market problems and overbuilding that are behind the US housing correction.

As a result, the decline in prices will likely not be as deep as in the US. As the moment, we're forecasting national home prices to drop on average around 5% next year, with declines of about 10% in BC, Alberta, Saskatchewan and Ontario and relatively flat prices in the remaining provinces. This is based on the assumption of only a very mild recession in Canada, which could turn out to be overly optimistic.

Housing cycles are generally quite long, both on the upswing and downswing. My guess is that we're looking at a number of years of relatively flat home prices in Canada, which would gradually lift affordability and bring new buyers back into the market.

John Galt from Vancouver Canada writes: Two questions:

1. At what point (Measurement) would the rate of foreclosure in Canada ring an alarm?
2. Do you think the US plan to aid homeowners in foreclosure (or in its proximity), and those with impaired values - fix the economy, or perpetuate the status quo?Thank you.

Adrienne Warren:The share of Canadian mortgages that are currently at least 90 days in arrears is still less than 0.3% of all outstanding mortgages. This is historically a very low level. I'm not sure if there is a hard and fast rule of what level would cause alarm bells, but for comparison purposes, the rate of arrears was about double this level in the 1991-1992 recession, and even then we didn't see widespread foreclosures. Keep in mind, any significant increase in foreclosures in Canada would likely be related to job losses and a weaker economy, and not affordability issues related to mortgage resets, etc as in the US. I'm keeping a closer eye on the job market here in Canada, which will likely lead any significant rise in foreclosures.

Propping up an overheated, overbuilt and overleveraged US housing market through various homeowner aid instruments will likely prolong the inevitable correction in the US housing market. As with various bailout packages being considered, however, the cost for the economy as a whole of doing nothing could be even greater. My personal preference would be to see some targeted initiatives with appropriate incentives and repayments build in.

Josephine Ochej from Toronto Canada writes: Given the current downturn and time of year, what are your thoughts on listing a house now vs waiting until Spring, when things may or may not have improved, but perhaps more buyers will be looking? Thank you.

Adrienne Warren:The latest sales figures from the Canadian Real Estate Association were indeed startling, as Canadian buyers moved to the sidelines en masse in October. This created a huge supply imbalance, and put further downward pressure on prices as sellers outnumbered buyers. I think buyers are understandably spooked by concerns over the economy and jobs, and plunging stock market values. I also expect many will wait out the market until the spring, for general economic and financial market conditions to (hopefully) stabilize. Unlike in the U.S., the majority of sellers in Canada are not in a situation where they are forced to sell, and may wish to wait for consumer confidence to return.

Former 2 Time CIBC Staffer from North Vancouver Canada writes: Does Ms. Warren buy into David Wolf (from ML) and Doug Porter (from BMO NB) that Canadian real estate prices are tracking US trends, but with a two year lag? If this is the case, isn't the magnitude of the price decline the same, but just a different time frame?

Adrienne Warren:I believe we are tracking US house price trends to some extent, as both countries have enjoyed a long housing boom which has inevitably come to an end. We can see this in the case of numerous other developed country housing markets, including the U.K., Ireland, Australia and Spain.

But simply looking at price trends does not get to the factors behind the softening in prices. In Canada, typical cyclical developments, mainly reduced affordability, increased supply and a slowing economy, are driving the softening in the housing market. South of the border, a massive oversupply of housing caused by widespread overbuilding and record foreclosures related to mortgage lending and products that don't exist in Canada, was (and still is) the biggest factor driving down home prices. We don't see either factor as a major risk to the Canadian market. Prices are moving down, but for somewhat different reasons and likely not as far.

Rob Allen from montreal Canada writes: I am looking to go from renting to buying...should I wait another 6 months or longer, or are lower prices factored in at this point with all the news on the economy and housing?

#2-variable or fixed rate mortgage?

Adrienne Warren:We're in a period of unprecedented financial market volatility and economic uncertainty, when forecasting home prices (or any economic or financial market variable for that matter) is a mug's game. It's a solid buyers' market in most parts of the country right now, with lots of choice and few bidding wars, and likely some deals to be had. But the risk is that prices could move lower still.

In any case, I don't see housing prices moving sharply higher again for some time. With the economy and inflation slowing, there is a good chance both variable and fixed rate mortgage costs will move lower over the next six months.

Paul Carey from Canada writes: Looking at residential real estate in the Greater Toronto Area. Do you see the suburb (outside the city core) prices adjusting differently compared to city prices?

Adrienne Warren:Prices have fallen more sharply in the city of Toronto over the past year than in the suburbs. However, much of this discrepancy appears to be related to the January 1, 2008 imposition of a new Land Transfer Tax, which led to a surge in sales and prices in the city late last year as buyers moved to avoid the new tax, and inflated prices above normal. Longer-term, demographic trends, especially immigration, are positive for price trends in both the city and the suburbs, with the latter remaining a more affordable option.

JOHN WELSMAN from Thamesville Canada writes: Ms. Warren....Do you think recreational property is more or less vulnerable to the current downturn than the general housing market? Thanks for your comments.

Adrienne Warren:Recreational property is generally more vulnerable during a downturn than primary homes, given that they are a luxury or discretionary purchase.

J. Kenneth Yurchuk from Canada writes:Good day Ms. Warren, and thanks for taking our questions. I am a home owner in an older neighbourhood of East End Toronto. (Realtors call it 'Upper Beaches' but in reality it's just South of the Danforth.) I purchased in the mid-nineties towards the end of the last period of depressed housing market in Toronto, and feel I got a pretty good deal.

