Economy Headed For Tougher Times

[inchman]

You can ignore the reality and the math if you want.

My original point was that low interest rates are the primary reason why house prices are up. Low interest rates allow people to buy a home for a higher price with the same monthly payment. So even if a family only makes $60,000, for the same payment as I had, they can afford a home 4 times as expensive. In addition, low rates allow more people into the market, driving up demand, so prices go up more than just the 4x multiplier.

I never said current growth in real estate was sustainable but, IMO, any retraction won't be as bad as what happened in the US because rules here don't allow people to leverage their purchases as much as the US did. Plus the required down payments here mean people won't be as quick to walk away when they have challenges meeting their mortgage payments.

[airt]

quote "Plus the required down payments here mean people won't be as quick to walk away when they have challenges meeting their mortgage payments.

In the US , mortgage holders are able to legally walk away. Not in Canada (without declaring bankruptcy) , which also strenthens your arguement.

I do see trouble ahead though for those who bought much larger houses than they normally would because of low interest rates when those rates eventually rise to historic norms.

[deicer]

Summary of the markets at the end of the article.....

http://online.wsj.com/news/articles/SB10001424052702303824204579423222177487850?mod=WSJ_hpp_sections_yourmoney&mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303824204579423222177487850.html%3Fmod%3DWSJ_hpp_sections_yourmoney

That's because several of the stock-market indicators which have most reliably predicted a slump over the past century are doing so again. The so-called Cyclically Adjusted Price/Earnings ratio, also known as the Shiller P/E ratio after Yale economist and Nobel laureate Robert Shiller, compares share prices to average per-share earnings from the past 10 years.

The latest boom in the stock market has taken this measure above 25—an alarming level. The market topped 25 on the Shiller P/E just before the great Crash of 1929, for example, and before the 2000-2002 and 2007-2009 slumps. A Shiller P/E above 20 has usually been associated with poor stock-market returns over the following decade.

Stock Prices vs. Revenues

Similar readings can be found by looking at another measure, Tobin's Q, named after late Nobel-prize winning economist James Tobin. This compares stock prices to the cost of replacing company assets. U.S. stocks today also look expensive, by historical standards, when compared with annual domestic output or corporate revenues.

As a general rule, if you had invested in stocks when these indicators said stocks were cheap, you did very well indeed over the next 10 or 20 years. But if you had invested in stocks when these indicators said stocks were expensive, you did poorly. Right now all of these measures are signaling that stocks are expensive (as they have been for some time).

It's possible that these indicators are wrong this time. Corporate profits are buoyant, after all. The economy is recovering, house prices are up, and the labor market continues to heal. It isn't hard to see why investors are optimistic.

It's a feature of bull markets that the voices of caution gradually get drowned out completely by the growing chatter of the ticker tape and the ringing of cash registers.

The bears look and sound more foolish, until they finally give up and fall silent completely. It's an old saw on Wall Street that the boom won't end until the last bear turns bullish.

[Guest longtimer]

seems that there is improvement.

Canadians are in the money as wealth rises and household debt falls from record

‎Today, ‎March ‎14, ‎2014, ‏‎14 minutes ago | Theophilos Argitis, Bloomberg NewsGo to full article

The ratio of Canadian household debt to disposable income fell from a record in the fourth quarter as Canadian families slow their pace of borrowing.

Credit-market debt such as mortgages increased to 163.97% of disposable income, compared with a revised 164.20% in the prior three-month period, Statistics Canada said Friday in Ottawa. Mortgage debt rose 1.1% to $1.1 trillion ($1.0 trillion), compared with an average 1.8% in the past six years.

Related

Fixed interest rates may be better choice than variable for home buyers amid possible hike: BMO

Why starting small is the best way to tackle debt

Paying down debt remains top financial priority of Canadians, poll shows

Household debt accumulation helped Canada through the worst of the 2008 global financial crisis as low interest rates boosted debt-fuelled home buying. Still, Bank of Canada Deputy Governor John Murray said in a speech earlier this month the nation’s household sector is “now largely played out” and that pushing consumers further may “lead to trouble.”

Household net worth rose 3% in the fourth quarter, Statistics Canada said, led by a 5.9% gain in the value of equities. The value of household real estate rose 1.6% in the quarter.

