Our debt isn’t like their debt

http://business.financialpost.com/2012/10/30/canada-need-not-fear-u-s-style-housing-crash-cibc/

CIBC Deputy Chief Economist Benjamin Tal sounds like he’s getting tired of the comparisons linking the Canadian housing market to a U.S. style crash.

Canada is just not going to have a severe crash, he says in a report dubbed “Should We Worry About a U.S. Style Housing Meltdown?

You could lose a “night’s sleep” if you glance at charts comparing U.S. household debt and prices before their correction with today’s Canadian housing market but Mr. Tal says a closer look reveals vast differences.

“To be sure houses prices in Canada will probably fall in the coming year or two but any comparison to the American market of 2006 reflects a deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today’s Canadian market,” says the economist.

He lays out a number of myths used to compare the two markets, listing everything from the difference in the quality of debt to the false assumption that most Americans had long-term 30-year mortgages before the crash.

“I just think the comparisons are irrelevant,” says Mr. Tal. “There are two different questions. Are we slowing? Yes, we are slowing. But not every slowdown should be a U.S. type crash. Just because it happened there doesn’t mean it happens here.”

The Canadian Real Estate Association said this month that September sales across the country were down 15.1% from a year ago. Many commentators expect prices to fall next but CREA said last month’s average sale price of was up 1.1% from a year ago.

Interestingly enough, Mr. Tal says some of the defences used to explain how the Canadian housing market is different than the U.S. probably are not valid.

For starters the low rate of mortgage arrears means nothing, it was just as low before the U.S. crash. Canada is a recourse country where borrowers in every province but Alberta can go after a homeowner’s other assets but that’s not much different than America where only 12 states are non-recourse states. Mortgage industry deductibility has long been seen as a contributor to the U.S. housing crash but only about 15% of Americans use that tax break, says Mr. Tal.

But the economist doesn’t need those excuses. He says the debt-income ratio in Canada is high but look at the quality of debt which rose quickly in the U.S. with almost 22% of the market considered risky — some of those people with a negative equity position even before prices crashed. In Canada, you must have a minimum of a 5% down payment.

While the 30-year fixed rate mortgage has long been the U.S. standard, 80% of new mortgages in the U.S. went for an adjusted rate mortgage leading up to the crash. Those mortgages had teaser rates for two to three years that were almost 4.25 percentage points below prevailing rates.

“[That teaser] expires and overnight you’ve got two years worth of [Federal Reserve] increases in one day, that’s a shock,” says Mr. Tal.

He says the Canadian market has room for a soft landing which is what Australia experienced recently. “They demonstrated there is such a thing as a soft landing, interest rates went up and prices went down by 7% to 8%.”

So why are we so obsessed with comparing ourselves to the U.S.? Mr. Tal says it’s normal. “It makes sense because it happened in the U.S. and everybody was talking about it and we are going through a significant increase in house prices. I can understand why people do it but it should be based on fact.”

Interest rates to rise before end of 2014, governor Mark Carney suggests

by Julian Beltrame on Wednesday, October 31, 2012 6:06am

OTTAWA – Bank of Canada governor Mark Carney is suggesting interest rates will likely rise before the end of 2014.

It’s one of the clearest indications Carney has given as to when he might raise the bank’s key benchmark, which has been held at one per cent for more than two years.

Responding to a question in the Commons finance committee Tuesday afternoon, the bank governor said the bank’s current thinking was that monetary policy will need to be tightened before 2015.

Last week, Carney inserted the phrase “over time” to give markets guidance on when the bank’s trendsetting rate might be increased. Tuesday’s response was somewhat more detailed, but still pointed to no immediate plans.

“We have in this projection … some modest withdrawal of monetary policy stimulus over the course of the projection, which runs until the end of 2014,” he said. “In other words in advance of 2015.”

Carney added that whenever he does move, it will be when global and domestic factors dictate. And he reiterated his recent guidance that he will also take into account household debt in his decision.

At the moment, he said the country still needs super-low interest rates to stimulate the economy and create jobs.

Canada may have recovered all the jobs it lost in the recession, and added an additional 380,000, he said, but the economy still has a way to go before returning to what would be considered full employment.

“We are in still in position where there are more Canadians who want to work than are working, and the level of involuntary part-time (workers) is still elevated,” he explained.

“They illustrate a degree of slack that still exist in the labour market, which is one reason our monetary policy continues to be and should be accommodative.”

Most private sector economists have pencilled in late 2013 or early 2014 for the first bank action.

