Australia central bank raises interest rates article below is an interesting read on interest rates in Australia, as the Australian market resembles the Canadian mortgage market in many ways.
Economy improving, but interest rates to stay at historic lows for now
• TSX +100.25 as commodity prices rallied and impressive quarterly results from Bank of Montreal lifted the index's heavily weighted financial sector.
• DOW +2.19 .
• Dollar +.47c to 96.48cUS
• Oil +$.98 to $79.68US per barrel.
• Gold +$19.10 to $1,16.90 USD per ounce
By Julian Beltrame, The Canadian Press
OTTAWA - The Bank of Canada is keeping interest rates at historic lows for a few more months, while sending out signals that the economy is rebounding strongly and could trigger inflationary pressures.
The central bank's more positive take on the economy followed a Statistics Canada report Monday of a surprising five per cent growth spurt in the fourth quarter of 2009 and sent a strong loonie even higher.
"The level of economic activity in Canada has been slightly higher than the bank had projected in January," the bank said Tuesday morning before markets opened.
"The economy grew at an annual rate of five per cent in the fourth quarter of 2009, spurred by vigorous domestic spending and further recovery in exports."
"Slightly higher" may be an understatement, as the bank had projected growth of only 3.3 per cent for the last three months of 2009.
The bank also noted that "core inflation" has been slightly firmer than projected, although it added that some of the price increases were due to transitory factors.
The governing council continued to reiterate that despite the improved conditions, they would likely leave the overnight rate where it has been since last spring - at 0.25 per cent - until at least July.
But some economists weren't buying it and the reaction of money markets suggested that there may be some pressure on governor Mark Carney to move on interest rates ahead of schedule.
"They are getting ready to take away the punch bowl," said Derek Holt, vice-president of economics with Scotia Capital.
"I think they are priming the markets for a second-quarter hike."
The next interest rate announcement comes in April, but June would be a more likely time to move, said Holt, if indeed the bank is preparing to act. http://ca.news.finance.yahoo.com/s/02032010/2/biz-finance-economy-improving-interest-rates-stay-historic-lows.html
Australia central bank raises interest rates
Wayne Cole, Reuters
SYDNEY-- Australia's central bank raised its benchmark interst rate by 25 basis points to 4.0% on Tuesday and flagged further hikes ahead, saying a surprisingly strong recovery allowed it to move policy toward more normal settings.
Interest rate futures slid as investors priced in further gradual hikes from the Reserve Bank of Australia (RBA). A rise in April was seen as unlikely but the odds of an increase in May were evenly split and almost fully priced in for June.
"It is very likely the RBA will hike again in the next three months," said Rory Robertson, interest rate strategist at Macquarie. "It's a ‘normalisation' of policy given the economy has performed better than anyone dreamed a year ago."
This was the fourth increase in five policy meetings, putting Australia far ahead of most other rich nations where rates are at 1% or less.
Indeed, RBA Governor Glenn Stevens flatly stated that lending rates were still below average and Tuesday's move was just a step toward getting back there.
"With growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average," Stevens said in a statement.
Last month he estimated a more normal range for lending rates would be between 4.25 and 4.75%, and investors assume the bank will get to the top of that band by year-end.
Interbank futures are fully priced for a move to 4.25% by July, and then in stages to 4.75% by December. One-year swap rates edged up to 4.65%.
Reaction in the currency market was restrained as the Australian dollar had already risen sharply in recent days, hitting a record high on the euro and a 25-year peak on sterling.
Treasurer Wayne Swan spun the hike as a sign of Australia's relative strength. Rising mortgage rates are always unpopular in a country obsessed with home ownership.
"The economy is recovering and rate rises are an inevitable consequence of a recovering economy that is outperforming the rest of the world," Swan told reporters.
BACK TO GROWTH
His optimism should be supported by figures due on Wednesday which are expected to show the economy grew by a solid 0.9% in the fourth quarter of 2009, a marked step up from 0.2% the previous quarter.
Growth for the year is seen accelerating to around 2.4%, from a pedestrian 0.5% in the third quarter.
Some of that revival was courtesy of fiscal stimulus which saw public spending jump 3.8% last quarter, the biggest rise in a decade. That alone should add 0.9%age points to gross domestic product (GDP) in the quarter.
By concentrating on the labour-intensive building sector, the fiscal splurge also helped keep people in jobs and was one reason unemployment surprised everyone by falling late last year.
The drop in the jobless rate to just 5.3% in January from a high of 5.8% in October, is a critical plank in the case for higher interest rates.