The amount of equity that owners have in their homes as a percentage of real estate rose to 69.5% in the quarter from 69.4%, Statistics Canada said.

National net worth increased 2.7% to $7.73 trillion in the fourth quarter, Statistics Canada said. On a per capita basis, the gain was to $218,500 from $213,100.

Bloomberg.com

http://business.financialpost.com/category/news/feed/

[st27]

On a local scale, the job losses continue. 100 jobs down the drain in the small town of Kemptville. The Ontario premier, who is also the provinces minister of agriculture will have a tough time explaining this, from a rural or educational perspective:

http://www.recorder.ca/2014/03/14/pro-college-forces-align

[conehead]

On a local scale, the job losses continue. 100 jobs down the drain in the small town of Kemptville. The Ontario premier, who is also the provinces minister of agriculture will have a tough time explaining this, from a rural or educational perspective:

http://www.recorder.ca/2014/03/14/pro-college-forces-align

Wow.. this is a bad decision, wasn't even discussed with the local community. With the amount of money the province takes in from Colleges and Universities (and it's Big business), I'm sure they could keep open this one campus. I'll bet the reason they want to close it is that they don't get much enrollment from off-shore, cuz that's where the money is.

[st27]

The libs don't seem to be worried about going in to the impending election....guess they figure rural ont is pc country... a lost cause... after tax increases, wind turbines, green energy plan etc..

[Guest longtimer]

Following is only part of the article, for the rest goto

http://globalnews.ca/news/1207863/whats-behind-ontarios-job-market-woes-hint-not-the-recession/

March 14, 2014 5:23 am

What’s behind Ontario’s job market woes (hint: not the recession)

By Anna Mehler Paperny Global News

THE CANADIAN PRESS/Ryan Remiorz

•23 per cent of unemployed Ontarians have been out of work for 27 weeks or more.

•32 per cent of those working part-time would prefer full-time work.

•28 per cent of Ontario’s unemployed receive EI.

Ontario’s labour dysfunction is more than a recessionary ripple effect, a new paper finds: It’s been more than a decade in the making.

If you’re working, you’re more likely to be underemployed; if you’re unemployed, your chances of being unemployed for a long time have grown even as the percentage of jobless people covered by EI shrinks.

‘It’s been a slow-moving train’

• Statistics Canada says the number of people receiving regular employment insurance benefits decreased in September by 1.4 per cent compared with the previous month. Canadian economy sheds 7,000 jobs, unemployment rate stable

• Unemployment rate in Saskatchewan drops in August; employment levels also drop. Immigrant unemployment: The more education, the bigger the gap

• Heinz has agreed to terms with workers at its Leamington, Ontario facility. The plant, which has been in use since 1909, will shut down in late June. Heinz announces deal on Ontario plant to keep some jobs

Canadian Centre for Policy Alternatives economist Kaylie Tiessen set out to study the recession’s impacts on Ontario workers. She quickly realized she’d have to alter her time frame.

“It’s been a slow-moving train that’s been coming for some time,” she said.

Many of the trends she found date back to the turn of the century.

The hollowing out of manufacturing and rise of the service industry are perhaps the most well-known among them.

Working part time – but not by choice

But Tiessen also found, as the growth of part-time and temporary work swiftly outpaced the growth in full-time and permanent work, a 43 per cent increase in the number of part-time workers who’d rather be working more – an indicator of underemployment or precarious employment that doesn’t show up in unemployment rates.

In 2013, almost a third of Ontarians working part time (32 percent) would rather work full time. That’s significantly higher in Ontario than the rest of Canada – the inverse of what this looked like 14 years ago.

McMaster University labour studies professor Wayne Lewchuk has found precarious employment and the financial uncertainty it creates can be bad for your health but also strain communities as a whole.

[Lakelad]

.

No CEOs paid price for 2008 meltdown. Here’s why

The U.S. financial sector drained taxpayers of $12.6 trillion in bailouts and more than 8 million jobs in North America. Why have no top CEOs gone to jail?


Fri Mar 14 2014 - Toronto Star
David Olive

With the statute of limitations close to expiring on the latest crop of “malefactors of great wealth,” as Theodore Roosevelt labelled reckless graspers in the business world, the question arises if any of the Wall Street culprits who triggered the Great Recession will ever be put behind bars.