The bank governor was appearing before the committee to explain his latest economic outlook released last week that projected growth of 2.2 per cent for this year, followed by a 2.3 per cent advance in 2013 and 2.4 in 2014.

That is slightly more optimistic than the economists’ consensus estimate handed to Finance Minister Jim Flaherty on Monday for the government’s fall update projections, which will be released in a few weeks.

Carney continued to blame global factors for most of the drag on the economy. But he said government restraint is also contributing to slower growth, although not as much as some have suggested.

He estimated the public sector will contribute about 0.3 percentage points to growth in 2013 and 2014. That’s about half the historic level and well down from when Ottawa and provincial governments were pumping billions into the economy during the 2008-09 recession and early stages of the recovery.

“So it’s positive but not as much as previously,” he said. Government restraint was a modest 0.2 percentage point constraint in 2012, however, the bank report shows.

Carney even ventured to assess the economic impact of the destruction caused by superstorm Sandy, which early estimates put at $20 billion.

While the economy will take a hit immediately, over the long term needed reconstruction in the eastern U.S. states will largely recoup the losses.

“There are activities that can never be redone, for instance a visit to a restaurant. Then there is restructuring (which creates economic activity). In general, it tends to be a relatively negligible impact over time,” he said.

For the full article and details visit Macleans at http://www2.macleans.ca/2012/10/31/interest-rates-to-rise-before-end-of-2014-governor-mark-carney-suggests/

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Housing Market sees slight changes in October - REBGV, November 2nd, 2012

The Greater Vancouver housing market saw a slight increase in the number of home sales, a slight reduction in the number of listings, and a slight decrease in home prices in October compared to the summer months. With those changes, the sales-to-active-listings ratio increased to 11 per cent in October from 8 per cent in September.

The Real Estate Board of Greater Vancouver (REBGV) reported 1,931 residential property sales of detached, attached and apartment properties on the region’s Multiple Listing Service® (MLS®) in October, a 16.7 per cent decline compared to the 2,317 sales in October 2011 and a 27.4 per cent increase compared to the 1,516 home sales in September 2012.

October sales were 28.5 per cent below the 10-year October sales average of 2,700.

“Buyer demand increased slightly in October compared to the previous few months,” Sandra Wyant, REBGV president-elect said. “Overall conditions in today’s market remain in favour of buyers, with low interest rates, more choice, and less time pressure in terms of decision-making. This translates into a calmer atmosphere for those looking to buy a home and it places more onus on sellers to ensure their homes are priced to compete in today’s marketplace.”

New listings for detached, attached and apartment properties in Greater Vancouver totalled 4,323 in October. This represents a 1.2 per cent decline compared to October 2011 when 4,374 properties were listed for sale on the MLS® and an 18.8 per cent decline compared to the 5,321 new listings in September 2012.

At 17,370, the total number of residential property listings on the MLS® increased 12 per cent from this time last year and declined 5.3 per cent compared to September 2012.

Since reaching a peak of $625,100 in May, the MLS Home Price Index® (MLS HPI®) composite benchmark price for all residential properties in Greater Vancouver declined 3.4 per cent to $603,800 in October. This represents a 0.8 per cent decline compared to last year.

“There’ve been modest price changes since they peaked in the spring. The largest reductions have occurred in the areas and property types that experienced the biggest price increases over the last few years,” Wyant said.

Since hitting a record high in April, the benchmark price of a detached home on the Westside of Vancouver has declined 8.6 per cent while detached homes in Richmond and West Vancouver have seen declines of 6 per cent over the same time period.

Sales of detached properties in Greater Vancouver reached 790 in October, a decrease of 18.9 per cent from the 974 detached sales recorded in October 2011, and a 19.1 per cent decrease from the 976 units sold in October 2010. Since reaching a peak in May, the benchmark price for a detached property in Greater Vancouver has declined 4.1 per cent to $927,500.

Sales of apartment properties reached 803 in October 2012, a 16.2 per cent decrease compared to the 958 sales in October 2011, and a decrease of 18.4 per cent compared to the 984 sales in October 2010. Since reaching a peak in May, the benchmark price for an apartment property in Greater Vancouver has declined 2.9 per cent to $368,800.

Attached property sales in October 2012 totalled 338, an 11.5 per cent decrease compared to the 382 sales in October 2011, and a 10.3 per cent decrease from the 377 attached properties sold in October 2010. Since reaching a peak in April, the benchmark price for an attached property in Greater Vancouver has declined 2.9 per cent to $457,700.

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