And there was more evidence the revival had gathered steam this year. Data out Tuesday showed retail sales jumped 1.2% in January, well above forecasts for a 0.5% gain and a return to growth after December's 0.9% drop.
Retail sales account for around 23% of GDP and the sector is the biggest single employer.
"It all hints at a consumer little affected by higher borrowing costs and is spending without any fiscal assistance," said Su-Lin Ong, senior economist at RBC Capital Markets.
"The bottom line is that a 3.75% cash rate was too low for an economy that is returning to 3%-plus growth, underpinned by a recovery in the terms of trade, and with limited capacity in both goods and labour markets," she added.
The buoyant outlook for trade was underlined by the country's official commodities forecaster which predicted that exports of liquefied natural gas would nearly double by 2014/15, while exports of iron ore could rise almost 70%.
If correct, that would deliver a huge windfall to Australian profits, investment, wages and tax receipts and is a major reason the RBA is so bullish on the country's longer-term outlook.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2631549#ixzz0h3vSj2ws
Wednesday, March 3, 2010
Tuesday, March 2, 2010
Financial Update For March 2, 2010
Pressure grows for Bank of Canada to hike rates
Economist calls for better policies, not bank bailouts
• TSX +98.43 amid signs that Canada's economy was surprisingly strong at the end of 2009 as Statistics Canada reported that the country's Gross Domestic Product expanded at a 5% annualized rate in the fourth quarter 2009, and a well-received report on the U.S. manufacturing sector.
• DOW +78.53 as investors welcomed AIG's $35.5 billion U.S. asset sale of its Asian life insurance operations to Prudential, and talk of mergers in the pharmaceutical sector and a better-than-expected report on consumer spending.
• Dollar +.95c to 96.01cUS
• Oil -$.96 to $78.70US per barrel.
• Gold -$.50 to $1,117.80 USD per ounce
Pressure grows for Bank of Canada to hike rates
Paul Vieira, Financial Post
OTTAWA -- Pressure on the Bank of Canada to move early on raising interest rates mounted Monday after data on fourth-quarter gross domestic product suggested the economy is roaring its way out of recession after recording the fastest pace of growth in nearly a decade.
The central bank could provide hints of a change Tuesday morning when it releases its latest statement on interest rates. Its plan for almost a year has been to conditionally keep its benchmark rate at 0.25% until July in an effort to pump up economic growth after the great recession.
Data from Statistics Canada suggest the emergency-level rates have worked their magic, perhaps faster and better than anticipated.
The economy expanded 5% in the final three months of 2009, blasting past market expectations for a 4% gain - and the bank's own 3.3% forecast - and setting the stage for robust growth this quarter. It is also the fastest pace of quarterly economic growth since late 2000. Further, the data were solid across the board, with personal consumption and net trade contributing to the performance.
Third-quarter data were also revised upward, with growth of 0.9% as opposed to the original 0.4% reading.
This comes on top of January inflation data that indicated price increases have moved closer to the central bank's 2% target earlier than envisaged.
"With growth being stronger than expected and inflation sticky ... we remain of the view that the Bank of Canada has the full green light to hike as emergency conditions have passed and with it justification for sticking to the zero lower bound on rates," said economists Derek Holt and Karen Cordes from Scotia Capital.
Yanick Desnoyers, assistant chief economist at National Bank Financial, said a rate hike could come as early as next month, when data might show the output gap - or the amount of slack in the economy - is narrowing faster than the central bank expected.
He added the headline GDP data might be underestimating how quickly economic slack is being absorbed. For instance, gross domestic income – or the sum of all wages, corporate profits and tax revenue – climbed by 8.5% in the quarter, the best showing since 2005. And that follows a 4.5% gain in the third quarter.
Sheryl King, chief economist and strategist at Bank of America/Merrill Lynch Canada, said she expects a rate hike in June, based on a belief the central bank will want to see through its conditional pledge for as long as possible.
Among the data points she said she found most encouraging was a 4% gain in real wage growth – defined as gains in household income excluding transfers from governments. The last time there was growth in this category was prior to the recession.
"This signals that risk taking and organic growth is coming back in Canada," she said.
Of course, not all analysts believe the data will push Bank of Canada governor Mark Carney to veer off course. Douglas Porter, deputy chief economist at BMO Capital Markets, said the data surely raises the odds of a July rate rise but anything earlier than that remained remote. Analysts at TD Securities also shared a similar view.