Don’t hold your breath.

In most cases, U.S. prosecutors have five years from the time of an alleged offence to lay criminal charges. None have been laid against the 25 to 100 masters of the universe most commonly cited as architects of the Great Recession.

That rogues gallery includes the likes of Robert Rubin, the top Citigroup Inc. executive who earlier, as U.S. treasury secretary, set the piratics in motion by relaxing financial regulations, and at Citi encouraged the high-risk activity that imperilled the bank; and Angelo Mozilo, who super-charged the record U.S. housing boom and bust by providing mortgages for a fee to anyone with a pulse.

The dearth of criminal charges is mightily suggestive that no one will go to jail over the biggest economic catastrophe since the Dirty Thirties.

We’ll get to why that is in a moment. For now, it’s important to measure the cost of the catastrophe.

Recall that every major economy save Canada had to bail out its banking systems. Europe continues to do so. The U.S. financial sector, now sound, drained taxpayers of $12.6 trillion in bailout funds.

In North America, 400,000 Canadians lost their jobs and household income, while in the U.S. more than eight million workers were rendered jobless through no fault of their own. Unemployment rates across Europe, to which the U.S. contagion spread, remain in double digits in France (10.2 per cent) and Italy (12.9 per cent), and approach Great Depression levels in Spain (26 per cent) and Greece (27.5 per cent).

That hardship in the general population has required the infusion of state deficit financing to stimulate economic rebounds, from Ottawa to Berlin to Washington to Rome. Late last year, the Dallas Federal Reserve estimated that, even assuming the U.S. climbs out of the economic doldrums, the financial crisis will cost that country as much as $14 trillion — or about 90 per cent of GDP — to cover increased spending on social assistance.

In the previous epidemic of white-collar crime in the corner office, many CEO miscreants did go to jail, including those at Enron Corp., WorldCom Inc., Tyco International Ltd. and Adelphia Communications Corp. Even Conrad Black was caught up in that dragnet, ultimately serving 37 months in U.S. prison for 2007 convictions of fraud and obstruction of justice.

Yet the immensity of the later Wall Street malefactors and their counterparts in Europe utterly eclipsed the damage done by the individuals above, who didn’t remotely threaten the workings of the global economy.

'So there it is, society’s to blame. “Right, we’ll be charging him too,”

.

[mrlupin]

The Economist on Canada...

http://econ.st/1iVRMyG

[mrlupin]

Household debt in Canada continues to rise against incomes...

[Guest longtimer]

Where did you get that last chart from???

Never mind I found the reference and like most charts the narrative is more interesting than the chart itself.

http://www.huffingtonpost.ca/2014/05/09/canadas-665000-missing-jobs_n_5296395.html

the story is based on information provided by:

Jim Stanford

Jim Stanford is an Economist with Unifor, the new union formed in 2013 from the merger of the Canadian Auto Workers (CAW) and the Communication Energy and Paperworkers' (CEP). Unifor represents over 300,000 members in over 20 economic sectors. Jim received his PhD in Economics in 1995 from the New School for Social Research in New York, and also holds economics degrees from Cambridge University and the University of Calgary. He is the author of Economics for Everyone (published in 2008 by Pluto Press and the Canadian Centre for Policy Alternatives), which has been translated into six languages. He writes an economics column for the Globe and Mail, and is a member of CBC TV's regular National News economics panel, "The Bottom Line." He lives in Toronto with his partner and two daughters. Jim's column appears in rabble courtesy of the Globe and Mail.

http://rabble.ca/category/bios/columnist/jim-stanford

[mrlupin]

Canadian housing bubble one of the biggest in the world according to IMF...

http://www.cbc.ca/news/business/imf-warns-on-house-prices-in-canada-and-elsewhere-1.2673122

Canada is right near the top of the list of countries the IMF says has a dangerously overvalued housing market.

Prices in Canada are 33 per cent above their historical average when compared to incomes and 87 per cent above their historical average compared with rents.

[mrlupin]

[mrlupin]

And house prices to rent...

[Trader]

From the Washington Post Poloz Debuts Bolstered Risk Paper With Canada Housing Focus

Greg QuinnJun 12, 2014 1:56 pm ET

(Updates with Poloz comments from fourth paragraph.)

