Financial Update

Flaherty says government, banks working to ensure people get loans

· TSX +186.58pts to 9,472 (Reuters) The strong start to 2009 trading continued for a 6th straight session, buoyed by strength across its three biggest sectors -- financials, energy, and materials. You're seeing confidence return back into the market. You're seeing an ability to shake off economic news that continues to be quite dismal," said Elvis Picardo, an analyst and strategist at Global Securities in Vancouver. "These gains are promising, but one still needs to be cautious."
· DOW +62.21pts on the increased likelihood of a government stimulus package
· Dollar +.52c to $.84.55US.
· Oil -$.23to $48.58US per barrel. as weak U.S. economic data triggered a bout of profit-taking.
· Gold +$8.20 to $866US per ounce
www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices

The financial group shot up 3.6% today as Royal Bank of Canada became the third bank this week to launch a preferred share offering to bolster its capital ratios. Canada's biggest bank, announced a C$200 million preferred share offering, following offerings on Monday from Toronto-Dominion Bank and National Bank of Canada .

Budget will address credit concerns: Flaherty Paul Vieira, Eoin Callan and John Greenwood, Financial Post

The federal Finance Minister, Jim Flaherty, said Tuesday the coming Jan. 27 budget is expected to address concerns regarding access to credit, through measures analysts say could see taxpayers exposed to new market risks.

He made the acknowledgment after consultations with chief executives from Canada's big banks, indicating Ottawa has recognized lenders require additional support to make credit more freely available.

Mr. Flaherty said access to credit has emerged as the No. 1 concern after meetings with stakeholders as part of his cross-country budget consultation tour, which stopped in Montreal on Tuesday.

The measures are designed to juice a flagging economy through a combination of state loans and support for private sector lenders, and drew a grudging welcome from opposition leaders who see the budget as a make-or-break moment for the minority Conservative government.
"It was about time," said John McCallum, the Liberal party chief of economic strategy, who said government's "moves to date have been timid and cautious."

The Finance Minister said a working group of government, central bank and Bay Street representatives was being created to develop "policy options," some of which are expected to be finalized in the coming budget.

While the membership of the working group will be fluid, it will begin with a top-tier meeting in the coming weeks of bank chief executives and senior government officials accompanied by the heads of Crown corporations with the authority to make state loans.

That meeting will start a process of identifying businesses sectors where companies are being starved of loans and intervention may be required by entities like the Businesses Development Corporation, Export Development Corporation and Farm Credit Corporation.

For example, executives and officials might single out struggling companies in the forestry sector where they felt it might make sense for the state to step in and make a loan instead of a bank, people briefed on the plans said.

The work of the joint industry-government group will quickly be passed to less senior figures, and is seen as a way to overcome gaps in information and allow policymakers and the financial sector to respond quickly to pinch points across the country where lack of credit could aggravate the economic downturn.

Ottawa is also looking to intervene in the moribund market for securitized credit such as commercial paper to get funds flowing again.

"We have had discussions about ways in which we can accomplish the goal of making sure the commercial paper works and functions. Those discussions are ongoing and there are a number of policy options there," Mr. Flaherty said, adding he expected the budget to "address" these matters.

Mark Carney, Governor of the Bank of Canada, is expected to take the lead in shaping further state intervention in this sphere.

Finn Poschmann, vice-president of research at the C.D. Howe Institute, said Ottawa's options are straightforward: it could guarantee short-term commercial paper; or buy it up directly from issuers who are having trouble otherwise placing their paper.

"We have not gone down this route before," Mr. Poschmann said. "Either way, this would involve taxpayer exposure to new credit market risks."

Maintaining a functioning market where banks and companies can turn to investors to back fresh loans -- fueling credit card spending, auto financing and small businesses -- is seen as crucial to determining the severity and duration of the economic downturn underway.