Also, the data contained one key blemish – a 9.2% drop in machinery and equipment investment by Canadian companies, which does not bode well for efforts to boost abysmal productivity levels.
The GDP data attracted investors, as the Canadian dollar gained a full US1¢, to US96.01¢, on the possibility of an early rate hike.
Canadian growth should remain robust as the global recovery takes hold. Business surveys released Monday indicated manufacturers continue to lead the recovery, with factory activity expanding last month across Asia, the United States and Europe.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2628952#ixzz0gySOg5Bz
Bank bailouts would have benefitted from sober thought, U.S. economist says By Rose Simone, Record staff— Robert Pozen would never say “never” to the need for bank bailouts in a financial crisis.
But Pozen, chair of MFS Investment Management, which is part of Sun Life Financial, and author of Too Big to Save: How to fix the U.S. Financial System, argues there should at least be some criteria established in advance to determine which institutions really are “too big” to fail.
“Doing these things over a weekend when people are panicked is not the way to go,” Pozen said this week in a talk at the University of Waterloo sponsored by Sun Life.
Pozen said the United States treasury committed money to 690 different financial institutions in the aftermath of financial meltdown of 2008. The U.S. response, which was fashioned in crisis mode, resulted in virtually any institution, big or small, getting a bailout, he said.
Pozen also made the case for reform of mortgage rules in the United Sates.
He said the mortgage lending industry in Canada is on firmer ground because most banks still require a reasonable down payment, and people taking out mortgages are on the hook if they default.
But in the United States, “even today, 50 per cent of all mortgage loans are done through the Federal Housing Authority, with a down payment of three per cent, and you can get a tax credit for that three per cent.” Also, people who default on mortgages are not held personally liable.
The likelihood of default is high when “you have nothing to lose,” Pozen said.
Pozen also explained how the collapse of the U.S. housing market led to a worldwide financial crisis.
In the years prior to the crisis, the U.S. government was swimming in deficits. Meanwhile, in the crisis that followed the Sept. 11, 2001 terrorist attack, interest rates were brought down and held down for five years.
In a climate of low interest rates, “yield hungry” foreign investors got heavily into mortgage-backed securities (mortgage debts bundled together) that were sold around the world, Pozen said.
The rising deficit is the major problem for the United States today, Pozen said. The U.S. current accounts deficit is $1.6 trillion or 11 per cent of the GDP this year.
U.S. households are still on shaky ground, he added. One-third of homes in the U.S. are “underwater,” which means the mortgage owed exceeds the value of the house, Pozen said.
People at risk of default have been able to get “mortgage modifications” to spread out their payments over a longer period, but as interest rates rise, the risk of “redefault” in this group is high, he said.
Pozen argued for better policies and regulations, saying financial crises are not as uncommon as people would like to think. Even using a conservative definition, “you will witness at least two or three financial crises in the industrialized world in the next 10 years,” he said
Economist calls for better policies, not bank bailouts
• TSX +98.43 amid signs that Canada's economy was surprisingly strong at the end of 2009 as Statistics Canada reported that the country's Gross Domestic Product expanded at a 5% annualized rate in the fourth quarter 2009, and a well-received report on the U.S. manufacturing sector.
• DOW +78.53 as investors welcomed AIG's $35.5 billion U.S. asset sale of its Asian life insurance operations to Prudential, and talk of mergers in the pharmaceutical sector and a better-than-expected report on consumer spending.
• Dollar +.95c to 96.01cUS
• Oil -$.96 to $78.70US per barrel.
• Gold -$.50 to $1,117.80 USD per ounce
Pressure grows for Bank of Canada to hike rates
Paul Vieira, Financial Post
OTTAWA -- Pressure on the Bank of Canada to move early on raising interest rates mounted Monday after data on fourth-quarter gross domestic product suggested the economy is roaring its way out of recession after recording the fastest pace of growth in nearly a decade.
The central bank could provide hints of a change Tuesday morning when it releases its latest statement on interest rates. Its plan for almost a year has been to conditionally keep its benchmark rate at 0.25% until July in an effort to pump up economic growth after the great recession.
Data from Statistics Canada suggest the emergency-level rates have worked their magic, perhaps faster and better than anticipated.
The economy expanded 5% in the final three months of 2009, blasting past market expectations for a 4% gain - and the bank's own 3.3% forecast - and setting the stage for robust growth this quarter. It is also the fastest pace of quarterly economic growth since late 2000. Further, the data were solid across the board, with personal consumption and net trade contributing to the performance.
Third-quarter data were also revised upward, with growth of 0.9% as opposed to the original 0.4% reading.