June 12 (Bloomberg) -- Bank of Canada Governor Stephen Poloz said the country’s financial system is threatened by risks from indebted consumers and a domestic housing boom as well as European and Chinese banks, emphasizing his concern through a revamped report and inaugural press conference devoted to these stresses.

The threat that China’s growing shadow banking system could disrupt financial markets has grown to “elevated” from “moderate” since December, the central bank said today in its semi-annual Financial System Review. There are elevated risks of a sharp correction in Canadian home prices and of financial stress coming from the euro area, the report said.

Poloz increased his focus on financial risks today by holding a press conference in Ottawa, the first ever devoted to the expanded 70-page report. The emphasis on the financial system as part of the bank’s inflation-targeting regime aligns Canada with counterparts such as the Bank of England and European Central Bank, which grappled with deeper recessions and bank bailouts after the 2008 credit crunch.

Canada’s main risk is “stretched valuations and some signs of overbuilding” in the housing market, Poloz, 58 said at the press conference. “After weighing the risks to financial stability through our improved framework and applying judgment, our level of comfort as policy makers remains similar to what it was six months ago.”

The report also identified a “moderate” risk of a jump in global long-term interest rates, tied to potential market reaction to the speed of monetary stimulus being unwound by the U.S. Federal Reserve. The report’s five risk categories are low, moderate, elevated, high and very high.

Housing Strength

Canada’s housing market has continued to show strength after the government tightened mortgage-lending rules on concern about overbuilding of condominiums in Toronto and Vancouver. The Teranet/National Bank home price index rose 4.6 percent from a year earlier in May, while the country’s housing agency said this week that construction starts unexpectedly accelerated last month.

The gains have also come as the Bank of Canada has kept its benchmark overnight interest rate at 1 percent since September 2010, close to a record low of 0.25 percent.

“Despite some signs of a soft landing, valuations are stretched and there are signs of overbuilding in certain segments of the housing market,” the report said, citing the condominium market in Toronto as a particular concern. The main scenario for a housing crash would be a shock that drives up unemployment and makes it harder for families to repay debts, the central bank said, adding that there is a low chance of that happening.

Household Debt

Household debt levels fell from a record in the fourth quarter as families slowed their pace of borrowing to the least in more than a decade. Credit-market debt such as mortgages increased to 164.0 percent of disposable income, compared with a revised 164.2 percent in the prior three-month period, Statistics Canada said March 14.

Such measures of consumer debt should stabilize now, Senior Deputy Governor Carolyn Wilkins said at the press conference. Poloz also said that consumer debt in Canada has a higher credit quality than in the U.S.

The governor declined to comment on yesterday’s recommendation from the the Organization for Economic Cooperation and Development that Canada should privatize the mortgage insurance provided by the government’s housing agency.

Soundest Banks

Canada has held the title of having the soundest banks for six straight years according to the World Economic Forum, the Geneva-based institution that promotes public-private cooperation and hosts an annual meeting in Davos.

European banks and governments have made some progress in the last six months in repairing their balance sheets, leading the Bank of Canada to cut its risk rating for that category to “elevated” from “high.”

China’s banking challenges pose a risk because of that country’s influence on the prices of commodities that make up a large part of Canada’s exports, the Bank of Canada said today.

The discussion of risks “will be used as additional support to underpin the Bank’s maintaining its higher accommodative stance on monetary policy when it publishes its Monetary Policy Report in July,” Randall Bartlett, senior economist at Toronto-Dominion Bank, said in a research note. “We continue to expect that the Bank of Canada will keep rates on hold until the second half of 2015.”

Poloz said today that the risks to Canada’s inflation rate remain balanced between a recent temporary jump in energy costs and slack in the wider economy.

[mrlupin]

The problem with such a high level of debt leverage is that any downturn is likely to be long and painful as consumer reinburses the banks.

Interesting times...

[IFG]

Interesting times indeed, mrlupin - with a heap of temptation for folk to pillory the policy-makers, but really they're along for the ride with the rest of us. Their task to "manage the economy" is more of a quixotic attempt to herd cats (us). The field of economics has only recently begun to contemplate that people do not always act rationally in their own interest - hitherto a pretty much axiomatic assumption.