Securitized debt, such as credit card loans, typically gets turned into asset-backed commercial and term paper -- a substantial market in Canada valued at over $50-billion. But since the beginning of the credit crunch, demand for these assets has plummeted, causing the market to shrink and raising the cost of financing for consumers and businesses.

Particularly squeezed are non-financial companies, most notably car leasing firms, which rely on commercial paper to fund operations.

There is also concern on Bay Street that if the market continues to erode, some banks could be forced to take the assets back onto their balance sheets, potentially requiring them to raise more capital.

CNW :Correction, not crash for Canadian real estate market in 2009; Average house prices forecast to fall 3.0 per cent
- Historically low interest rates, stable local economies and increasing affordability should support Canada's residential real estate market during transitioning period -

>> TORONTO, Jan. 6 /CNW/ - After experiencing a significant reset in 2008 -a reaction to continuous dire news surrounding the health of the globaleconomy combined with a cooling from the previous years' fervid activitylevels - Canada's resale real estate market should see only modest price andunit sales corrections take place across the country during 2009. Bothnational average house prices and the number of homes sold is expected todecline this year, according to the Royal LePage 2009 Market Survey Forecastreleased today.

Nationally, average house prices are forecast to dip by 3.0 per cent fromlast year to $295,000, while transactions are projected to fall to 416,000(-3.5 %) unit sales in 2009. In spite of this cooling trend on a nationallevel, price and activity gains are anticipated in some provinces.

Emotional reaction to recent economic and political instability did muchto dampen consumer confidence during the latter part of 2008, causing a markedslowdown in house sales activity. However, as a more rational understanding ofthe issues gains ground, together with a wide range of announced correctivemeasures, consumer confidence is anticipated to recover, prompting real estateactivity to pick up once again in the latter half of 2009. Further, Canada in2009 enjoys a stronger economic foundation than most countries and that shouldtemper the housing market correction. The combination of low inflation,reasonable employment levels and improving housing affordability, driven inpart by low mortgage rates, are anticipated to stimulate demand in the comingmonths.

"While Canada's housing market is anticipated to continue to move througha period of adjustment over the next six months, we should expect modestlylower home prices, not a U.S.-style collapse, which was brought on by astructural failure of the entire American credit system," said Phil Soper,president and chief executive of Royal LePage Real Estate Services. "Mostconsumers are not aware that nationally, Canadian housing market activitypeaked in 2007 and has been adjusting lower since. We are well into thisinevitable cyclical correction."

Added Soper: "While a grey cloud hangs over some markets, the sky is notfalling. In recent years, Canada has been a difficult place to be a purchaserof real estate, particularly for first-time buyers. When real estate marketscorrect, inventory levels rise, providing buyers choices instead offrustrating bidding wars. In 2009, appropriately-priced homes will still sellfor fair value."
The housing market is expected to perform quite differently from regionto region across the country. In many mid-sized cities where home pricesremain below the national average, such as Regina and Winnipeg, prices areexpected to increase moderately through 2009, as home ownership remainsparticularly affordable. The most significant price decreases are forecast forCanada's most expensive city, Vancouver, which has experienced above averageprice increases for most of the decade. The correction is a natural cyclicalreaction to an extended period of high price appreciation. Vancouver'sfundamentals, including growing population figures and the positive economicspinoffs expected from the 2010 Olympics, remain very positive.

Observed Soper: "For several years, Vancouver experienced aggressiveprice run-ups in response to overwhelming levels of demand - conditions, whicheventually reached a tipping point. While buyers will be acquiring propertiesfor less in 2009, it is important to note that prices are coming down fromall-time record levels."

Secondary Ontario markets heavily populated by people working in themanufacturing sectors are also anticipated to experience greater than averagedeclines in house prices and activity levels in 2009. In contrast, real estatein Montreal and Ottawa is poised to remain stable, with average house pricesrelatively flat through 2009.

