Financial Update For Feb. 26, 2010

• TSX +109.61
• DOW -53.13 On the data front, demand for a wide range of U.S. manufactured goods unexpectedly fell in January, while new applications for jobless benefits rose again last week, suggesting a step back in the economic recovery.
• Dollar -.48c to 94.40cUS as market players fled to the greenback and other safe havens on worries about possible downgrades to Greece's sovereign debt and sluggish U.S. economic data
• Oil -$1.83 to $78.17US per barrel.
• Gold +$11.30 to $1,107.80 USD per ounce


David Rosenberg took your questions on housing In December, 2009, economist David Rosenberg wrote, “Is the Canadian housing market in a bubble? It sure looks that way.” (Floating high on a delicate housing bubble)
Two months later, Mr. Rosenberg reasserted his views in another column, arguing, “the hot Canadian housing market is now likely to burn even brighter in coming months... While there may be a healthy debate as to whether there is a bubble or not in the Canadian housing market, suffice it to say that residential mortgage balances relative to disposable income just hit 92 per cent which is exactly where this ratio was in the U.S. in 2005 when the mania was about to morph into a full-fledged bubble. It was barely a year later that the process of mean reversion began its course.”
Mr. Rosenberg took your questions on real estate, the economy and bubbles in a live discussion. You can view it by clicking on the Cover It Live box below.
Mr. Rosenberg received both a Bachelor of Arts and Masters of Arts degree in economics from the University of Toronto. Prior to joining Gluskin Sheff in 2009, he was chief North American economist at Bank of America-Merrill Lynch in New York and before that, he was a senior economist at BMO Nesbitt Burns and Bank of Nova Scotia.
Mr. Rosenberg has ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and was on the U.S. Institutional Investor All American All Star Team for the last four years, and was ranked second overall in the 2008 survey. Mr. Rosenberg also ranked fourth out of 104 economists in the 2009 Thompson-Extel survey of global portfolio managers.
when do we expect housing correction for the prices to come to down to reality.
10:38 Tony S.
David RosenbergDavid Rosenberg: ]
I expect the correction to begin sometime in the second half of this year



Looking on a 3-5 year horizon and with the likely chance of (significant?) interest rate hikes, is this likely to be a period where fixed rate mortgages are better than variable

David Rosenberg:
I found looking at historical data that sticking with shorter-term mortgages made more sense the vast majority of the time .... only when the Bank of Canada moves so aggressively as to invert the yield curve has this not been the case ... and I doubt Mr. Carney is going to do that in the context of a highly uncertain economic outlook.

Have you had the opportunity to study the Canadian real estate market during the last serious correction during 91-94? In light of everything that has happened to the global (& Canadian) economies and the increased amount of leverage in the system, what do you conclude about the potential severity of the peiod ahead relative to the prior correction?
10:43 George g
David Rosenberg:
The major difference is that back in the early 1990s John Crow had a perceived inflation problem on his hands and interest rates surged to double-digits .... and we had much more speculation back then (flipping). The more acute problem this time around surrounds the degree of leverage that has been applied to purchase residential real estate and the thin layer of home equity that buyers over the past two years have considering the easing in CMHC guidelines. While interest rates are not as big a problem now, one has to wonder how the excessive price today is going to crowd out potential new entrants .... as was the case south of the border around the summer of 2006.


What about smaller markets (i.e. NOT Toronto and Vancouver)? I'm in London, ON and housing prices don't seem to be much different than usual. I'm thinking of trying to buy in the next year or so. Are smaller markets just behind the trend or not affected?
10:59 sgoodwin
David Rosenberg:
I accept the premise that much of the overvaluation is in the urban areas, especially Toronto and Vancouver. But I shudder somewhat because I recall all too well in 2005 and 2006 about how the bubbles were regional and concentrated in Florida and California. Hindsight shows it was a lot more national than people were willing to acknowledge. Smaller markets are probably more stable -- that would not surprise me.

Our banks are heralded as among the best and safest in the world....will a downturn in real estate valuations change that view?
11:02 Joel M.
David Rosenberg:
Since the vast majority of the mortgages that have been issued in the last 1-2 years have been CMHC-insured, then the risk is more on the taxpayer than it is on the banks. Of course, there are second-round impacts from a housing correction (in terms of impairing consumer ability to pay off other loans) that could pose a risk but the Canadian banks are not nearly as vulnerable to a housing shock as their U.S. brethren were









Do you think it will be an actual downturn, or will we see a more balanced market as time goes on? I feel the demand will outweigh supply for quite a while, and so I just don’t see how prices will fall.
David Rosenberg:
They could move higher near-term indeed if there is a demand rush ahead of the CMHC changes, the sales tax harmonization in Ontario and BC and the broad expectation that the Bank of Canada starts to hike this summer. All these factors could "bring foward" housing demand and add more froth to prices this spring before they come down to earth. Good point.
I think that we will see a short-term boost to demand followed by a sharp slowing in the second half of the year. Meanwhile, the builders are boosting production of homes and condos ... keep a close eye on the unsold inventory data going forward.