My question is in regards to demographics, and changing trends. There appears to be a growing trend of people moving back into the city core from suburbia. Is this borne out by your observations, and what do you feel are the underlying causes. (Certainly 2 hour commutes on traffic jammed roads is one!) What effect do you feel this will have on housing demand in neighbourhoods like mine? And finally, is this a Toronto phenomena, or more widely spread across the country?

Adrienne Warren:There has been a general trend across the country of people moving back to city cores, which in many cases have been revitalized with more employment and shopping options, and a booming condo market. While I would expect this trend to continue, affordability issues mean that the suburbs will also remain a viable and popular housing option.

Imants Gaikis from Toronto Canada writes: I read that in the US a mortgagee can walk away and take a hit on their credit rating, but they are not forced to declare bankruptcy. Somewhere I heard that in Canada the mortgage is the personal responsibility of the mortgagee and that bancruptcy must be declared if the mortgage cannot be paid. Is my understanding of the Canadian situation true? Is this true in all provinces?

Adrienne Warren:There are important differences in bankruptcy laws between Canada and the US, as well as some differences between provinces. I can get back to you on the details.
Ger A from Oshawa Canada writes: Hello, I have three questions:

1. Which areas will be hit harder, downtown cores or outlying areas, for decline.
2. If the property is a rental property, do you think that will do better?
3. Do you think the condo market will take the worst of the downturn due to the sheer number of condos in Toronto?

Adrienne Warren:In general, there is probably a bit more downside price risk to the condo market, given that it appears a bit more oversupplied/overbuilt. I would also guess that downtown cores could have a bit more near-term downside risk given that they have generally seen the biggest price increases in recent years. Generalizations are hard to make, however, as housing markets are very localized. Talking to a few real estate agents in your market(s) of interest is probably the best bet on local trends.

D Chris from Calgary Canada writes: Ms. Warren: Economic forecasting and modeling is certainly an art, and not a science. In such volatile times, I would say this means that there is that much more uncertainty or margin of error in these exercises. With that in mind, and recognizing that your own expectations are not for dramatic real estate price declines in Canada, can you comment on what would have to happen in order for your expectations to turn out quite wrong -- that is, which sensitivities in your analysis could lead to quite dramatic real estate price declines? (Or put another way, what do you see as the major downside-risks?) Thank you.

Adrienne Warren:I completely agree that forecasting is an art, and incorporates a lot of subjective assumptions. There is a wider degree of uncertainty around our forecasts than usual right now, and the risks lie more on the downside than upside. In my view, the biggest risk for the housing market in Canada right now is a more substantial slowing in the economy and significant rise in unemployment.

Rebecca leung from Canada writes: When would be a good time for a first-time buyer to enter the market?

Adrienne Warren:It's a buyer's market right now, meaning more choice and less competition, but there is inherent price risk. My suggestion for potential first-time buyers is to speak to a mortgage advisor or broker with respect to your own financial situation. And of course, do plenty of research in the housing market you're interested in.

Rod Smelser from Maple Ridge, B.C. Canada writes: To what degree does it make any real sense to speak of the Canadian housing market, as opposed to several regional and metropolitan markets? Is there any economically meaningful way of separating investment and consumption demands in the housing market? Do rent to price ratios in that market have the same significance as earnings to price ratios do for liquid assets, and would an analysis of rent to price ratios indicate that any of the major metropolitan markets in Canada are out of equilibrium?
Adrienne Warren:I agree. For example, while news headlines widely reported on the 10% year-over-year decline in national average prices in Canada for October, average prices were actually only below year-ago levels in BC, Alberta and Ontario. Local differences are even wider. For a buyer and/or investor, local conditions are key, and maybe all that matters. From a macroeconomic perspective, however, aggregate figures can give us some insight into broader risks for the market and economy.

Wherearewe Going from Toronto Canada writes: When do you anticipate housing prices will stop dropping (when is the low point) and how long after that do you anticipate housing prices will remain flat? Could you speak to the US and the Canadian differences in timing. Thanks.

Adrienne Warren:I could see home prices in both Canada and the U.S. dropping a further 5% or so next year, though the magnitude of the peak to trough price correction would remain significantly larger in the US. Beyond that, price developments really depend on the economic outlook further out. I wish I had a crystal ball. Saying that, housing cycles are long on both the upswing and downswing, and I would expect home prices to remain relatively flat for a number of years until affordability is returned to the market.

sam slick from Canada writes: Out here in the west, if each government (provincial, municipal or transit levy) raises their taxes, does this impact the ability of the household to maintain their payments? If the economy gets worse and deflation is in the horizon, does this cause more stress to the household?

Adrienne Warren: On their own, higher taxes would generally reduce disposable income, and could reduce the ability of a household to maintain their payments. In the current environment of slowing economic growth, however, I think significant tax increases are unlikely. A weakening economy and the prospect of deflation does cause more stress to households, as it leads to weaker job gains and slowing wage growth.

M T from Toronto Canada writes: Has your price forecast for Canada ... and specifically the Toronto and Vancouver markets ... considered the impact of how the large number of unbuilt Condo units held by 'speculators' ; investors impact prices going forward ?

Adrienne Warren:The rising stock of unbuilt condo units poses a risk to prices in Toronto and Vancouver, particularly given the current severe stains in credit market globally, and the fact that much of the investment into this segment comes from overseas investors. However, because we're not close enough to the ground to consider all local variables, I couldn't make a city specific price forecast with any degree of confidence.