After moving through a period of correction that started in 2007, wellbefore other regions in the country, both Calgary and Edmonton's housingmarkets are anticipated to return to a growth state later in 2009,characterized by stable average house prices and increased unit sales. Despiteslowdowns and delay with some major energy projects, Alberta's economy remainsone of the strongest in Canada.

Looking east, Halifax's real estate market is expected to experience verymodest price appreciation through 2009. After experiencing strong priceincreases over the last year and a half, the market has hit its capacity forabsorbing rising prices and activity levels. The city's diversified array ofindustries is expected to bolster the economy and continue to create solidemployment opportunities, stabilizing home values.

Canadians have been confused and justifiably skeptical of the efforts ofthe worlds' central banks and governments to combat the global economiccrisis. There is broad belief, however, that Canada's financial house is inbetter shape than many peer countries, particularly the U.S. While the federaland most provincial governments have been slow to implement economic stimuluspackages, they enjoy broad public support in principle. Together with theactions taken by the Bank of Canada, the positive impact on consumerconfidence stemming from infrastructure spending announcements and otherstimulus programs is expected to be significant.

Concluded Soper: "We believe that the Canadian economy will struggleearly in 2009, but that conditions will progress continually throughout theyear. Improving credit markets, the stimulative impact from a weaker Canadiandollar, together with the implementation of large fiscal stimulus initiatives,set the stage for a return to growth in the second half of 2009."
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Global Economic Woes

No country is impervious to the current economic woes being felt aroundthe world. The poor performance of the equity markets and the constant streamof pessimistic economic news had a very negative impact on housing activity inCanada in 2008. Consumer confidence is expected to slowly recover during 2009as the impact of the many corrective actions introduced and announced takesroot.

Tempered, but continued growth in emerging economies, particularly China,India and Brazil, should mitigate the downside risk to Canadian commodityexporters.

Foreclosure Figures in Canada

Foreclosure rates in Canada are expected to increase, but remain verylimited, especially when compared to the U.S. experience, where a broadstructural failure of the credit system occurred. Canada's relativelyinsignificant subprime market, and in turn, the low number of Canadianscontractually committed to very risky mortgages, should result in aforeclosure rate of insufficient volume to impact house prices or transactionactivity.

Employment Rates

Across the country, employment rates are expected to erode somewhat in2009, but remain at long-term healthy levels. Some areas in Ontario, and to alesser extent Quebec, that have high levels of manufacturing jobs, mayexperience greater than national average unemployment. Areas in Alberta tiedto the energy sector may see short-term employment declines, but theprovince's tight overall labour market is expected to mitigate the downside.

Interest Rates

The Bank of Canada's overnight target-lending rate, already at very lowlevels, is expected to be reduced again early in 2009. This should bode wellfor home buyers in 2009 as loosening credit spreads allow banks to offer moreaggressively priced mortgages.

<< 2009 Market Survey Forecast - Average House Prices
------------------------------------------------------------------------- 2009 2008 Market 09/08% Forecast Projected 2008/2007 2007 2006 -------------------------------------------------------------------------
Halifax 1.0% $234,300 $232,000 7.2% $216,339 $203,178
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Montreal -1.0% $254,400 $257,000 4.3% $246,500 $215,659
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Ottawa 0.0% $291,000 $291,000 6.6% $273,058 $257,481
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Toronto -4.0% $364,800 $380,000 0.8% $377,029 $352,388
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Winnipeg 4.0% $204,900 $197,000 20.5% $163,500 $151,983
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Regina 6.0% $243,300 $229,500 38.6% $165,613 $131,851
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Calgary -1.0% $402,000 $406,000 -1.9% $414,066 $346,675
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Edmonton 0.0% $333,000 $333,000 -1.7% $338,636 $250,915
-------------------------------------------------------------------------
Vancouver -9.0% $540,100 $593,500 4.0% $570,795 $509,876
-------------------------------------------------------------------------
Canada -3.0% $295,000 $304,000 -1.1% $307,265 $276,974
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