WRT the reports & charts you've referred to, while I also suspect property values are percolating a bit too much, there is a problem with the metrics they use. The currently very low interest rates would have the natural effect of skewing those ratios upward unless those numbers are corrected for that (does not seem to be the case here). Inchman laid that out pretty thoroughly above, and absent a quantification of the effect from low rates, that stuff doesn't compel a conclusion about fair values OWOTO.

To me (FWIW), what justifies concern for over-valuation is the ratio of rents to ongoing real-estate carrying-costs (whiich of course build in the rates' effect). When carrying costs greatly exceed rental (i.e. more than what's justifiable by non-monetary benefits of ownership), people are expecting greater capital gain to justify the extra expense (sometimes called the "greater fool theory"). Overall longterm gains from real-estate do not match other asset classes, which should be of particular concern, recent huge gains having already been absorbed in current valuations.

But even that isn't a proof that values are too high (in spite of our suspicions/convictions). The only clear thing? Something's out of whack - either prices are too high, or rents are too low. The present divergence is not sustainable, one of them has to correct. Recent buyers maxxed out on their mortgage need it to be rents.

Cheers, IFG

[mrlupin]

IFG,

I agree about the policy makers. I understand the needs to keep interest rates low in order to stimulate the economy... I see the real estate "bubble" as an unintended consequence of that policy. At the same time, if the central bank hadn't lowered rate we would probably be in a worse state at the moment. Hard to know which is worst... sometime the solution to todays problems causes tomorrows.

Regarding the low interest rates, simple spot calculations can point out if current prices are appropriate but one has to keep in mind that interests used today, are not likely to be the ones used in a year or so. Also noteworthy is the fact that the Canadian central bank doesn't directly control interest rates. Mr market (as incoherent and full of irrational players as he may be), determines a large part of the short term bond rate. As US rates go up due to the reduction of quantitative easing, we are likely to see a bump up in the mortgage rates. The low interest rates may explain the current prices but outstanding mortgage value will not go down if the rates go up. That part is inelastic and could prove to be the downfall of the Canadian economy if rates do go up.

On a political level, things are different. Our new finance minister doesn't seem as focused on controling housing as M. Flaherty was. Where the last finance minister warned banks not to drop rates, this one seems content to let rates drop to lower levels yet. For those who think the banks are still doing their due diligence regarding new loans, more than half of new loans are going to first time buyers. Those are CHMC insured loans. The federal government (ie the tax payers) is the one backstopping those loans. There is very little risk to the banks. From a fiscal conservative's point of view, I wonder why the government would back stop loans for half million dollar homes...

Re Gains from real estate; gains for one group often come at the expense of another group. Many get rilled up at the top 1% or top 10% but how is this different here? I bought a house for roughly 100000$ in 2002. It is now worth 350000$. I didn't do anything special to get any of this gain in asset value. The market simply inflated. That's good for me but in the greater scheme of things, i am concerned with the next generations and how they will fare out. True some will get a wealth transfer from their parents, but for most, these giant mortgages are a ticket to a golden cage... An inability to spend on much save for housing, food and transportation.

I am watching closely trying to see where this all leads but at the moment I am having trouble seeing how the "happy ending" will come about.

Éric

[IFG]

.... I am watching closely trying to see where this all leads but at the moment I am having trouble seeing how the "happy ending" will come about ....

Hi again, Éric - Re: "happy ending" - As they say, hope for the best but have a plan for the worst. Pessimists' lives have lots of pleasant surprises

I find macro-economics far too opaque for prediction, or even semi-educated guesswork. Best I hope for is a grasp of the range of possibilities. For real-estate, the biggest trip-wire is rates. While they're certainly at historic lows, there's a lot of money in long-term bonds betting they'll stay that way. And given that there are urban markets out in the wider world that make Canadian housing look cheap, it's not an absolute slam-dunk that we'll crash, even tho' there's plenty of justification for expecting that. We'll just have to wait and see ...

Cheers, IFG

[mrlupin]

I too find macro-economics to be quite opaque. Yet I find the subject fascinating... A country that prints seemingly endless supply of money and floods a market with liquidity... The direct effect on land prices, resources and housing. The battle for currencies , the great appreciation of gold and its subsequent free fall. The banks that got bailed out, the ones that didn't... Monetary policy etc... its all very interesting!