This comes on top of January inflation data that indicated price increases have moved closer to the central bank's 2% target earlier than envisaged.
"With growth being stronger than expected and inflation sticky ... we remain of the view that the Bank of Canada has the full green light to hike as emergency conditions have passed and with it justification for sticking to the zero lower bound on rates," said economists Derek Holt and Karen Cordes from Scotia Capital.
Yanick Desnoyers, assistant chief economist at National Bank Financial, said a rate hike could come as early as next month, when data might show the output gap - or the amount of slack in the economy - is narrowing faster than the central bank expected.
He added the headline GDP data might be underestimating how quickly economic slack is being absorbed. For instance, gross domestic income – or the sum of all wages, corporate profits and tax revenue – climbed by 8.5% in the quarter, the best showing since 2005. And that follows a 4.5% gain in the third quarter.
Sheryl King, chief economist and strategist at Bank of America/Merrill Lynch Canada, said she expects a rate hike in June, based on a belief the central bank will want to see through its conditional pledge for as long as possible.
Among the data points she said she found most encouraging was a 4% gain in real wage growth – defined as gains in household income excluding transfers from governments. The last time there was growth in this category was prior to the recession.
"This signals that risk taking and organic growth is coming back in Canada," she said.
Of course, not all analysts believe the data will push Bank of Canada governor Mark Carney to veer off course. Douglas Porter, deputy chief economist at BMO Capital Markets, said the data surely raises the odds of a July rate rise but anything earlier than that remained remote. Analysts at TD Securities also shared a similar view.
Also, the data contained one key blemish – a 9.2% drop in machinery and equipment investment by Canadian companies, which does not bode well for efforts to boost abysmal productivity levels.
The GDP data attracted investors, as the Canadian dollar gained a full US1¢, to US96.01¢, on the possibility of an early rate hike.
Canadian growth should remain robust as the global recovery takes hold. Business surveys released Monday indicated manufacturers continue to lead the recovery, with factory activity expanding last month across Asia, the United States and Europe.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2628952#ixzz0gySOg5Bz
Bank bailouts would have benefitted from sober thought, U.S. economist says By Rose Simone, Record staff— Robert Pozen would never say “never” to the need for bank bailouts in a financial crisis.
But Pozen, chair of MFS Investment Management, which is part of Sun Life Financial, and author of Too Big to Save: How to fix the U.S. Financial System, argues there should at least be some criteria established in advance to determine which institutions really are “too big” to fail.
“Doing these things over a weekend when people are panicked is not the way to go,” Pozen said this week in a talk at the University of Waterloo sponsored by Sun Life.
Pozen said the United States treasury committed money to 690 different financial institutions in the aftermath of financial meltdown of 2008. The U.S. response, which was fashioned in crisis mode, resulted in virtually any institution, big or small, getting a bailout, he said.
Pozen also made the case for reform of mortgage rules in the United Sates.
He said the mortgage lending industry in Canada is on firmer ground because most banks still require a reasonable down payment, and people taking out mortgages are on the hook if they default.
But in the United States, “even today, 50 per cent of all mortgage loans are done through the Federal Housing Authority, with a down payment of three per cent, and you can get a tax credit for that three per cent.” Also, people who default on mortgages are not held personally liable.
The likelihood of default is high when “you have nothing to lose,” Pozen said.
Pozen also explained how the collapse of the U.S. housing market led to a worldwide financial crisis.
In the years prior to the crisis, the U.S. government was swimming in deficits. Meanwhile, in the crisis that followed the Sept. 11, 2001 terrorist attack, interest rates were brought down and held down for five years.
In a climate of low interest rates, “yield hungry” foreign investors got heavily into mortgage-backed securities (mortgage debts bundled together) that were sold around the world, Pozen said.
The rising deficit is the major problem for the United States today, Pozen said. The U.S. current accounts deficit is $1.6 trillion or 11 per cent of the GDP this year.
U.S. households are still on shaky ground, he added. One-third of homes in the U.S. are “underwater,” which means the mortgage owed exceeds the value of the house, Pozen said.
People at risk of default have been able to get “mortgage modifications” to spread out their payments over a longer period, but as interest rates rise, the risk of “redefault” in this group is high, he said.
Pozen argued for better policies and regulations, saying financial crises are not as uncommon as people would like to think. Even using a conservative definition, “you will witness at least two or three financial crises in the industrialized world in the next 10 years,” he said
Friday, February 26, 2010
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.
• 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.
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