Yet not all have access to this new capital. The banks do... yet what does the man on the street get? He gets a cheap mortgage rate, a cheap financing rate for a car etc... They have now pushed the concept of having people spend an ever larger part of their salary on consumption... If people get next to no interest on their deposits, they are likely to spend instead of save. If you can't stimulate the economy and all you are getting on the job front are mcjobs, then you give people more credit... The consuming continues!

Even the tuition rates have skyrocketed in the US. The cost of a decent education is now higher that it has ever been. (as measured as a percentage of GDP) The kids start life with quite a mountain of debt. How's that for consumption... wonder where it ends? This whole situation kinda reminds me of the tulip craze in Holland that didn't end so well for many.

I wouldn't go as far as betting against the markets as I find the market can stay incoherent way longer that I could stay solvent to make good on these bets. The markets have so many variables that timing a rise or collapse is nearly impossible. Just like the real estate market... They keep rising and rising... the Canadian real estate board seems to think it will always go up. You'd have to have some sort of insider information to successfully time the market.

Interesting times... Hopefully we get a soft landing. In the 1990 recession, prices dropped and did not recover to pre-recession levels before 2001. Prices didn't drop much in the period... maybe the same can happen here.

Cheers!

[mrlupin]

News on the Canadian Housing market...

With record high consumer debt and record high real estate prices, I wonder if the combination of collapsed oil prices and a likely rate hike in the US FED interest rate (mid 2015) will be the tipping point for the Canadian economy.

Deutshe Bank report on the Canadian housing market.

http://business.financialpost.com/2015/01/08/deutsche-bank-reveals-7-reasons-why-canada-is-in-serious-trouble-starting-with-a-63-overvalued-housing-market/

Bloomberg:

Canadian housing bulls are joining real estate doubters as warnings and oil collapse sink in

http://business.financialpost.com/2015/01/06/canadian-housing-bulls-are-joining-real-estate-doubters-after-2014-gains/

[dagger]

News on the Canadian Housing market...

With record high consumer debt and record high real estate prices, I wonder if the combination of collapsed oil prices and a likely rate hike in the US FED interest rate (mid 2015) will be the tipping point for the Canadian economy.

Deutshe Bank report on the Canadian housing market.

http://business.financialpost.com/2015/01/08/deutsche-bank-reveals-7-reasons-why-canada-is-in-serious-trouble-starting-with-a-63-overvalued-housing-market/

Bloomberg:

Canadian housing bulls are joining real estate doubters as warnings and oil collapse sink in

http://business.financialpost.com/2015/01/06/canadian-housing-bulls-are-joining-real-estate-doubters-after-2014-gains/

Canadian interest rates may remain flat into mid-2016, the average consumer/driver is pocketing $1500 a year from lower gas prices, money they can put towards debt repayment if they choose. The Calgary housing market may slow down a bit, but I don't see a slowdown anywhere else.

[John S.]

As a director of a financial institution that deals with mortgages and commercial loans I get a lot of real estate information on a monthly basis. The problem with almost any real estate report is that the truth is usually hidden in the details.

One of those 'hidden' details is that location is critical. We all know that city by city locations have huge variances. This is vividly true if you look at Canada and the US. Take a look at this as a great example: http://www.vancitybuzz.com/2015/01/house-1-million-vancouver-vs-25-cities/

But for those of us who live in larger urban areas even neighbourhood by neighbourhood values can differ by outrageous amounts. In Vancouver, for example, the 'average' house in now $1,002,200. But look at that million dollar dump in the first link and then look at this neighbourhood: http://www.royallepage.ca/en/bc/vancouver/dunbar-southlands/properties#.VLFwSmTF8_Y

I think that there will be a 'correction' in real estate prices in Canada. If I were a betting man I'd say it will probably start in Montreal and spread out from there. Saskatchewan will not, in general, get as involved in any price drops or stabilizations as say Alberta. And in BC some areas will hardly be affected at all - including the Dunbar neighbourhood described in the second link.

Also I should mention that I'm watching real estate very closely in my Vancouver neighbourhood right now as we are going to list our home on January 30th.

[mrlupin]

How long will that resilient elastic hold (the Canadian economy..)?

An interesting blog post re the Canadian Economy...

http://www.greaterfool.ca/2015/01/15/leadership-2/